File No. 33-55775 CIK #910860
Securities and Exchange Commission
Washington, D. C. 20549
Post-Effective
Amendment No. 2
to
Form S-6
For Registration under the Securities Act of 1933
of Securities of Unit Investment Trusts Registered
on Form N-8B-2
Kemper Defined Funds Series 23
Name and executive office address of Depositor:
Ranson & Associates, Inc.
250 North Rock Road, Suite 150
Wichita, Kansas 67206
Name and complete address of agent for service:
Robin Pinkerton
Ranson & Associates, Inc.
250 North Rock Road, Suite 150
Wichita, Kansas 67206
( X ) Check box if it is proposed that this filing will become
effective at 2:00 p.m. on December 27, 1996 pursuant to
paragraph (b) of Rule 485.
<PAGE>
The following Part One Prospectus should be attached to this Trust:
INSNAT-PTI, INSMS-PTI
KEMPER TAX-EXEMPT INSURED INCOME TRUSTNATIONAL SERIESKEMPER
DEFINED FUNDSINSURED NATIONAL SERIESEVEREN Unit Investment
TrustsInsured National SeriesPART ONE
The date of this Part One is that datewhich is set forth in Part
Two of the Prospectus
Kemper Tax-Exempt Insured Income Trust, Kemper Defined Funds
Insured National Series and EVEREN Unit Investment Trusts Insured
National Series (the "Trusts" and each a "Trust") were formed for
the purpose of gaining interest income free from Federal income
taxes while conserving capital and diversifying risks by
investing in an insured, fixed portfolio consisting of
obligations issued by or on behalf of states of the United States
or counties, municipalities, authorities or political
subdivisions thereof.
Units of the Trust are not deposits or obligations of, or
guaranteed by, any bank, and Units are not federally insured or
otherwise protected by the Federal Deposit Insurance Corporation
and involve investment risk including loss of principal.
Insurance guaranteeing the scheduled payment of principal and
interest on all of the Municipal Bonds in the portfolio listed in
Part Two has been obtained from an independent company by either
the Trust, the Sponsor or the issuer of the Municipal Bonds
involved. Insurance obtained by the Sponsor or a Municipal Bond
issuer is effective so long as such Bonds are outstanding. The
insurance, in any case, does not relate to the Units offered
hereby or to their market value. As a result of such insurance,
the Units of the Trust received on the Date of Deposit a rating
of "AAA" by Standard & Poor's, a Division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's") or "Aaa" by Moody's
Investors Service, Inc. See "Insurance on the Portfolio" and
"Description of Securities Ratings." No representation is made
as to any insurer's ability to meet its commitments.
This Prospectus is in two parts. Read and retain both parts for
future reference.
Sponsor: EVEREN Unit Investment Trusts,a service of EVEREN
Securities, Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
SUMMARY 3
The Trust 3
Insurance 3
Public Offering Price 4
Interest and Principal Distributions 4
Reinvestment 4
Estimated Current Return and Estimated Long-Term Return 4
Market for Units 5
Risk Factors 5
THE TRUST 5
PORTFOLIOS 6
Risk Factors 7
INSURANCE ON THE PORTFOLIOS 14
Financial Guaranty Insurance Company 16
AMBAC Indemnity Corporation 17
Municipal Bond Investors Assurance Corporation 17
Financial Security Assurance 18
Capital Guaranty Insurance Company 19
DISTRIBUTION REINVESTMENT 20
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS 21
TAX STATUS OF THE TRUST 21
TAX REPORTING AND REALLOCATION 26
PUBLIC OFFERING OF UNITS 26
Public Offering Price 26
Accrued Interest 29
Purchased and Daily Accrued Interest 30
Accrued Interest 30
Public Distribution of Units 31
Profits of Sponsor 32
MARKET FOR UNITS 32
REDEMPTION 32
Computation of Redemption Price 34
UNITHOLDERS 34
Ownership of Units 34
Distributions to Unitholders 35
Statement to Unitholders 36
Rights of Unitholders 38
INVESTMENT SUPERVISION 38
ADMINISTRATION OF THE TRUST 39
The Trustee 39
The Evaluator 40
Amendment and Termination 40
Limitations on Liability 42
The Sponsor 42
The Trustee 42
The Evaluator 42
EXPENSES OF THE TRUST 42
THE SPONSOR 44
LEGAL OPINIONS 44
INDEPENDENT AUDITORS 44
DESCRIPTION OF MUNICIPAL BOND RATINGS 45
Essential Information[1]
Report of Independent Auditors*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
KEMPER TAX-EXEMPT INSURED INCOME TRUST
KEMPER DEFINED FUNDS INSURED NATIONAL SERIES
EVEREN UNIT INVESTMENT TRUSTS INSURED NATIONAL SERIES
SUMMARY
The Trust. Kemper Tax-Exempt Insured Income Trust, Kemper
Defined Funds Insured National Series and EVEREN Unit Investment
Trusts Insured National Series (the "Trusts" and each a "Trust")
are each a unit investment trust consisting of a number of
diversified portfolios (the "Series"), each portfolio consisting
of obligations ("Municipal Bonds," "Securities" or "Bonds")
issued by or on behalf of states of the United States or
counties, municipalities, authorities or political subdivisions
thereof.
The objective of each Series of the Trust is tax-exempt income
and conservation of capital with diversification of risk through
investment in an insured, fixed portfolio of Municipal Bonds.
Interest on certain Municipal Bonds in certain of the Trusts will
be a preference item for purposes of the alternative minimum tax.
Accordingly, such Trusts may be appropriate only for investors
who are not subject to the alternative minimum tax. There is, of
course, no guarantee that the Trusts' objective will be achieved.
All of the Municipal Bonds in a Series of the Trust were rated in
the category "BBB" or better by Standard & Poor's ("Standard &
Poor's") or "Baa" by Moody's Investors Service, Inc. ("Moody's")
on the date such Series was established (the "Date of Deposit").
Ratings of the Municipal Bonds may have changed since the Date of
Deposit. See "Description of Securities Ratings" herein and the
"Schedule of Investments" in Part Two.
The Units, each of which represents a pro rata undivided
fractional interest in the Municipal Bonds deposited in the
appropriate Series of the Trust, are issued and outstanding Units
which have been reacquired by the Sponsor either by purchase of
Units tendered to the Trustee for redemption or by purchase in
the open market. No offering is being made on behalf of the
Trust and any profit or loss realized on the sale of Units will
accrue to the Sponsor and/or the firm reselling such Units.
Insurance. Insurance guaranteeing the scheduled payment of
principal and interest on all of the Municipal Bonds in the
portfolio of each Series of the Trust has been obtained by the
Trust, the Sponsor or directly by the issuer from an independent
insurance company. Series A through A-24 of the Kemper
Tax-Exempt Insured Income Trust are insured by AMBAC Indemnity
Corporation ("AMBAC Indemnity") and Series A-25 and subsequent
Series of the Kemper Tax-Exempt Insured Income Trust, Kemper
Defined Funds Insured National Series and EVEREN Unit Investment
Trusts Insured National Series are insured by Financial Guaranty
Insurance Company ("Financial Guaranty"), Municipal Bond Investor
Assurance Corporation ("MBIA") or other insurers. Insurance
obtained directly by the issuer may be from such companies or
other insurers. See "Insurance on the Portfolio" herein and
"Schedule of Investments" in Part Two. Insurance obtained by the
Trust remains in effect only while the insured Municipal Bonds
are retained in the Trust, while insurance obtained by a
Municipal Bond issuer is effective so long as such Bonds are
outstanding. Pursuant to an irrevocable commitment of Financial
Guaranty, in the event of a sale of any Bond from Series A-25 or
subsequent Series of the Kemper Tax-Exempt Insured Income Trust
covered under the Trust's insurance policy, the Trustee has the
right to obtain permanent insurance for such Municipal Bond upon
the payment of a single predetermined insurance premium from the
proceeds of the sale of such Municipal Bond. The insurance, in
either case, does not relate to the Units offered hereby or to
their market value. As a result of such insurance, the Units of
each Series of the Trust received on the original Date of Deposit
a rating of "AAA" from Standard & Poor's. See "Insurance on the
Portfolio." No representation is made as to AMBAC Indemnity's,
Financial Guaranty's, MBIA's or any other insurer's ability to
meet its commitments.
Public Offering Price. The Public Offering Price per Unit of a
Series of the Trust is equal to a pro rata share of the aggregate
bid prices of the Municipal Bonds in such Series (plus or minus a
pro rata share of cash, if any, in the Principal Account, held or
owned by the Series) plus Purchased Interest, if any, plus a
sales charge shown under "Public Offering of Units." In
addition, there will be added to each transaction an amount equal
to the accrued interest from the last Record Date of such Series
to the date of settlement (three business days after order)(such
amount is referred to as Daily Accrued Interest in the case of
certain Series). The sales charge is reduced on a graduated
scale as indicated under "Public Offering of Units _ Public
Offering Price."
Interest and Principal Distributions. Distributions of the
estimated annual interest income to be received by a Series of
the Trust, after deduction of estimated expenses, will be made
monthly unless the Unitholder elects to receive such
distributions quarterly or semi-annually. Distributions will be
paid on the Distribution Dates to holders of record of such
Series on the Record Dates set forth for the applicable option.
See "Essential Information" in Part Two. The distribution of
funds, if any, in the Principal Account of each Series, will be
made semi-annually to Unitholders of Record on the appropriate
dates. See "Essential Information" in Part Two. Unitholders of
Kemper Defined Funds and EVEREN Unit Investment Trusts receive
monthly distributions of interest and principal.
Reinvestment. Distributions of interest and principal, including
capital gains, if any, made by a Series of the Trust will be paid
in cash unless a Unitholder elects to reinvest such distributions.
See "Distribution Reinvestment."
Estimated Current Return and Estimated Long-Term Return. The
Estimated Current Return is calculated by dividing the estimated
net annual interest income per Unit by the Public Offering Price
of such Trust. The estimated net annual interest income per Unit
will vary with changes in fees and expenses of such Trust and
with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with
changes in the bid price of the underlying Securities and with
changes in the Purchased Interest, if any; therefore, there is no
assurance that the present Estimated Current Return will be
realized in the future. Estimated Long-Term Return is calculated
using a formula which (1) takes into consideration, and
determines and factors in the relative weightings of, the market
values, yields (which takes into account the amortization of
premiums and the accretion of discounts) and estimated
retirements of all of the Securities in the Trust and (2) takes
into account the expenses and sales charge associated with each
Trust Unit. Since the market values and estimated retirements of
the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Return will
be realized in the future. Estimated Current Return and
Estimated Long-Term Return are expected to differ because the
calculation of Estimated Long-Term Return reflects the estimated
date and amount of principal returned while Estimated Current
Return calculations include only net annual interest income and
Public Offering Price.
Market for Units. While under no obligation to do so, the
Sponsor intends, subject to change at any time, to maintain a
market for the Units of each Series of the Trust and to
continuously offer to repurchase such Units at prices which are
based on the aggregate bid side evaluation of the Municipal Bonds
in such Series of the Trust. If such a market is not maintained
and no other over-the-counter market is available, Unitholders
will still be able to dispose of their Units through redemption
by the Trustee at prices based upon the aggregate bid price of
the Municipal Bonds in such Series of the Trust. See
"Redemption."
Risk Factors. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among
other factors, the inability of the issuer or an insurer to pay
the principal of or interest on a bond when due, volatile
interest rates, early call provisions, and changes to the tax
status of the Municipal Bonds. See "Portfolios _ Risk Factors."
THE TRUST
Each Series of the Trust is one of a series of unit investment
trusts created by the Sponsor under the name Kemper Tax-Exempt
Insured Income Trust, Kemper Defined Funds Insured National
Series or EVEREN Unit Investment Trusts Insured National Series,
all of which are similar, and each of which was created under the
laws of the State of Missouri pursuant to a Trust Agreement[2]
(the "Agreement"). EVEREN Unit Investment Trusts, a service of
EVEREN Securities, Inc., acts as Sponsor and Evaluator and The
Bank of New York acts as Trustee.
The objectives of the Trust are tax-exempt income and
conservation of capital with diversification of risk through
investment in an insured, fixed portfolio of Municipal Bonds.
Interest on certain Municipal Bonds in the Trusts will be a
preference item for purposes of the alternative minimum tax.
Accordingly, such Trusts may be appropriate only for the
investors who are not subject to the alternative minimum tax.
There is, of course, no guarantee that the Trusts' objectives
will be achieved.
A Series of the Trust may be an appropriate investment vehicle
for investors who desire to participate in a portfolio of
insured, tax-exempt, fixed income securities with greater
diversification than they might be able to acquire individually.
In addition, Municipal Bonds of the type deposited in the Trust
are often not available in small amounts.
Each Series of the Trust consists of an insured portfolio of
interest bearing obligations issued by or on behalf of states of
the United States or counties, municipalities, authorities or
political subdivisions thereof the interest on which is, in the
opinion of bond counsel to the issuing authorities, exempt from
all Federal income taxes under existing law, but may be subject
to state and local taxes. Proceeds from the maturity, redemption
or sale of the Municipal Bonds in a Series of the Trust, unless
used to pay for Units tendered for redemption, will be
distributed to Unitholders of such Series and will not be
utilized to purchase replacement or additional Municipal Bonds
for the Series.
The Units, each of which represents a pro rata undivided
fractional interest in the principal amount of Municipal Bonds
deposited in a Series of the Trust, are issued and outstanding
Units which have been reacquired by the Sponsor either by
purchase of Units tendered to the Trustee for redemption or by
purchase in the open market. No offering is being made on behalf
of the Trust or any Series thereof and any profit or loss
realized on the sale of Units will accrue to the Sponsor and/or
the firm reselling such Units. To the extent that Units of a
Series of the Trust are redeemed, the principal amount of
Municipal Bonds in such Series will be reduced and the undivided
fractional interest represented by each outstanding Unit of the
Series will increase. See "Redemption."
PORTFOLIOS
In selecting the Municipal Bonds which comprise the portfolio of
a Series of the Trust the following requirements, were deemed to
be of primary importance: (a) a minimum rating of "BBB" by
Standard & Poor's or "Baa" by Moody's Investors Service, Inc.
(see "Description of Securities Ratings"); (b) the price of the
Municipal Bonds relative to other issues of similar quality and
maturity; (c) the diversification of the Municipal Bonds as to
purpose of issue; (d) the income to the Unitholders of the
Series; (e) whether such Municipal Bonds were insured, or the
availability and cost of insurance for the prompt payment of
principal and interest, when due, on the Municipal Bonds; and (f)
the dates of maturity of the Municipal Bonds.
Subsequent to the Date of Deposit, a Municipal Bond may cease to
be rated or its rating may be reduced below the minimum required
as of the Date of Deposit. Neither event requires the
elimination of such investment from the portfolio, but may be
considered in the Sponsor's determination to direct the Trustee
to dispose of the investment. See "Investment Supervision"
herein and "Schedule of Investments" in Part Two.
The Sponsor may not alter the portfolio of a Series of the Trust,
except that certain of the Municipal Bonds may be sold upon the
happening of certain extraordinary circumstances. See
"Investment Supervision."
Certain Series of the Trust contain Municipal Bonds which may be
subject to redemption prior to their stated maturity date
pursuant to sinking fund provisions, call provisions or
extraordinary optional or mandatory redemption provisions or
otherwise. A sinking fund is a reserve fund accumulated over a
period of time for retirement of debt. A callable debt
obligation is one which is subject to redemption or refunding
prior to maturity at the option of the issuer. A refunding is a
method by which a debt obligation is redeemed at or before
maturity, by the proceeds of a new debt obligation. In general,
call provisions are more likely to be exercised when the offering
side valuation is at a premium over par than when it is at a
discount from par. Accordingly, any such call, redemption, sale
or maturity will reduce the size and diversity of such Series,
and the net annual interest income of the Series and may reduce
the Estimated Long-Term Returns and/or Estimated Current Return.
See "Interest and Estimated Long-Term and Current Returns." Each
Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions
result from the happening of certain events. Generally, events
that may permit the extraordinary optional redemption of
Municipal Bonds or may require the mandatory redemption of
Municipal Bonds include among others: a final determination that
the interest on the Municipal Bonds is taxable; the substantial
damage or destruction by fire or other casualty of the project
for which the proceeds of the Municipal Bonds were used; an
exercise by a local, state or Federal governmental unit of its
power of eminent domain to take all or substantially all of the
project for which the proceeds of the Municipal Bonds were used;
changes in the economic availability of raw materials, operating
supplies or facilities or technological or other changes which
render the operation of the project for which the proceeds of the
Municipal Bonds were used uneconomic; changes in law or an
administrative or judicial decree which renders the performance
of the agreement under which the proceeds of the Municipal Bonds
were made available to finance the project impossible or which
creates unreasonable burdens or which imposes excessive
liabilities, such as taxes not imposed on the date the Municipal
Bonds are issued on the issuer of the Municipal Bonds or the user
of the proceeds of the Municipal Bonds; an administrative or
judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of
the Municipal Bonds; an overestimate of the costs of the
project to be financed with proceeds of the Municipal Bonds
resulting in excess proceeds of the Municipal Bonds which may be
applied to redeem Municipal Bonds; or an underestimate of a
source of funds securing the Municipal Bonds resulting in excess
funds which may be applied to redeem Municipal Bonds. The
Sponsor is unable to predict all of the circumstances which may
result in such redemption of an issue of Municipal Bonds.
The Sponsor and the Trustee shall not be liable in any way for
any default, failure or defect in any Municipal Bond.
Risk Factors. An investment in Units of a Series of the Trust
should be made with an understanding of the risks which an
investment in fixed rate debt obligations may entail, including
the risk that the value of the portfolio and hence of the Units
will decline with increases in interest rates. The value of the
underlying Municipal Bonds will fluctuate inversely with changes
in interest rates. The uncertain economic conditions experienced
in the past, together with the fiscal measures adopted to attempt
to deal with them, have resulted in wide fluctuations in interest
rates and, thus, in the value of fixed rate debt obligations
generally and long term obligations in particular. The Sponsor
cannot predict whether such fluctuations will continue in the
future.
Certain Series of the Trust contain Municipal Bonds which are
general obligations of a governmental entity that are backed by
the taxing power of such entity. All other Municipal Bonds in
the Series of the Trust are revenue bonds payable from the income
of a specific project or authority and are not supported by the
issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. Revenue bonds,
on the other hand, are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific
revenue source. There are, of course, variations in the security
of the different Municipal Bonds in the Series of the Trust, both
within a particular classification and between classifications,
depending on numerous factors.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are derived from services
provided by hospitals and other health care facilities, including
nursing homes. In view of this an investment in such Series
should be made with an understanding of the characteristics of
such issuers and the risks that such an investment may entail.
Ratings of bonds issued for health care facilities are often
based on feasibility studies that contain projections of
occupancy levels, revenues and expenses. A facility's gross
receipts and net income available for debt service will be
affected by future events and conditions including, among other
things, demand for services and the ability of the facility to
provide the services required, physicians' confidence in the
facility, management capabilities, economic developments in the
service area, competition, efforts by insurers and governmental
agencies to limit rates, legislation establishing state rate-setting
agencies, expenses, the cost and possible
unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, and
government regulation. Federal legislation has been enacted
which implemented a system of prospective Medicare reimbursement
which may restrict the flow of revenues to hospitals and other
facilities which are reimbursed for services provided under the
Medicare program. Future legislation or changes in the areas
noted above, among other things, would affect all hospitals to
varying degrees and, accordingly, any adverse changes in these
areas may adversely affect the ability of such issuers to make
payment of principal and interest on Municipal Bonds held in such
Series. Such adverse changes also may adversely affect the
ratings of the Municipal Bonds held in such Series of the Trust.
Hospitals and other health care facilities are subject to claims
and legal actions by patients and others in the ordinary course
of business. Although these claims are generally covered by
insurance, there can be no assurance that a claim will not exceed
the insurance coverage of a health care facility or that
insurance coverage will be available to a facility. In addition,
a substantial increase in the cost of insurance could adversely
affect the results of operations of a hospital or other health
care facility. Certain hospital bonds may provide for redemption
at par at any time upon the sale by the issuer of the hospital
facilities to a non-affiliated entity or in other circumstances.
For example, certain hospitals may have the right to call bonds
at par if the hospital may legally be required because of the
bonds to perform procedures against specified religious
principles. Certain FHA-insured bonds may provide that all or a
portion of those bonds, otherwise callable at a premium, can be
called at par in certain circumstances. If a hospital defaults
upon a bond obligation, the realization of Medicare and Medicaid
receivables may be uncertain and, if the bond obligation is
secured by the hospital facilities, legal restrictions on the
ability to foreclose upon the facilities and the limited
alternative uses to which a hospital can be put may reduce
severely its collateral value.
Certain Series of the Trust contain Municipal Bonds which are
single family mortgage revenue bonds, which are issued for the
purpose of acquiring from originating financial institutions
notes secured by mortgages on residences located within the
issuer's boundaries and owned by persons of low or moderate
income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events
such as sale of the mortgaged premises, default, condemnation or
casualty loss. Because these Municipal Bonds are subject to
extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such
Municipal Bonds will probably be redeemed prior to their
scheduled maturities or even prior to their ordinary call dates.
The redemption price of such issues may be more or less than the
offering price of such Municipal Bonds. Extraordinary mandatory
redemption without premium could also result from the failure of
the originating financial institutions to make mortgage loans in
sufficient amounts within a specified time period or, in some
cases, from the sale by the Municipal Bond issuer of the mortgage
loans. Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates on
mortgage loans funded from other sources becoming competitive
with the interest rates on the mortgage loans funded with the
proceeds of the single family mortgage revenue bonds.
Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of
principal of or interest on such mortgage revenue bonds. Single
family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code, which
Section contains certain ongoing requirements relating to the use
of the proceeds of such Bonds in order for the interest on such
Municipal Bonds to retain its tax-exempt status. In each case,
the issuer of the Municipal Bonds has covenanted to comply with
applicable ongoing requirements and bond counsel to such issuer
has issued an opinion that the interest on the Municipal Bonds is
exempt from Federal income tax under existing laws and
regulations. There can be no assurances that the ongoing
requirements will be met. The failure to meet these requirements
could cause the interest on the Municipal Bonds to become
taxable, possibly retroactively from the date of issuance.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are primarily derived from
mortgage loans to housing projects for low to moderate income
families. The ability of such issuers to make debt service
payments will be affected by events and conditions affecting
financed projects, including, among other things, the achievement
and maintenance of sufficient occupancy levels and adequate
rental income, increases in taxes, employment and income
conditions prevailing in local labor markets, utility costs and
other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends
affecting the localities in which the projects are located. The
occupancy of housing projects may be adversely affected by high
rent levels and income limitations imposed under Federal and
state programs. Like single family mortgage revenue bonds,
multi-family mortgage revenue bonds are subject to redemption and
call features, including extraordinary mandatory redemption
features, upon prepayment, sale or non-origination of mortgage
loans as well as upon the occurrence of other events. Certain
issuers of single or multi-family housing bonds have considered
various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the Trust, the Sponsor has not
had any direct communications with any of the issuers thereof,
but at the initial Date of Deposit it was not aware that any of
the respective issuers of such Municipal Bonds were actively
considering the redemption of such Municipal Bonds prior to their
respective stated initial call dates. However, there can be no
assurance that an issuer of a Municipal Bond in the Trust will
not attempt to so redeem a Municipal Bond in the Trust.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are derived from the sale
of water and/or sewerage services. Water and sewerage bonds are
generally payable from user fees. Problems faced by such issuers
include the ability to obtain timely and adequate rate increases,
a decline in population resulting in decreased user fees, the
difficulty of financing large construction programs, the
limitations on operations and increased costs and delays
attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh
water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced
these problems in varying degrees. Because of the relatively
short history of solid waste disposal bond financing, there may
be technological risks involved in the satisfactory construction
or operation of the projects exceeding those associated with most
municipal enterprise projects. Increasing environmental
regulation on the federal, state and local level has a
significant impact on waste disposal facilities. While
regulation requires more waste producers to use waste disposal
facilities, it also imposes significant costs on the facilities.
These costs include compliance with frequently changing and
complex regulatory requirements, the cost of obtaining
construction and operating permits, the cost of conforming to
prescribed and changing equipment standards and required methods
of operation and the cost of disposing of the waste residue that
remains after the disposal process in an environmentally safe
manner. In addition, waste disposal facilities frequently face
substantial opposition by environmental groups and officials to
their location and operation, to the possible adverse effects
upon the public health and the environment that may be caused by
wastes disposed of at the facilities and to alleged improper
operating procedures. Waste disposal facilities benefit from
laws which require waste to be disposed of in a certain manner
but any relaxation of these laws could cause a decline in demand
for the facilities' services. Finally, waste disposal facilities
are concerned with many of the same issues facing utilities
insofar as they derive revenues from the sale of energy to local
power utilities.
Certain Series of the Trust contain Municipal Bonds which are
obligations of issuers whose revenues are primarily derived from
the sale of electric energy or natural gas. Utilities are
generally subject to extensive regulation by state utility
commissions which, among other things, establish the rates which
may be charged and the appropriate rate of return on an approved
asset base. The problems faced by such issuers include the
difficulty in obtaining approval for timely and adequate rate
increases from the governing public utility commission, the
difficulty in financing large construction programs, the
limitations on operations and increased costs and delays
attributable to environmental considerations, increased
competition, recent reductions in estimates of future demand for
electricity in certain areas of the country, the difficulty of
the capital market in absorbing utility debt, the difficulty in
obtaining fuel at reasonable prices and the effect of energy
conservation. Issuers may have experienced these problems in
varying degrees. In addition, Federal, state and municipal
governmental authorities may from time to time review existing
and impose additional regulations governing the licensing,
construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal
Bonds to make payments of principal and/or interest on such
Municipal Bonds. The ability of state and local joint action
power agencies to make payments on bonds they have issued is
dependent in large part on payments made to them pursuant to
power supply or similar agreements. Courts in Washington and
Idaho have held that certain agreements between the Washington
Public Power Supply System ("WPPSS") and the WPPSS participants
are unenforceable because the participants did not have the
authority to enter into the agreements. While these decisions
are not specifically applicable to agreements entered into by
public entities in other states, they may cause a reexamination
of the legal structure and economic viability of certain projects
financed by joint action power agencies, which might exacerbate
some of the problems referred to above and possibly lead to legal
proceedings questioning the enforceability of agreements upon
which payment of these bonds may depend.
Certain Series of the Trust contain Municipal Bonds which are
industrial revenue bonds ("IRBs"), including pollution control
revenue bonds, which are tax-exempt securities issued by states,
municipalities, public authorities or similar entities to finance
the cost of acquiring, constructing or improving various
industrial projects. These projects are usually operated by
corporate entities. Issuers are obligated only to pay amounts
due on the IRBs to the extent that funds are available from the
unexpended proceeds of the IRBs or receipts or revenues of the
issuer under an arrangement between the issuer and the corporate
operator of a project. The arrangement may be in the form of a
lease, installment sale agreement, conditional sale agreement or
loan agreement, but in each case the payments to the issuer are
designed to be sufficient to meet the payments of amounts due on
the IRBs. Regardless of the structure, payment of IRBs is solely
dependent upon the creditworthiness of the corporate operator of
the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings,
regulatory and environmental restrictions, litigation resulting
from accidents or environmentally-caused illnesses, extensive
competition and financial deterioration resulting from leveraged
buy-outs or takeovers. The IRBs in the Series of the Trust may
be subject to special or extraordinary redemption provisions
which may provide for redemption at par or, with respect to
original issue discount bonds, at issue price plus the amount of
original issue discount accreted to the redemption date plus, if
applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in
the Series of the Trust prior to the stated maturity of such
Municipal Bonds.
Certain Series of the Trust contain Municipal Bonds which are
obligations which are payable from and secured by revenues
derived from the ownership and operation of facilities such as
airports, bridges, turnpikes, port authorities, convention
centers and arenas. The major portion of an airport's gross
operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of
annual payments for leases, occupancy of certain terminal space
and service fees. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due
to increased competition, excess capacity, increased costs,
deregulation, traffic constraints and other factors, and several
airlines are experiencing severe financial difficulties. The
Sponsor cannot predict what effect these industry conditions may
have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the
particular airport facility. Similarly, payment on Municipal
Bonds related to other facilities is dependent on revenues from
the projects, such as user fees from ports, tolls on turnpikes
and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors
as increased cost of maintenance, decreased use of a facility,
lower cost of alternative modes of transportation, scarcity of
fuel and reduction or loss of rents.
Certain Series of the Trusts contain Municipal Bonds which are
obligations of issuers which are, or which govern the operation
of, schools, colleges and universities and whose revenues are
derived mainly from ad valorem taxes, or for higher education
systems, from tuition, dormitory revenues, grants and
endorsements. General problems relating to school bonds include
litigation contesting the state constitutionality of financing
public education in part from ad valorem taxes, thereby creating
a disparity in educational funds available to schools in wealthy
areas and schools in poor areas. Litigation or legislation on
this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating
to college and university obligations would include the prospect
of a declining percentage of the population consisting of
"college" age individuals, possible inability to raise tuition
and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state
funding and new government legislation or regulations which may
adversely affect the revenues or costs of such issuers. All of
such issuers have been experiencing certain of these problems in
varying degrees. In addition, the ability of universities and
colleges to meet their obligations is dependent upon various
factors, including the size and diversity of their sources of
revenues, enrollment, reputation, management expertise, the
availability and restrictions on the use of endowments and other
funds, the quality and maintenance costs of campus facilities,
and, in the case of public institutions, the financial condition
of the relevant state or other governmental entity and its
policies with respect to education. The institution's ability to
maintain enrollment levels will depend on such factors as tuition
costs, geographic location, geographic diversity and quality of
student body, quality of the faculty and the diversity of program
offerings.
Certain Series of the Trust contain Municipal Bonds which are
Urban Redevelopment Bonds ("URBs"). URBs have generally been
issued under bond resolutions pursuant to which the revenues and
receipts payable under the arrangements with the operator of a
particular project have been assigned and pledged to purchasers.
In some cases, a mortgage on the underlying project may have been
granted as security for the URBs. Regardless of the structure,
payment of the URBs is solely dependent upon the creditworthiness
of the operator of the project.
Certain of the Municipal Bonds in the Trust may be lease revenue
bonds whose revenues are derived from lease payments made by a
municipality or other political subdivision which is leasing
equipment or property for use in its operation. The risks
associated with owning Municipal Bonds of this nature include the
possibility that appropriation of funds for a particular project
or equipment may be discontinued. The Sponsor cannot predict the
likelihood of nonappropriation of funds for these types of lease
revenue Municipal Bonds.
Certain Series of the Trust contain "zero coupon" bonds, i.e., an
original issue discount bond that does not provide for the
payment of current interest. Zero coupon bonds are purchased at
a deep discount because the buyer receives only the right to
receive a final payment at the maturity of the bond and does not
receive any periodic interest payments. The effect of owning
deep discount bonds which do not make current interest payments
(such as the zero coupon bonds) is that a fixed yield is earned
not only on the original investment but also, in effect, on all
discount earned during the life of such obligation. This
implicit reinvestment of earnings at the same rate eliminates the
risk of being unable to reinvest the income on such obligation at
a rate as high as the implicit yield on the discount obligation,
but at the same time eliminates the holder's ability to reinvest
at higher rates in the future. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations
during periods of changing market interest rates than are
securities of comparable quality which pay interest currently.
For the Federal tax consequences of original issue discount bonds
such as the zero coupon bonds, see "Tax Status of the Trust."
Investors should be aware that many of the Municipal Bonds in the
Series of the Trust are subject to continuing requirements such
as the actual use of Municipal Bond proceeds or manner of
operation of the project financed from Municipal Bond proceeds
that may affect the exemption of interest on such Municipal Bonds
from Federal income taxation. Although at the time of issuance
of each of the Municipal Bonds in the Series of the Trust an
opinion of bond counsel was rendered as to the exemption of
interest on such obligations from Federal income taxation, there
can be no assurance that the respective issuer or other obligors on
such obligations will fulfill the various continuing
requirements established upon issuance of the Municipal Bonds. A
failure to comply with such requirements may cause a
determination that interest on such obligations is subject to
Federal income taxation, perhaps even retroactively from the date
of issuance of such Municipal Bonds, thereby reducing the value
of the Municipal Bonds and subjecting Unitholders to
unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts
of political subdivisions and authorities of states of the United
States provide that, in certain circumstances, such subdivisions
or authorities may be authorized to initiate bankruptcy
proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse
modification or alteration of the rights of holders of
obligations issued by such subdivisions or authorities.
Certain issues of the Municipal Bonds in some Series of the Trust
represent "moral obligations" of a governmental entity other than
the issuer. In the event that the issuer of the Municipal Bond
defaults in the repayment thereof, such other governmental entity
lawfully may, but is not obligated to, discharge the obligation
of the issuer to repay such Municipal Bond. If an issuer of
moral obligation bonds is unable to meet its obligations, the
repayment of such Municipal Bonds becomes a moral commitment but
not a legal obligation of the state or municipality in question.
Even though the state may be called on to restore any deficits in
capital reserve funds of the agencies or authorities which issued
the bonds, any restoration generally requires appropriation by
the State legislature and accordingly does not constitute a
legally enforceable obligation or debt of the state. The
agencies or authorities generally have no taxing power.
To the best of the Sponsor's knowledge, as of the Date of Deposit
for each Trust, there is no litigation pending with respect to
any Municipal Bond which might reasonably be expected to have a
material adverse effect on the Trust or any Series thereof.
Although the Sponsor is unable to predict whether any litigation
may be instituted, or if instituted, whether such litigation
might have a material adverse effect on the Trust or any Series,
the Trust received copies of the opinions of bond counsel given
to the issuing authorities at the time of original delivery of
each of the Municipal Bonds to the effect that the Municipal
Bonds had been validly issued and that the interest thereon is
exempt from Federal income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolios of each Series of the Trust
are insured as to payment of interest and principal, when due,
either by a policy obtained by the Trust, the Sponsor or by the
Bond issuer. Series A through A-24 of the Kemper Tax-Exempt
Insured Income Trust are insured by AMBAC Indemnity and Series
A-25 and subsequent Series of the Kemper Tax-Exempt Insured
Income Trust, Kemper Defined Funds Insured National Series and
EVEREN Unit Investment Trusts Insured National Series are insured
by Financial Guaranty, MBIA and other insurers. The insurance
policy obtained by the Trust for a Series is non-cancelable and will
continue in force so long as such Series of the Trust is in
existence, the insurer and/or the reinsures referred to below
remain in business and the Municipal Bonds described in the
policy continue to be held in such Series of the Trust. The
premium for any insurance policy or policies obtained by an
issuer of Municipal Bonds has been paid in advance by such issuer
and any such policy or policies are non-cancelable and will
remain in force so long as the Municipal Bonds so insured are
outstanding and the insurer and/or insurers referred to below
remain in business. In those instances where Municipal Bond
insurance is obtained by the Sponsor or the issuer directly from
an insurer, no premiums for insurance are paid by the Trust and
such bonds are not covered by the Trust's policy. Non-payment of
premiums on the policy obtained by the Trust will not result in
the cancellation of such insurance but will force the insurer to
take action against the Trustee to recover premium payments due
it. Premium rates for each issue of Municipal Bonds protected by
the policy obtained by the Trust are fixed for the life of the
appropriate Series of the Trust.
The aforementioned insurance guarantees the scheduled payment of
principal and interest on all of the Municipal Bonds as they fall
due. It does not guarantee the market value of the Municipal
Bonds or the value of the Units of a Series of the Trust. The
insurance obtained by the Trust is only effective as to Municipal
Bonds owned by and held in a Series of the Trust and the price
which an individual pays on acquisition of Units, or receives on
redemption or resale of Units, does not, except as indicated
below, include any element of value for the insurance obtained by
the Trust. Unitholders should recognize that in order to receive
any benefit from the portfolio insurance obtained by the Trust
they must be owners of the Units of a Series of the Trust at the
time the Trustee becomes entitled to receive any payment from the
insurer for such Series. Insurance obtained by the issuer of a
Municipal Bond is effective so long as the Municipal Bond is
outstanding, whether or not held by a Series of the Trust.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee, upon the sale of a Municipal Bond from Series A-25 (or
any subsequent Series) of the Kemper Tax-Exempt Insured Income
Trust, Kemper Defined Funds Insured National Series or EVEREN
Unit Investment Trusts covered under the Trust's insurance
policy, has the right to obtain permanent insurance (the
"Permanent Insurance") with respect to such Municipal Bond (i.e.,
insurance to the maturity of the Municipal Bond regardless of the
identity of the holder thereof) upon the payment of a single
predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. Accordingly, every Municipal Bond in Series
A-25 (or subsequent Series) of the Kemper Tax-Exempt Insured
Income Trust, Kemper Defined Funds Insured National Series or
EVEREN Unit Investment Trusts is eligible to be sold on an
insured basis. It is expected that the Trustee will exercise
the right to obtain Permanent Insurance with respect to Municipal
Bonds in such Series only if upon such exercise the Trust would
receive net proceeds (i.e., the value of such Municipal Bond if
sold as an insured Municipal Bond less the insurance premium
attributable to the Permanent Insurance) from such sale in excess
of the sale proceeds if such Municipal Bond was sold on an
uninsured basis. The insurance premium with respect to each
Municipal Bond is determined based upon the insurability of each
Municipal Bond as of the Date of Deposit and will not be
increased or decreased for any change in the creditworthiness of
such Municipal Bond's issuer.
Insurance obtained by the Trust, under normal circumstances, has
no effect on the price or redemption value of Units. It is the
present intention of the Evaluator to attribute a value to such
insurance for the purpose of computing the price or redemption
value of Units only in circumstances where the credit quality of
an underlying Municipal Bond has significantly deteriorated.
Insurance obtained by the issuer of a Municipal Bond is effective
so long as such Municipal Bond is outstanding. Therefore, any
such insurance may be considered to represent an element of
market value in regard to the Municipal Bonds thus insured, but
the exact effect, if any, of this insurance on such market value
cannot be predicted.
The value to be added to such Municipal Bonds shall be an amount
equal to the excess, if any, by which the net proceeds realized
from the sale of the Municipal Bonds on an insured basis exceeds
the sum of (i) the net proceeds realizable from the sale of the
Municipal Bonds on an uninsured basis plus (ii) in the case of
Series A-25 and subsequent Series of the Kemper Tax-Exempt
Insured Income Trust, Kemper Defined Funds Insured National
Series or EVEREN Unit Investment Trusts the premium attributable
to the Permanent Insurance. The portfolio insurance obtained by
the Trust from AMBAC Indemnity for Series A through A-24 of the
Kemper Tax-Exempt Insured Income Trust is applicable only while
the Municipal Bonds remain in the Trust's portfolio.
Consequently, the price received by the Trust upon the
disposition of any such Municipal Bond will reflect a value
placed upon it by the market as an uninsured obligation rather
than a value resulting from the insurance. Due to this fact, the
Sponsor will not direct the Trustee to dispose of Municipal Bonds
in Series A through A-24 of the Kemper Tax-Exempt Insured Income
Trust which are in default or imminent danger of default but to
retain such Municipal Bonds in the portfolio so that if a default
in the payment of interest or principal occurs the Trust may
realize the benefits of the insurance.
The Sponsor will instruct the Trustee not to sell Municipal Bonds
from Series A-25 or subsequent Series of the Kemper Tax-Exempt
Insured Income Trust, Kemper Defined Funds Insured National
Series or EVEREN Unit Investment Trusts Insured National Series
to effect redemptions or for any reason but rather to retain them
in the portfolio unless value attributable to the Permanent
Insurance can be realized upon sale. See "Investment
Supervision."
Financial Guaranty Insurance Company. Financial Guaranty is a
wholly-owned subsidiary of FGIC Corporation (the "Corporation"),
a Delaware holding company. The Corporation is a wholly-owned
subsidiary is General Electric Capital Corporation ("GECC").
Neither the Corporation nor GECC is obligated to pay the debt of or
the claims against Financial Guaranty. Financial Guaranty is
domiciled in the State of New York and is subject to regulation
by the State of New York Insurance Department. As of December
31, 1995, the total capital and surplus of Financial Guaranty was
approximately $1,000,520,000. Copies of Financial Guaranty's
financial statements, prepared on the basis of statutory
accounting principles, and the Corporation's financial
statements, prepared on the basis of generally accepted
accounting principles, may be obtained by writing to Financial
Guaranty at 115 Broadway, New York, New York 10006, Attention:
Communications Department or to the New State Insurance
Department at 160 West Broadway, 18th Floor, New York, New York
10013, Attention: Property Companies Bureau (telephone number
(212) 621-0389). Financial Guaranty's telephone number is (212)
312-3000.
In addition, Financial Guaranty Insurance Company is currently
authorized to write insurance in all 50 states and the District
of Columbia.
The information relating to Financial Guaranty contained above
has been furnished by such corporation. The financial
information contained herein with respect to such corporation is
unaudited but appears in reports or other materials filed with
state insurance regulatory authorities and is subject to audit
and review by such authorities. No representation is made herein
as to the accuracy or adequacy of such information or as to the
absence of material adverse changes in such information
subsequent to the date thereof but the Sponsor is not aware that
the information herein is inaccurate or incomplete.
AMBAC Indemnity Corporation. AMBAC Indemnity Corporation
("AMBAC") is a Wisconsin-domiciled stock insurance company,
regulated by the office of Commissioner of Insurance of
Wisconsin, and licensed to do business in 50 states, the District
of Columbia and the Commonwealth of Puerto Rico, with admitted
assets (unaudited) of approximately $2,145,000,000 and statutory
capital (unaudited) of approximately $782,000,000 as of December
31, 1994. Statutory capital consists of statutory contingency
reserve and policyholders' surplus. AMBAC Indemnity is a
wholly-owned subsidiary of AMBAC Inc., a 100% publicly held
company. Moody's Investors Service, Inc. and Standard & Poor's
Corporation have both assigned a AAA claims-paying ability rating
to AMBAC. Copies of AMBAC's financial statements prepared in
accordance with statutory accounting standards are available from
AMBAC. The address of AMBAC's administrative offices and its
telephone number are One State Street Plaza, 17 Floor, New York,
New York 10004 and (212) 668-0340. AMBAC has entered into quota
share reinsurance agreements under which a percentage of the
insurance underwritten pursuant to certain municipal bank
insurance programs of AMBAC Indemnity has been and will be
assumed by a number of foreign and domestic unaffiliated
reinsures.
MBIA Insurance Corporation. MBIA Insurance Corporation ("MBIA
Corporation") is the principal operating subsidiary of MBIA,
Inc., a New York Stock Exchange listed Company. MBIA, Inc. is
obligated to pay the debts of or claims against MBIA Corporation.
MBIA Corporation, which commenced municipal bond insurance
operations on January 5, 1987, is a limited liability corporation
rather than a several liability association. MBIA Corporation is
domiciled in the State of New York and licensed to do business in
all 50 states, the District of Columbia and the Commonwealth of
Puerto Rico.
As of September 30, 1995 MBIA Corporation had admitted assets of
$3.7 billion (unaudited), total liabilities of $2.5 billion
(unaudited), and total capital and surplus of $1.2 billion
(unaudited) prepared in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory
authorities. As of December 31, 1994, the Insurer has admitted
assets of $3.4 billion (audited), total liabilities of $2.3
billion (audited), and total capital and surplus of $1.1 billion
(audited) determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory
authorities. Standard & Poor's has rated the claims-paying
ability of MBIA "AAA." Copies of MBIA Corporation's financial
statements prepared in accordance with statutory accounting
practices are available from MBIA Corporation. The address of
MBIA Corporation is 113 King Street, Armonk, New York 10504.
Effective December 31, 1993, MBIA Inc. acquired Bond Investors
Group, Inc. On January 5, 1990, the Insurer acquired all of the
outstanding stock of Bond Investors Group, Inc., the parent of
BIG, now known as MBIA Insurance Corp. of Illinois. Through a
reinsurance agreement, BIG has ceded all of its net insured
risks, as well as its unearned premium and contingency reserves,
to the Insurer and the Insurer has reinsured BIG's net
outstanding exposure.
Moody's Investors Service rates all bonds issues insured by MBIA
"Aaa" and short-term loans "MIG1," both designated to be of the
highest quality. Standard & Poor's rates all new issues insured
by MBIA "AAA."
Financial Security Assurance. Financial Security Assurance
("Financial Security" or "FSA") is a monoline insurance company
incorporated on March 16, 1984 under the laws of the State of New
York. The operations of Financial Security commenced on July 25,
1985, and Financial Security received its New York State
insurance license on September 23, 1985. Financial Security and
its two wholly owned subsidiaries are licensed to engage in
financial guaranty insurance business in 49 states, the District
of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively
in the business of writing financial guaranty insurance,
principally in respect of asset-backed and other collateralized
securities offered in domestic and foreign markets. Financial
Security and its subsidiaries also write financial guaranty
insurance in respect of municipal and other obligations and
reinsure financial guaranty insurance policies written by other
leading insurance companies. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled
payments of an issuer's securities, thereby enhancing the credit
rating of these securities, in consideration for payment of a
premium to the insurer.
Financial Security is 91.6% owned by U S West, Inc., and 8.4%
owned by Tokio Marine and Fire Insurance Co., Ltd. ("Tokio
Marine"). Neither U S West, Inc. nor Tokio Marine is obligated
to pay the debts of or the claims against Financial Security.
Financial Security is domiciled in the State of New York and is
subject to regulation by the State of New York Insurance
Department.
As of March 31, 1993 the total policyholders' surplus and
contingency reserves and the total unearned premium reserve,
respectively, of Financial Security and its consolidated
subsidiaries were, in accordance with statutory accounting
principles, approximately $479,110,000 (unaudited) and
$220,078,000 (unaudited), and the total shareholders' equity and
the unearned premium reserve, respectively of Financial Security
and its consolidated subsidiaries were, in accordance with
generally accepted accounting principles, approximately
$628,119,000 (unaudited) and $202,493,000 (unaudited).
Copies of Financial Security's financial statements may be
obtained by writing of Financial Security at 350 Park Avenue, New
York, New York 10022, attention Communications Department.
Financial Security's and its telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written by Financial Security or either of its
subsidiaries are reinsured among such companies at an agreed-upon
percentage substantially proportional to their respective
capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, Financial Security reinsures a
portion of its liabilities under certain of its financial
guaranty insurance policies with unaffiliated reinsures under
various quota share treaties and on a transaction-by-transaction
basis. Such reinsurance is utilized by Financial Security as a
risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance
policy.
Financial Security's claims-paying ability is rated "Aaa" by
Moody's Investors Service, Inc., and "AAA" by Standard & Poor's,
Nippon Investors Service Inc., Duff & Phelps Inc. and Australian
Ratings Pty. Ltd. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell
or hold securities and are subject to revision or withdrawal at
any time by such rating agencies.
Capital Guaranty Insurance Company. Capital Guaranty Insurance
Company ("Capital Guaranty" or "CGIC") is a "Aaa/AAA" rated
monoline stock insurance company incorporated in the State of
Maryland, and is a wholly owned subsidiary of Capital Guaranty
Corporation, a Maryland insurance holding company. Capital
Guaranty Corporation is a publicly owned company whose shares are
traded on the New York Stock Exchange.
Capital Guaranty Corporation is authorized to provide insurance
in all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, Guam and the U.S. Virgin Islands. Capital Guaranty
focuses on insuring municipal securities and provides policies
which guaranty the timely payment of principal and interest when due
for payment on new issue and secondary market issue municipal
bond transactions. Capital Guaranty's claims-paying ability is
rated "Triple-A" by both Moody's and Standard & Poor's.
As of September 30, 1995, Capital Guaranty had $19.0 billion in
net exposure outstanding (excluding defeased issues). The total
statutory policyholders' surplus and contingency reserve of
Capital Guaranty was $204,642,000 and the total admitted assets
were $326,802,226 as reported to the Insurance Department of the
State of Maryland as of September 30, 1995.
Financial statements for Capital Guaranty Insurance Company, that
have been prepared in accordance with statutory insurance
accounting standards, are available upon request. The address of
Capital Guaranty's headquarters is Steuart Tower, 22nd Floor, One
Market Plaza, San Francisco, CA 94105-1413 and the telephone
number is (415) 955-8000.
In order to be in a Series of the Trust, Municipal Bonds must be
insured by the issuer thereof or be eligible for the insurance
obtained by the Series of the Trust. In determining eligibility,
the company insuring the portfolio has applied its own standards
which correspond generally to the standards it normally uses in
establishing the insurability of new issues of municipal bonds
and which are not necessarily the criteria used in regard to the
selection of Municipal Bonds by the Sponsor. To the extent the
standards of the insurer are more restrictive than those of the
Sponsor, the previously stated Trust investment criteria have
been limited.
On the date shown under "Essential Information" in Part Two, the
Estimated Long-Term and Current Returns per Unit for the Trust,
after payment of the insurance premium, if any, were as
indicated. The Estimated Long-Term and Current Returns per Unit
for a trust with an identical portfolio without the insurance
obtained by the Trust would have been higher on such date.
An objective of the portfolio insurance obtained by the Trust is
to obtain a higher yield on the portfolio of the Series of the
Trust than would be available if all the Municipal Bonds in such
portfolio had Standard & Poor's "AAA" rating and/or Moody's "Aaa"
rating(s), while having the protection of insurance of prompt
payment of interest and principal, when due, on the Municipal
Bonds. There is, of course, no certainty that this result will
be achieved. Municipal Bonds in a Series of the Trust which have
been insured by the issuer (all of which are rated "AAA" by
Standard & Poor's and/or "Aaa" by Moody's) may or may not have a
higher yield than uninsured bonds rated "AAA" by Standard &
Poor's or "Aaa" by Moody's. In selecting such Municipal Bonds
for the portfolio, the Sponsor has applied the criteria described
above.
In the event of nonpayment of interest or principal, when due, in
respect of a Municipal Bond, the appropriate insurer shall make
such payment not later than 30 days after it has been notified
that such nonpayment has occurred or is threatened (but not
earlier than the date such payment is due). The insurer, as
regards any payment it may make, will succeed to the rights of
the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling which holds,
in effect, that insurance proceeds representing maturity
interest on defaulted municipal obligations paid to municipal
bond funds substantially similar to the Trust, under policy
provisions substantially identical to the policies described
herein, will be excludable from Federal gross income under
Section 103(a)(1) of the Internal Revenue Code. Holders of Units
in the Trust should discuss with their tax advisers the degree of
reliance which they may place on this letter ruling.
Furthermore, Chapman and Cutler, Counsel for the Sponsor, have
given an opinion to the effect that such payment of proceeds
would be excludable from Federal gross income to the same extent
that such interest would have been so excludable if paid by the
issuer of the defaulted obligations. See "Tax Status of the
Trust."
DISTRIBUTION REINVESTMENT
Each Unitholder of a Trust Fund may elect to have distributions
of principal (including capital gains, if any) or interest or
both automatically invested without charge in shares of any
mutual fund registered in such Unitholder's state of residence
which is underwritten or advised by Kemper Financial Services,
Inc., an affiliate of the sponsor, (the "Kemper Funds"), other
than those Kemper Funds sold with a contingent deferred sales
charge. Since the portfolio securities and investment objectives
of such Kemper Funds may differ significantly from that of the
Trust Funds, Unitholders should carefully consider the
consequences, including the fact that distributions from such
Kemper Funds may be taxable, before selecting such Kemper Funds
for reinvestment. Detailed information with respect to the
investment objectives and the management of the Funds is
contained in their respective prospectuses, which can be obtained
from and appropriate Trust Fund Underwriter upon request. An
investor should read the prospectus of the reinvestment fund
selected prior to making the election to reinvest. Unitholders
who desire to have such distributions automatically reinvested
should inform their broker at the time of purchase or should file
with the Program Agent referred to below a written notice of
election.
Unitholders who are receiving distributions in cash may elect to
participate in distribution reinvestment by filing with the
Program Agent an election to have such distributions reinvested
without charge. Such election must be received by the Program
Agent at least ten days prior to the Record Date applicable to
any distribution in order to be in effect for such Record Date.
Any such election shall remaining effect until a subsequent
notice is received by the Program Agent (See "Distributions to
Unitholders").
The Program Agent is the Trustee. All inquiries concerning
participation in distribution reinvestment should be directed to
the Program Agent at its unit investment trust division office.
INTEREST AND ESTIMATED LONG-TERM AND CURRENT RETURNS
As of the opening of business on the date indicated therein, the
Estimated Current Returns, if applicable, and the Estimated
Long-Term Returns for the Trust were as set forth under
"Essential Information" in Part Two of this Prospectus. Estimated
Current Returns are calculated by dividing the
estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per
Unit will vary with changes in fees and expenses of the Trust and
with the principal prepayment, redemption, maturity, exchange or
sale of Securities while the Public Offering Price will vary with
changes in the offering price of the underlying Securities and
with changes in Purchased Interest, if any; therefore, there is
no assurance that the present Estimated Current Returns will be
realized in the future. Estimated Long-Term Returns are
calculated using a formula which (1) takes into consideration,
and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization
of premiums and the accretion of discounts) and estimated
retirements of all of the Securities in the Trust and (2) takes
into account the expenses and sales charge associated with the
Trust Unit. Since the market values and estimated retirements of
the Securities and the expenses of the Trust will change, there
is no assurance that the present Estimated Long-Term Returns will
be realized in the future. Estimated Current Returns and
Estimated Long-Term Returns are expected to differ because the
calculation of Estimated Long-Term Returns reflects the estimated
date and amount of principal returned while Estimated Current
Returns calculations include only net annual interest income and
Public Offering Price.
TAX STATUS OF THE TRUST
All Municipal Bonds in the Trust were accompanied by copies of
opinions of bond counsel given to the issuers thereof at the time
of original delivery of the Municipal Bonds to the effect that
the interest thereon is exempt from all Federal income taxes. In
connection with the offering of Units of the Trust Funds, neither
the Sponsor, the Trustee, the auditors nor their respective
counsel have made any review of the proceedings relating to the
issuance of the Municipal Bonds or the basis for such opinions.
Gain realized on the sale or redemption of the Municipal Bonds by
the Trustee or of a Unit by a Unitholder is, however, includable
in gross income for Federal income tax purposes (subject to
various non-recognition provisions of the Internal Revenue Code
of 1986, as amended (the "Code")). Such gain does not include
any amounts received in respect of accrued interest or earned
original issue discount, if any. It should be noted that, as
further described below, accretion of market discount on
tax-exempt bonds to taxation as ordinary income. Market discount
can arise based on the price a Trust Fund pays for Municipal
Bonds or the price a Unitholder pays for his or her Units. In
addition, bond counsel to the issuing authorities rendered
opinions as to the exemption of interest on such Bonds, when held
by residents of the state in which the issuers of such bonds are
located, from state income taxes and, where applicable, local
income taxes.
In the opinion of Chapman and Cutler, counsel for the Sponsor:
Each series of the Trust is not an association taxable as a
corporation for federal income tax purposes and interest and
accrued original issue discount on Bonds which is excludable from
gross income under the Code will retain its status when
distributed to Unitholders; however, such interest may be taken
into account in computing the alternative minimum tax, an
additional tax on branches of foreign corporations and the
environmental tax (the "Superfund Tax"), as noted below.
Exemption of interest and accrued original issue discount on any
Municipal Bonds for Federal income tax purposes does not
necessarily result in tax-exemption under the laws of the several
states as such laws vary with respect to the taxation of such
securities and in many states all or part of such interest and
accrued original issue discount may be subject to tax.
Each Unitholder is considered to be the owner of a pro rata
portion of each asset of the respective Series of the Trust in
the proportion that the number of Units of such Trust held by him
bears to the total number of Units outstanding of such Trust
under subpart E, subchapter J of chapter 1 of the Code and will
have a taxable event when such Trust disposes of a Bond, or when
the Unitholder redeems or sells his Units. Unitholders must
reduce the tax basis of their Units for their share of accrued
interest received by a Trust, if any, on Bonds delivered after
the Unitholders pay for their Units to the extent that such
interest accrued on such Bonds during the period from the
Unitholder's settlement date to the date such Bonds are delivered
to a Trust and, consequently, such Unitholders may have an
increase in taxable gain or reduction in capital loss upon the
disposition of such Units. Gain or loss upon the sale or
redemption of Units is measured by comparing the proceeds of such
sale or redemption with the adjusted basis of the Units. If the
Trustee disposes of Bonds (whether by sale, payment on maturity,
redemption or otherwise), gain or loss is recognized to the
Unitholder (subject to various non-recognition provisions of the
Code). The amount of any such gain or loss is measured by
comparing the Unitholder's pro rata share of the total proceeds
from such disposition with the Unitholder's basis for his or her
fractional interest in the asset disposed of. In the case of a
Unitholder who purchases Units, such basis (before adjustment for
earned original issue discount and amortized bond premium, if
any) is determined by apportioning the cost of the Units among
each of the Trust's assets ratably according to value as of the
date of acquisition of the Units. The basis of each Unit and of
each Municipal Bond which was issued with original issue discount
must be increased by the amount of the accrued original issue
discount (and market discount, if the Unitholder elects to
include market discount in income as it accrues) and the basis of
each Unit and of the Unitholder's interest in each Municipal Bond
which was acquired by such Unitholder at a premium must be
reduced by the annual amortization of Municipal Bond premium.
The tax basis reduction requirements of the Code relating to
amortization of bond premium may, under some circumstances,
result in the Unitholder realizing a taxable gain when his Units
are sold or redeemed for an amount equal to his original cost.
Any proceeds paid under individual insurance policies obtained by
issuers of Bonds or under any insurance policies obtained by the
Trust or the Sponsor which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from
Federal gross income if, and to the same extent as, such interest
would have been so excludable if paid in the normal course by the
issuer of the defaulted obligations; provided that, at the time
such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the
insurer, will pay debt service on the obligations.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules
provide that original issue discount accrues either on the basis
of a constant compound interest rate or ratably over the term of
the Municipal Bond, depending on the date the Municipal Bond was
issued. In addition, special rules apply if the purchase price
of a Municipal Bond exceeds the original issue price plus the
amount of original issue discount which would have previously
accrued based upon its issue price (its "adjusted issue price")
to prior owners. The application of these rules will also vary
depending on the value of the Municipal Bond on the date a
Unitholder acquires his Units, and the price the Unitholder pays
for his Units. Unitholders should consult with their tax
advisers regarding these rules and their application.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects
tax-exempt bonds to the market discount rules of the Code
effective for bonds purchased after April 30, 1993. In general,
market discount is the amount (if any) by which the stated
redemption price at maturity exceeds an investor's purchase price
(except to the extent that such difference, if any, is
attributable to original issue discount not yet accrued) subject
to a statutory "de minimis" rule. Market discount can arise
based on the price a Trust pays for Municipal Bonds or the price
a Unitholder pays for his or her Units. Under the Tax Act,
accretion of market discount is taxable as ordinary income; under
prior law the accretion had been treated as capital gain. Market
discount that accretes while a Trust Fund holds a Municipal Bond
would be recognized as ordinary income by the Unitholders when
principal payments are received on the Municipal Bond, upon sale
or at redemption (including early redemption), or upon sale or
redemption of his or her Units, unless a Unitholder elects to
include market discount in taxable income as it accrues. The
market discount rules are complex and Unitholders should consult
their tax advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax
and the Superfund Tax depend upon the corporation's alternative
minimum taxable income, which is the corporation's taxable income
with certain adjustments. One of the adjustment items used in
computing the alternative minimum taxable income and the
Superfund Tax of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or
REMIC) is an amount equal to 75% of the excess of such
corporation's "adjusted current earnings" over an amount equal to
its alternative minimum taxable income (before such adjustment
item and the alternative tax net operating loss deduction).
"Adjusted current earnings" includes all tax-exempt interest,
including interest on all of the Bonds in a Trust and tax-exempt
original issue discount. Unitholders should consult their tax
advisers with respect to the particular tax consequences to them
including the corporate alternative minimum tax, the Superfund
Tax and the branch profits tax imposed by Section 884 of the
Code.
Counsel for the Sponsor has also advised that under Section 265
of the Code, interest on indebtedness incurred or continued to
purchase or carry Units of a Trust is not deductible for Federal
income tax purposes. The Internal Revenue Service has taken the
position that such indebtedness need not be directly traceable to
the purchase or carrying of Units (however, these rules generally
do not apply to interest paid on indebtedness incurred to
purchase or improve a personal residence or to purchase goods or
services for personal consumption). Also, under Section 265 of
the Code, certain financial institutions that acquire units would
generally not be able to deduct any of the interest expense
attributable to ownership of such Units. On December 7, 1995 the
U.S. Treasury Department released proposed legislation that, if
adopted, would generally extend the financial institution rules
to all corporations, effective for obligations acquired after the
date of announcement. Investors with questions regarding these
issues should consult with their tax advisers.
In the case of certain Municipal Bonds in certain Series of the
Trust, the opinions of bond counsel indicate that interest on
such securities received by a "substantial user" of the
facilities being financed with the proceeds of these securities
or persons related thereto, for periods while such securities are
held by such a user or related person, will not be excludable
from Federal gross income, although interest on such securities
received by others would be excludable from Federal gross income.
"Substantial user" and "related person" are defined under the
Code and U.S. Treasury Regulations. Any person who believes that
he or she may be a "substantial user" or a "related person" as so
defined should contact his or her tax adviser.
In the case of corporations, the alternative tax rate applicable
to long-term capital gains is 35% effective for long-term capital
gains realized in taxable years beginning on or after January 1,
1993. For taxpayers other than corporations, net capital gains
are subject to a maximum marginal stated tax rate of 28%.
However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could
affect relative differences at which ordinary income and capital
gains are taxed. Under the Code, taxpayers must disclose to the
Internal Revenue Service the amount of tax-exempt interest earned
during the year.
All statements of law in the Prospectus concerning exclusion from
gross income for Federal, state or other tax purposes are the
opinions of counsel and are to be so construed.
At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exclusion of interest
thereon from Federal gross income are rendered by bond counsel to
the respective issuing authorities. Neither the Sponsor nor Chapman
and Cutler has made any special review for the Trust
Funds of the proceedings relating to the issuance of the Bonds or
of the basis for such opinions.
Section 86 of the Code, in general, provides that fifty percent
of Social Security benefits are includible in gross income to the
extent that the sum of "modified adjusted gross income" plus
fifty percent of the Social Security benefits received exceeds a
"base amount." The base amount is $25,000 for unmarried
taxpayers, $32,000 for married taxpayers filing a joint return
and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns. Modified
adjusted gross income is adjusted gross income determined without
regard to certain otherwise allowable deductions and exclusions
from gross income and by including tax-exempt interest. To the
extent that Social Security benefits are includible in gross
income, they will be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after
December 31,1993, up to eighty-five percent of Social Security
benefits are includible in gross income to the extent that the
sum of "modified adjusted gross income" plus fifty percent of
Social Security benefits received exceeds an "adjusted base
amount." The adjusted base amount is $34,000 for married
taxpayers, $44,000 for married taxpayers filing a joint return
and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified adjusted
gross income solely for the purpose of determining what portion,
if any, of Social Security benefits will be included in gross
income, no tax-exempt interest, including that received from the
Trust, will be subject to tax. A taxpayer whose adjusted gross
income already exceeds the base amount or the adjusted base
amount must include fifty percent or eighty-five percent,
respectively of his Social Security benefits in gross income
whether or not he receives any tax-exempt interest. A taxpayer
whose modified adjusted gross income (after inclusion of
tax-exempt interest) does not exceed the base amount need not
include any Social Security benefits in gross income.
Ownership of the Units may result in collateral federal income
tax consequences to certain taxpayers, including, without
limitation, corporations subject to either the environmental tax
or the branch profits tax, financial institutions, certain
insurance companies, certain S corporations, individual
recipients of Social Security or Railroad Retirement benefits and
taxpayers who may be deemed to have incurred (or continued)
indebtedness to purchase or carry tax-exempt obligations.
Prospective investors should consult their tax advisors as to the
applicability of any collateral consequences. On December 7,
1995, the U.S. Treasury Department released proposed legislation
that, if adopted, could affect the United States federal income
taxation of non-United States Unitholders and the portion of the
Trusts' income allocable to non-United States Unitholders.
The exemption of interest on state and local obligations for
Federal income tax purposes discussed above does not necessarily
result in exemption under the income or other tax laws of any state
or city. The laws of the several states vary with respect
to the taxation of such obligations.
TAX REPORTING AND REALLOCATION
Because the Trust receives interest and makes monthly
distributions based upon such Trust's expected total collections
of interest and any anticipated expenses, certain tax reporting
consequences may arise. The Trust is required to report
Unitholder information to the Internal Revenue Service ("IRS"),
based upon the actual collection of interest by such Trust on the
securities in such Trust, without regard to such Trust, without
regard to such Trust's expenses or to such Trust's payments to
Unitholders during the year. If distributions to Unitholders
exceed interest collected, the difference will be reported as a
return of principal which will reduce a Unitholder's cost basis
in its Units (and its pro rata interest in the securities in the
Trust). A Unitholder must include in taxable income the amount
of income reported by a Trust to the IRS regardless of the amount
distributed to such Unitholder. If a Unitholder's share of
taxable income exceeds income distributions made by a Trust to
such Unitholder, such excess is in all likelihood attributable to
the payment of miscellaneous expenses of such Trust which will
not be deductible by an individual Unitholder as an itemized
deduction except to the extent that the total amount of certain
itemized deductions, such as investments expenses (which would
include the Unitholder's share of Trust expenses), tax return
preparation fees and employee business expenses, exceeds 2% of
such Unitholder's adjusted gross income. Alternatively, in
certain cases, such excess may represent an increase in the
Unitholder's tax basis in the Units owned. Investors with
questions regarding these issues should consult with their tax
advisors.
PUBLIC OFFERING OF UNITS
Public Offering Price. Units of each Series of the Trust are
offered at the Public Offering Price, plus accrued interest to
the expected settlement date (Daily Accrued Interest for certain
Series). The Public Offering Price per Unit of a Series is equal
to the aggregate bid side evaluation of the Municipal Bonds in
the Series' portfolio (as determined pursuant to the terms of a
contract with the Evaluator, by Cantor Fitzgerald & Co., a
non-affiliated firm regularly engaged in the business of
evaluating, quoting or appraising comparable securities), plus or
minus cash, if any, in the Principal Account, held or owned by
the Series, divided by the number of outstanding Units of that
Series of the Trust, plus Purchased Interest, if any, plus the
sales charge applicable. The sales charge is based upon the
dollar weighted average maturity of the Trust and is determined
in accordance with the table set forth below. Investors who
purchase Units through brokers or dealers pursuant to a current
management agreement which by contract or operation of law does
not allow such broker or dealer to earn an additional commission
(other than any fee or commission paid for maintenance of such
investor's account under the management agreement) on such
transactions may purchase such Units at the current Public
Offering Price net of the applicable broker or dealer concession.
See "Public Distribution of Units" below. For purposes of this
computation, Municipal Bonds will be deemed to mature on their
expressed maturity dates unless: (a) the Municipal Bonds have
been called for redemption or funds or securities have been
placed in escrow to redeem them on an earlier call date, in which
case such call date will be deemed to be the date upon which they
mature; or (b) such Municipal Bonds are subject to a "mandatory
tender," in which case such mandatory tender will be deemed to be
the date upon which they mature. The effect of this method of
sales charge computation will be that different sales charge
rates will be applied to the Trust based upon the dollar weighted
average maturity of such Trust's portfolio, in accordance with
the following schedule:
PERCENT OF PERCENT
DOLLAR WEIGHTED PUBLIC OF NET
AVERAGE YEARS OFFERING AMOUNT
TO MATURITY PRICE INVESTED
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
The sales charge per Unit will be reduce d as set forth below:
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 to 7.99 8 to 14.99 15 or more
Amount of Investment Sales Charge (% of Public Offering
Price)
$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
- -------------------
* If the dollar weighted average maturity of a Trust is from 1
to 3.99 years, the sales charge is 2% and 1.5% of the Public
Offering Price for purchases of $1 to $249,999 and $250,000 or
more, respectively.
The reduced sales charge as shown on the preceding charts will
apply to all purchases of Units on any one day by the same
purchases from the same dealer, and for this purpose, purchases
of Units of a Series of the Trust will be aggregated with
concurrent purchases of Units of any other unit investment trust
that may be offered by the Sponsor. Additionally, Units
purchased in the name of a spouse or child (under 21) of such
purchaser will be deemed to be additional purchases by such
purchaser. The reduced sales charge will also be applicable to a
trust or other fiduciary purchasing for a single trust estate or
single fiduciary account.
The Sponsor intends to permit officers, directors and employees
of the Sponsor and Evaluator and, at the discretion of the
Sponsor, registered representatives of selling firms to purchase
Units of the Trusts without a sales charge, although a
transaction processing fee may be imposed on such trades.
The Public Offering Price on the date shown on the cover page of
Part Two of the Prospectus or on any subsequent date will vary
from the amounts stated under "Essential Information" in Part Two
in accordance with fluctuations in the prices of the underlying
Municipal Bonds. The aggregate bid side evaluation of the
Municipal Bonds shall be determined (a) on the basis of current
bid prices of the Municipal Bonds, (b) if bid prices are not
available for any particular Municipal Bond, on the basis of
current bid prices for comparable bonds, (c) by determining the
value of the Municipal Bonds on the bid side of the market by
appraisal, or (d) by any combination of the above. Except as
described in "Insurance on the Portfolios" above, the Evaluator
will not attribute any value to the insurance obtained by the
Trust. On the other hand, the value of insurance obtained by an
issuer of Municipal Bonds or by the Sponsor is reflected and
included in the market value of such Municipal Bonds.
In any case, the Evaluator will consider the ability of an
insurer to meet its commitments under the Trust's insurance
policy (if any). For example, if the Trust were to hold the
Municipal Bonds of a municipality which had significantly
deteriorated in credit quality, the Evaluator would first
consider in its evaluation the market price of the Municipal
Bonds at their lower credit rating. The Evaluator would also
attribute a value to the insurance feature of the Municipal Bonds
which would be equal to the difference between the market value
of such Municipal Bonds and the market value of bonds of a
similar nature which were of investment grade rating. It is the
position of the Sponsor that this is a fair method of valuing
insured Municipal Bonds and reflects a proper valuation method in
accordance with the provisions of the Investment Company Act of
1940. For a description of the circumstances under which a full
or partial suspension of the right of Unitholders to redeem their
Units may occur, see "Redemption."
The foregoing evaluations and computations shall be made as of
the Evaluation Time stated under "Essential Information" in Part
Two, on each business day effective for all sales made during the
preceding 24-hour period, and for purposes of resales and
repurchases of Units.
The interest on the Municipal Bonds in each Series of the Trust,
less the estimated fees and expenses, is estimated to accrue in
the annual amounts per Unit set forth under "Essential
Information" in Part Two. The amount of net interest income
which accrues per Unit may change as Municipal Bonds mature or
are redeemed, exchanged or sold, or as the expenses of a Series
of the Trust change or as the number of outstanding Units of such
Series changes.
Payment for Units must be made on or before the third business
day following purchase (the "settlement date"). A purchaser
becomes the owner of Units on the settlement date. If a
Unitholder desires to have certificates representing Units
purchased, such certificates will be delivered as soon as
possible following his written request therefor. For information
with respect to redemption of Units purchased, but as to which
certificates requested have not been received, see "Redemption"
below.
Accrued Interest. Included in the Public Offering Price of Units
of Kemper Tax-Exempt Insured Income Trust is accrued interest as
described herein. Accrued Interest consists of two elements.
The first arises as a result of accrued interest which is the
accumulation of unpaid interest on a bond from the last day on
which interest thereon was paid. Interest on Bonds in the Trust
Funds is actually paid either monthly or semi-annually to the
Trust Fund. However, interest on the Bonds in the Trust Funds is
accounted for daily on an accrual basis. Because of this, a
Trust Fund always has an amount of interest earned but not yet
collected by the Trustee because of coupons that are not yet due.
For this reason, the Public Offering Price of Units will have
added to it the proportionate share of accrued and undistributed
interest to the date of settlement.
The Trustee will advance the amount of accrued interest as of the
First Settlement Date and the same will be distributed to
Sponsor. Such advance will be repaid to the Trustee through the
first receipts of interest received on the Municipal Bonds.
Consequently, the amount of accrued interest to be added to the
Public Offering Price of Units will include only accrued interest
arising after the First Settlement Date of a Trust Fund, less any
distributions from the Interest Account subsequent to this First
Settlement Date. Since the First Settlement Date is the date of
settlement for anyone ordering Units on the Date of Deposit, no
accrued interest will be added to the Public Offering Price of
Units ordered on the Date of Deposit.
The second element of accrued interest arises because of the
structure of the Interest Account. The Trustee has no cash for
distribution to Unitholders until it receives interest payments
on the Bonds in a Trust Fund. The Trustee is obligated to
provide its own funds, at times, in order to advance interest
distributions. The Trustee will recover these advancements when
such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis
for the Trustee to advance its own funds in connection with such
interest distributions. The Interest Account balances are also
structured so that there will generally be positive cash balances
and since the funds held by the Trustee will be used by it to
earn interest thereon, it benefits thereby (see "Expenses of the
Trust").
Accrued interest is computed as of the initial Record Date of the
Trust Funds. On the date of the first distribution of interest
to Unitholders after the First Settlement Date, the interest
collected by the Trustee will be sufficient to repay its
advances, to allow for accrued interest under the monthly,
quarterly and semi-annual plans of distribution and to generate
enough cash to commence distributions to Unitholders. If a
Unitholder sells or redeems all or a portion of his Units or if
the Bonds in a Trust Fund are sold or otherwise removed or if a
Trust Fund is liquidated, he will receive at that time his
proportionate share of the accrued interest computed to the
settlement date in the case of sale or liquidation and to the of
tender in the case of redemption in such Trust Fund.
Purchased and Daily Accrued Interest. Included in the Public
Offering Price of Units for Kemper Defined Funds Insured National
Series 1-13 is Purchased and Daily Accrued Interest as described
herein. Accrued interest consist of two elements. The first
element arises as a result of accrued interest which is the
accumulation of unpaid interest on a bond from the later of the
last day on which interest thereon was paid or the date of
original issuance of the bond. Interest on the coupon Bonds in
the Trust fund is paid semi-annually to the Trust. A portion of
the aggregate amount of such accrued interest on the Bonds in the
Trust to the First Settlement Date of the Trust Units is the
Purchased Interest. In an effort to reduce the amount of
Purchased Interest which would otherwise have to be paid by
Unitholders, the Trustee may advance a portion of the accrued
interest to the Sponsor as the Unitholder of record as of the
First Units in the Trust Fund is accounted for daily on an
accrual basis (herein referred to as "Daily Accrued Interest").
Because of this, the Units always have an amount of interest
earned but not yet paid or reserved for payment. For this
reason, the Public Offering Price of Units will include the
proportionate share of Daily Accrued Interest to the date of
settlement.
If a Unitholder sells or redeems all or a portion of his Units or
if the bonds are sold or otherwise removed or if the Trust Fund
is liquidated, he will receive at that time his proportionate
share of the Purchase Interest and Daily Accrued Interest
computed to the settlement date in the case of sale or
liquidation and to the date of tender in the case of redemption
in the Trust Fund.
Accrued Interest. Included in the Public Offering Price of Units
for Kemper Defined Funds Insured National Series 14 and
subsequent series and all EVEREN Unit Investment Trusts Insured
National Series is accrued interest as described herein. Accrued
interest is the accumulation of unpaid interest on a security
from the last day on which interest thereon was paid. Interest
on Securities generally is paid semi-annually although a Trust
accrues such interest daily. Because of this, a Trust always has
an amount of interest earned but not yet collected by the
Trustee. For this reason, with respect to sales settling
subsequent to the First Settlement Date, the Public Offering
Price of Units will have added to it the proportionate share of
accrued interest to the date of settlement. Unitholders will
receive on the next distribution date of a Trust the amount, if
any, of accrued interest paid on their Units.
In an effort to reduce the amount of accrued interest which would
otherwise have to be paid in addition to the Public Offering
Price in the sale of Units to the public, the Trustee will
advance the amount of accrued interest as of the First Settlement
Date and the same will be distributed to the Sponsor as the
Unitholder of record as of the First Settlement Date.
Consequently, the amount of accrued interest to be added to the
Public Offering Price of Units will include only accrued interest
from the First Settlement Date to the date of settlement, less
any distributions from the Interest Account subsequent to the
First Settlement Date.
Because of the varying interest payment dates of the Securities,
accrued interest at any point in time will be greater than the
amount of interest actually received by the Trusts and
distributed to Unitholders. Therefore, there will always remain
an item of accrued interest that is added to the value of the
Units. If a Unitholder sells or redeems all or a portion of his
Units, he will be entitled to receive his proportionate share of
the accrued interest from the purchaser of his Units. Since the
Trustee has the use of the funds held in the Interest Account for
distributions to Unitholders and since such Account is
non-interest-bearing to Unitholders, the Trustee benefits
thereby.
Public Distribution of Units. The Sponsor has qualified Units
for sale in all states. Units will be sold through dealers who
are members of the National Association of Securities Dealers,
Inc. and through others. Sales may be made to or through dealers
at prices which represent discounts from the Public Offering
Price as set forth in the table below. Certain commercial banks
are making Units of the Trust available to their customers on an
agency basis. A portion of the sales charge paid by their
customers is retained by or remitted to the banks, in the amount
shown in the table below. Under the Glass-Steagall Act, banks
are prohibited from underwriting Trust Units; however, the
Glass-Steagall Act does permit certain agency transactions and
the banking regulators have indicated that these particular
agency transactions are permitted under such Act. In addition,
state securities laws on this issue may differ from the
interpretations of Federal law expressed herein and banks and
financial institutions may be required to register as dealers
pursuant to state law.
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 to 7.99 8 to 14.99 15 or more
Amount of Investment Discount per Unit (% of Public Offering
Price)
$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
- -----------------
* If the dollar weighted average maturity of a Trust is from 1
to 3.99 years, the concession or agency commission is 1.00% of
the Public Offering Price.
In addition to such discounts, the Sponsor may, from time to
time, pay or allow an additional discount, in the form of cash or
other compensation, to dealers employing registered
representatives who sell, during a specified time period, a
minimum dollar amount of Units of the Trusts and other unit
investment trusts underwritten by the Sponsor.
The Sponsor reserves the right to change the levels of discounts
at any time. The difference between the discount and the sales
charge will be retained by the Sponsor.
The Sponsor reserves the right to reject, in whole or in part,
any order for the purchase of Units.
Profits of Sponsor. The Sponsor will retain a portion of the
sales charge on each Unit sold, representing the difference between
the Public Offering Price of the Units and the discounts
allowed to firms selling such Units. The Sponsor may realize
additional profit or loss as a result of the possible change in
the daily evaluation of the Municipal Bonds in the Trust, since
the value of its inventory of Units may increase or decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, and certain
of the Underwriters may, subject to change at any time, maintain
a market for Units of each Series of the Trust offered hereby and
to continuously offer to purchase said Units at prices, as
determined by the Evaluator, based on the aggregate bid prices of
the underlying Municipal Bonds of such Series, together with
accrued interest to the expected date of settlement. Unitholders
who wish to dispose of their Units should inquire of their broker
or bank as to the current market price of the Units in order to
determine whether there is in existence any price in excess of
the Redemption Price and, if so, the amount thereof.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary
market described above may cause their Units to be redeemed by
the Trustee by making a written request to the Trustee, The Bank
of New York, 101 Barclay Street, New York, New York 10286 and, in
the case of Units evidenced by a certificate, by tendering such
certificate to the Trustee, properly endorsed or accompanied by a
written instrument or instruments of transfer in form
satisfactory to the Trustee. Unitholders must sign the request,
and such certificate or transfer instrument, exactly as their
names appear on the records of the Trustee and on any certificate
representing the Units to be redeemed. If the amount of the
redemption is $25,000 or less and the proceeds are payable to the
Unitholder(s) of record at the address of record, no signature
guarantee is necessary for redemptions by individual account
owners (including joint owners). Additional documentation may be
requested, and a signature guarantee is always required, from
corporations, executors, administrators, trustees, guardians or
associations. The signatures must be guaranteed by a participant
in the Securities Transfer Agents Medallion Program ("STAMP") or
such other guarantee program in addition to, or in substitution
for, STAMP, as may be accepted by the Trustee. A certificate
should only be sent by registered or certified mail for the
protection of the Unitholder. Since tender of the certificate is
required for redemption when one has been issued, Units
represented by a certificate cannot be redeemed until the
certificate representing such Units has been received by the
purchaser.
Redemption shall be made by the Trustee on the third business day
following the day on which a tender for redemption is received
(the "Redemption Date"), by payment of cash equivalent to the
Redemption Price for that Series of the Trust, determined as set
forth below under "Computation of Redemption Price," as of the
evaluation time stated under "Essential Information" in Part Two,
next following such tender, multiplied by the number of Units
being redeemed. Any Units redeemed shall be cancelled and any
undivided fractional in the Trust Fund extinguished. The price
received upon redemption might be more or less than the amount
paid by the Unitholder depending on the value of the Municipal
Bonds in the portfolio at the time of redemption. Any Units
redeemed shall be cancelled and any undivided fractional interest
in that Series of the Trust will be extinguished.
Under regulations issued by the Internal Revenue Service, the
Trustee is required to withhold a specified percentage of the
principal amount of a Unit redemption if the Trustee has not been
furnished the redeeming Unitholder's tax identification number in
the manner required by such regulations. Any amount so withheld
is transmitted to the Internal Revenue Service and may be
recovered by the Unitholder only when filing a tax return. Under
normal circumstances the Trustee obtains the Unitholder's tax
identification number from the selling broker. However, any time
a Unitholder elects to tender Units for redemption, such
Unitholder should make sure that the Trustee has been provided a
certified tax identification number in order to avoid this
possible "back-up withholding." In the event the Trustee has not
been previously provided such number, one must be provided at the
time redemption is requested.
Any amounts paid on redemption representing interest shall be
withdrawn from the Interest Account of such Series to the extent
that funds are available for such purpose. All other amounts
paid on redemption shall be withdrawn from the Principal Account
of such Series. The Trustee is empowered to sell Municipal Bonds
from the portfolio of a Series in order to make funds available
for the redemption of Units of such Series. Such sale may be
required when Municipal Bonds would not otherwise be sold and
might result in lower prices than might otherwise be realized.
To the extent Municipal Bonds are sold, the size and diversity of
that Series of the Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if an
Underwriter does not elect to purchase any Units tendered for
redemption, in lieu of redeeming such Units, to sell such Units
in the over-the-counter market for the account of tendering
Unitholders at prices which will return to such Unitholders
amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the Redemption Price
for such Units. In the event of any such sale, the Trustee shall
pay the net proceeds thereof to the Unitholders on the day they
would otherwise be entitled to receive payment of the Redemption
Price.
The right of redemption may be suspended and payment postponed
(1) for any period during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or
during which (as determined by the Securities and Exchange
Commission) trading on the New York Stock Exchange is restricted;
(2) for any period during which an emergency exists as a result
of which disposal by the Trustee of Municipal Bonds is not
reasonably practicable or it is not reasonably practicable to
fairly determine the value of the underlying Municipal Bonds in
accordance with the Trust Agreements; or (3) for such other
period as the Securities and Exchange Commission may by order
permit. Because insurance obtained by certain Series of the Trust
terminates as to Bonds which are sold by the Trustee and
because the insurance obtained by such Series of the Trust does
not have a realizable cash value which can be used by the Trustee
to meet redemptions of Units, under certain circumstances the
Sponsor may apply to the Securities and Exchange Commission for
an order permitting a full or partial suspension of the right of
Unitholders to redeem their Units if a significant portion of the
Bonds in the portfolio is in default in payment of principal or
interest or in significant risk of such default. The Trustee is
not liable to any person or in any way for any loss or damage
which may result from any such suspension or postponement.
Computation of Redemption Price. The Redemption Price for Units
of each Series of the Trust is computed by the Evaluator as of
the evaluation time stated under "Essential Information" in Part
Two next occurring after the tendering of a Unit for redemption
and on any other business day desired by it, by:
A. adding (1) the cash on hand in such Series of the Trust
other than cash depositor in the Trust Funds to purchase
Municipal Bonds not applied to the purchase of such Bonds; (2)
the aggregate value of the Municipal Bonds held in such Series of
the Trust, as determined by the Evaluator on the basis of bid
prices therefor; and (3) interest accrued and unpaid on the
Municipal Bonds in that Series of the Trust as of the date of
computation; and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of that
Series of the Trust and for which no deductions have been
previously made for the purpose of additions to the Reserve
Account described under "Expenses of the Trust"; (2) amounts
representing estimated accrued expenses of that Series of the
Trust including, but not limited to, fees and expenses of the
Trustee (including legal and auditing fees and insurance costs),
the Evaluator, the Sponsor and bond counsel, if any; (3) cash
held for distribution to Unitholders of record as of the business
day prior to the evaluation being made; and (4) other liabilities
incurred by such Series of the Trust; and
C. finally, dividing the results of such computation by
the number of Units of such Series of the Trust outstanding as of
the date thereof.
UNITHOLDERS
Ownership of Units. Ownership of Units of a Trust will not be
evidenced by certificates unless a Unitholder, the Unitholder's
registered broker/dealer or the clearing agent makes a written
request to the Trustee. Units are transferable by making a
written request to the Trustee and, in the case of Units
evidenced by a certificate, by presenting and surrendering such
certificate to the Trustee properly endorsed or accompanied by a
written instrument or instruments of transfer which should be
sent registered or certified mail for the protection of the
Unitholder. Unitholders must sign such written request, and such
certificate or transfer instrument, exactly as their names appear
on the records of the Trustee and on any certificate representing
the Units to be transferred. Such signatures must be guaranteed
by a participant in the Securities Transfer Agents Medallion Program
("STAMP") or such other signature guarantee program in
addition to, or in substitution for, STAMP, as may be accepted by
the Trustee.
Units may be purchased and certificates, if requested, will be
issued in denominations of one Unit or any multiple thereof
subject to any minimum investment requirement established by the
Sponsor from time to time. Any Certificate issued will be
numbered serially for identification, issued in fully registered
form and will be transferable only on the books of the Trustee.
The Trustee may require a Unitholder to pay a reasonable fee, to
be determined in the sole discretion of the Trustee, for each
certificate re-issued or transferred, and to pay any governmental
charge that may be imposed in connection with each such transfer
or interchange. The Trustee at the present time does not intend
to charge for the normal transfer or interchange of certificates.
Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity
(generally amounting to 3% of the market value of the Units),
affidavit of loss, evidence of ownership and payment of expenses
incurred.
Distributions to Unitholders. Interest received by a Series of
the Trust, including any portion of the proceeds from a
disposition of Municipal Bonds which represents accrued interest,
is credited by the Trustee to the Interest Account for such
Series. All other receipts are credited by the Trustee to a
separate Principal Account for such Series. During each year the
distributions to the Unitholders of each Series of the Trust as
of each Record Date (see "Essential Information" in Part Two)
will be made on the following Distribution Date or shortly
thereafter and shall consist of an amount substantially equal to
one-twelfth, one-fourth or one-half (depending on the
distribution option selected except in Series of Kemper Defined
Funds and EVEREN Unit Investment Trusts in which case only
monthly distributions are available) of such Unitholders' pro
rata share of the estimated net annual interest income to the
Interest Account for such Series of the Trust. However, the
interest to which Unitholders of a Series of the Trust are
entitled will at most times exceed the amount available for
distribution, there will almost always remain an item of accrued
interest that is added to the daily value of the Units of such
Series. If Unitholders of a Series sell or redeem all or a
portion of their Units they will be paid their proportionate
share of the accrued interest of such Series to, but not
including, the fifth business day after the date of sale or to
the date of tender in the case of a redemption.
Persons who purchase Units between a Record Date and a
Distribution Date will receive their first distribution on the
Second Distribution Date following the purchase of their Units.
Since interest on Municipal Bonds in each Series of the Trust is
payable at varying intervals, usually in semiannual installments,
and distributions of income are made to Unitholders of a Series
of the Trust at what may be different intervals from receipt of
interest, the interest accruing to such Series of the Trust may not
be equal to the amount of money received and available for
distribution from the Interest Account of such Series.
Therefore, on each Distribution Date the amount of interest
actually on deposit in the Interest Account and available for
distribution may be slightly more or less than the interest
distribution made. In order to eliminate fluctuations in
interest distributions resulting from such variances, the Trustee
is authorized by the Agreement to advance such amounts as may be
necessary to provide interest distributions of approximately
equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available in the Interest
Account of such Series.
Unitholders purchasing Units will initially receive distributions
in accordance with the election of the prior owner. Unitholders
desiring to change their distribution option, if applicable, may
do so by sending written notice to the Trustee, together with
their certificate (if one was issued). Certificates should only
be sent by registered or certified mail to minimize the
possibility of loss. If written notice and any certificate are
received by the Trustee not later than January 1 of a year, the
change will become effective on January 2 for distributions
commencing with February 15 of that year. If notice is not
received by the Trustee, the Unitholder will be deemed to have
elected to continue with the same option for the subsequent
twelve months.
The Trustee will distribute on each semi-annual Distribution Date
(or in the case of Kemper Defined Funds and EVEREN Unit
Investment Trusts, on each Distribution Date) or shortly
thereafter, to each Unitholder of Record of the Trust on the
preceding Record Date, an amount substantially equal to such
Unitholder's pro rata share of the cash balance, if any, in the
Principal Account of such Trust computed as of the close of
business on the preceding Record Date. However, no distribution
will be required if the balance in the Principal Account is less
than $1.00 per Unit (or $.001 per Unit for certain Series).
Except for Series of Kemper Tax-Exempt Insured Income Trust, if
such balance is between $5.00 and $10.00 per Unit, distributions
will be made on each quarterly Distribution Date; and if such
balance exceeds $10.00 per Unit, such amounts will be distributed
on the next monthly Distribution Date.
Statement to Unitholders. With each distribution, the Trustee
will furnish or cause to be furnished each Unitholder a statement
of the amount of interest and the amount of other receipts, if
any, which are being distributed, expressed in each case as a
dollar amount per Unit.
The accounts of each Series of the Trust are required to be
audited annually, at the Series' expense, by independent auditors
designated by the Sponsor, unless the Trustee determines that
such an audit would not be in the best interest of the
Unitholders of such Series of the Trust. The accountants' report
will be furnished by the Trustee to any Unitholder of such Series
of the Trust upon written request.
Within a reasonable period of time after the end of each calendar
year, the Trustee shall furnish to each person who at any time during
the calendar year was a Unitholder of a Series of the
Trust a statement covering the calendar year, setting forth:
A. As to the Interest Account:
1. The amount of interest received on the Municipal Bonds
in such Series and the percentage of such amount by states and
territories in which the issuers of such Municipal Bonds are
located;
2. The amount paid from the Interest Account of such
Series representing accrued interest of any Units redeemed;
3. The deductions from the Interest Account of such Series
for applicable taxes, if any, fees and expenses (including
insurance costs and auditing fees) of the Trustee, the Evaluator,
the Sponsor and bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve
Account for such Series described under "Expenses of the Trust";
and
5. The net amount remaining after such payments and
deductions, expressed both as a total dollar amount and a dollar
amount per Unit outstanding on the last business day of such
calendar year.
B. As to the Principal Account:
1. The dates of the maturity, liquidation or redemption of
any of the Municipal Bonds in such Series and the net proceeds
received therefrom excluding any portion credited to the Interest
Account;
2. The amount paid from the Principal Account of such
Series representing the principal of any Units redeemed;
3. The deductions from the Principal Account of such
Series for payment of applicable taxes, if any, fees and expenses
(including insurance costs and auditing expenses) of the Trustee,
the Evaluator, the Sponsor and of bond counsel, if any;
4. Any amounts credited by the Trustee to a Reserve
Account for such Series described under "Expenses of the Trust";
and
5. The net amount remaining after distributions of
principal and deductions, expressed both as a dollar amount and
as a dollar amount per Unit outstanding on the last business day
of such calendar year.
C. The following information:
1. A list of the Municipal Bonds in such Series as of the
last business day of such calendar year;
2. The number of Units of such Series outstanding on the
last business day of such calendar year;
3. The Redemption Price of such Series based on the last
Trust Evaluation made during such calendar year; and
4. The amount actually distributed during such calendar
year from the Interest and Principal Accounts of such Series
separately stated, expressed both as total dollar amounts and as
dollar amounts per Unit of such Series outstanding on the Record
Date for each such distribution.
Rights of Unitholders. A Unitholder may at any time tender Units
to the Trustee for redemption. No Unitholder of a Series shall
have the right to control the operation and management of such
Series or of the Trust in any manner, except to vote with respect
to amendment of the Trust Agreements or termination of such
Series of the Trust. The death or incapacity of any Unitholder
will not operate to terminate the Series or the Trust nor entitle
legal representatives or heirs to claim an accounting or to bring
any action or proceeding in any court for partition or winding up
of such Series or the Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the Trust by the
purchase, sale or substitution of Municipal Bonds, except in the
special circumstances noted below. Thus, with the exception of
the redemption or maturity of Municipal Bonds in accordance with
their terms, and/or the sale of Municipal Bonds to meet
redemption requests, the assets of the Trust will remain
unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds
the value of which has been affected by certain adverse events,
including institution of certain legal proceedings, a decline in
their price or the occurrence of other market factors, including
advance refunding, so that in the opinion of the Sponsor the
retention of such Municipal Bonds in a Series of the Trust would
be detrimental to the interest of the Unitholders of such Series.
The proceeds from any such sales, exclusive of any portion which
represents accrued interest, will be credited to the Principal
Account for distribution to the Unitholders.
The portfolio insurance obtained by the Trust from AMBAC
Indemnity for Series A through A-24 of the Kemper Tax-Exempt
Insured Income Trust is applicable only while the Municipal Bonds
remain in the portfolio of a Series of the Trust. Consequently,
the price received by such Series of the Trust upon the
disposition of any such Municipal Bond will reflect a value
placed upon it by the market as an uninsured obligation rather
than a value resulting from the insurance. Due to this fact, the
Sponsor will not direct the Trustee to dispose of Municipal Bonds
in Series A through A-24 of the Kemper Tax-Exempt Insured Income
Trust which are in default or imminent danger of default but to
retain such Municipal Bonds in the portfolio so that if a default
in the payment of interest or principal occurs, the Trust may
realize the benefits of the insurance.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee, at the time of the sale of a Municipal Bond covered
under the Trust's insurance policy with respect to Series A-25
and subsequent Series of the Kemper Tax-Exempt Insured Income
Trust, has the right to obtain permanent insurance with respect
to such Municipal Bond (i.e., insurance to maturity of the
Municipal Bond regardless of the identity of the holder thereof)
(the "Permanent Insurance") upon the payment of a single
predetermined insurance premium from the proceeds of the sale of
such Municipal Bond. Accordingly, every Municipal Bond in such
Series of the Trust is eligible to be sold on an insured basis.
It is expected that the Trustee will exercise the right to obtain
Permanent Insurance for Municipal Bonds in Series A-25 and
subsequent Series of the Kemper Tax-Exempt Insured Income Trust
only if upon such exercise a Series of the Trust would receive net
proceeds (i.e., the value of such Municipal Bond if sold as
an insured bond less the insurance premium attributable to the
Permanent Insurance) from such sale in excess of the sale
proceeds if such Municipal Bond were sold on an uninsured basis.
The insurance premium with respect to each Municipal Bond in such
Series is determined based upon the insurability of each
Municipal Bond as of the initial Date of Deposit and will not be
increased or decreased for any change in the creditworthiness of
such Municipal Bond's issuer.
The Trustee is permitted to utilize the option to obtain
Permanent Insurance available on Series A-25 and subsequent
Series of the Kemper Tax-Exempt Insured Income Trust only in
circumstances where the value added to the Municipal Bonds
exceeds the costs of acquiring such Permanent Insurance. Unless
such Permanent Insurance may be obtained at an acceptable price,
the Sponsor will not direct the Trustee to dispose of Municipal
Bonds which are in default or imminent danger of default but to
retain such Municipal Bonds in the portfolio so that the Trust
may realize the benefits of the insurance on the portfolio.
The Sponsor is required to instruct the Trustee to reject any
offer made by an issuer of Municipal Bonds to issue new
obligations in exchange or substitution for any of such Municipal
Bonds pursuant to a refunding financing plan except that the
Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the
Sponsor may deem proper if (1) the issuer is in default with
respect to such Bonds or (2) in the written opinion of the
Sponsor the issuer will probably default with respect to such
Bonds in the reasonably foreseeable future. Any obligation so
received in exchange or substitution will be held by the Trustee
subject to the terms and conditions of the Trust Agreement to the
same extent as Bonds originally deposited thereunder. Within
five days after the deposit of obligations in exchange or
substitution for underlying Bonds, the Trustee is required to
give notice thereof to each Unitholder, identifying the Bonds
eliminated and the Bonds substituted therefor.
The Trustee may sell Municipal Bonds designated by the Sponsor
from a Series of the Trust for the purpose of redeeming Units of
such Series tendered for redemption and the payment of expenses.
See "Redemption."
ADMINISTRATION OF THE TRUST
The Trustee. The Trustee is The Bank of New York, a trust
company organized under the laws of New York. The Bank of New
York has its officers at 101 Barclay Street, New York, New York
10286, telephone 1-800-701-8178. The Bank of New York is subject
to supervision and examination by the Superintendent of Banks of
the State of New York and the Board of Governors of the Federal
Reserve System, and its deposits are insured by the Federal
Deposit Insurance Corporation to the extent permitted by law.
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Series of the
Trust. For information relating to the responsibilities of the
Trustee under the Agreement, reference is made to the material
set forth under "Unitholders."
In accordance with the Trust Agreements, the Trustee shall keep
records of all transactions at its office. Such records shall
include the name and address of, and the number of Units held by,
every Unitholder of each Series. The books and records with
respect to a Series of the Trust shall be open to inspection by
any Unitholder of such Series at all reasonable times during the
usual business hours. The Trustee shall make such annual or
other reports as may from time to time be required under any
applicable state or Federal statute, rule or regulation. The
Trustee shall keep a certified copy or duplicate original of the
Trust Agreements on file in its office available for inspection
at all reasonable times during usual business hours by any
Unitholder, together with a current list of the Municipal Bonds
held in each Series of the Trust. Pursuant to the Trust
Agreements, the Trustee may employ one or more agents for the
purpose of custody and safeguarding of Municipal Bonds comprising
the portfolios.
Under the Trust Agreements, the Trustee or any successor trustee
may resign and be discharged of its duties created by the Trust
Agreements by executing an instrument in writing and filing the
same with the Sponsor.
The Trustee or successor trustee must mail a copy of the notice
of resignation to all Unitholders then of record, not less than
sixty days before the date specified in such notice when such
resignation is to take effect. The Sponsor upon receiving notice
of such resignation is obligated to appoint a successor trustee
promptly. If, upon such resignation, no successor trustee has
been appointed and has accepted the appointment within thirty
days after notification, the retiring Trustee may apply to a
court of competent jurisdiction for the appointment of a
successor. The Sponsor may at any time remove the Trustee with
or without cause and appoint a successor trustee as provided in
the Trust Agreements. Notice of such removal and appointment
shall be mailed to each Unitholder by the Sponsor. Upon
execution of a written acceptance of such appointment by a
successor trustee, all the rights, powers, duties and obligations
of the original Trustee shall vest in the successor. The Trustee
shall be a corporation organized under the laws of the United
States or any state thereof, which is authorized under such laws
to exercise trust powers. The Trustee shall have at all times an
aggregate capital, surplus and undivided profits of not less than
$5,000,000.
The Evaluator. EVEREN Unit Investment Trusts, a service of
EVEREN Securities, Inc., the Sponsor, also serves as Evaluator.
The Evaluator may resign or be removed by the Trustee, in which
event the Trustee is to use its best efforts to appoint a
satisfactory successor. Such resignation or removal shall become
effective upon acceptance of appointment by the successor
evaluator. If, upon resignation of the Evaluator, no successor
has accepted appointment within thirty days after notice of
resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor. Notice of such
resignation or removal and appointment shall be mailed by the
Trustee to each Unitholder. At the present time, pursuant to a
contract with the Evaluator, Cantor Fitzgerald & Co., a
non-affiliated firm regularly engaged in the business of
evaluating, quoting or appraising comparable securities, provides
portfolio evaluations of the Municipal Bonds in the Trust which
are then reviewed by the Evaluator. In the event the Sponsor is
unable to obtain current evaluations from Cantor Fitzgerald &
Co., it may make its own evaluations or it may utilize the
services of any other non-affiliated evaluator or evaluators it
deems appropriate.
Amendment and Termination. The Trust Agreements may be amended
by the Trustee and the Sponsor without the consent of any of the
Unitholders: (1) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent;
(2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental
agency; or (3) to make such provisions as shall not adversely
affect the interests of the Unitholders. The Trust Agreements
may also be amended in any respect by the Sponsor and the
Trustee, or any of the provisions thereof may be waived, with the
consent of the holders of Units representing 66-2/3% of the Units
then outstanding, provided that no such amendment or waiver will
reduce the interest in a Series of the Trust of any Unitholder
without the consent of such Unitholder or reduce the percentage
of Units required to consent to any such amendment or waiver
without the consent of all Unitholders. In no event shall the
Trust Agreements be amended to increase the number of Units
issuable thereunder or to permit, except in accordance with the
provisions of the Trust Agreements, the acquisition of any
Municipal Bonds in addition to or in substitution for those in
the Trust. The Trustee shall promptly notify Unitholders of the
substance of any such amendment.
The Trust Agreements provide that a Series of the Trust shall
terminate upon the maturity, redemption or other disposition, of
the last of the Municipal Bonds held in such Series. If the
value of a Series of the Trust shall be less than the applicable
minimum Trust value stated under "Essential Information" in Part
Two the Trustee may, in its discretion, and shall, when so
directed by the Sponsor, terminate such Series of the Trust. A
Series of the Trust may be terminated at any time by the holders
of Units representing 66-2/3% of the Units of such Series then
outstanding. In the event of termination, written notice thereof
will be sent by the Trustee to all Unitholders of such Series.
Within a reasonable period after termination, the Trustee will
sell any Municipal Bonds remaining in such Series of the Trust
and, after paying all expenses and charges incurred by such
Series of the Trust, will distribute to Unitholders of such
Series (upon surrender for cancellation of certificates for
Units, if issued) their pro rata share of the balances remaining
in the Interest and Principal Accounts of such Series.
Notwithstanding the foregoing, in connection with final
distributions to Unitholders, it should be noted that because the
portfolio insurance obtained by Series A through A-24 of the
Kemper Tax-Exempt Insured Income Trust is applicable only while
Bonds so insured are held by such Series of the Trust, the price to
be received by such Series of the Trust upon the disposition
of any such Bond which is in default by reason of nonpayment of
principal or interest, will not reflect any value based on such
insurance. Therefore, in connection with any liquidation of such
Series it shall not be necessary for the Trustee to, and the
Trustee does not currently intend to, dispose of any Bond or
Bonds if retention of such Bond or Bonds, until due, shall be
deemed to be in the best interest of Unitholders, including, but
not limited to situations in which a Bond or Bonds so insured are
in default and situations in which a Bond or Bonds so insured
have a deteriorated market price resulting from a significant
risk of default. All proceeds received, less applicable
expenses, from insurance on defaulted Bonds not disposed of at
the date of termination will ultimately be distributed to
Unitholders of record as of such date of termination as soon as
practicable after the date such defaulted Bond or Bonds become
due and applicable insurance proceeds have been received by the
Trustee.
Limitations on Liability.
The Sponsor. The Sponsor is liable for the performance of its
obligations arising from its responsibilities under the Trust
Agreements, but will be under no liability to the Unitholders for
taking any action or refraining from any action in good faith
pursuant to the Trust Agreements or for errors in judgment,
except in cases of its own gross negligence, bad faith or willful
misconduct. The Sponsor shall not be liable or responsible in
any way for depreciation or loss incurred by reason of the sale
of any Municipal Bonds.
The Trustee. The Trust Agreements provide that the Trustee shall
be under no liability for any action taken in good faith in
reliance upon prima facie properly executed documents or for the
disposition of monies, Municipal Bonds, or certificates except by
reason of its own gross negligence, bad faith or willful
misconduct, nor shall the Trustee be liable or responsible in any
way for depreciation or loss incurred by reason of the sale by
the Trustee of any Municipal Bonds. In the event that the
Sponsor shall fail to act, the Trustee may act and shall not be
liable for any such action taken by it in good faith. The
Trustee shall not be personally liable for any taxes or other
governmental charges imposed upon or in respect of the Municipal
Bonds or upon the interest thereon. In addition, the Trust
Agreements contain other customary provisions limiting the
liability of the Trustee.
The Evaluator. The Trustee and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no
responsibility for the accuracy thereof. The Trust Agreements
provide that the determinations made by the Evaluator shall be
made in good faith upon the basis of the best information
available to it, provided, however, that the Evaluator shall be
under no liability to the Trustee or Unitholders for errors in
judgment, but shall be liable only for its gross negligence, lack
of good faith or willful misconduct.
EXPENSES OF THE TRUST
The Sponsor will charge each Series a surveillance fee for services
performed for such Series in an amount not to exceed
that amount set forth in "Essential Information" in Part Two but
in no event will such compensation, when combined with all
compensation received from other unit investment trusts for which
the Sponsor both acts as sponsor and provides portfolio
surveillance, exceed the aggregate cost to the Sponsor for
providing such services. Such fee shall be based on the total
number of Units of each Series outstanding as of the January
Record Date for any annual period. The Sponsor paid all the
expenses of creating and establishing the Trust, including the
cost of the initial preparation, printing and execution of the
Prospectus, Agreement and the certificates, legal and accounting
expenses, advertising and selling expenses, payment of closing
fees, expenses of the Trustee, initial evaluation fees and other
out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the
basis of the annual rate set forth under "Essential Information"
in Part Two, based on the largest aggregate principal amount of
Municipal Bonds in such Series at any time during the monthly,
quarterly or semi-annual period, as appropriate. Funds that are
available for future distributions, redemptions and payment of
expenses are held in accounts which are non-interest bearing to
Unitholders and are available for use by the Trustee pursuant to
normal banking procedures; however, the Trustee is also
authorized by the Trust Agreements to make from time to time
certain non-interest bearing advances to the Trust Funds. The
Trustee also receives indirect benefits to the extent that it
holds funds on deposit in the various non-interest bearing
accounts created pursuant to the Agreement; however, the Trustee
is also authorized by the Agreement to make from time to time
certain non-interest bearing advances to the Trust. See
"Unitholders_Distributions to Unitholders."
For evaluation of Municipal Bonds in a Series of the Trust, the
Evaluator receives a fee, payable monthly, calculated on the
basis of an annual rate as set forth under "Essential
Information" in Part Two, based upon the largest aggregate
principal amount of Municipal Bonds in such Series of the Trust
at any time during such monthly period.
The Trustee's and Evaluator's fees are payable monthly on or
before each Distribution Date by deductions from the Interest
Account of each Series to the extent funds are available and then
from the Principal Account of such Series. Such fees may be
increased without approval of Unitholders by amounts not
exceeding a proportionate increase in the Consumer Price Index
entitled "All Services Less Rent of Shelter," published by the
United States Department of Labor, or any equivalent index
substituted therefor.
The following additional charges are or may be incurred by a
Series of the Trust: (a) fees for the Trustee's extraordinary
services; (b) expenses of the Trustee (including legal and
auditing expenses and insurance costs, but not including any fees
and expenses charged by any agent for custody and safeguarding of
Municipal Bonds) and of bond counsel, if any; (c) various
governmental charges; (d) expenses and costs of any action taken by
the Trustee to protect the Trust or such Series, or the rights
and interests of the Unitholders; (e) indemnification of the
Trustee for any loss, liability or expense incurred by it in the
administration of such Series of the Trust without gross
negligence, bad faith or willful misconduct on its part; (f)
indemnification of the Sponsor for any loss, liability or expense
incurred in acting in that capacity without gross negligence, bad
faith or willful misconduct; and (g) expenditures incurred in
contacting Unitholders upon termination of the Series. The fees
and expenses set forth herein are payable out of such Series of
the Trust and, when owed to the Trustee, are secured by a lien on
the assets of the Series of the Trust. Fees or charges relating
to the Trust shall be allocated to each Trust Fund in the same
ratio as the principal amount of such Trust Fund bears to the
total principal amount of all Trust Funds in the Trust. Fees or
charges relating solely to a particular Trust Fund shall be
charged only to such Trust Fund.
Fees and expenses of a Series of the Trust shall be deducted from
the Interest Account of such Series, or, to the extent funds are
not available in such Account, from the Principal Account of such
Series. The Trustee may withdraw from the Principal Account or
the Interest Account of such Series such amounts, if any, as it
deems necessary to establish a reserve for any taxes or other
governmental charges or other extraordinary expenses payable out
of that Series of the Trust. Amounts so withdrawn shall be
credited to a separate account maintained for such Series known
as the Reserve Account and shall not be considered a part of such
Series when determining the value of the Units of such Series
until such time as the Trustee shall return all or any part of
such amounts to the appropriate account.
THE SPONSOR
The Sponsor, EVEREN Unit Investment Trusts, with an office at 77
West Wacker Drive, 29th Floor, Chicago, Illinois 60601, (800)
621-5024, is a service of EVEREN Securities, Inc., which is a
wholly-owned subsidiary of Capital Corporation. The Sponsor acts
as underwriter of a number of other EVEREN unit investment trusts
and will act as underwriter of any other unit investment trust
created by the Sponsor in the future. As of December 31, 1995,
the total stockholder's equity of EVEREN Securities, Inc. was
approximately $261,286,862 (unaudited).
If at any time the Sponsor shall of fail to perform any of its
duties under the Agreement or shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or its affairs are
taken over by public authorities, then the Trustee may (a)
appoint a successor sponsor at rates of compensation deemed by
the Trustee to be reasonable and not exceeding such reasonable
amounts as may be prescribed by the Securities and Exchange
Commission, or (b) terminate the Agreement and liquidate the
Trust or any Series thereof as provided therein or (c) continue
to act as Trustee without terminating the Agreement.
The foregoing financial information with regard to the Sponsor
relates to the Sponsor only and not to this Trust or any Series.
Such information is included in this Prospectus only for the
purposes of informing investors as to the financial responsibility
of the Sponsor and its ability to carry out its
contractual obligations with respect to the Series of the Trust.
More comprehensive financial information can be obtained upon
request from the Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters
relating to Federal tax law were originally passed upon by
Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois
60603, as counsel for the Sponsor.
INDEPENDENT AUDITORS
The statement of net assets, including the schedule of
investments, appearing in Part Two of this Prospectus and
Registration Statement, with information pertaining to the
specific Series of the Trust to which such statement relates, has
been audited by Ernst & Young LLP, independent auditors, as set
forth in their report appearing in Part Two and is included in
reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
DESCRIPTION OF MUNICIPAL BOND RATINGS[3]
Standard & Poor's _ A brief description of the applicable
Standard & Poor's rating symbols and their meanings follows:
A Standard & Poor's corporate or municipal bond rating is a
current assessment of the creditworthiness of an obligor with
respect to a specific debt obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or
lessees.
The bond rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer and obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit
in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default _ capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangement, under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA _ Bonds rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest
and repay principal is extremely strong.
AA _ Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only
in small degree.
A _ Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB _ Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the bonds being rated
and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and
risk.
Moody's Investors Service, Inc. _ A brief description of the
applicable Moody's Investors Service, Inc. rating symbols and
their meanings follow:
Aaa _ Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues. Their safety is so absolute that with the occasional
exception of oversupply in a few specific instances,
characteristically, their market value is affected solely by
money market fluctuations.
Aa _ Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger
than in Aaa securities. Their market value is virtually immune
to all but money market influences, with the occasional exception
of oversupply in a few specific instances.
A _ Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
The market value of A-rated bonds may be influenced to some
degree by economic performance during a sustained period of
depressed business conditions, but, during periods of normalcy,
A-rated bonds frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few
specific instances.
A1 _ Bonds which are rated A1 offer the maximum in security
within their quality group, can be bought for possible upgrading
in quality, and additionally, afford the investor an opportunity
to gauge more precisely the relative attractiveness of offerings
in the market place.
Baa _ Bonds which are rated Baa are considered as lower medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as
well. The market value of Baa-rated bonds is more sensitive to
changes in economic circumstances and, aside from occasional
speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa and A obligations
during periods of economic normalcy, except in instances of
oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for which the
security depends upon the completion of some act or the
fulfillment of some condition. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or
elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in certain areas
of its bond rating system. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
[1] Information on these items appears in Part Two
[2] Reference is made to the Trust Agreement, and any statements
contained herein are qualified in their entirety by the
provisions of the Trust Agreement.
[3] As published by the rating companies.
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Part Two
Dated December 20, 1996
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed Unless Accompanied by
Part One.
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Essential Information
As of August 31, 1996
Sponsor and Evaluator: EVEREN Unit Investment Trusts
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $8,280,000
Number of Units 828,374
Fractional Undivided Interest in the Trust per Unit 1/828,374
Principal Amount of Municipal Bonds per Unit $9.995
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $8,243,571
Aggregate Bid Price of Municipal Bonds per Unit $9.952
Cash per Unit (1) $.005
Pricing accrued interest to date of settlement $.005
Sales Charge of 3.627% (3.50% of Public Offering Price) $.361
Public Offering Price per Unit (inclusive of accrued
interest) (2) $10.323
Redemption Price per Unit (inclusive of accrued interest) $9.962
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $.361
Minimum Value of the Trust under which Trust Agreement
may be terminated $2,000,000
</TABLE>
Date of Trust September 14, 1994
Mandatory Termination Date December 31, 2003
Annual Evaluation and Portfolio Surveillance Fees: Evaluation fee of $.30 per
$1,000 principal amount of Municipal Bonds. Evaluations for purpose of sale,
purchase or redemption of Units are made as of the close of business of the
Sponsor next following receipt of an order for a sale or purchase of Units or
receipt by The Bank of New York Co. of Units tendered for redemption. Portfolio
surveillance fee of $.20 per 100 Units.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price which includes interest to
the date of settlement (three business days after purchase).
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Essential Information (continued)
As of August 31, 1996
Sponsor and Evaluator: EVEREN Unit Investment Trusts
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly
<S> <C>
---------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $.507496
Less: Estimated Annual Expense .021691
---------
Estimated Net Annual Interest Income $.485805
=========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $.485805
Divided by 12 $.040484
Estimated Daily Rate of Net Interest
Accrual per Unit $.001349
Estimated Current Return Based on Public
Offering Price (3) 4.74%
Estimated Long-Term Return (3) 5.01%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's and Portfolio
Surveillance Fees): $.021691 ($.007628 of which represents expenses) per Unit.
Record and Computation Dates: First day of the month.
Distribution Dates: Fifteenth day of the month.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Defined Funds
Insured National
Series 12
We have audited the accompanying statement of assets and liabilities of Kemper
Defined Funds Insured National Trust Series 12, including the schedule of
investments, as of August 31, 1996, and the related statements of operations and
changes in net assets for the year then ended and for the period from September
14, 1994 (Date of Deposit) to August 31, 1995. These financial statements are
the responsibility of the Trust's sponsor. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of investments owned as of August 31, 1996, by
correspondence with the custodial bank. An audit also includes assessing the
accounting principles used and significant estimates made by the sponsor, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Defined Funds Insured
National Trust Series 12 at August 31, 1996, and the results of its operations
and changes in its net assets for the periods indicated above in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
December 17, 1996
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Statement of Assets and Liabilities
August 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $8,273,055) $8,243,571
Interest receivable 84,207
Receivable from securities sold or redeemed 51,033
---------
Total assets 8,378,811
Liabilities and net assets
Cash overdraft 87,664
Accrued liabilities 2,275
Redemptions payable 9,985
---------
99,924
Net assets, applicable to 828,374 Units outstanding:
Cost of Trust assets, exclusive of interest $8,273,055
Unrealized depreciation (29,484)
Distributable funds 35,316
--------- ---------
Net assets $8,278,887
=========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Statements of Operations
<TABLE>
<CAPTION>
Period from
September 14,
Year ended 1994 to
August 31, August 31,
1996 1995
<S> <C> <C>
--------- ---------
Investment income - interest $469,528 $484,512
Expenses:
Trustee's fees and related expenses 16,374 15,332
Evaluator's fees and portfolio surveillance fees 5,055 4,803
--------- ---------
Total expenses 21,429 20,135
--------- ---------
Net investment income 448,099 464,377
Realized and unrealized gain (loss) on investments:
Realized gain (loss) 19,552 (1,130)
Unrealized appreciation (depreciation) during
the period (251,946) 222,462
--------- ---------
Net gain (loss) on investments (232,394) 221,332
--------- ---------
Net increase in net assets resulting from operations $215,705 $685,709
========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Period from
September 30,
Year ended 1994 to
August 31, August 31,
1996 1995
<S> <C> <C>
--------- ---------
Operations:
Net investment income $448,099 $464,377
Realized gain (loss) on investments 19,552 (1,130)
Unrealized appreciation (depreciation) on
investments during the period (251,946) 222,462
--------- ---------
Net increase in net assets resulting from operations 215,705 685,709
Distributions to Unitholders:
Net investment income (455,890) (425,055)
Capital transactions:
Issuance of Units - 9,990,660
Redemption of Units (1,599,511) (132,731)
--------- ---------
Total increase (decrease) in net assets (1,839,696) 10,118,583
Net assets:
At the beginning of the period 10,118,583 -
--------- ---------
At the end of the year (including distributable
funds, applicable to Trust Units of $35,316 and
$40,316 at August 31, 1996 and 1995,
respectively) $8,278,887 $10,118,583
========= =========
Trust Units outstanding at the end of the period 828,374 986,711
========= =========
Net asset value at the end of the period: $9.994 $10.255
========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Defined Funds
Insured National
Series 12
Schedule of Investments
August 31, 1996
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (4) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
- --------------------- --- --- ----- --- --------- ---
School District Number 63, Cook County (Illinois), 5.000% 12/01/1999 Non-Callable AAA $1,725,000 $1,714,667
East Maine, School Bonds, Series 1994. Insured by
AMBAC.
District of Columbia (Washington D.C.), General 5.000 6/01/2001 Non-Callable AAA 1,540,000 1,513,112
Obligation Refunding Bonds, Series 1994A. Insured by
FGIC.
Incorporated County of Los Alamos, New Mexico, 5.400 7/01/2002 Non-Callable AAA 1,680,000 1,722,128
Utility System Revenue Bonds, Series 1994A. Insured
by FSA.
North Slope Borogh, Alaska, General Obligation 4.850 6/30/1998 Non-Callable AAA 1,675,000 1,659,958
Bonds, Series 1992A. Insured by MBIA.
Washington Public Power Supply System, Nuclear 5.000 7/01/2000 Non-Callable AAA 1,660,000 1,633,706
Project No. 3 Refunding Revenue Bonds, Series 1993B.
Insured by FSA.
--------- ---------
$8,280,000 $8,243,571
========= =========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc. The
symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices thereafter,
but not below par value. In addition, certain Bonds in the Portfolio may be
redeemed in whole or in part other than by operation of the stated redemption or
sinking fund provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions of such
Bonds. "S.F." indicates a sinking fund is established with respect to an issue
of Bonds. Redemption pursuant to call provisions generally will, and redemption
pursuant to sinking fund provisions may, occur at times when the redeemed Bonds
have a valuation which represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of capital
when compared with the original Public Offering Price of the Units. To the
extent that the Bonds were acquired at a price lower than the redemption price,
this may represent an increase in capital when compared with the original Public
Offering Price of the Units. Distributions of net income will generally be
reduced by the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and, unless utilized to pay for Units tendered for
redemption, there will be distributed to Unitholders the principal amount and
any premium received on such redemption. In this event the estimated current
return and estimated long-term return may be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description of the
method of determining cost and value.
4. Insurance on the Bonds in the Trust was obtained by the issuers of such
Bonds.
See accompanying notes to financial statements.
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Notes to Financial Statements
1. Significant Accounting Policies
Trust Sponsor and Evaluator
From the Trust's date of deposit through November 26, 1996, the Trust's sponsor
and evaluator was EVEREN Unit Investment Trusts (EVEREN), or its predecessor
entity, Kemper Unit Investment Trusts. On that date, Zurich Kemper Investments,
Inc. acquired EVEREN and assigned substantially all of its unit investment trust
business to Ranson & Associates, Inc., which will serve as the Trust's sponsor
and evaluator.
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by EVEREN Unit
Investment Trusts, the "Evaluator" of the Trust. The aggregate bid prices of
the Bonds are determined by the Evaluator based on (a) current bid prices of the
Bonds, (b) current bid prices for comparable bonds, (c) appraisal, (d)
insurance, or (e) any combination of the above (See Note 4 - Insurance).
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
September 14, 1994 (Date of Deposit). The premium or discount (including any
original issue discount) existing at September 14, 1994, is not being amortized.
Realized gain (loss) from Bond transactions is reported on an identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized depreciation at August 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $31,678
Gross unrealized depreciation (61,162)
----------
Net unrealized depreciation $(29,484)
=========
</TABLE>
3. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust under Subpart E, Subchapter J of Chapter 1 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made for federal
income taxes.
4. Other Information
Cost to Investors
The cost to original investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a sales
charge of 3.00% of the Public Offering Price (equivalent to 3.093% of the net
amount invested). The Public Offering Price for secondary market transactions
is based on the aggregate bid price of the Bonds plus or minus a pro rata share
of cash or overdraft in the Principal Account, if any, on the date of an
investor's purchase, plus a sales charge of 3.50% of the Public Offering Price
(equivalent to 3.627% of the net amount invested).
<PAGE>
Kemper Defined Funds
Insured National
Series 12
Notes to Financial Statements (continued)
Insurance
Insurance guaranteeing the payment of all principal and interest on the Bonds in
the portfolio has been obtained from independent companies by the respective
issuers of such Bonds. Insurance obtained by a Bond issuer is effective as long
as such Bonds are outstanding. As a result of such insurance, the Units of
Trust have received a rating of "AAA" by Standard & Poor's Corporation. No
representation is made as to any insurer's ability to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are declared and paid
monthly. Income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Period from
Year ended September 14, 1994 to
Distribution August 31, 1996 August 31, 1995
Plan Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
- ----- --------- ---------- --------- ----------
Monthly $.480 $453,150 $.427* $425,042*
* Includes $9,819 ($.010 per Unit) distributed to the Underwriters of the Trust,
representing interest income from the Date of Deposit to September 21, 1994
(First Settlement Date).
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Period from
September 14,
Year ended 1994 to
August 31, August 31,
1996 1995
<S> <C> <C> <C>
---------- ----------
Principal portion $1,599,511 $132,731
Net interest accrued 2,740 13
---------- ----------
$1,602,255 $132,744
========= =========
Units 158,337 13,289
========= =========
</TABLE>
5. Change of Trustee
On March 1, 1996, The Bank of New York Co. assumed all trustee responsibilities
from Investors Fiduciary Trust Company.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated December 17, 1996, in this Post-Effective
Amendment to the Registration Statement (Form S-6) and related Prospectus of
Kemper Defined Funds Insured National Trust Series 12 dated December 20, 1996.
Ernst & Young LLP
Kansas City, Missouri
December 20, 1996
KEMPER TAX-EXEMPT INSURED INCOME TRUSTMULTI-STATE SERIES
OHIO TAX-EXEMPT BOND TRUST SERIES 11-22
KEMPER DEFINED FUNDS (TAX-EXEMPT PORTFOLIO)
EVEREN UNIT INVESTMENT TRUSTS (TAX-EXEMPT PORTFOLIO)
PART ONE
Each State Trust of the Kemper Tax-Exempt Insured Income Trust,
Multi-State Series, Series 11-22 of the Ohio Tax-Exempt Bond
Trust, Kemper Defined Funds (Tax-Exempt Portfolio) and EVEREN
Unit Investment Trusts (Tax-Exempt Portfolio) was formed for the
purpose of gaining interest income free from Federal, State and,
where applicable, local income taxes and/or property taxes, while
conserving capital and diversifying risks by investing in an
insured, fixed portfolio of Municipal Bonds consisting of
obligations issued primarily by or on behalf of the State for
which such Trust is named or counties, municipalities,
authorities or political subdivisions thereof.
Insurance guaranteeing the scheduled payment of principal and
interest on all of the Municipal Bonds in the portfolio of each
State Trust has been obtained by the Trust from Financial
Guaranty Insurance Company ("Financial Guaranty") or other
insurers or directly by the issuer or the Sponsor from Financial
Guaranty, MBIA Insurance Corporation or other insurers. See
"Insurance on the Portfolios" herein and the "Schedule of
Investments" in Part Two. Insurance obtained by the Trust
remains in effect only while the insured Municipal Bonds are
retained in such State Trust, while insurance obtained by a
Municipal Bond issuer or the Sponsor is effective so long as such
Bonds are outstanding. Pursuant to an irrevocable commitment of
Financial Guaranty or such other insurers, in the event of a sale
of any Bond covered under the Trust's insurance policy, the
Trustee has the right to obtain permanent insurance for such Bond
upon the payment of a single predetermined insurance premium from
the proceeds of the sale of such Bond. The insurance, in either
case, does not relate to the Units offered hereby or to their
market value. As a result of such insurance, the Units of each
State Trust received on the original date of deposit a rating of
either "AAA" by Standard & Poor's, a division of The McGraw Hill
Companies ("Standard & Poor's") or "Aaa" by Moody's Investors
Service, Inc. ("Moody's") and, while held in a State Trust, the
Municipal Bonds are rated either "Aaa" by Moody's Investors
Service, Inc. or "AAA" by Standard & Poor's. The "AAA" Unit
rating received by a State Trust from Standard & Poor's on the
original date of deposit will be in effect for a period of 13
months from such date and will, unless renewed, terminate at the
end of such period. See "Insurance on the Portfolios" and
"Description of Securities Ratings." No representation is made
as to Financial Guaranty's, MBIA Insurance Corporation's or any
other insurer's ability to meet its commitments.
Units of the Trusts are not deposits or obligations of, or
guaranteed by, any bank, and Units are not federally insured or
otherwise protected by the Federal Deposit Insurance Corporation and
involve investment risk including loss of principal.
This Prospectus is in two parts. Read and retain both parts for
future reference.
The date of this Part One is that datewhich is set forth in Part
Two of the Prospectus.
SPONSOR: EVEREN UNIT INVESTMENT TRUSTS,a service of EVEREN
Securities, Inc.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
TABLE OF CONTENTS
PAGE PAGE
<S> <C>
SUMMARY 1
THE TRUST 2
PORTFOLIOS 3
Risk Factors 4
INSURANCE ON THE PORTFOLIOS 9
DISTRIBUTION REINVESTMENT 14
INTEREST, ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM
RETURN 14
FEDERAL TAX STATUS OF THE STATE TRUSTS 15
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS 18
Alabama Trusts 18
Arizona Trusts 20
California Trusts 23
Colorado Trust 31
Florida Trusts 35
Louisiana Trusts 40
Massachusetts Trusts 43
Michigan Trusts 45
Minnesota Trusts 48
Missouri Trusts 50
New Jersey Trusts 52
New York Trusts 56
North Carolina Trusts 64
Ohio Trusts 69
Pennsylvania Trusts 73
Texas Trusts 79
PUBLIC OFFERING OF UNITS 82
Public Offering Price 82
Public Distribution of Units 85
Profits of Sponsor 86
MARKET FOR UNITS 86
REDEMPTION 86
Computation of Redemption Price 88
UNITHOLDERS 88
Ownership of Units 88
Distributions to Unitholders 88
Principal Distributions 90
Statements to Unitholders 90
Rights of Unitholders 90
INVESTMENT SUPERVISION 91
ADMINISTRATION OF THE TRUST 91
The Trustee 91
The Evaluator 92
Amendment and Termination 92
Limitations on Liability 93
EXPENSES OF THE TRUST 93
THE SPONSOR 94
LEGAL OPINIONS 95
AUDITORS 95
DESCRIPTION OF SECURITIES RATINGS 95
Essential Information*
Report of Certified Public Accountants*
Statement of Assets and Liabilities*
Statement of Operations*
Statement of Changes in Net Assets*
Schedule of Investments*
Notes to Schedules of Investments*
Notes to Financial Statements*
* Information on these items appears in Part Two for the
appropriate State Trust
</TABLE>
SUMMARY
The Trust. Kemper Tax-Exempt Insured Income Trust,
Multi-State Series, Ohio Tax-Exempt Bond Trust, Series 11-22,
Kemper Defined Funds (Tax-Exempt Portfolio) and EVEREN Unit
Investment Trusts (Tax-Exempt Portfolio) (collectively, the
"Trust") are unit investment trusts consisting of a number of
diversified portfolios designated as the State Trusts. Each
State Trust consists of obligations ("Municipal Bonds," "Bonds"
or "Securities") issued primarily by or on behalf of the State
for which such State Trust is named or counties, municipalities,
authorities or political subdivisions thereof.
Each State Trust's investment objective is interest income which
is exempt from Federal, State and, where applicable, local income
taxes and/or property taxes, while conserving capital and
diversifying risks by investing in an insured, fixed portfolio of
Municipal Bonds consisting of obligations issued primarily by or
on behalf of the State for which such State Trust is named or
counties, municipalities, authorities or political subdivisions
thereof. There is, of course, no guarantee that the State
Trusts' objective will be achieved.
All of the Municipal Bonds in the State Trust portfolios were
rated in the category "BBB" or better by either Standard & Poor's
or "Baa" by Moody's on the date such State Trust was established
(the "Date of Deposit"). Ratings of the Municipal Bonds may have
changed since the Date of Deposit. See "Description of
Securities Ratings" herein and the "Schedule of Investments" in
Part Two.
The Units, each of which represents a pro rata undivided
fractional interest in the principal amount of Municipal Bonds
deposited in the appropriate Trust, are issued and outstanding
Units which have been reacquired by the Sponsor either by
purchase of Units tendered to the Trustee for redemption or by
purchase in the open market. No offering is being made on behalf
of the State Trust and any profit or loss realized on the sale of
Units will accrue to the Sponsor and/or the firm reselling such
Units.
Insurance. Insurance guaranteeing the scheduled payment of
principal and interest on all of the Municipal Bonds in the
portfolio of each State Trust has been obtained by the Trust from
Financial Guaranty Insurance Company ("Financial Guaranty"), MBIA
Insurance Corporation ("MBIA Corporation" or "MBIA") or other
insurers, or directly by the issuer or the Sponsor from Financial
Guaranty, MBIA or other insurers. See "Insurance on the
Portfolios" herein and the "Schedule of Investments" in Part Two.
Insurance obtained by the Trust remains in effect only while the
insured Municipal Bonds are retained in such State Trust, while
insurance obtained by a Municipal Bond issuer or the Sponsor is
effective so long as such Bonds are outstanding. Pursuant to an
irrevocable commitment of Financial Guaranty, MBIA or such other
insurers, in the event of a sale of any bond covered under the
Trust's insurance policy, the Trustee has the right to obtain
permanent insurance for such Municipal Bonds upon the payment of
a single predetermined insurance premium from the proceeds of the
sale of such Municipal Bond. The insurance, in either case, does
not relate to the Units offered hereby or to their market value.
As a result of such insurance, the Units of each State Trust
received on the original Date of Deposit a rating of "AAA" from
Standard & Poor's and, while held in a State Trust, the Municipal
Bonds are rated "Aaa" by Moody's. See "Insurance on the
Portfolios." No representation is made as to Financial
Guaranty's or any other insurer's ability to meet its
commitments.
Public Offering Price. The Public Offering Price per Unit
of each State Trust is equal to a pro rata share of the aggregate
bid prices of the Municipal Bonds in such State Trust plus or
minus a pro rata share of cash, if any, in the Principal Account,
held or owned by the State Trust plus a sales charge shown under
"Public Offering of Units." In addition, there will be added to
each transaction in a State Trust an amount equal to the accrued
interest from the last Record Date of such State Trust to the
date of settlement (three business days after order). The sales
charge is reduced on a graduated scale for sales as indicated
under "Public Offering of Units."
Interest and Principal Distributions. Distributions of the
estimated annual interest income to be received by each State
Trust, after deduction of estimated expenses, will be made
monthly unless the Unitholder elects to receive such
distributions quarterly or semi-annually. Distributions will be
paid on the Distribution Dates to holders of record of such State
Trust on the Record Dates set forth for the applicable option.
See "Essential Information" in Part Two. Only monthly
distributions of estimated annual interest income will be
available for Kemper Defined Funds Unitholders. The distribution
of funds, if any, in the Principal Account of each State Trust,
will be made as provided in "Unitholders_Distributions to
Unitholders."
Reinvestment. Each Unitholder of a State Trust offered
herein may elect to have distributions of principal or interest
or both automatically invested without charge in shares of
certain mutual funds sponsored by Zurich Kemper Investments, Inc.
See "Distribution Reinvestment."
Estimated Current Return and Estimated Long-Term Return.
The Estimated Current Return is calculated by dividing the
estimated net annual interest income per Unit by the Public
Offering Price of the applicable State Trust. The estimated net
annual interest income per Unit will vary with changes in fees
and expenses of the Trusts and with the principal prepayment,
redemption, maturity, exchange or sale of Bonds while the Public
Offering Price will vary with changes in the bid price of the
underlying Bonds and with changes in accrued interest; therefore,
there is no assurance that the present Estimated Current Returns
will be realized in the future. Estimated Long-Term Return is
calculated using a formula which (1) takes into consideration,
and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization
of premiums and the accretion of discounts) and estimated
retirement dates of all of the Bonds in the State Trust and (2)
takes into account the expenses and sales charge associated with
each State Trust Unit. Since the market values and estimated
retirement dates of the Bonds and the expenses of the State Trust
will change, there is no assurance that the present Estimated
Long-Term Return will be realized in the future. Estimated
Current Return and Estimated Long-Term Return are expected to
differ because the calculation of Estimated Long-Term Return
reflects the estimated date and amount of principal returned
while Estimated Current Return calculations include only net
annual interest income and Public Offering Price.
Market for Units. While under no obligation to do so and
subject to change at any time, the Sponsor intends to and certain
Underwriters may, maintain a market for the Units of each State
Trust and continuously offer to repurchase such Units at prices
which are based on the aggregate bid side evaluation of the
Municipal Bonds in each State Trust plus accrued interest to the
date of settlement.
Risk Factors. An investment in the Trusts should be made
with an understanding of the risks associated therewith, including,
among other factors, the inability of the issuer or an
insurer to pay the principal of or interest on a bond when due,
volatile interest rates, early call provisions, and changes to
the tax status of the Securities. See "Portfolios_Risk Factors."
THE TRUST
Each State Trust Fund is one of a series of unit investment
trusts created by the Sponsor under the name Kemper Tax-Exempt
Insured Income Trust, Multi-State Series, Series 11-22 of Ohio
Tax-Exempt Bond Trust, Kemper Defined Funds (Tax-Exempt
Portfolio) or EVEREN Unit Investment Trusts (Tax-Exempt
Portfolio), all of which are similar, and each of which was
created under the laws of the State of Missouri pursuant to a
Trust Agreement[1] (the "Agreement") (such "State Trusts" being
collectively referred to herein as the "Trust"). EVEREN Unit
Investment Trusts, a service of EVEREN Securities, Inc., acts as
Sponsor and Evaluator and The Bank of New York acts as Trustee.
A State Trust may be an appropriate investment vehicle for
investors who desire to participate in a portfolio of insured,
tax-exempt, fixed income securities with greater diversification
than they might be able to acquire individually. In addition,
Municipal Bonds of the type deposited in the State Trusts are
often not available in small amounts. Each State Trust was
formed for the purpose of gaining interest income free from
Federal, State and, where applicable, local income and/or
property taxes, while conserving capital and diversifying risks
by investing in an insured, fixed portfolio of Municipal Bonds
consisting of obligations issued primarily by or on behalf of the
State for which such State Trust is named or counties,
municipalities, authorities or political subdivisions thereof.
There is, of course, no guarantee that the State Trusts'
objective will be achieved. All of the Municipal Bonds in the
State Trusts' portfolios are rated "BBB" or better by Standard &
Poor's or "Baa" or better by Moody's. See "Description of
Securities Ratings" herein and the "Schedule of Investments" in
Part Two.
Each State Trust consists of an insured portfolio of interest
bearing obligations issued by or on behalf of states of the
United States or counties, municipalities, authorities or
political subdivisions thereof the interest on which is, in the
opinion of bond counsel to the issuing authorities, exempt from
all Federal income taxes under existing law, but may not be
subject to State and local taxes. Proceeds of the maturity,
redemption or sale of the Municipal Bonds in a State Trust,
unless used to pay for Units tendered for redemption, will be
distributed to Unitholders thereof and will not be utilized to
purchase replacement or additional Municipal Bonds for the State
Trust.
The Units, each of which represents a pro rata undivided
fractional interest in the principal amount of Municipal Bonds
deposited in the appropriate State Trust, are issued and
outstanding Units which have been reacquired by the Sponsor
either by purchase of Units tendered to the Trustee for
redemption or by purchase in the open market. No offering is
being made on behalf of the State Trusts and any profit or loss
realized on the sale of Units will accrue to the Sponsor and/or
the firm reselling such Units. To the extent that Units of any
State Trust are redeemed, the principal amount of Municipal Bonds
in such State Trust will be reduced and the undivided fractional
interest represented by each outstanding Unit of such State Trust
will increase. See "Redemption."
PORTFOLIOS
The selection of Municipal Bonds for each State Trust was based
largely upon the experience and judgment of the Sponsor. In
making such selections the Sponsor considered the following
factors: (a) a minimum rating in the category "BBB" by Standard
& Poor's or "Baa" by Moody's (see "Description of Securities
Ratings") except that the Sponsor may, from time to time, in
specifically designated State Trusts, have deemed it to be
acceptable to acquire unrated municipal bonds which had, in the
opinion of the Sponsor, credit characteristics at least equal to
municipal bonds so rated; (b) the price of the Municipal Bonds
relative to other issues of similar quality and maturity (c) the
diversification of the Municipal Bonds as to purpose of issue
(d) the income to the Unitholders of the State Trust (e) whether
such Municipal Bonds were insured, or the cost and availability
of insurance for the scheduled payment of principal and interest,
when due, on the Municipal Bonds and (f) the dates of maturity
of the Municipal Bonds.
Subsequent to the Date of Deposit, a Municipal Bond may cease to
be rated or its rating may be reduced below the minimum required
as of the Date of Deposit. Neither event requires the
elimination of such investment from a State Trust, but may be
considered in the Sponsor's determination to direct the Trustee
to dispose of the investment. See "Investment Supervision"
herein and the "Schedule of Investments" in Part Two. The
Sponsor may not alter the portfolio of a State Trust except that
certain of the Municipal Bonds may be sold upon the happening of
certain extraordinary circumstances. See "Investment
Supervision."
Certain of the Municipal Bonds in the State Trusts may be subject
to redemption prior to their stated maturity date pursuant to
sinking fund provisions, call provisions or extraordinary
optional or mandatory redemption provisions or otherwise. A
sinking fund is a reserve fund accumulated over a period of time
for retirement of debt. A callable debt obligation is one which
is subject to redemption or refunding prior to maturity at the
option of the issuer. A refunding is a method by which a debt
obligation is redeemed, at or before maturity, by the proceeds of
a new debt obligation. In general, call provisions are more
likely to be exercised when the offering side valuation is at a
premium over par than when it is at a discount from par.
Accordingly, any such call, redemption, sale or maturity will
reduce the size and diversity of such State Trust, and the net
annual interest income of the State Trust and may reduce the
Estimated Current and Long-Term Returns. See "Interest and
Estimated Current and Long-Term Returns." Each State Trust
portfolio contains a listing of the sinking fund and call,
provisions if any, with respect to each of the debt obligations.
Extraordinary optional redemptions and mandatory redemptions
result from the happening of certain events. Generally, events
that may permit the extraordinary optional redemption of
Municipal Bonds or may require the mandatory redemption of
Municipal Bonds include, among others: a final determination
that the interest on the Municipal Bonds is taxable the
substantial damage or destruction by fire or other casualty of
the project for which the proceeds of the Municipal Bonds were
used an exercise by a local, State or Federal governmental unit
of its power of eminent domain to take all or substantially all
of the project for which the proceeds of the Municipal Bonds were
used changes in the economic availability of raw materials,
operating supplies or facilities or technological or other
changes which render the operation of the project for which the
proceeds of the Municipal Bonds were used uneconomic changes in
law or an administrative or judicial decree which renders the
performance of the agreement under which the proceeds of the
Municipal Bonds were made available to finance the project
impossible or which creates unreasonable burdens or which imposes
excessive liabilities, such as taxes, not imposed on the date the
Municipal Bonds are issued on the issuer of the Municipal Bonds
or the user of the proceeds of the Municipal Bonds an
administrative or judicial decree which requires the cessation of
a substantial part of the operations of the project financed with
the proceeds of the Municipal Bonds an overestimate of the costs
of the project to be financed with the proceeds of the Municipal
Bonds resulting in excess proceeds of the Municipal Bonds which
may be applied to redeem Municipal Bonds or an underestimate of
a source of funds securing the Municipal Bonds resulting in
excess funds which may be applied to redeem Municipal Bonds. The
Sponsor is unable to predict all of the circumstances which may
result in such redemption of an issue of Municipal Bonds. The
Sponsor and the Trustee shall not be liable in any way for any
default, failure or defect in any Municipal Bond.
Risk Factors. An investment in the Units of a State Trust
should be made with an understanding of the risks which an
investment in fixed rate debt obligations may entail, including
the risk that the value of the portfolio and hence of the State
Trusts will decline with increases in interest rates. The value
of the underlying Municipal Bonds will fluctuate inversely with
changes in interest rates. The uncertain economic conditions of
recent years, together with the fiscal measures adopted to
attempt to deal with them, have resulted in wide fluctuations in
interest rates and, thus, in the value of fixed rate debt
obligations generally and long term obligations in particular.
The Sponsor cannot predict whether such fluctuations will
continue in the future.
Certain of the Municipal Bonds in the State Trusts may be general
obligations of a governmental entity that are backed by the
taxing power of such entity. All other Municipal Bonds in the
State Trusts are revenue bonds payable from the income of a
specific project or authority and are not supported by the
issuer's power to levy taxes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing
power for the payment of principal and interest. Revenue bonds,
on the other hand, are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific
revenue source. There are, of course, variations in the security
of the different Municipal Bonds in the State Trusts, both within
a particular classification and between classifications,
depending on numerous factors.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are derived from services
provided by hospitals and other health care facilities, including
nursing homes. Ratings of bonds issued for health care
facilities are often based on feasibility studies that contain
projections of occupancy levels, revenues and expenses. A
facility's gross receipts and net income available for debt
service will be affected by future events and conditions
including, among other things, demand for services and the
ability of the facility to provide the services required,
physicians' confidence in the facility, management's
capabilities, economic developments in the service area,
competition, efforts by insurers and governmental agencies to
limit rates, legislation establishing state rate-setting
agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and
other similar third party payor programs, and government
regulation. Federal legislation has been enacted which implement
a system of prospective Medicare reimbursement which may restrict
the flow of revenues to hospitals and other facilities which are
reimbursed for services provided under the Medicare program.
Future legislation or changes in the areas noted above, among
other things, would affect all hospitals to varying degrees and,
accordingly, any adverse changes in these areas may adversely
affect the ability of such issuers to make payment of principal
and interest on Municipal Bonds held in the State Trusts. Such
adverse changes also may adversely affect the ratings of the
Municipal Bonds held in the State Trusts.
Hospitals and other health care facilities are subject to claims
and legal actions by patients and others in the ordinary course
of business. Although these claims are generally covered by
insurance, there can be no assurance that a claim will not exceed
the insurance coverage of a health care facility or that
insurance coverage will be available to a facility. In addition,
a substantial increase in the cost of insurance could adversely
affect the results of operations of a hospital or other health
care facility. Certain hospital bonds may provide for redemption
at par at any time upon the sale by the issuer of the hospital
facilities to a non-affiliated entity or in other circumstances.
For example, certain hospitals may have the right to call bonds
at par if the hospital may legally be required because of the
bonds to perform procedures against specified religious
principles. Certain FHA-insured bonds may provide that all or a
portion of those bonds, otherwise callable at a premium, can be
called at par in certain circumstances. If a hospital defaults
upon a bond obligation, the realization of Medicare and Medicaid
receivables may be uncertain and, if the bond obligation is
secured by the hospital facilities, legal restrictions on the
ability to foreclose upon the facilities and the limited
alternative uses to which a hospital can be put may reduce
severely its collateral value.
Certain of the Municipal Bonds in the State Trusts may be single
family mortgage revenue bonds, which are issued for the purpose
of acquiring from originating financial institutions notes
secured by mortgages on residences located within the issuer's
boundaries and owned by persons of low or moderate income.
Mortgage loans are generally partially or completely prepaid
prior to their final maturities as a result of events such as
sale of the mortgaged premises, default, condemnation or casualty
loss. Because these Municipal Bonds are subject to extraordinary
mandatory redemption in whole or in part from such prepayments of
mortgage loans, a substantial portion of such Municipal Bonds
will probably be redeemed prior to their scheduled maturities or
even prior to their ordinary call dates. The redemption price of
such issues may be more or less than the offering price of such
Municipal Bonds. Extraordinary mandatory redemption without
premium could also result from the failure of the originating
financial institutions to make mortgage loans in sufficient
amounts within a specified time period or, in some cases, from
the sale by the Municipal Bond issuer of the mortgage loans.
Failure of the originating financial institutions to make
mortgage loans would be due principally to the interest rates on
mortgage loans funded from other sources becoming competitive
with the interest rates on the mortgage loans funded with the
proceeds of the single family mortgage revenue bonds.
Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of
principal of or interest on such mortgage revenue bonds. Single
family mortgage revenue bonds issued after December 31, 1980 were
issued under Section 103A of the Internal Revenue Code of 1954,
which Section contains certain ongoing requirements relating to
the use of the proceeds of such Municipal Bonds in order for the
interest on such Municipal Bonds to retain its tax-exempt status.
In each case, the issuer of the Municipal Bonds has covenanted to
comply with applicable ongoing requirements and bond counsel to
such issuer has issued an opinion that the interest on the
Municipal Bonds is exempt from Federal income tax under existing
laws and regulations. There can be no assurances that the
ongoing requirements will be met. The failure to meet these
requirements could cause the interest on the Municipal Bonds to
become taxable, possibly retroactively from the date of issuance.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are primarily derived from
mortgage loans to housing projects for low to moderate income
families. The ability of such issuers to make debt service
payments will be affected by events and conditions affecting
financed projects, including, among other things, the achievement
and maintenance of sufficient occupancy levels and adequate
rental income, increases in taxes, employment and income conditions
prevailing in local labor markets, utility costs and
other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends
affecting the localities in which the projects are located. The
occupancy of housing projects may be adversely affected by high
rent levels and income limitations imposed under Federal and
State programs. Like single family mortgage revenue bonds,
multi-family mortgage revenue bonds are subject to redemption and
call features, including extraordinary mandatory redemption
features, upon prepayment, sale or non-origination of mortgage
loans as well as upon the occurrence of other events. Certain
issuers of single or multi-family housing bonds have considered
various ways to redeem bonds they have issued prior to the stated
first redemption dates for such bonds. In connection with the
housing Municipal Bonds held by the State Trusts, the Sponsor has
not had any direct communications with any of the issuers
thereof, but at the Initial Date of Deposit it was not aware that
any of the respective issuers of such Municipal Bonds were
actively considering the redemption of such Municipal Bonds prior
to their respective stated initial call dates. However, there
can be no assurance that an issuer of a Municipal Bond in the
State Trusts will not attempt to so redeem a Municipal Bond in
the State Trusts.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are derived from the sale
of water and/or sewerage services. Water and sewerage bonds are
generally payable from user fees. Problems faced by such issuers
include the ability to obtain timely and adequate rate increases,
a decline in population resulting in decreased user fees, the
difficulty of financing large construction programs, the
limitations on operations and increased costs and delays
attributable to environmental considerations, the increasing
difficulty of obtaining or discovering new supplies of fresh
water, the effect of conservation programs and the impact of
"no-growth" zoning ordinances. Issuers may have experienced
these problems in varying degrees.
Because of the relatively short history of solid waste disposal
bond financing, there may be technological risks involved in the
satisfactory construction or operation of the projects exceeding
those associated with most municipal enterprise projects.
Increasing environmental regulation on the Federal, State and
local level has a significant impact on waste disposal
facilities. While regulation requires more waste producers to
use waste disposal facilities, it also imposes significant costs
on the facilities. These costs include compliance with
frequently changing and complex regulatory requirements, the cost
of obtaining construction and operating permits, the cost of
conforming to prescribed and changing equipment standards and
required methods of operation and the cost of disposing of the
waste residue that remains after the disposal process in an
environmentally safe manner. In addition, waste disposal
facilities frequently face substantial opposition by
environmental groups and officials to their location and operation,
to the possible adverse effects upon the public health
and the environment that may be caused by wastes disposed of at
the facilities and to alleged improper operating procedures.
Waste disposal facilities benefit from laws which require waste
to be disposed of in a certain manner but any relaxation of these
laws could cause a decline in demand for the facilities'
services. Finally, waste disposal facilities are concerned with
many of the same issues facing utilities insofar as they derive
revenues from the sale of energy to local power utilities.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers whose revenues are primarily derived from
the sale of electric energy or natural gas. Utilities are
generally subject to extensive regulation by state utility
commissions which, among other things, establish the rates which
may be charged and the appropriate rate of return on an approved
asset base. The problems faced by such issuers include the
difficulty in obtaining approval for timely and adequate rate
increases from the governing public utility commission, the
difficulty in financing large construction programs, the
limitations on operations and increased costs and delays
attributable to environmental considerations, increased
competition, recent reductions in estimates of future demand for
electricity in certain areas of the country, the difficulty of
the capital market in absorbing utility debt, the difficulty in
obtaining fuel at reasonable prices and the effect of energy
conservation. Issuers may have experienced these problems in
varying degrees. In addition, Federal, state and municipal
governmental authorities may from time to time review existing
and impose additional regulations governing the licensing,
construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of such Municipal
Bonds to make payments of principal and/or interest on such
Municipal Bonds.
The ability of state and local joint action power agencies to
make payments on bonds they have issued is dependent in large
part on payments made to them pursuant to power supply or similar
agreements. Courts in Washington and Idaho have held that
certain agreements between the Washington Public Power Supply
System ("WPPSS") and the WPPSS participants are unenforceable
because the participants did not have the authority to enter into
the agreements. While these decisions are not specifically
applicable to agreements entered into by public entities in other
states, they may cause a reexamination of the legal structure and
economic viability of certain projects financed by joint action
power agencies, which might exacerbate some of the problems
referred to above and possibly lead to legal proceedings
questioning the enforceability of agreements upon which payment
of these bonds may depend.
Certain of the Municipal Bonds in the State Trusts may be
industrial revenue bonds ("IRBs"), including pollution control
revenue bonds, which are tax-exempt securities issued by states,
municipalities, public authorities or similar entities to finance
the cost of acquiring, constructing or improving various
industrial projects. These projects are usually operated by corporate
entities. Issuers are obligated only to pay amounts
due on the IRBs to the extent that funds are available from the
unexpended proceeds of the IRBs or receipts or revenues of the
issuer under an arrangement between the issuer and the corporate
operator of a project. The arrangement may be in the form of a
lease, installment sale agreement, conditional sale agreement or
loan agreement, but in each case the payments to the issuer are
designed to be sufficient to meet the payments of amounts due on
the IRBs. Regardless of the structure, payment of IRBs is solely
dependent upon the creditworthiness of the corporate operator of
the project or corporate guarantor. Corporate operators or
guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings,
regulatory and environmental restrictions, litigation resulting
from accidents or environmentally-caused illnesses, extensive
competition and financial deterioration resulting from leveraged
buy-outs or takeovers. The IRBs in the State Trusts may be
subject to special or extraordinary redemption provisions which
may provide for redemption at par or, with respect to original
issue discount bonds, at issue price plus the amount of original
issue discount accreted to the redemption date plus, if
applicable, a premium. The Sponsor cannot predict the causes or
likelihood of the redemption of IRBs or other Municipal Bonds in
the State Trusts prior to the stated maturity of such Municipal
Bonds.
Certain of the Municipal Bonds in the State Trusts may be
obligations which are payable from and secured by revenues
derived from the ownership and operation of facilities such as
airports, bridges, turnpikes, port authorities, convention
centers and arenas. The major portion of an airport's gross
operating income is generally derived from fees received from
signatory airlines pursuant to use agreements which consist of
annual payments for leases, occupancy of certain terminal space
and service fees. Airport operating income may therefore by
affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is
experiencing significant variations in earnings and traffic, due
to increased competition, excess capacity, increased costs,
deregulation, traffic constraints and other factors, and several
airlines are experiencing severe financial difficulties. The
Sponsor cannot predict what effect these industry conditions may
have on airport revenues which are dependent for payment on the
financial condition of the airlines and their usage of the
particular airport facility. Similarly, payment on Municipal
Bonds related to other facilities is dependent on revenues from
the projects, such as user fees from ports, tolls on turnpikes
and bridges and rents from buildings. Therefore, payment may be
adversely affected by reduction in revenues due to such factors
as increased cost of maintenance, decreased use of a facility,
lower cost of alternative modes of transportation, scarcity of
fuel and reduction or loss of rents.
Certain of the Municipal Bonds in the State Trusts may be
obligations of issuers which are, or which govern the operation of,
schools, colleges and universities and whose revenues are
derived mainly from ad valorem taxes, or for higher education
systems, from tuition, dormitory revenues, grants and endowments.
General problems relating to school bonds include litigation
contesting the state constitutionality of financing public
education in part from ad valorem taxes, thereby creating a
disparity in educational funds available to schools in wealthy
areas and schools in poor areas. Litigation or legislation on
this issue may affect the sources of funds available for the
payment of school bonds in the Trust. General problems relating
to college and university obligations would include the prospect
of a declining percentage of the population consisting of
"college" age individuals, possible inability to raise tuition
and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state
funding and new government legislation or regulations which may
adversely affect the revenues or costs of such issuers. All of
such issuers have been experiencing certain of these problems in
varying degrees.
In addition, the ability of universities and colleges to meet
their obligations is dependent upon various factors, including
the size and diversity of their sources of revenues, enrollment,
reputation, management expertise, the availability and
restrictions on the use of endowments and other funds, the
quality and maintenance costs of campus facilities, and, in the
case of public institutions, the financial condition of the
relevant state or other governmental entity and its policies with
respect to education. The institution's ability to maintain
enrollment levels will depend on such factors as tuition costs,
geographic location, geographic diversity and quality of student
body, quality of the faculty and the diversity of program
offerings.
Certain of the Municipal Bonds in the State Trusts may be Urban
Redevelopment Bonds ("URBs"). URBs have generally been issued
under bond resolutions pursuant to which the revenues and
receipts payable under the arrangements with the operator of a
particular project have been assigned and pledged to purchasers.
In some cases, a mortgage on the underlying project may have been
granted as security for the URBs. Regardless of the structure,
payment of the URBs is solely dependent upon the creditworthiness
of the operator of the project.
Certain of the Municipal Bonds in the State Trusts may be lease
revenue bonds whose revenues are derived from lease payments made
by a municipality or other political subdivision which is leasing
equipment or property for use in its operation. The risks
associated with owning Municipal Bonds of this nature include the
possibility that appropriation of funds for a particular project
or equipment may be discontinued. The Sponsor cannot predict the
likelihood of nonappropriation of funds for these types of lease
revenue Municipal Bonds.
Certain of the Bonds in the Trust Funds may be sales and/or use
tax revenue bonds whose revenues are derived from the proceeds of
a special sales or use tax. Such taxes are generally subject to
continuing Legislature approval. Payments may be adversely
affected by reduction of revenues due to decreased use of a
facility or decreased sales.
Certain of the Municipal Bonds in the State Trusts may be "zero
coupon" bonds, i.e., an original issue discount bond that does
not provide for the payment of current interest. Zero coupon
bonds are purchased at a deep discount because the buyer receives
a final payment at the maturity of the bond and does not receive
any periodic interest payments. The effect of owning deep
discount bonds which do not make current interest payments (such
as the zero coupon bonds) is that a fixed yield is earned not
only on the original investment but also, in effect, on all
discount earned during the life of such obligation. This
implicit reinvestment of earnings at the same rate eliminates the
risk of being unable to reinvest the income on such obligation at
a rate as high as the implicit yield on the discount obligation,
but at the same time eliminates the holder's ability to reinvest
at higher rates in the future. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations
during periods of changing market interest rates than are
securities of comparable quality which pay interest currently.
For the Federal tax consequences of original issue discount bonds
such as the zero coupon bonds, see "Federal Tax Status of the
State Trusts."
Investors should be aware that many of the Municipal Bonds in the
State Trusts are subject to continuing requirements such as the
actual use of Municipal Bond proceeds or manner of operation of
the project financed from Municipal Bond proceeds that may affect
the exemption of interest on such Municipal Bonds from Federal
income taxation. Although at the time of issuance of each of the
Municipal Bonds in the State Trusts an opinion of bond counsel
was rendered as to the exemption of interest on such obligations
from Federal income taxation, there can be no assurance that the
respective issuers or other obligers on such obligations will
fulfill the various continuing requirements established upon
issuance of the Municipal Bonds. A failure to comply with such
requirements may cause a determination that interest on such
obligations is subject to Federal income taxation, perhaps even
retroactively from the date of issuance of such Municipal Bonds,
thereby reducing the value of the Municipal Bonds and subjecting
Unitholders to unanticipated tax liabilities.
Federal bankruptcy statutes relating to the adjustment of debts
of political subdivisions and authorities of states of the United
States provide that, in certain circumstances, such subdivisions
or authorities may be authorized to initiate bankruptcy
proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse
modification or alteration of the rights of holders of
obligations issued by such subdivisions or authorities.
Certain issues of the Municipal Bonds in the State Trusts
represent "moral obligations" of another governmental entity. In
the event that the issuer of the Municipal Bond defaults in the
repayment thereof, such other governmental entity lawfully may,
but is not obligated to, discharge the obligation of the issuer to
repay such Municipal Bond.
If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such Municipal Bonds becomes a
moral commitment but not a legal obligation of the State or
municipality in question. Even though the State may be called on
to restore any deficits in capital reserve funds of the agencies
or authorities which issued the bonds, any restoration generally
requires appropriation by the State legislature and accordingly
does not constitute a legally enforceable obligation or debt of
the State. The agencies or authorities generally have no taxing
power.
To the best of the Sponsor's knowledge, as of the date of this
Prospectus, there is no litigation pending with respect to any
Municipal Bond which might reasonably be expected to have a
material adverse effect on the Trust or any State Trust.
Although the Sponsor is unable to predict whether any litigation
may be instituted, or if instituted, whether such litigation
might have a material adverse effect on the Trust, the Trust
received copies of the opinions of bond counsel given to the
issuing authorities at the time of original delivery of each of
the Municipal Bonds to the effect that the Municipal Bonds had
been validly issued and that the interest thereon is exempt from
Federal income taxes.
INSURANCE ON THE PORTFOLIOS
All Municipal Bonds in the portfolio of the State Trusts are
insured as to the scheduled payment of interest and principal,
when due, by policies obtained directly by the Trust from
Financial Guaranty Insurance Company ("Financial Guaranty") or by
the Sponsor or by the issuer from Financial Guaranty, MBIA or
other insurers. The insurance policies obtained by the Trust for
a Series are non-cancelable and will continue in force so long as
such State Trust is in existence, Financial Guaranty remains in
business and the Municipal Bonds described in the policy continue
to be held in such State Trusts. The premium for any insurance
policy or policies obtained by an issuer of Municipal Bonds or
the Sponsor has been paid in advance by such issuer or the
Sponsor and any such policy or policies are non-cancelable and
will remain in force so long as the Municipal Bonds so insured
are outstanding and the insurer and/or insurers referred to below
remain in business. A monthly premium is paid by each State
Trust for the insurance obtained by the Trust, which is payable
from the interest received by such State Trust. In those
instances where Municipal Bond insurance is obtained by the
issuer or the Sponsor directly from an insurer, no premiums for
insurance are paid by the State Trust and such bonds are not
covered by the State Trust's policy. Nonpayment of premiums on
the policy obtained by the State Trust will not result in the
cancellation of such insurance but will force the insurer to take
action against the Trustee to recover premium payments due it.
Premium rates for each issue of Municipal Bonds protected by the
policy obtained by the Trust are fixed for the life of the
appropriate State Trusts. If the provider of an original
issuance insurance policy is unable to meet its obligations under
such policy or if the rating assigned to the claims paying ability
of any such insurer deteriorates, no other insurer has an
obligation to insure any issue adversely affected by either of
the above describe events.
The aforementioned insurance guarantees the scheduled payment of
principal and interest on the Municipal Bonds of each State
Trust. It does not guarantee the market value of the Municipal
Bonds or the value of the Units of a State Trust. The insurance
obtained by the Trust is only effective as to Municipal Bonds
owned by and held in a State Trust and the price which an
individual pays on acquisition of Units, or receives on
redemption or resale of Units, does not, except as indicated
below, include any element of value for the insurance obtained by
the Trust. Unitholders should recognize that in order to receive
any benefit from the portfolio insurance obtained by the State
Trust, they must be owners of the Units of a State Trust at the
time the Trustee becomes entitled to receive any payment from the
insurer for such State Trust. Insurance obtained by the issuer
or the Sponsor of a Municipal Bond is effective so long as the
Municipal Bond is outstanding, whether or not held by the State
Trust.
Pursuant to an irrevocable commitment of Financial Guaranty, the
Trustee, upon the sale of a Municipal Bond under the Trust's
insurance policy, has the right to obtain permanent insurance
with respect to such Municipal Bond (i.e., insurance to the
maturity of the Municipal Bond regardless of the identity of the
holder thereof) (the "Permanent Insurance") upon the payment of a
single predetermined insurance premium from the proceeds of the
sale of such Municipal Bond. Accordingly, every Municipal Bond
in the Trust is eligible to be sold on an insured basis. It is
expected that the Trustee will exercise the right to obtain
Permanent Insurance with respect to Municipal Bonds in the State
Trust only if upon such exercise the Trust would receive net
proceeds (i.e., the value of such Municipal Bond if sold as an
insured Municipal Bond less the insurance premium attributable to
the Permanent Insurance) from such sale in excess of the sale
proceeds if such Municipal Bond was sold on an uninsured basis.
The insurance premium with respect to each Municipal Bond is
determined based upon the insurability of each Municipal Bond as
of the Date of Deposit and will not be increased or decreased for
any change in the creditworthiness of such Municipal Bond's
issuer.
Insurance obtained for a State Trust, under normal circumstances,
has no effect on the price or redemption value of Units. It is
the present intention of the Evaluator to attribute a value to
such insurance for the purpose of computing the price or
redemption value of Units only in circumstances where the credit
quality of an underlying Municipal Bond has significantly
deteriorated. Insurance obtained by the issuer of a Municipal
Bond is effective so long as such Municipal Bond is outstanding.
Therefore, any such insurance may be considered to represent an
element of market value in regard to the Municipal Bonds thus
insured, but the exact effect, if any, of this insurance on such
market value cannot be predicted.
The value to be added to such Municipal Bonds shall be an amount
equal to the excess, if any, by which the net proceeds realizable
from the sale of the Municipal Bond on an insured basis exceeds
the sum of (i) the net proceeds receivable from the sale of the
Municipal Bonds on an uninsured basis plus (ii) the insurance
premium attributable to the Permanent Insurance. Insurance
obtained by the issuer of a Municipal Bond is effective so long
as such Municipal Bond is outstanding. Therefore, any such
insurance may be considered to represent an element of market
value in regard to the Municipal Bonds thus insured, but the
exact effect, if any, of this insurance on such market value
cannot be predicted.
Under the provisions of the aforementioned insurance, Financial
Guaranty unconditionally and irrevocably agrees to pay to
Citibank, N.A., or its successor, as its agent (the "Fiscal
Agent"), that portion of the principal of and interest on the
covered Municipal Bonds which shall become due for payment but
shall be unpaid by reason of nonpayment by the issuer of the
Municipal Bonds. The term "due for payment" means, when
referring to the principal of a Municipal Bond, its stated
maturity date or the date on which it shall have been called for
mandatory sinking fund redemption and does not refer to any
earlier date on which payment is due by reason of call for
redemption (other than by mandatory sinking fund redemption),
acceleration or other advancement of maturity and means, when
referring to interest on a Municipal Bond, the stated date for
payment of interest. When the interest on a Municipal Bond shall
have been determined, as provided in the underlying documentation
relating to such Municipal Bond, to be subject to Federal income
taxation, "due for payment" also means, when referring to the
principal of such Municipal Bond, the date on which such
Municipal Bond has been called for mandatory redemption as a
result of such determination of taxability, and when referring to
interest on such Municipal Bond, the accrued interest at the rate
provided in such documentation to the date on which such
Municipal Bond has been called for such mandatory redemption,
together with any applicable redemption premium.
Financial Guaranty will make such payments to the Fiscal Agent on
the date such principal or interest becomes due for payment or on
the business day next following the day on which Financial
Guaranty shall have received notice of nonpayment, whichever is
later. The Fiscal Agent will disburse to the Trustee the face
amount of principal and interest which is then due for payment
but is unpaid by reason of nonpayment and interest which is then
due for payment but is unpaid by reason of nonpayment by the
issuer but only upon receipt by the Fiscal Agent of (i) evidence
of the Trustee's right to receive payment of the principal or
interest due for payment and (ii) evidence, including any
appropriate instruments of assignment, that all of the rights to
payment of such principal or interest due for payment shall
thereupon vest in Financial Guaranty. Upon such disbursement,
Financial Guaranty shall become the owner of the Municipal Bond,
appurtenant coupon or right to payment of principal or interest
on such Municipal Bond and shall be fully subrogated to all the
Trustee's rights thereunder, including the right to payment thereof.
Financial Guaranty Insurance Company. Financial Guaranty is
a wholly-owned subsidiary of FGIC Corporation, a Delaware holding
company (the "Corporation"). The Corporation is a wholly owned
subsidiary of General Electric Capital Corporation ("GECC").
Neither the Corporation nor GECC is obligated to pay the debts of
or the claims against Financial Guaranty. Financial Guaranty is
domiciled in the State of New York and is subject to regulation
by the State of New York Insurance Department. As of December
31, 1995 the total capital and surplus of Financial Guaranty was
approximately $1,000,520,000. Copies of Financial Guaranty's
financial statements, prepared on the basis of statutory
accounting principles, and the Corporation's financial
statements, prepared on the basis of generally accepted
accounting principles, may be obtained by writing to Financial
Guaranty at 115 Broadway, New York, New York 10006, Attention:
Communications Department (telephone number is (212) 312-3000) or
to the New York State Insurance Department at 160 West Broadway,
18th Floor, New York 10013, Attention: Property Companies Bureau
(telephone number (212) 621-0389).
In addition, Financial Guaranty is currently authorized to write
with insurance in all 50 states and the District of Columbia.
The information relating to Financial Guaranty contained above
has been furnished by such corporation. The financial
information contained herein with respect to such corporation is
unaudited but appears in reports or other materials filed with
state insurance regulatory authorities and is subject to audit
and review by such authorities. No representation is made herein
as to the accuracy or adequacy of such information or as to the
absence of material adverse changes in such information
subsequent to the date thereof but the Sponsor is not aware that
the information herein is inaccurate or incomplete.
AMBAC Indemnity Corporation. AMBAC Indemnity Corporation
("AMBAC") is a Wisconsin-domiciled stock insurance company,
regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin, and licensed to do business in 50 states, the
District of Columbia and the Commonwealth of Puerto Rico, with
admitted assets (unaudited) of approximately $2,145,000,000 and
statutory capital (unaudited) of approximately $782,000,000 as of
December 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
have both assigned a AAA claims-paying ability rating to AMBAC.
Copies of AMBAC's financial statements prepared in accordance
with statutory accounting standards are available from AMBAC.
The address of AMBAC's administrative offices and its telephone
number at One State Street Plaza, 17th Floor, New York, New York
10004 and (212) 668-0340. AMBAC has entered into quota share
reinsurance agreements under which a percentage of the insurance
underwritten pursuant to certain municipal bonds insurance
programs of AMBAC has been and will be assumed by a number of
foreign and domestic unaffiliated reinsurers.
MBIA Insurance Corporation. MBIA Insurance Corporation
("MBIA Corporation") is the principal operating subsidiary of
MBIA, Inc., a New York Stock Exchange listed company. MBIA, Inc.
is not obligated to pay the debts of or claims against MBIA
Corporation. MBIA Corporation, which commenced municipal bond
insurance operations on January 5, 1987, is a limited liability
corporation rather than a several liability association. MBIA
Corporation is domiciled in the State of New York and licensed to
do business in all 50 states, the District of Columbia, the
Commonwealth of the Northern Mariana Islands, the Commonwealth of
Puerto Rico, the Virgin Islands of the United States and the
Territory of Guam.
As of December 31, 1995 MBIA Corporation had admitted assets of
$3.8 billion (unaudited), total liabilities of $2.5 billion
(unaudited), and total capital and surplus of $1.3 billion
(unaudited) prepared in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory
authorities. Standard & Poor's has rated the claims paying
ability of MBIA "AAA." Copies of MBIA Corporation's financial
statements prepared in accordance with statutory accounting
practices are available form MBIA Corporation. The address of
MBIA Corporation is 113 King Street, Armonk, New York 10504.
Effective December 31, 1989 MBIA Inc. acquired Bond Investors
Group, Inc. On January 5, 1990, the Insurer acquired all of the
outstanding stock of Bond Investors Group, Inc., The parent of
BIG, now known as MBIA Insurance Corp. of Illinois. Though a
reinsurance agreement, BIG has ceded all of its net insured
risks, as well as its unearned premium and contingency reserves,
to the Insurer and the Insurer has reinsured BIG's net
outstanding exposure.
Moody's Investors Service rates all bonds issues insured by MBIA
"Aaa" and short-term loans "MIG-1," both designated to be of the
highest quality. Standard & Poor's rates all new issues insured
by MBIA "AAA."
Financial Security Assurance. Financial Security Assurance
("Financial Security" or "FSA") is monoline insurance company
incorporated on March 16, 1984 under the laws of the State of New
York. The operations of Financial Security commenced on July 25,
1985, and Financial Security received its New York State
insurance license on September 23, 1985. Financial Security and
its two wholly owned subsidiaries are licensed to engage in
financial guaranty insurance business in 49 states, the District
of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively
in the business of writing financial guaranty insurance,
principally in respect of asset-backed and other collateralized
securities offered in domestic and foreign markets. Financial
Security and its subsidiaries also write financial guaranty
insurance in respect of municipal and other obligations and
reinsure financial guaranty insurance policies written by other
leading insurance companies. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled
payments of an issuer's securities, thereby enhancing the credit
rating of these securities, in consideration for payment of a
premium to the insurer.
Financial Security is 91.6% owned by U S West, Inc., and 8.4%
owned by The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio
Marine"). Neither U S WEST, Inc. nor Tokio Marine is obligated
to pay the debts of or the claims against Financial Security.
Financial Security is domiciled in the State of New York and is
subject to regulation by the State of New York Insurance
Department.
As of March 31, 1993, the total policyholders' surplus and
contingency reserves and the total unearned premium reserve,
respectively, of Financial Security and its consolidated
subsidiaries were, in accordance with statutory accounting
principles, approximately $479,110,000 (unaudited) and
$220,078,000 (unaudited), and the total shareholder's equity and
the unearned premium reserve, respectively of Financial Security
and its consolidated subsidiaries were, in accordance with
generally accepted accounting principles, approximately
$628,119,000 (unaudited) and $202,493,000 (unaudited).
Copies of Financial Security's financial statements may be
obtained by writing to Financial Security at 350 Park Avenue, New
York, New York 10022, Attention: Communications Department.
Financial Security's Telephone number is (212) 826-0100.
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written by Financial Security or either of its
subsidiaries are insured among such companies at an agreed-upon
percentage substantially proportional to their respective
capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, Financial Security reinsurers a
portion of its liabilities under certain of its financial
guaranty insurance policies with unaffiliated reinsurers under
various quota share treaties and on a transaction-by-transaction
basis. Such reinsurance is utilized by Financial Security as a
risk management device and to comply with certain statutory and
rating agency requirements it does not alter or limit Financial
Security's obligations under any financial guaranty insurance
policy.
Financial Security's claims-paying ability is rated "Aaa" by
Moody's Investors Service, Inc., and "AAA" by Standard & Poor's,
Nippon Investors Service Inc., Duff & Phelps Inc. and Australian
Ratings Pty. Ltd. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell
or hold securities and are subject to revision or withdrawal at
any time by such rating agencies.
Capital Guaranty Insurance Company. Capital Guaranty
Insurance Company ("Capital Guaranty") was incorporated in
Maryland on June 25, 1986, and is wholly owned subsidiary of
Capital Guaranty Corporation, a Maryland insurance holding
company. Capital Guaranty Corporation is a publicly owned
company whose shares are traded on the New York Stock Exchange.
Capital Guaranty Insurance Company is authorized to provide
insurance in all 50 states, the District of Columbia and three
U.S. territories. Capital Guaranty focuses on insuring municipal
securities and provides policies which guaranty the timely
payment of principal and interest when due for payment on new
issue and secondary market issue municipal bond transactions.
Capital Guaranty's claims-paying ability is rated "Triple-A" by
both Moody's and Standard & Poor's.
As of September 30, 1995, Capital Guaranty had $19.0 billion in
net exposure outstanding (excluding defeased issues). The total
policyholders' surplus and contingency reserve of Capital
Guaranty was $204,642,000 (unaudited), and the total admitted
assets were $326,802,226 (unaudited) as reported to the Insurance
Department of the State of Maryland. Financial statements for
Capital Guaranty Insurance Company, that have been prepared in
accordance with statutory insurance accounting standards, are
available upon request. The address of Capital Guaranty's
headquarters is Steuart Tower, 22nd Floor, One Market Plaza, San
Francisco, CA 94105-1413 and the telephone number is (415)
995-8000.
Because the Municipal Bonds are insured as to the scheduled
payment of principal and interest and on the basis of the
financial condition and the method of operation of the insurance
companies referred to above, either Standard & Poor's or Moody's
has assigned to the State Trusts' Units its "AAA" or "Aaa"
investment rating, respectively, and, in addition, Moody's has
assigned its "Aaa" investment rating to each of the Municipal
Bonds covered by the Financial Guaranty policy while held in the
Trust. These are the highest ratings assigned to securities by
such rating agencies. See "Description of Securities Ratings"
herein. These ratings should not be construed as an approval of
the offering of the Units by Standard & Poor's or Moody's or as a
guarantee of the market value of the State Trusts or the Units.
There is no guarantee that the "AAA" or "Aaa" investment ratings
will be maintained. The "AAA" Unit rating received by a State
Trust from Standard & Poor's on the original date of deposit will
be in effect for a period of 13 months from such date and will,
unless renewed, terminate at the end of such period.
On the date shown under "Essential Information" in Part Two, the
Estimated Long-Term and Current Returns per Unit for the Trust,
after payment of the insurance premium, if any, were as
indicated. The Estimated Long-Term and Current Returns per Unit
for a trust with an identical portfolio without the insurance
obtained by the Trust would have been higher on such date.
An objective of the portfolio insurance obtained by the Trust is
to obtain a higher yield on the portfolio of the Series of the
Trust than would be available if all the Municipal Bonds in such
portfolios had Standard & Poor's "AAA" rating and/or Moody's
"Aaa" rating, and at the same time to have the protection of
insurance of prompt payment of interest and principal, when due,
on the Municipal Bonds. There is, of course, no certainty that
this result will be achieved. Municipal Bonds in a Series of the
Trust which have been insured by the issuer (all of which are
rated "AAA" by Standard & Poor's and/or "Aaa" by Moody's) may or
may not have a higher yield than uninsured bonds rated "AAA" by
Standard & Poor's or "Aaa" by Moody's. In selecting such
Municipal Bonds for the portfolio, the Sponsor has applied the
criteria described above.
In the event of nonpayment of interest or principal, when due, in
respect of a Municipal Bond, the appropriate insurer shall make such
payment not later than 30 days after it has been notified
that such nonpayment has occurred or is threatened (but not
earlier than the date such payment is due). The insurer, as
regards any payment it may make, will succeed to the rights of
the Trustee in respect thereof.
The Internal Revenue Service has issued a letter ruling which
holds, in effect, that insurance proceeds representing maturing
interest on defaulted municipal obligations paid to municipal
bond funds substantially similar to the Trust, under policy
provisions substantially identical to the policies described
herein, will be excludable from Federal gross income under
Section 103(a)(1) of the Internal Revenue Code. Holders of Units
in the State Trust should discuss with their tax advisers the
degree of reliance which they may place on this letter ruling.
Furthermore, Chapman and Cutler, counsel for the Sponsor, has
given an opinion to the effect that such payment of proceeds
would be excludable from Federal gross income to the same extent
that such interest would have been so excludable if paid by the
issuer of the defaulted obligations. See "Federal Tax Status of
the State Trusts."
DISTRIBUTION REINVESTMENT
Each Unitholder of a State Trust may elect to have distributions
of principal (including capital gains, if any) or interest or
both automatically invested without charge in shares of any
mutual fund underwritten or advised by Zurich Kemper Investments,
Inc. (the "Kemper Funds") which are registered in the
Unitholder's State of Residence, other than those Kemper Funds
sold with a contingent deferred sales charge. Since the
portfolio securities and investment objectives of such Kemper
Funds may differ significantly from that of the Trust,
Unitholders should carefully consider the consequences, including
the fact that distributions from such Kemper Funds may be
taxable, before selecting such Kemper Funds for reinvestment.
Detailed information with respect to the investment objectives
and the management of the Funds is contained in their respective
prospectuses, which can be obtained from the Sponsor, and many
investment firms, upon request. An investor should read the
appropriate prospectus prior to making the election to reinvest.
A Unitholder who desires to have such distributions automatically
reinvested without charge should file a written notice of
election with the Program Agent referred to below. Such election
must be received by the Program Agent at least ten days prior to
the Record Date applicable to any distribution in order to be in
effect for such Record Date. Any such election shall remain in
effect until a subsequent notice is received by the Program
Agent. See "Unitholders_Distributions to Unitholders."
The Program Agent is the Trustee. All inquiries concerning
participation in distribution reinvestment should be directed to
the Trustee at its unit investment trust office.
INTEREST, ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM
RETURN
As of the opening of business on the date indicated therein, the
Estimated Current Returns and the Estimated Long-Term Returns for
each State Trust were as set forth under "Essential Information" for
the applicable State Trust in Part Two of this Prospectus.
Estimated Current Returns are calculated by dividing the
estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per
Unit will vary with changes in fees and expenses of the Trustee,
the Sponsor and the Evaluator and with the principal prepayment,
redemption, maturity, exchange or sale of Securities while the
Public Offering Price will vary with changes in the offering
price of the underlying Securities and with changes in accrued
interest therefore, there is no assurance that the present
Estimated Current Returns will be realized in the future.
Estimated Long-Term Returns are calculated using a formula which
(1) takes into consideration, and determines and factors in the
relative weightings of, the market values, yields (which takes
into account the amortization of premiums and the accretion of
discounts) and estimated retirements of all of the Securities in
the State Trust and (2) takes into account the expenses and sales
charge associated with each State Trust Unit. Since the market
values and estimated retirements of the Securities and the
expenses of the State Trust will change, there is no assurance
that the present Estimated Long-Term Returns will be realized in
the future. Estimated Current Returns and Estimated Long-Term
Returns are expected to differ because the calculation of
Estimated Long-Term Returns reflects the estimated date and
amount of principal returned while Estimated Current Returns
calculations include only net annual interest income and Public
Offering Price.
FEDERAL TAX STATUS OF THE STATE TRUSTS
All Municipal Bonds deposited in a Trust were accompanied by
copies of opinions of bond counsel to the issuers thereof, given
at the time of original delivery of the Municipal Bonds, to the
effect that the interest thereon is excludable from gross income
for Federal income tax purposes. In connection with the offering
of Units of a Trust, neither the Sponsor, the Trustee, the
auditors nor their respective counsel have made any review of the
proceedings relating to the issuance of the Municipal Bonds or
the basis for such opinions.
With respect to each Trust, counsel for the Sponsor rendered an
opinion as of the Date of Deposit that:
The Trust is not an association taxable as a corporation for
Federal income tax purposes and interest and accrued original
issue discount on Bonds which is excludable from gross income
under the Internal Revenue Code of 1986, as amended (the "Code")
will retain its status when distributed to Unitholders however,
such interest may be taken into account in computing the
alternative minimum tax, an additional tax on branches of foreign
corporations and the environmental tax (the "Superfund Tax"), as
noted below.
Each Unitholder is considered to be the owner of a pro rata
portion of each asset of the respective Trust in the proportion
that the number of Units of such Trust held by him bears to the
total number of Units outstanding of such Trust under subpart E,
subchapter J of chapter 1 of the Code and will have a taxable
event when such Trust disposes of a Bond, or when the Unitholder
redeems or sells his Units. Unitholders must reduce the tax
basis of their Units for their share of accrued interest received
by a Trust, if any, on Bonds delivered after the date the
Unitholders pay for their Units to the extent that such interest
accrued on such Bonds during the period from the Unitholder's
settlement date to the date such Bonds are delivered to a Trust
and, consequently, such Unitholders may have an increase in
taxable gain or reduction in capital loss upon the disposition of
such Units. Gain or loss upon the sale or redemption of Units is
measured by comparing the proceeds of such sale or redemption
with the adjusted basis of the Units. If the Trustee disposes of
Bonds (whether by sale, payment on maturity, redemption or
otherwise), gain or loss is recognized to the Unitholder (subject
to various non-recognition provisions of the Code). The amount
of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such
disposition with the Unitholder's basis for his or her fractional
interest in the asset disposed of. In the case of a Unitholder
who purchases Units, such basis (before adjustment for earned
original issue discount and amortized bond premium, if any) is
determined by apportioning the cost of the Units among each of
the Trust's assets ratably according to their value as of the
valuation date nearest the date of acquisition of the Units. The
tax basis reduction requirements of the Code relating to
amortization of bond premium may, under some circumstances,
result in the Unitholder realizing a taxable gain when his Units
are sold or redeemed for an amount equal to or less than his
original cost.
Any insurance proceeds paid under individual policies obtained by
issuers of Bonds which represent maturing interest on defaulted
obligations held by the Trustee will be excludable from Federal
gross income if, and to the same extent as, such interest would
have been so excludable if paid in the normal course by the
issuer of the defaulted obligations provided that, at the time
such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the
insurer, will pay debt service on the obligations.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules
provide that original issue discount accrues either on the basis
of a constant compound interest rate or ratably over the term of
the Municipal Bond, depending on the date the Municipal Bond was
issued. In addition, special rules apply if the purchase price
of a Municipal Bond exceeds the original issue price plus the
amount of original issue discount which would have previously
accrued based upon its issue price (its "adjusted issue price")
to prior owners. The application of these rules will also vary
depending on the value of the Municipal Bond on the date a
Unitholder acquires his Units, and the price the Unitholder pays
for his Units. Unitholders should consult with their tax
advisers regarding these rules and their application.
The Revenue Reconciliation Act of 1993 (the "Tax Act") subjects
tax-exempt bonds to the market discount rules of the Code effective
for bonds purchased after April 30, 1993. In general,
market discount is the amount (if any) by which the stated
redemption price at maturity exceeds an investor's purchase price
(except to the extent that such difference, if any, is
attributable to original issue discount not yet accrued) subject
to a statutory de minimis rule. Market discount can arise based
on the price a Trust pays for Municipal Bonds or the price a
Unitholder pays for his or her Units. Under the Tax Act,
accretion of market discount is taxable as ordinary income under
prior law the accretion had been treated as capital gain. Market
discount that accretes while a Trust holds a Municipal Bond would
be recognized as ordinary income by the Unitholders when
principal payments are received on the Municipal Bond, upon sale
or at redemption (including early redemption), or upon the sale
or redemption of his or her Units, unless a Unitholder elects to
include market discount in taxable income as it accrues. The
market discount rules are complex and Unitholders should consult
their tax advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax
and the Superfund Tax for taxable years beginning after December
31, 1986 depends upon the corporation's alternative minimum
taxable income, which is the corporation's taxable income with
certain adjustments. One of the adjustment items used in
computing the alternative minimum taxable income and the
Superfund Tax of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, or
REMIC) is an amount equal to 75% of the excess of such
corporation's "adjusted current earnings" over an amount equal to
its alternative minimum taxable income (before such adjustment
item and the alternative tax net operating loss deduction).
"Adjusted current earnings" includes all tax-exempt interest,
including interest on all of the Bonds in a Trust. Under the
provisions of Section 884 of the Code, a branch profits tax is
levied on the "effectively connected earnings and profits" of
certain foreign corporations which include tax-exempt interest
such as interest on the Bonds in the Trust. Under current Code
provisions, the Superfund Tax does not apply to tax years
beginning on or after January 1, 1996. However, the Superfund
Tax could be extended retroactively. Unitholders should consult
their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum
tax, the Superfund Tax and the branch profits tax imposed by
Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265
of the Code, interest on indebtedness incurred or continued to
purchase or carry Units of a Trust is not deductible for Federal
income tax purposes. The Internal Revenue Service has taken the
position that such indebtedness need not be directly traceable to
the purchase or carrying of Units (however, these rules generally
do not apply to interest paid on indebtedness incurred to
purchase or improve a personal residence). Also, under Section
265 of the Code, certain financial institutions that acquire
Units would generally not be able to deduct any of the interest
expense attributable to ownership of such Units. On December 7,
1995 the U.S. Treasury Department released proposed legislation
that, if enacted, would generally extend the financial
institution rules to all corporations, effective for obligations
acquired after the date of announcement. Investors with
questions regarding these issues should consult with their tax
advisers.
In the case of certain Municipal Bonds in a Trust, the opinions
of bond counsel indicate that interest on such Municipal Bonds
received by a "substantial user" of the facilities being financed
with the proceeds of these Municipal Bonds or persons related
thereto, for periods while such Municipal Bonds are held by such
a user or related person, will not be excludable from Federal
gross income, although interest on such Municipal Bonds received
by others would be excludable from Federal gross income.
"Substantial user" and "related person" are defined under the
Code and U.S. Treasury Regulations. Any person who believes that
he or she may be a "substantial user" or a "related person" as so
defined should contact his or her tax adviser.
In the case of corporations, the alternative tax rate applicable
to long-term capital gains is 35% effective for long-term capital
gains realized in taxable years beginning on or after January 1,
1993. For taxpayers other than corporations, net capital gains
are subject to a maximum marginal stated tax rate of 28%.
However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could
affect relative differences at which ordinary income and capital
gains are taxed. Under the Code, taxpayers must disclose to the
Internal Revenue Service the amount of tax-exempt interest earned
during the year.
All statements of law in the Prospectus concerning exclusion from
gross income for Federal, State or other tax purposes are the
opinions of counsel and are to be so construed.
At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exclusion of interest
thereon from Federal gross income are rendered by bond counsel to
the respective issuing authorities. Neither the Sponsor nor its
counsel has made any special review for the Trust of the
proceedings relating to the issuance of the bonds or of the basis
for such opinions.
Section 86 of the Code, in general, provides that fifty percent
of Social Security benefits are includible in gross income to the
extent that the sum of "modified adjusted gross income" plus
fifty percent of the Social Security benefits received exceeds a
"base amount." The base amount is $25,000 for unmarried
taxpayers, $32,000 for married taxpayers filing a joint return
and zero for married taxpayers who do not live apart at all times
during the taxable year and who file separate returns. Modified
adjusted gross income is adjusted gross income determined without
regard to certain otherwise allowable deductions and exclusions
from gross income and by including tax-exempt interest. To the
extent that Social Security benefits are includible in gross
income, they will be treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after
December 31, 1993, up to 85 percent of Social Security benefits are
includible in gross income to the extent that the sum of
"modified adjusted gross income" plus fifty percent of Social
Security benefits received exceeds an "adjusted base amount."
The adjusted based amount is $34,000 for unmarried taxpayers,
$44,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the
taxable year and who file separate returns.
Although tax-exempt interest is included in modified adjusted
gross income solely for the purpose of determining what portion,
if any, of Social Security benefits will be included in gross
income, no tax-exempt interest, including that received from the
Trust, will be subject to tax. A taxpayer whose adjusted gross
income already exceeds the base amount or the adjusted base
amount must include 50% or 85%, respectively, of his or her
Social Security benefits in gross income whether or not he or she
receives any tax-exempt interest. A taxpayer whose modified
adjusted gross income (after inclusion of tax-exempt interest)
does not exceed the base amount need not include any Social
Security benefits in gross income.
Ownership of the Units may result in collateral Federal income
tax consequences to certain taxpayers, including, without
limitation, corporations subject to either the environmental tax
or the branch profits tax, financial institutions, certain
insurance companies, certain S corporations, individual
recipients of Social Security or Railroad Retirement benefits and
taxpayers who may be deemed to have incurred (or continued)
indebtedness to purchase or carry tax-exempt obligations.
Prospective investors should consult their tax advisors as to the
applicability of any collateral consequences. On December 7,
1995, the U.S. Treasury Department released proposed legislation
that, if adopted, could affect the United States Federal income
taxation of non-United States Unitholders and the portion of the
Trusts' income allocable to non-United States Unitholders.
Similar language, which would be effective on the date of
enactment, was included in the Health Insurance Reform Bill as
passed by the U.S. Senate on April 23, 1996.
For a discussion of the State tax status of income earned on
Units of a State trust, see the discussion of tax status for the
applicable trust. Except as noted therein, the exemption of
interest on State and local obligations for Federal income tax
purposes discussed above does not necessarily result in exemption
under the income or other tax laws of any State or city. The
laws of the several States vary with respect to the taxation of
such obligations.
DESCRIPTION AND STATE TAX STATUS OF THE STATE TRUSTS
Alabama Trusts. Alabama's economy has experienced a major
trend toward industrialization over the past two decades. By
1990, manufacturing accounted for 26.7% of Alabama's Real Gross
State Product (the total value of goods and services produced in
Alabama). During the 1960s and 1970s, the State's industrial
base became more diversified and balanced, moving away from
primary textiles (including apparel), chemicals, rubber and
plastics. Since the early 1980s, modernization of existing
facilities and an increase in direct foreign investments in the
State has made the manufacturing sector more competitive in
domestic and international markets.
Among several leading manufacturing industries have been pulp and
papers and chemicals, the development and growth of which have
been made possible by abundant rainfall (the mean annual average
of which varies between 52 and 68 inches) and a high pulpwood
growth rate (averaging approximately one-half cord per acre per
year). In recent years, Alabama has ranked as the fifth largest
producer of timber in the nation. Alabama has fresh water
availability of twenty times present usage. The State's growing
chemical industry has been the natural complement of production
of wood pulp and paper. Mining, oil and gas production and
service industries are also important to Alabama's economy. Coal
mining is by far the most important mining activity.
In recent years, the importance of service industries to the
State's economy has increased significantly. The major service
industries in the State are the general healthcare industries,
most notably represented by the University of Alabama medical
complex in Birmingham and the high technology research and
development industries concentrated in the Huntsville area. The
financial, insurance and real estate sectors have also shown
strong growth over the last several years.
The economy in the State of Alabama recovered quickly from the
recession of the early 1980s. Since 1983, the State has
recovered and moved forward faster than the national average.
The Alabama Development Office reported as of December 31, 1992,
that for the sixth consecutive year, more than two billion
dollars were expended in Alabama for new and expanded industries.
The State had new and expanding capital investment of $2.2
billion in 1991 and $2.0 billion in 1992. These expenditures
included 17,893 announced jobs created by 845 separate companies
for 1991 and 19,582 announced jobs by 979 companies in 1992.
From 1987_1991, $13.2 billion was invested in new or expanding
industry in the State. Some of the largest investments during
this period include Alabama Pine Pulp Company ($700 million)
Mead Corporation ($300 million) EXXON Company, USA ($900
million) Gulf States Paper ($225 million) and United States
Steel Corp. ($200 million). During 1992, three significant
projects were announced by companies within the State. These
projects are by Scott Paper Company ($344 million) Russell
Corporation ($147 million) and Courtfaulds Fibers, Inc. ($125
million).
During the recent recession, State revenues suffered along with
the rest of the nation. Growth in overall tax revenues was only
about 3.4% from fiscal 1991 to 1992. Corporate income tax
receipts declined slightly from 1991 to 1992. However, State tax
collections were up by about 8.9% for the nine month period
ending June 30, 1993, as compared to the same period for fiscal
1992, indicating an economic recovery is in progress. Individual
income tax receipts and sales tax receipts for the same nine
month period increased 8.0% and 7.8%, respectively.
.c3.Real Gross State Product. Real Gross State Product (RGSP)
is a comprehensive measure of economic performance for the State of
Alabama. Alabama's RGSP is defined as the total value of all
final goods and services produced in the State in constant dollar
terms. Hence, changes in RGSP reflect changes in final output.
From 1984 to 1992 RGSP originating in manufacturing increased by
2.5% per year while RGSP originating in all the non-manufacturing
sectors grew by 2.1% per year.
Those non-manufacturing sectors exhibiting large percentage
increases in RGSP originating between 1986 and 1992 were Mining
Transportation Communication and Public Utilities and Services.
From 1986 to 1992, RGSP originating in Mining increased by 5.7%
per year, Transportation, Communication and Public Utilities grew
by 6.2% per year, and Services grew by 3.8% per year. The
present movement toward diversification of the State's
manufacturing base and a similar present trend toward enlargement
and diversification of the transportation, communication, and
public utilities and service industries in the State are expected
to lead to increased economic stability.
.c3.Employment. There was a significant decrease in
unemployment in the period 1985-1989 due to the economic recovery
from the recession of the early 1980s. Since 1989, unemployment
rates have come down more gradually due to the general nationwide
reduction in activity and employment in the industrial sector.
.c3.Transportation. Alabama contains one of the largest
networks of inland river systems in the nation. Across the
northern section of the State, through the heartland and down to
the Gulf of Mexico flow the waters of four major rivers offering
barge transportation to industries and businesses that depend on
the movement of large, heavy or bulky cargoes.
The Port of Mobile is one of the nation's busiest ports in tons
of cargo handled. During the fiscal year ending September 30,
1991, the Port of Mobile handled approximately 35,031,521 tons of
cargo. It has been the largest port of entry in the United
States for bauxite, a basic ingredient in aluminum. Other
important imports handled at the Port of Mobile are manganese,
iron ore, chrome ore, newsprint, wire and nails. In addition to
coal, the State's most important export, the other significant
exports passing through the Port of Mobile are soybeans, corn,
flour, wheat, rice, lumber, scrap iron, paper and paper products,
creosoted timbers, dry milk, iron, steel and iron and steel
products.
Political subdivisions of the State of Alabama have limited
taxing authority. In addition, the Alabama Supreme Court has
held that a governmental unit may first use its taxes and other
revenues to pay the expenses of providing necessary governmental
services before paying debt service on its bonds, warrants or
other indebtedness. The State has statutory budget provisions
which result in a proration procedure in the event estimated
budget resources in a fiscal year are insufficient to pay in full
all appropriations for that year. Proration has a materially
adverse effect on public entities that are dependent upon State
funds subject to proration.
Deterioration of economic conditions could adversely affect both
tax and other governmental revenues, as well as revenues to be used
to service various revenue obligations, such as industrial
development obligations. Such difficulties could adversely
affect the market value of the bonds held by the Alabama Trust
and thereby adversely affect Unitholders.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
Bonds held by the Alabama Trust are subject. Additionally, many
factors including national economic, social and environmental
policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse
impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other
factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Alabama Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Alabama Trust, Special
Counsel to the Fund for Alabama tax matters rendered an opinion
under then existing Alabama income tax law applicable to
taxpayers whose income is subject to Alabama income taxation
substantially to the effect that:
The Alabama Trust is not taxable as a corporation for purposes of
the Alabama income tax.
Income of the Alabama Trust, to the extent it is taxable, will be
taxable to the Unitholders, not the Alabama Trust.
Each Unitholder's distributive share of the Alabama Trust's net
income will be treated as the income of the Unitholder for
purposes of the Alabama income tax.
Interest on obligations of the State of Alabama and subdivisions
thereof and on bona fide tax-exempt obligations of the United
States' Possessions held by the Alabama Trust which is exempt
from Alabama income tax will retain its tax-exempt character when
the distributive share thereof is distributed or deemed
distributed to each Unitholder. Any proceeds paid to the Alabama
Trust under insurance policies issued to the Sponsor or under
individual policies obtained by the Sponsor, the issuer or
underwriter of the respective obligations which represent
maturing interest on defaulted obligations held by the Trustee
will be exempt from Alabama income tax if and to the same extent
as such interest would be exempt from such taxes if paid directly
by the issuer of such obligations.
Each Unitholder will, for purposes of the Alabama income tax,
treat his distributive share of gains realized upon the sale or
other disposition of the Bonds held by the Alabama Trust as
though the Bonds were sold or disposed of directly by the
Unitholders.
Gains realized on the sale or redemption of Units by Unitholders,
who are subject to the Alabama income tax, will be includable in
the Alabama income of such Unitholders.
Arizona Trusts. The following brief summary regarding the
economy of Arizona is based upon information drawn from publicly
available sources and is included for the purpose of providing the
information about general economic conditions that may or may
not affect issuers of the Arizona Bonds. The Sponsor has not
independently verified any of the information contained in such
publicly available documents.
Arizona is the nation's sixth largest state in terms of area.
Arizona's main economic/employment sectors include services,
tourism and manufacturing. Mining and agriculture are also
significant, although they tend to be more capital than labor
intensive. Services is the single largest economic sector. Many
of these jobs are directly related to tourism.
The unemployment rate in Arizona for 1994 was 6.3% and for 1993
was 6.2%. This compares favorably with a national rate of 6.3%
in 1994 and 6.8% in 1993.
In 1986, the value of Arizona real estate began a steady decline,
reflecting a market which had been overbuilt in the previous
decade with a resulting surplus of completed inventory. This
decline adversely affected both the construction industry and
those Arizona financial institutions which had aggressively
pursued many facets of real estate lending. In the near future,
Arizona's financial institutions are likely to continue to
experience problems until the excess inventories of commercial
and residential properties are absorbed. The problems of the
financial institutions have adversely affected employment and
economic activity. Longer-term prospects are brighter. Arizona
has been, and is projected to continue to be, one of the fastest
growing areas in the United States. Over the last several
decades the State has outpaced most other regions of the country
in virtually every major category of growth, including
population, personal income, gross state product and job
creation.
.c3.Budgetary Process. Arizona operates on a fiscal year
beginning July 1 and ending June 30. Fiscal year 1995 refers to
the year ending June 30, 1995.
Total General and Special Revenue Funds revenues of $6.5 billion
were expected during fiscal year 1994. Approximately 44.5% of
this budgeted revenue comes from sales and use taxes, 44.4% from
income taxes (both individual and corporate) and 4.4% from
property taxes. All taxes total approximately $4.0 billion, or
93% of General Fund revenues. Non-tax revenue includes items
such as income from the state lottery, licenses, fees and
permits, and interest.
For fiscal year 1994, the budget called for expenditures of
approximately $6.3 billion. These expenditures fell into the
following major categories: education (47.4%), health and welfare
(26.3%), protection and safety (4.0%), general government (15.5%)
and inspection and regulation, natural resources, transportation
and other (6.8%). The State's general fund revenues for fiscal
year 1995 are budgeted at approximately $4.7 billion.
Most or all of the Bonds of the Arizona Trust are not obligations
of the State of Arizona, and are not supported by the State's
taxing powers. The particular source of payment and security for
each of the Bonds is detailed in the instruments themselves and
in related offering materials. There can be no assurances,
however, with respect to whether the market value of marketability
of any of the Bonds issued by an entity other than
the State of Arizona will be affected by the financial or other
condition of the State or of any entity located within the State.
In addition, it should be noted that the State of Arizona, as
well as counties, municipalities, political subdivisions and
other public authorities of the state, are subject to limitations
imposed by Arizona's constitution with respect to ad valorem
taxation, bonded indebtedness and other matters. For example,
the state legislature cannot appropriate revenues in excess of 7%
of the total personal income of the state in any fiscal year.
These limitations may affect the ability of the issuers to
generate revenues to satisfy their debt obligations.
Although most of the Bonds in an Arizona Trust are revenue
obligations of local governments or authorities in the State,
there can be no assurance that the fiscal and economic conditions
referred to above will not affect the market value or
marketability of the Bonds or the ability of the respective
obligors to pay principal of and interest on the Bonds when due.
On July 21, 1994, the Arizona Supreme Court rendered its opinion
in Roosevelt Elementary School District Number 66, et al. v
Dianne Bishop, et al. (the "Roosevelt Opinion"). In this
opinion, the Arizona Supreme Court held that the present
statutory financing scheme for public education in the State of
Arizona does not comply with the Arizona constitution.
Subsequently, the Arizona School Boards Association, with the
approval of the appellants and the appellees to the Roosevelt
Opinion, and certain Arizona school districts, filed with the
Arizona Supreme Court motions for clarification of the Roosevelt
Opinion, specifically with respect to seeking prospective
application of the Roosevelt Opinion. On July 29, 1994, the
Arizona Supreme Court clarified the Roosevelt Opinion to hold
that such opinion will have prospective effect only.
Certain other circumstances are relevant to the market value,
marketability and payment of any hospital and health care revenue
bonds in the Arizona Trust. The Arizona Legislature has in the
past sought to enact health care cost control legislation.
Certain other health care regulatory laws have expired. It is
expected that the Arizona legislature will at future sessions
continue to attempt to adopt legislation concerning health care
cost control and related regulatory matters. The effect of any
such legislation or of the continued absence of any legislation
restricting hospital bed increases and limiting new hospital
construction on the ability of Arizona hospitals and other health
care providers to pay debt service on their revenue bonds cannot
be determined at this time.
Arizona does not participate in the federally administered
Medicaid program. Instead, the state administers an alternative
program, Arizona Health Care Cost Containment System ("AHCCCS"),
which provides health care to indigent persons meeting certain
financial requirements, through managed care programs. In fiscal
year 1994, AHCCCS was financed approximately 60% by federal
funds, 29% by state funds, and 11% by county funds.
Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the
Department of Health Services. Hospitals in Arizona have
experienced profitability problems along with those in other
states. At least two Phoenix-based hospitals have defaulted on
or reported difficulties in meeting their bond obligations during
the past three years.
Insofar as tax-exempt Arizona public utility pollution control
revenue bonds are concerned, the issuance of such bonds and the
periodic rate increases needed to cover operating costs and debt
service are subject to regulation by the Arizona Corporation
Commission, the only significant exception being the Salt River
Project Agricultural Improvement and Power District which, as a
Federal instrumentality, is exempt from rate regulation. On July
15, 1991, several creditors of Tucson Electric Power Company
("Tucson Electric") filed involuntary petitions under Chapter 11
of the U.S. Bankruptcy Code to force Tucson Power to reorganize
under the supervision of the bankruptcy court. On December 31,
1991, the Bankruptcy Court approved the utility's motion to
dismiss the July petition after five months of negotiations
between Tucson Electric and its creditors to restructure the
utility's debts and other obligations. In December, 1992, Tucson
Electric announced that it had completed its financial
restructuring. In January, 1993, Tucson Electric asked the
Arizona Corporation Commission for a 9.3% average rate increase.
Tucson Electric serves approximately 270,000 customers, primarily
in the Tucson area. Inability of any regulated public utility to
secure necessary rate increases could adversely affect, to an
indeterminable extent, its ability to pay debt service on its
pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has
determined to refund $197 million, including statutory interest,
in State income taxes previously collected from Federal retirees
on their pensions. This payment will be made over a four-year
period beginning with approximately $14.6 million in tax refunds
in fiscal year 1993-94. A combination of tax refunds and tax
credits will be used to satisfy this liability.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
Bonds held by the Arizona Trusts are subject, Additionally, many
factors including national economic, social and environmental
policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse
impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other
factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Arizona Trusts to pay
interest on or principal of the Bonds.
At the time of the closing for each Arizona Trust, Special
Counsel to the Fund for Arizona tax matters rendered an opinion
under then existing Arizona income tax law applicable to
taxpayers whose income is subject to Arizona income taxation
substantially to the effect that:
For Arizona income tax purposes, each Unitholder will be treated
as the owner of a pro rata portion of the Arizona Trust, and the
income of the Trust therefore will be treated as the income of
the Unitholder under State law.
For Arizona income tax purposes, interest on the Bonds which is
excludable from Federal gross income and which is exempt from
Arizona income taxes when received by the Arizona Trust, and
which would be excludable from Federal gross income and exempt
from Arizona income taxes if received directly by a Unitholder,
will retain its status as tax-exempt interest when received by
the Arizona Trust and distributed to the Unitholders.
To the extent that interest derived from the Arizona Trust by a
Unitholder with respect to the Bonds is excludable from Federal
gross income, such interest will not be subject to Arizona income
taxes
Each Unitholder will receive taxable gain or loss for Arizona
income tax purposes when Bonds held in the Arizona Trust are
sold, exchanged, redeemed or paid at maturity, or when the
Unitholder redeems or sells Units, at a price that differs from
original cost as adjusted for accretion of any discount or
amortization of any premium and other basis adjustments,
including any basis reduction that may be required to reflect a
Unitholder's share of interest, if any, accruing on Bonds during
the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona Trust, if later.
Amounts paid by the Insurer under an insurance policy or policies
issued to the Trust, if any, with respect to the Bonds in the
Trust with represent maturing interest on defaulted obligations
held by the Trustee will be exempt from State income taxes if,
and to the same extent as, such interest would have been so
exempt if paid by the issuer of the defaulted obligations
provided that, at the time such policies are purchased, the
amounts paid for such policies are reasonable, customary and
consistent with the reasonable expectation that the issuer of the
obligations, rather than the insurer, will pay debt service on
the obligations.
Arizona law does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or
carry Units in the Arizona Trust, the interest on which is exempt
from Arizona income taxes.
Neither the Bonds nor the Units will be subject to Arizona
property taxes, sales taxes or use taxes.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provisions of Arizona law. Ownership of
the Units may result in collateral Arizona tax consequences to
certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral
consequences.
California Trusts. The Trust will invest substantially all
of its assets in California Municipal Obligations. The Trust is
therefore susceptible to political, economic or regulatory
factors affecting issuers of California Municipal Obligations.
These include the possible adverse effects of certain California
constitutional amendments, legislative measures, voter
initiatives and other matters that are described below. The
following information provides only a brief summary of the
complex factors affecting the financial situation in California
(the "State") and is derived from sources that are generally
available to investors and are believed to be accurate. No
independent verification has been made of the accuracy or
completeness of any of the following information. It is based in
part on information obtained from various State and local
agencies in California or contained in official statements for
various California Municipal Obligations.
There can be no assurance that future statewide or regional
economic difficulties, and the resulting impact on State or local
governmental finances generally, will not adversely affect the
market value of California Municipal Obligations held in the
portfolio of the Trust or the ability of particular obligors to
make timely payments of debt service on (or relating to) those
obligations.
California's economy is the largest among the 50 states and one
of the largest in the world. The State's population of almost 32
million represents 12.3% of the total United States population
and grew by 27% in the 1980s. While the State's substantial
population growth during the 1980s stimulated local economic
growth and diversification and sustained a real estate boom
between 1984 and 1990, it has increased strains on the State's
limited water resources and its infrastructure. Resultant
traffic congestion, school overcrowding and high housing costs
have increased demands for government services and may impede
future economic growth. Population growth has slowed between
1991 and 1993 even while substantial immigration has continued,
due to a significant increase in outmigration by California
residents. Generally, the household incomes of new residents
have been departing households, which may have a major long-term
socioeconomic and fiscal impact. However, with the California
economy improving, the recent net outmigration within the
Continental U.S. is expected to decrease or be reversed.
From mid-1990 to late 1993, the State's economy suffered its
worst recession since the 1930s, with recovery starting later
than for the nation as a whole. The State has experienced the
worst job losses of any post-war recession. Prerecession job
levels may not be realized until near the end of the decade. The
largest job losses have been in Southern California, led by
declines in the aerospace and construction industries. Weakness
statewide occurred in manufacturing, construction, services and
trade. Additional military base closures will have further
adverse effects on the State's economy later in the decade.
Since the start of 1994, the California economy has shown signs
of steady recovery and growth. The State Department of Finance
reports net job growth, particularly in construction and related
manufacturing, wholesale and retail trade, transportation,
recreation and services. This growth has offset the continuing
but slowing job losses in the aerospace industry and
restructuring of the finance and utility sectors. Unemployment
in the State was down substantially in 1994 from its 10% peak in
January, 1994, but still remains higher than the national average
rate. Retail sales were up strongly in 1994 from year-earlier
figures. Delay or slowdown in recovery will adversely affect
State revenues.
Certain California Municipal Obligations may be obligations of
issuers which rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited
by Article XIIIA of the California Constitution, enacted by the
voters in 1978 and commonly known as "Proposition 13." Briefly,
Article XIIIA limits to 1% of full cash value the rate of ad
valorem property taxes on real property and generally restricts
the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of
exemptions). Taxing entities may, however, raise ad valorem
taxes above the 1% limit to pay debt service on voter-approved
bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of
acquisition (or as of March 1, 1975, if acquired earlier),
subject to certain adjustments. This system has resulted in
widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the
acquisition-based assessment system of Proposition 13, and on
June 18, 1992, the U.S. Supreme Court announced a decision
upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit it also
requires voters of any governmental unit to give two-thirds
approval to levy any "special tax." Court decisions, however,
allowed non-voter approved levy of "general taxes" which were not
dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which
imposed significant new limits on the ability of local entities
to raise or levy general taxes, except by receiving majority
local voter approval. Significant elements of this initiative,
"Proposition 62," have been overturned in recent court cases. An
initiative proposed to re-enact the provisions of Proposition 62
as a constitutional amendment was defeated by the voters in
November 1990, but such a proposal may be renewed in the future.
California and its local governments are subject to an annual
"appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly
amended by Propositions 98 and 111 in 1988 and 1990,
respectively. Article XIIIB prohibits the State or any covered
local government from spending "appropriations subject to
limitation" in excess of the appropriations limit imposed.
"Appropriations subject to limitation" are authorizations to
spend "proceeds of taxes," which consists of tax revenues and
certain other funds, including proceeds from regulatory licenses,
user charges or other fees, to the extent that such proceeds
exceed the cost of providing the product or service, but
"proceeds of taxes" excludes most State subventions to local
governments. No limit is imposed on appropriations or funds which
are not "proceeds of taxes," such as reasonable user
charges or fees and certain other non-tax funds, including bond
proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds
issued or authorized prior to January 1, 1979, or subsequently
authorized by the voters, (2) appropriations arising from certain
emergencies declared by the Governor, (3) appropriations for
certain capital outlay projects, (4) appropriations by the State
of post-1989 increases in gasoline taxes and vehicle weight fees,
and (5) appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to
reflect changes in cost of living and population, and any
transfers of service responsibilities between government units.
The definitions for such adjustments were liberalized in 1990 by
Proposition 111 to follow more closely growth in California's
economy.
"Excess" revenues are measured over a two-year cycle. With
respect to local governments, excess revenues must be returned by
a revision of tax rates or fee schedules within the two
subsequent fiscal years. The appropriations limit for a local
government may be overridden by referendum under certain
conditions for up to four years at a time. With respect to the
State, 50% of any excess revenues is to be distributed to K-12
school districts and community college districts (collectively,
"K-14 districts") and the other 50% is to be refunded to
taxpayers. With more liberal annual adjustment factors since
1988, and depressed revenues since 1990 because of the recession,
few governments, including the State, are currently operating
near their spending limits, but this condition may change over
time. Local governments may by voter approval exceed their
spending limits for up to four years.
Because of the complex nature of Articles XIIIA and XIIIB of the
California Constitution, the ambiguities and possible
inconsistencies in their terms, and the impossibility of
predicting future appropriations or changes in population and
cost of living, and the probability of continuing legal
challenges, it is not currently possible to determine fully the
impact of Article XIIIA or Article XIIIB on California Municipal
Obligations or on the ability of California or local governments
to pay debt service on such California Municipal Obligations. It
is not presently possible to predict the outcome of any pending
litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or
the impact of any such determinations upon State agencies or
local governments, or upon their ability to pay debt service on
their obligations. Future initiative or legislative changes in
laws or the California Constitution may also affect the ability
of the State or local issuers to repay their obligations.
Under the California Constitution, debt service on outstanding
general obligation bonds is the second charge to the General Fund
after support of the public school system and public institutions
of higher education. Total outstanding general obligation bond
and lease purchase debt of the State increased from $9.4 billion at
June 30, 1987 to $23.5 billion at June 30, 1994. In FY
1993-94, debt service on general obligation bonds and lease
purchase debt was approximately 5.2% of General Fund revenues.
The principal sources of General Fund revenues in 1993_94 were
the California personal income tax (44% of total revenues), the
sales tax (35%), bank and corporation taxes (12%), and the gross
premium tax on insurance (3%). California maintains a Special
Fund for Economic Uncertainties (the "Economic Uncertainties
Fund"), derived from General Fund revenues, as a reserve to meet
cash needs of the General Fund.
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 33%).
Since the start of 1990-91 Fiscal Year, the State has faced
adverse economic, fiscal and budget conditions. The economic
recession seriously affected State tax revenues. It also caused
increased expenditures for health and welfare programs. The
State is also facing a structural imbalance in its budget with
the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates significantly
higher than the growth rates for the principal revenue sources of
the General Fund. These structural concerns will be exacerbated
in coming years by the expected need to substantially increase
capital and operating funds for corrections as a result of a
"Three Strikes" law enacted in 1994.
As a result of these factors, among others, from the late 1980's
until 1992-1993, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of
six years, and the State accumulated and sustained a budget
deficit in the budget reserve, the Special Fund for Economic
Uncertainties ("SFEU") approaching $2.8 billion at its peak at
June 30, 1993. Starting in the 1990-91 Fiscal Year and for each
year thereafter, each budget required multibillion dollar actions
to bring projected revenues and expenditures into balance and to
close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to
produce Budget Acts in the years 1991-92 to 1994-95, including:
significant cuts in health and welfare program expenditures
transfers of program responsibilities and funding from the State
to local governments, coupled with some reduction in mandates on
local government transfer of about $3.6 billion in annual local
property tax revenues from cities, counties, redevelopment
agencies and some other districts to local school districts,
thereby reducing State funding for schools reduction in growth
of support for higher education programs, coupled with increases
in student fees revenue increases (particularly in the 1992-93
Fiscal Year budget), most of which were for a short duration increased
reliance on aid from the federal government to offset
the costs of incarcerating, educating and providing health and
welfare services to undocumented aliens (although these efforts
have produced much less federal aid than the State Administration
has requested) and various on-time adjustments and accounting
changes.
Despite these budget actions, the effects of the recession led to
large, unanticipated deficits in the SFEU, as compared to
projected positive balances. By the start of the 1993-94 Fiscal
Year, the accumulated deficit was so large (almost $2.8 billion)
that it was impractical to budget to retire it in one year, so a
two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the
end of the fiscal year. When the economy failed to recover
sufficiently in 1993-94, a second two-year plan was implemented
in 1994-95, to carry the final retirement of the deficit into
1995-96.
The combination of stringent budget actions cutting State
expenditures, and the turnaround of the economy by late 1993,
finally led to the restoration of positive financial results.
While General Fund revenues and expenditures were essentially
equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results
in FY 1993-94 and 1994-95, which have reduced the accumulated
budget deficit to around $600 million as of June 30, 1995.
A consequence of the accumulated budget deficits in the early
1990's, together with other factors such as disbursement of funds
to local school districts "borrowed" from future fiscal years and
hence not shown in the annual budget, was to significantly reduce
the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to
adopt a budget for the 1992-93 Fiscal Year by July 1, 1992, which
would have allowed the State to carry out its normal annual cash
flow borrowing to replenish its cash reserves, the State
Controller was forced to issue registered warrants ("IOUs") to
pay a variety of obligations representing prior years' or
continuing appropriations, and mandates from court orders.
Available funds were used to make constitutionally-mandated
payments, such as debt service on bonds and warrants. Between
July 1 and September 4, 1992, the State Controller issued a total
of approximately $3.8 billion of registered warrants. After that
date, all remaining outstanding registered warrants (about $2.9
billion) were called for redemptions from proceeds of the
issuance of 1992 Interim Notes after the budget was adopted.
The State's cash condition became so serious in late spring of
1992 that the State Controller was required to issue revenue
anticipation warrants maturing in the following fiscal year in
order to pay the State's continuing obligations. The State was
forced to rely increasingly on external debt markets to meet its
cash needs, as a succession of notes and warrants (both forms of
short-term cash flow financing) were issued in the period from
June 1992 to July 1994, often needed to pay previously-maturing
notes or warrants. These borrowings were used also in part to
spread out the repayment of the accumulated budget deficit over
the end of a fiscal year.
The State issued $7.0 billion of short-term debt in July, 1994,
to meet its cash flow needs and to finance the deferral of part
of the accumulated budget deficit to the 1995-96 fiscal year. In
order to assure repayment of the $4 billion, 22-month part of
this borrowing, the State enacted legislation (the "Trigger Law")
which can lead to automatic, across-the-board cuts in General
Fund expenditures in either the 1994-95 or 1995-96 fiscal years
if cash flow projections made at certain times during those years
show deterioration from the projections made in July 1994 when
the borrowings were made. On November 15, 1994, the State
Controller, as part of the Trigger Law, reported that the cash
position of the General Fund on June 30, 1995, would be about
$580 million better than earlier projected, so no automatic
budget adjustments were required in 1994-95. The Controller's
report showed that loss of federal funds was offset by higher
revenues, lower expenditures, and certain other increases in cash
resources.
For the first time in four years, the State entered the 1995-96
fiscal year with strengthening revenues based on an improving
economy. The major feature of the Governor's proposed Budget, a
15% phased tax cut, was rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3,
1995, 34 days after the start of the fiscal year. The Budget Act
projects General Fund revenues and transfers of $44.1 billion.
Expenditures are budgeted at $43.4 billion. The Department of
Finance projects that, after repaying the last of the carryover
budget deficit, there will be positive balance of less than $30
million in the budget reserve, the Special Fund for Economic
Uncertainties, at June 30, 1996, providing no margin for adverse
results during the year.
The Department of Finance projects cash flow borrowings in the
1995-96 Fiscal Year will be the smallest in many years,
comprising about $2 billion of notes to be issued in April, 1996,
and maturing by June 30, 1996. With full payment of $4 billion
of revenue anticipation warrants on April 25, 1996, the
Department sees no further need for borrowing over the end of the
fiscal year. The Department projects that available cash
resources to pay State obligations will be almost $2 billion at
June 30, 1996. This "cushion" will be re-examined by the State
Controller on October 15, 1995, in the third step in the Budget
Adjustment Law process. If the Controller believes the available
cash resources on June 30, 1996 will, in fact, be zero or less,
her report would start a process which could lead to automatic
budget cuts starting in December, 1995.
The principal features of the 1995-96 Budget Act, in addition to
those noted above, are additional cuts in health and welfare
expenditures (some of which are subject to approvals or waivers
by the federal government) assumed further federal aid for
illegal immigrant costs and an increase in per-pupil funding for
public schools and community colleges, the first such significant
increase in four years.
State general obligation bonds ratings were reduced in July, 1994
to "A1" by Moody's and "A" by S&P. Both of these ratings were reduced
from "AAA" levels which the State held until late 1991.
There can be no assurance that such ratings will be maintained in
the future. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated
to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the
State to make payment on such local obligations in the event of
default.
The State is involved in certain legal proceedings (described in
the State's recent financial statements) that, if decided against
the State, may require the State to make significant future
expenditures or may substantially impair revenues. Trial courts
have recently entered tentative decisions or injunctions which
would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include a
deferral of payments by the State to the Public Employees
Retirement System, reductions in welfare payments, and the use of
certain cigarette tax funds for health costs. All of these cases
are subject to further proceedings and appeals, and if the State
eventually loses, the final remedies may not have to be
implemented in one year.
There are a number of State agencies, instrumentalities and
political subdivisions of the State that issue Municipal
Obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary
considerably from the credit quality of the obligations backed by
the full faith and credit of the State.
Property tax revenues received by local governments declined more
than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the
redistribution of the State's General Fund surplus to local
agencies, the reallocation of certain State revenues to local
agencies and the assumption of certain governmental functions by
the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at
approximately 75% of General Fund expenditures in recent years,
including the effect of implementing reductions in certain aid
programs. To reduce State General Fund support for school
districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to
school districts, representing loss of the post-Proposition 13
"bailout" aid. The largest share of these transfers came from
counties, and the balance from cities, special districts and
redevelopment agencies. In order to make up this shortfall, the
Legislature proposed and voters approved, in 1993, dedicating
0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to
relieve local governments of certain mandates, allowing them to
reduce costs.
To the extent the State should be constrained by its Article XIII
appropriations limit, or its obligation to conform to Proposition
98, or other fiscal considerations, the absolute level, or the rate
of growth, of State assistance to local governments may be
further reduced. Any such reductions in State aid could compound
the serious fiscal constraints already experienced by many local
governments, particularly counties. At least one rural county
(Butte) publicly announced that it might enter bankruptcy
proceedings in August 1990, although such plans were put off
after the Governor approved legislation to provide additional
funds for the county. Other counties have also indicated that
their budgetary condition is extremely grave. The Richmond
Unified School District (Contra Costa County) entered bankruptcy
proceedings in May, 1991, but the proceedings have been
dismissed. Los Angeles County, the largest in the State, has
reported severe fiscal problems, leading to a nominal $1.2
billion deficit in its $11 billion budget for the 1995-96 Fiscal
Year. To balance the budget, the county has imposed severe cuts
in services, particularly for health care. The Legislature is
considering actions to help alleviate the County's fiscal
problems, but none were completed before August 15, 1995. As a
result of its bankruptcy proceedings (discussed further below)
Orange County also has implemented stringent cuts in services and
has laid off workers.
California Municipal Obligations which are assessment bonds may
be adversely affected by a general decline in real estate values
or a slowdown in real estate sales activity. In many cases, such
bonds are secured by land which is undeveloped at the time of
issuance but anticipated to be developed within a few years after
issuance. In the event of such reduction or slowdown, such
development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special
assessments or taxes securing these bonds are not the personal
liability of the owners of the property assessed, the lien on the
property is the only security for the bonds. Moreover, in most
cases, the issuer of these bonds is not required to make payments
on the bonds in the event of delinquency in the payment of
assessments or taxes, except from amounts, if any, in a reserve
fund established for the bonds.
Certain California long-term lease obligations, though typically
payable from the general fund of the municipality, are subject to
"abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be
no remedies available to the holders of the certificates
evidencing the lease obligation in the event abatement occurs.
The most common causes of abatement are failure to complete
construction of the facility before the end of the period during
which lease payments have been capitalized and uninsured casualty
losses to the facility (e.g., due to earthquake). In the event
abatement occurs with respect to a lease obligation, lease
payments may be interrupted (if all available insurance proceeds
and reserves are exhausted) and the certificates may not be paid
when due.
Several years ago, the Richmond United School District (the
"District") entered into a lease transaction in which certain
existing properties of the District were sold and leased back in order
to obtain funds to cover operating deficits. Following a
fiscal crisis in which the District's finances were taken over by
a State receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this
lease, resulting in a lawsuit by the Trustee for the Certificate
of Participation holders, in which the State was a named
defendant (on the grounds that it controlled the District's
finances). One of the defenses raised in answer to this lawsuit
was the invalidity of the original lease transaction. The trial
court has upheld the validity of the District's lease, and the
case has been settled. Any judgment in any future case against
the position asserted by the Trustee in the Richmond case may
have adverse implications for lease transactions of a similar
nature by other California entities.
The repayment of industrial development securities secured by
real property may be affected by California laws limiting
foreclosure rights of creditors. Securities backed by health
care and hospital revenues may be affected by changes in State
regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program),
including risks related to the policy of awarding exclusive
contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect
"tax allocation" bonds issued by California redevelopment
agencies. Such bonds are secured solely by the increase in
assessed valuation of a redevelopment project area after the
start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a
major natural disaster such as an earthquake), the tax increment
revenue may be insufficient to make principal and interest
payments on these bonds. Both Moody's and S&P suspended ratings
on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a
selective basis.
Proposition 87, approved by California voters in 1988, requires
that all revenues produced by a tax rate increase go directly to
the taxing entity which increased such tax rate to repay that
entity's general obligation indebtedness. As a result,
redevelopment agencies (which, typically, are the Issuers of tax
allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are
increased to repay voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes
upon the ability of California municipal securities issuers to
pay interest and principal on their obligations remains unclear.
Furthermore. other measures affecting the taxing or spending
authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may
be introduced which would modify existing taxes or other
revenue-raising measures or which either would further limit or,
alternatively, would increase the abilities of state and local
governments to impose new taxes or increase existing taxes. It
is not presently possible to determine the impact of any such
legislation on California Municipal Obligations in which the Fund may
invest future allocations of state revenues to local
governments or the abilities of state or local governments to pay
the interest on, or repay the principal of, such California
Municipal Obligations.
Substantially all of California is within an active geologic
region subject to major seismic activity. Northern California in
1989 and Southern California in 1994 experienced major
earthquakes causing billions of dollars in damages. The federal
government provided more than $1.8 billion in aid for both
earthquakes, and neither event is expected to have any long-term
negative economic impact. Any California Municipal Obligation in
the Portfolio could be affected by an interruption of revenues
because of damaged facilities, or, consequently, income tax
deductions for casualty losses or property tax assessment
reductions. Compensatory financial assistance could be
constrained by the inability of (i) an issuer to have obtained
earthquake insurance coverage at reasonable rates (ii) an
insurer to perform on its contracts of insurance in the event of
widespread losses or (iii) the Federal or State government to
appropriate sufficient funds within their respective budget
limitations.
On January 17, 1994, a major earthquake with an estimated
magnitude 6.8 on the Richter scale struck the Los Angeles area,
causing significant property damage to public and private
facilities, presently estimated at $15-20 billion. While over
$9.5 billion of federal aid, and a projected $1.9 billion of
State aid, plus insurance proceeds, will reimburse much of that
loss, there will be an ultimate loss of health and income in the
region, in addition to costs of the disruption caused by the
event. Short-term economic projections are generally neutral, as
the infusion of aid will restore billions of dollars to the local
economy within a few months already the local construction
industry has picked up. Although the earthquake will hinder
recovery from the recession in Southern California, already
hard-hit, its long-term impact is not expected to be material in
the context of the overall wealth of the region. Almost five
years after the event, there are few remaining effects of the
1989 Loma Prieta earthquake in northern California (which,
however, caused less severe damage than Northridge).
On December 7, 1994, Orange County, California (the "County"),
together with its pooled investment fund (the "Pools") filed for
protection under Chapter 9 of the federal Bankruptcy Code, after
reports that the Pools had suffered significant market losses in
its investments caused a liquidity crisis for the Pools and the
County. Approximately 180 other public entities, most but not
all located in the County, were also depositors in the Pools.
The County estimated the Pools' loss at about $1.64 billion, or
23% of its initial deposits of around $7.5 billion. Many of the
entities which kept moneys in the Pools, including the County,
faced cash flow difficulties because of the bankruptcy filing and
may be required to reduce programs or capital projects. Moody's
and Standard & Poor's have suspended, reduced to below investment
grade levels, or placed on "Credit Watch" various securities of
the County and the entities participating in the Pools.
On May 2, 1995, the Bankruptcy Court approved a settlement
agreement covering claims of the other participating entities
against the County and the Pools. Most participants have
received in cash 80% (90% for school districts) of their Pools'
investment the balance is to be paid in the future. The County
succeeded in deferring, by consent, until June 30, 1996, the
repayment of $800 million of short-term obligations due in July
and August, 1995 these notes are, however, considered to be in
default by Moody's and S&P. On June 27, 1995, County voters
turned down a proposal for a temporary 0.5% increase in the local
sales tax, making the County's fiscal recovery much harder.
The State of California has no obligation with respect to any
obligations or securities of the County or any of the other
participating entities, although under existing legal precedents,
the State may be obligated to ensure that school districts have
sufficient funds to operate. All school districts were able to
meet their obligations in the 1994-95 Fiscal Year.
At the time of the closing for each California Trust, Special
Counsel to each California Trust for California tax matters,
rendered an opinion under then existing California income tax law
applicable to taxpayers whose income is subject to California
income taxation substantially to the effect that:
(1) the California Trust is not an association taxable as a
corporation and the income of the California Trust will be
treated as the income of the Unitholders under the income tax
laws of California
(2) amounts treated as interest on the underlying
Securities in the California Trust which are exempt from tax
under California personal income tax and property tax laws when
received by the California Trust will, under such laws, retain
their status as tax-exempt interest when distributed to
Unitholders. However, interest on the underlying Securities
attributed to a Unitholder which is a corporation subject to the
California franchise tax laws may be includable in its gross
income for purposes of determining its California franchise tax.
Further, certain interest which is attributable to a Unitholder
subject to the California personal income tax and which is
treated as an item of tax preference for purposes of the federal
alternative minimum tax pursuant to Section 57(a)(5) of the
Internal Revenue Code of 1986 may also be treated as an item of
tax preference that must be taken into account in computing such
Unitholder's alternative minimum taxable income for purposes of
the California alternative minimum tax enacted by 1987 California
Statutes, chapter 1138. However, because of the provisions of
the California Constitution exempting the interest on bonds
issued by the State of California, or by local governments within
the state, from taxes levied on income, the application of the
new California alternative minimum tax to interest otherwise
exempt from the California personal income tax in some cases may
be unclear
(3) under California income tax law, each Unitholder in the
California Trust will have a taxable event when the California
Trust disposes of a Security (whether by sale, exchange,
redemption, or payment at maturity) or when the Unitholder redeems
or sells Units. Because of the requirement that tax cost
basis be reduced to reflect amortization of bond premium, under
some circumstances a Unitholder may realize taxable gains when
Units are sold or redeemed for an amount equal to, or less than,
their original cost. The total cost of each Unit in the
California Trust to a Unitholder is allocated among each of the
Bond issues held in the California Trust (in accordance with the
proportion of the California Trust comprised by each Bond issue)
in order to determine his per Unit tax cost for each Bond issue
and the tax cost reduction requirements relating to amortization
of bond premium will apply separately to the per Unit tax cost of
each Bond issue. Unitholders' bases in their units, and the
bases for their fractional interest in each Trust asset, may have
to be adjusted for their pro rata share of accrued interest
received, if any, on Securities delivered after the Unitholders'
respective settlement dates
(4) under the California personal property tax laws, bonds
(including the Securities in the California Trust) or any
interest therein is exempt from such tax
(5) any proceeds paid under the insurance policy issued to
the California Trust with respect to the Securities which
represent maturing interest on defaulted obligations held by the
Trustee will be exempt from California personal income tax if,
and to the same extent as, such interest would have been so
exempt if paid by the issuer of the defaulted obligations and
(6) under Section 17280(b)(2) of the California Revenue and
Taxation Code, interest on indebtedness incurred or continued to
purchase or carry Units of the California Trust is not deductible
for the purposes of the California personal income tax. While
there presently is no California authority interpreting this
provision, Section 17280(b)(2) directs the California Franchise
Tax Board to prescribe regulations determining the proper
allocation and apportionment of interest costs for this purpose.
The Franchise Tax Board has not yet proposed or prescribed such
regulations. In interpreting the generally similar Federal
provision, the Internal Revenue Service has taken the position
that such indebtedness need not be directly traceable to the
purchase or carrying of Units (although the Service has not
contended that a deduction for interest on indebtedness incurred
to purchase or improve a personal residence or to purchase goods
or services for personal consumption will be disallowed). In the
absence of conflicting regulations or other California authority,
the California Franchise Tax Board generally has interpreted
California statutory tax provisions in accord with Internal
Revenue Service interpretations of similar Federal provisions.
At the respective times of issuance of the Securities, opinions
relating to the validity thereof and to the exemption of interest
thereon from Federal income tax and California personal income
tax are rendered by bond counsel to the respective issuing
authorities. Except in certain instances in which Special
Counsel acted as bond counsel to issuers of Securities, and as
such made a review of proceedings relating to the issuance of
certain Securities at the time of their issuance, Special Counsel
has not made any special review for the California Trust of the
proceedings relating to the issuance of the Securities or of the
basis for such opinions.
Colorado Trust. .c3.Restrictions on Appropriations and
Revenues. The State Constitution requires that expenditures for
any fiscal year not exceed revenues for such fiscal year. By
statute, the amount of General Fund revenues available for
appropriation is based upon revenue estimates which, together
with other available resources, must exceed annual appropriations
by the amount of the unappropriated reserve (the "Unappropriated
Reserve"). The Unappropriated Reserve requirement for fiscal
years 1991, 1992 and 1993 was set at 3% of total appropriations
from the General Fund. For fiscal years 1994 and thereafter, the
Unappropriated Reserve requirement is set at 4%. In addition to
the Unappropriated Reserve, a constitutional amendment approved
by Colorado voters in 1992 requires the State and each local
government to reserve a certain percentage of its fiscal year
spending (excluding bonded debt service) for emergency use (the
"Emergency Reserve"). The minimum Emergency Reserve was set at
2% for 1994 and 3% for 1995 and later years. For fiscal year
1992 and thereafter, General Fund appropriations are also limited
by statute to an amount equal to the cost of performing certain
required reappraisals of taxable property plus an amount equal to
the lesser of (i) five percent of Colorado personal income or
(ii) 106% of the total General Fund appropriations for the
previous fiscal year. This restriction does not apply to any
General Fund appropriations which are required as a result of a
new federal law, a final state or federal court order or moneys
derived from the increase in the rate or amount of any tax or fee
approved by a majority of the registered electors of the State
voting at any general election. In addition, the statutory limit
on the level of General Fund appropriations may be exceeded for a
given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
The 1993 ending General Fund balance was $326.8 million, which
was $196.9 million over the Combined Unappropriated Reserve and
Emergency Reserve requirement. The 1994 fiscal year ending
General Fund balance was $405.1 million, or $234.0 million over
the required Unappropriated Reserve and Emergency Reserve. Based
on June 20, 1995 estimates, the 1995 fiscal year ending General
Fund balance is expected to be $427.0 million, or $204.8 million
over the required Unappropriated Reserve and Emergency Reserve.
On November 3, 1992, voters in Colorado approved a constitutional
amendment (the "Amendment") which, in general, became effective
December 31, 1992, and could restrict the ability of the State
and local governments to increase revenues and impose taxes. The
Amendment applies to the State and all local governments,
including home rule entities ("Districts"). Enterprises, defend
as government-owned businesses authorized to issue revenue bonds
and receiving under 10% of annual revenue in grants from all
Colorado state and local governments combined, are excluded from
the provisions of the Amendment.
The provisions of the Amendment are unclear and will probably
require judicial interpretation. Among other provisions,
beginning November 4, 1992, the Amendment requires voter approval
prior to tax increases, creation of debt, or mill levy or
valuation for assessment ratio increases. The Amendment also
limits increases in government spending and property tax revenues
to specified percentages. The Amendment requires that District
property tax revenues yield no more than the prior year's
revenues adjusted for inflation, voter approved changes and
(except with regard to school districts) local growth in property
values according to a formula set forth in the Amendment. School
districts are allowed to adjust tax levies for changes in student
enrollment. Pursuant to the Amendment, local government spending
is to be limited by the same formula as the limitation for
property tax revenues. The Amendment limits increases in
expenditures from the State General Fund and program revenues
(cash funds) to the growth in inflation plus the percentage
change in State population in the prior calendar year. The bases
for initial spending and revenue limits are fiscal year 1992
spending and 1991 property taxes collected in 1992. The bases
for spending and revenue limits for fiscal year 1994 and later
years will be the prior fiscal year's spending and property taxes
collected in the prior calendar year. Debt service changes,
reductions and voter-approved revenue changes are excluded from
the calculation bases. The Amendment also prohibits new or
increased real property transfer tax rates, new State real
property taxes and local District income taxes.
Litigation concerning several issues relating to the Amendment is
pending in the Colorado courts. The litigation deals with three
principal issues: (i) whether Districts can increase mill levies
to pay debt service on general obligation bonds without obtaining
voter approval (ii) whether a multi-year lease-purchase
agreement subject to annual appropriations is an obligation which
requires voter approval prior to execution of the agreement and
(iii) what constitutes an "enterprise" which is excluded from the
provisions of the Amendment. In September, 1994, the Colorado
Supreme Court held that Districts can increase mill levies to pay
levies to pay debt service on general obligation bonds issued
after the effective date of the Amendment in June, 1995, the
Colorado Supreme Court validated mill levy increases to pay
general obligation bonds issued prior to the Amendment. In late
1994, the Colorado Court of Appeals held that multi-year
lease-purchase agreements subject to annual appropriation do not
require voter approval. The time to file an appeal in that case
has expired. Finally, in May, 1995, the Colorado Supreme Court
ruled that entities with the power to levy taxes may not
themselves be "enterprises" for purposes of the Amendment
however, the Court did not address the issue of how valid
enterprises may be created. Future litigation in the
"enterprise" arena may be filed in the future to clarify these
issues.
According to the Colorado Economic Perspective, Fourth Quarter,
FY 1994-95, June 20, 1995 (the "Economic Report"), inflation for
1993 was 4.2% and population grew at the rate of 2.9% in
Colorado. Accordingly, under the Amendment, increases in State
expenditures during the 1995 fiscal year will be limited to 7.1%
over expenditures during the 1994 fiscal year. The limitation for
the 1996 fiscal year is projected to be 7.0%, based on
projected inflation of 4.4% for 1994 and projected population
growth of 2.6% during 1994. The 1994 fiscal year is the base
year for calculating the limitation for the 1995 fiscal year.
For the 1994 fiscal year, General Fund revenues totalled $3,725.2
million and program revenues (cash funds) totalled $1,659.9
million, resulting in total estimated base revenues of $5,385.1
million. Expenditures for the 1995 fiscal year, therefore,
cannot exceed $5,767.4 million. However, the 1995 fiscal year
General Fund and program revenues (cash funds) are projected to
be only $5,664.7 million, or $102.7 million less than
expenditures allowed under the spending limitation.
There is also a statutory restriction on the amount of annual
increases in taxes that the various taxing jurisdictions in
Colorado can levy without electoral approval. This restriction
does not apply to taxes levied to pay general obligation debt.
.c3.State Finances. As the State experienced revenue shortfalls
in the mid-1980s, it adopted various measures, including
impoundment of funds by the Governor, reduction of appropriations
by the General Assembly, a temporary increase in the sales tax,
deferral of certain tax reductions and inter-fund borrowings. On
a GAAP basis, the State had unrestricted General Fund balances at
June 30 of approximately $16.3 million in fiscal year 1991,
$133.3 million in fiscal year 1992, $326.6 million in fiscal year
1993 and $405.1 million in fiscal year 1994. The fiscal year
1995 unrestricted General Fund ending balance is currently
projected to be $427.0 million.
For fiscal year 1994, the following tax categories generated the
following percentages of the State's $3,725.2 million total gross
receipts: individual income taxes represented 51.5% of gross
fiscal year 1994 receipts sales, use and other excise taxes
represented 32.4% of gross fiscal year 1994 receipts and
corporate income taxes represented 3.9% of gross fiscal year 1994
receipts. The final budget for fiscal year 1995 projects General
Fund revenues of approximately $3,929.6 million and
appropriations of approximately $3,905.9 million. The
percentages of General Fund revenue generated by type of tax for
fiscal year 1995 are not expected to be significantly different
from fiscal year 1994 percentages.
.c3.State Debt. Under its constitution, the State of Colorado
is not permitted to issue general obligation bonds secured by the
full faith and credit of the State. However, certain agencies
and instrumentalities of the State are authorized to issue bonds
secured by revenues from specific projects and activities. The
State enters into certain lease transactions which are subject to
annual renewal at the option of the State. In addition, the
State is authorized to issue short-term revenue anticipation
notes. Local governmental units in the State are also authorized
to incur indebtedness. The major source of financing for such
local government indebtedness is an ad valorem property tax. In
addition, in order to finance public projects, local governments
in the State can issue revenue bonds payable from the revenues of
a utility or enterprise or from the proceeds of an excise tax, or
assessment bonds payable from special assessments. Colorado local
governments can also finance public projects through leases
which are subject to annual appropriation at the option of the
local government. Local governments in Colorado also issue tax
anticipation notes. The Amendment requires prior voter approval
for the creation of any multiple fiscal year debt or other
financial obligation whatsoever, except for refundings at a lower
rate or obligations of an enterprise.
.c3.State Economy. Based on data published by the State of
Colorado, Office of State Planning and Budgeting as presented in
the Economic Report, over 50% of non-agricultural employment in
Colorado in 1994 was concentrated in the retail and wholesale
trade and service sectors, reflecting the importance of tourism
to the State's economy and of Denver as a regional economic and
transportation hub. The government and manufacturing sectors
followed as the fourth and fifth largest employment sectors in
the State, representing approximately 17.1% and 10.9%,
respectively, of non-agricultural employment in the State in
1994. The Office of Planning and Budgeting projects similar
concentrations for 1995 and 1996.
According to the Economic Report, the unemployment rate improved
slightly from an average of 5.2% during 1993 to 4.2% during 1994.
Total retail sales increased by 12.2% during 1994. Colorado
continued to surpass the job growth rate of the United States
with a 2.8% rate of growth projected for Colorado in 1994, as
compared with 2.7% for the nation as a whole. However, the rate
of job growth in Colorado is expected to be lower in 1995 than
the 1994 rate as a result of layoffs at Lowry Air Force Base,
Public Service Company, Continental Airlines and U.S. West.
Personal income rose 7.5% in Colorado during 1993 and 7.6% in
1992. During 1994, personal income rose 6.6% in Colorado, as
compared with 6.1% for the nation as a whole.
Economic conditions in the State may have continuing effects on
other governmental units within the State (including issuers of
the Colorado Bonds in the Colorado Trust), which, to varying
degrees, have also experienced reduced revenues as a result of
recessionary conditions and other factors.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
Bonds held by the Colorado Trusts are subject. Additionally,
many factors including national economic, social and
environmental policies and conditions, which are not within the
control of the issuers of the Bonds, could affect or could have
an adverse impact on the financial condition of the issuers. The
Sponsor is unable to predict whether or to what extent such
factors or other factors may affect the issuers of the Bonds, the
market value or marketability of the Bonds or the ability of the
respective issuers of the Bonds acquired by the Colorado Trusts
to pay interest on or principal of the Bonds.
At the time of the closing for each Colorado Trust, Special
Counsel to the Fund for Colorado tax matters rendered an opinion
under then existing Colorado income tax law applicable to taxpayers
whose income is subject to Colorado income taxation
substantially to the effect that:
Because Colorado income tax law is based upon the Federal law,
the Colorado Trust is not an association taxable as a corporation
for purposes of Colorado income taxation.
With respect to Colorado Unitholders, in view of the relationship
between Federal and Colorado tax computations described above:
(1) Each Colorado Unitholder will be treated as owning a
pro rata share of each asset of the Colorado Trust for Colorado
income tax purposes in the proportion that the number of Units of
such Trust held by the Unitholder bears to the total number of
outstanding Units of the Colorado Trust, and the income of the
Colorado Trust will therefore be treated as the income of each
Colorado Unitholder under Colorado law in the proportion
described
(2) Interest on Bonds that would not be includable in
income for Colorado income tax purposes when paid directly to a
Colorado Unitholder will be exempt from Colorado income taxation
when received by the Colorado Trust and attributed to such
Colorado Unitholder and when distributed to such Colorado
Unitholder
(3) Any proceeds paid under an insurance policy or
policies, if any, issued to the Colorado Trust with respect to
the Bonds in the Colorado Trust which represent maturing interest
on defaulted obligations held by the Trustee will be excludable
from Colorado adjusted gross income if, and to the same extent
as, such interest would have been so excludable if paid in the
normal course by the issuer of the defaulted obligations
(4) Any proceeds paid under individual policies obtained by
the Bond issuer, the underwriters, the Sponsor or others which
represent maturing interest on defaulted obligations held by the
Trustee will not be includable in income for Colorado income tax
purposes if, and to the same extent as, such interest would not
have been so includable if paid in the normal course by the
issuer of the defaulted obligations
(5) Each Colorado Unitholder will realize taxable gain or
loss when the Colorado Trust disposes of a Bond (whether by sale,
exchange, redemption, or payment at maturity) or when the
Colorado Unitholder redeems or sells Units at a price that
differs from original cost as adjusted for amortization of bond
discount or premium and other basis adjustments (including any
basis reduction that may be required to reflect a Colorado
Unitholder's share of interest, if any, accruing on Bonds during
the interval between the Colorado Unitholder's settlement date
and the date such Bonds are delivered to the Colorado Trust, if
later)
(6) Tax cost reduction requirements relating to
amortization of bond premium may, under some circumstances,
result in Colorado Unitholders realizing taxable gain when their
Units are sold or redeemed for an amount equal to or less than
their original cost and
(7) If interest on indebtedness incurred or continued by a
Colorado Unitholder to purchase Units in the Colorado Trust is
not deductible for federal income tax purposes, it also will be
non-deductible for Colorado income tax purposes.
Unitholders should be aware that all tax-exempt interest,
including their share of interest on the Bonds paid to the
Colorado Trust, is taken into account for purposes of determining
eligibility for the Colorado Property Tax/Rent/Heat Rebate.
Florida Trusts. .c3.Population. In 1980, Florida was the
seventh most populous state in the United States. The State has
grown dramatically since then and as of April 1, 1994, ranks
fourth with an estimated population of 13.9 million. Florida's
attraction, as both a growth and retirement state, has kept net
migration fairly steady with an average of 235,600 new residents
a year from 1985 through 1994. The U.S. average population
increase since 1984 is about 1% annually, while Florida's average
annual rate of increase is about 2.3%. Florida continues to be
the fastest growing of the eleven largest states. This strong
population growth is one reason the State's economy is performing
better than the nation as a whole. In addition to attracting
senior citizens to Florida as a place for retirement, the State
is also recognized as attracting a significant number of working
age individuals. Since 1985, the prime working age population
(18-44) has grown at an average annual rate of 2.2%. The share
of Florida's total working age population (18-59) to total State
population is approximately 54%. This share is not expected to
change appreciably into the twenty-first century.
.c3.Income. The State's personal income has been growing
strongly the last several years and has generally outperformed
both the United States as a whole and the southeast in
particular, according to the U.S. Department of Commerce and the
Florida Consensus Economic Estimating Conference. This is due to
the fact that Florida's population has been growing at a very
strong pace and, since the early 1970s, the State's economy has
diversified so as to provide a broader economic base. As a
result, Florida's real per capita personal income has tracked
closely with the national average and has tracked above the
southeast. From 1985 through 1994, the State's real per capita
personal income rose at an average of 5.2% per year, while the
national real per capita income increased at an average of 5.1%
per year.
Because Florida has a proportionately greater retirement age
population, property income (dividends, interest, and rent) and
transfer payments (Social Security and pension benefits, among
other sources of income) are relatively more important sources of
income. For example, Florida's total wages and salaries and
other labor income in 1994 was 1.5% of total personal income,
while a similar figure for the nation was 72.6%. Transfer
payments are typically less sensitive to the business cycle than
employment income and, therefore, act as stabilizing forces in
weak economic periods.
The State's per capita personal income in 1994 of $21,677 was
slightly below the national average of $1,809 and significantly
ahead of that for the southeast United States, which was $19,649.
Real personal income in the State is estimated to increase 4.6%
in 1995-96 and 3.8% in 1996-97. Real personal income per capita
in the State is projected to grow at 2.7% in 1995_96 and 1.9% in
1996_97. The Florida economy appears to be performing in line
with the U.S. economy and is expected to experience steady if
unspectacular growth.
.c3.Employment. Since 1985, the State's population has
increased an estimated 26.1%. In the same period, Florida's
total non-farm employment has grown by approximately 37.9%.
Since 1985, the job creation rate in the State is almost twice
that of the nation as a whole. Contributing to the State's rapid
rate of growth in employment and income is international trade.
Changes to its economy have also contributed to the State's
strong performance. The State is now less dependent on
employment from construction, construction-related manufacturing,
and resource-based manufacturing, which have declined as a
proportion of total State employment. The State's private sector
employment is 86.4% of total non-farm employment. While the
southeast and the nation have a greater proportion of
manufacturing jobs, which tend to pay higher wages, service jobs
tend to be less sensitive to swings in the business cycle. The
State has a concentration of manufacturing jobs in high-tech and
high value-added sectors, such as electrical and electronic
equipment, as well as printing and publishing. These types of
manufacturing jobs tend to be less cyclical. The State's
unemployment rate throughout the 1980's tracked below the
nation's. As the State's economic growth has slowed, its
unemployment rate has tracked above the national average. The
average in Florida since 1985 has been 6.3%. The national
average is 6.4%. According to the U.S. Department of Commerce,
the Florida Department of Labor and Employment Security, and the
Florida Consensus Economic Estimating Conference (together, the
"Organization"), the State's unemployment rate was 6.6% during
1994. As of November, 1995, the Organization estimates that the
unemployment rate will be 5.6% for 1995-96 and 5.7% for 1996-97.
The State's economy is expected to decelerate along with the
nation, but is expected to outperform the nation as a whole.
Total non-farm employment in Florida is expected to increase
3.2.% in 1995-96 and rise 3.0% in 1996-97. Trade and services,
the two largest, account for more than half of the total non-farm
employment. Employment in the service sectors should experience
an increase of 5.3.% in 1995-96, while growing 4.5% in 1996-97.
Trade is expected to expand 3.4% in 1996 and 3.0% in 1997. The
service sector is now the State's largest employment category.
.c3.Construction. The State's economy has in the past been
highly dependent on the construction industry and
construction-related manufacturing. This dependency has declined
in recent years and continues to do so as a result of continued
diversification of the State's economy. For example, in 1980,
total contract construction employment as a share of total
non-farm employment was just about 7.5%, and in 1994, the share
had edged downward to 5.0%. This trend is expected to continue
as the State's economy continues to diversify. Florida,
nevertheless, has a dynamic construction industry, with single
and multi-family housing starts accounting for 8.5% of total U.S.
housing starts in 1994 while the State's population is 5.3% of the
U.S. total population. Florida's housing starts since 1980
have represented an average of 11.0% of the United States' total
annual starts, and since 1985 total housing starts have averaged
48,500 a year.
A driving force behind the State's construction industry has been
the State's rapid rate of population growth. Although the State
currently is the fourth most populous state, its annual
population growth is now projected to decline as the number of
people moving into the State is expected to hover near the
mid-235,000 range annually throughout the 1990s. This population
trend should provide fuel for business and home builders to keep
construction activity lively in Florida for some time to come.
However, other factors do influence the level of construction in
the State. For example, federal tax reform in 1986 and other
changes to the federal income tax code have eliminated tax
deductions for owners of more than two residential real estate
properties and have lengthened depreciation schedules on
investment and commercial properties. Economic growth and
existing supplies of homes also contribute to the level of
construction activity in the State.
Single and multi-family housing starts in 1995_96 are projected
to reach a combined level of 113,200, increasing to 115,100 next
year. Lingering recessionary effects on consumers and tight
credit are some of the reasons for relatively slow core
construction activity, as well as lingering effects from the 1986
tax reform legislation discussed above. Total construction
expenditures are forecasted to increase 4.0% this year and
increase 5.3% next year.
The State has continuously been dependent on the highly cyclical
construction and construction_related manufacturing industries.
While that dependency has decreased, the State is still somewhat
at the mercy of the construction and construction_related
manufacturing industries. The construction industry is driven to
a great extent by the State's rapid growth in population. There
can be no assurance that population growth will continue
throughout the 1990s in which case there could be an adverse
impact on the State's economy through the loss of construction
and construction_related manufacturing jobs. Also, increases in
interest rates could significantly adversely impact the financing
of new construction within the State, thereby adversely impacting
unemployment and other economic factors within the State. In
addition, available commercial office space has tended to remain
high over the past few years. So long as this glut of commercial
rental space continues, construction of this type of space will
likely continue to remain slow.
.c3.Tourism. Tourism is one of Florida's most important
industries. Approximately 39.9 million tourists visited the
State in 1993, as reported by the Florida Department of Commerce.
In terms of business activities and state tax revenues, tourists
in Florida in 1994 represented an estimated 4.5 million
additional residents. Visitors to the State tend to arrive
slightly more by air than by car. The State's tourist industry
over the years has become more sophisticated, attracting visitors
year-round and, to a degree, reducing its seasonality. Tourist
arrivals are expected to increase by 1.3% this year, and 4.3%
next year. Tourist arrivals to Florida by air are expected to
decrease by 0.5% this year and increase by 4.6% next year, while
arrivals by car are expected to rise 3.2% in 1995-96 and 4.9% in
1996_97. By the end of the State's current fiscal year, 41.1
million domestic and international tourists are expected to have
visited the State. In 1995-96, tourist arrivals should
approximate 43.2 million.
.c3.Revenues and Expenses. Estimated fiscal year 1995-96
General Revenue plus Working Capital and Budget Stabilization
funds available to the State total $15,149.12 million, a 2.2%
increase over 1994-95. Of the total General Revenue plus Working
Capital and Budget Stabilization funds available to the State,
$14,456.7 million of that is Estimated Revenues (excluding the
Andrew impact), which represents an increase of 5.9% over the
previous year's Estimated Revenues. With effective General
Revenues plus Working Capital and Budget Stabilization Fund
appropriations at $14,824.09 million, unencumbered reserves at
the end of 1995-96 are estimated at $325.1 million. Estimated
fiscal year 1996-97 General Revenue plus Working Capital and
Budget Stabilization funds available total $15,717.8 million, a
3.8% increase over 1995-96. The $15,717.8 million in Estimated
Revenues represents an increase of 5.6% over the previous year's
Estimated Revenues.
In fiscal year 1994-95, approximately 66% of the State's total
direct revenue to its three operating funds was derived from
State taxes, with Federal grants and other special revenue
accounting for the balance. State sales and use tax, corporate
income tax, intangible personal property tax, and beverage tax
amounted to 67%, 7%, 4% and 4%, respectively, of total General
Revenue Funds available during fiscal 1994-95. In that same
year, expenditures for education, health and welfare, and public
safety amounted to approximately 49%, 32%, and 11%, respectively,
of total expenditures from the General Revenue Fund.
The State's sales and use tax (6%) currently accounts for the
State's single largest source of tax receipts. Slightly less
than 10% of the State's sales and use tax is designated for local
governments and is distributed to the respective counties in
which collected for such use by the counties, and the
municipalities therein. In addition to this distribution, local
governments may assess (by referendum) a 0.5% or a 1.0%
discretionary sales surtax within their county. Proceeds from
this local option sales tax are earmarked for funding local
infrastructure programs and acquiring land for public recreation
or conservation or protection of natural resources as provided
under applicable Florida law. Certain charter counties have
other additional taxing powers, and non-consolidated counties
with a population in excess of 800,000 may levy a local option
sales tax to fund indigent health care. It alone cannot exceed
0.5% and when combined with the infrastructure surtax cannot
exceed 1.0%. For the fiscal year ended June 30, 1995, sales and
use tax receipts (exclusive of the tax on gasoline and special
fuels) totalled $10,672 million, an increase of 6.0% over fiscal year 1993-94.
The second largest source of State tax receipts is the tax on
motor fuels. However, these revenues are almost entirely
dedicated trust funds for specific purposes and are not included
in the State's General Revenue Fund.
The State imposes an alcoholic beverage wholesale tax (excise
tax) on beer, wine, and liquor. This tax is one of the State's
major tax sources, with revenues totalling $437.3 million in
fiscal year ending June 30, 1995. Alcoholic beverage tax
receipts increased 1.0% from the previous year's total. The
revenues collected from this tax are deposited into the State's
General Revenue Fund.
The State imposes a corporate income tax. All receipts of the
corporate income tax are credited to the General Revenue Fund.
For the fiscal year ended June 30, 1995, receipts from this
source were $1,063.5 million, an increase of 1.5% from fiscal
year 1993-94.
The State imposes a documentary stamp tax on deeds and other
documents relating to realty, corporate shares, bonds,
certificates of indebtedness, promissory notes, wage assignments,
and retail charge accounts. The documentary stamp tax
collections totalled $695.3 million during fiscal year 1994-95,
an 11.4% decrease from the previous fiscal year. Beginning in
fiscal year 1993-94, 62.63% of these taxes are to be deposited to
the General Revenue Fund.
The State imposes a gross receipts tax on electric, natural gas,
and telecommunications services. All gross receipts utilities
tax collections are credited to the State's Public Education
Capital Outlay and Debt Service Trust Fund. In fiscal year
1993-94, this amounted to $508.4 million.
The State imposes an intangible personal property tax on stocks,
bonds, including bonds secured by liens in Florida real property
notes, governmental leaseholds, and certain other intangibles not
secured by a lien on Florida real property. The annual rate of
tax is 2 mils. The State also imposes a non-recurring 2 mil tax
on mortgages and other obligations secured by liens on Florida
real property. In fiscal year 1994-95, total tangible personal
property tax collections were $818.0 million, a 2.1% increase
over the prior year. Of the tax proceeds, 66.5% are distributed
to the General Revenue Fund.
The State's severance tax taxes oil, gas, and sulphur production,
as well as the severance of phosphate rock and other solid
minerals. Total collections from severance taxes total $61.2
million during fiscal year 1994-95, up 1.1% from the previous
year. Currently, 58% of this amount is transferred to the
General Revenue Fund.
The State began its own lottery in 1988. State law requires that
lottery revenues be distributed 50.0% to the public in prizes,
38.0% for use in enhancing education, and the balance, 12.0%, for
costs of administering the lottery. Fiscal year 1994-95 lottery
ticket sales totalled $2.19 billion, providing education with
approximately $853.2 million.
.c3.Debt-Balanced Budget Requirement. At the end of fiscal
1994, approximately $6.07 billion in principal amount of debt secured
by the full faith and credit of the State was
outstanding. In addition, since July 1, 1994, the State issued
about $1.17 billion in principal amount of full faith and credit
bonds.
The State Constitution and statutes mandate that the State
budget, as a whole, and each separate fund within the State
budget, be kept in balance from currently available revenues each
fiscal year. If the Governor or Comptroller believe a deficit
will occur in any State fund, by statute, he must certify his
opinion to the Administrative Commission, which then is
authorized to reduce all State agency budgets and releases by a
sufficient amount to prevent a deficit in any fund.
Additionally, the State Constitution prohibits issuance of State
obligations to fund State operations.
.c3.Litigation. Currently under litigation are several issues
relating to State actions or State taxes that put at risk
substantial amounts of General Revenue Fund monies. Accordingly,
there is no assurance that any of such matters, individually or
in the aggregate, will not have a material adverse affect on the
State's financial position.
Florida law provides preferential tax treatment to insurers who
maintain a home office in the State. Certain insurers challenged
the constitutionality of this tax preference and sought a refund
of taxes paid. Recently, the Florida Supreme Court ruled in
favor of the State. This case and others, along with pending
refund claims, total about $150 million.
The State imposes a $295 fee on the issuance of certificates of
title for motor vehicles previously titled outside the State.
The State has been sued by plaintiffs alleging that this fee
violates the Commerce Clause of the U.S. Constitution. The
Circuit Court in which the case was filed has granted summary
judgment for the plaintiffs and has enjoined further collection
of the impact fee and has ordered refunds to all those who have
paid the fee since the collection of the fee went into effect.
In the State's appeal of the lower court's decision, the Florida
Supreme Court ruled that this fee was unconstitutional under the
Commerce Clause. Thus, the Supreme Court approved the lower
court's order enjoining further collection of the fee and
required refund of the previously collected fees. The refund
exposure of the State has been estimated to be in excess of $88
million.
The State maintains a bond rating of Aa, AA and AA from Moody's
Investors Service, Standard & Poor's and Fitch, respectively, on
the majority of its general obligation bonds, although the rating
of a particular series of revenue bonds relates primarily to the
project, facility, or other revenue source from which such series
derives funds for repayment. While these ratings and some of the
information presented above indicate that the State is in
satisfactory economic health, there can be no assurance that
there will not be a decline in economic conditions or that
particular Florida Bonds purchased by the fund will not be
adversely affected by any such changes.
The sources for the information presented above include official
statements and financial statements of the State of Florida. While
the Sponsor has not independently verified this
information, it has no reason to believe that the information is
not correct in all material respects.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
Bonds held by the Florida Trusts are subject. Additionally, many
factors including national economic, social and environmental
policies and conditions which are not within the control of the
issuers of the Bonds, could affect or could have an adverse
impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other
factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Florida Trusts to pay
interest on or principal of the Bonds.
At the time of the closing for each Florida Trust, Counsel to the
Fund for Florida tax matters, rendered an opinion under then
existing Florida income tax law applicable to taxpayers whose
income is subject to Florida income taxation substantially to the
effect that:
For Florida state income tax purposes, the Florida Trust will not
be subject to the Florida income tax imposed by Chapter 220,
Florida Statutes.
Because Florida does not impose an income tax on individuals,
Non-Corporate Unitholders residing in Florida will not be subject
to any Florida income taxation on income realized by the Florida
Trust. Any amounts paid to the Florida Trust or to Non-Corporate
Unitholders under an insurance policy issued to the Florida Trust
or the Sponsor which represent maturing interest on defaulted
obligations held by the Trustee will not be subject to the
Florida income tax imposed by Chapter 220, Florida Statutes.
Corporate Unitholders with commercial domiciles in Florida will
be subject to Florida income or franchise taxation on income
realized by the Florida Trust and on payments of interest
pursuant to any insurance policy to the extent such income
constitutes "non-business income" as defined by Chapter 220 or is
otherwise allocable to Florida under Chapter 220. Other
Corporate Unitholders will be subject to Florida income or
franchise taxation on income realized by the Florida Trust (or on
payments of interest pursuant to any insurance policy) only to
the extent that the income realized does not constitute
"non-business income" as defined by Chapter 220 and if income is
otherwise allocable to Florida under Chapter 220.
Units will be subject to Florida estate tax only if held by
Florida residents. However, the Florida estate tax is limited to
the amount of the credit for state death taxes provided for in
Section 2011 of the Internal Revenue Code.
Neither the Bonds nor the Units will be subject to the Florida ad
valorem property tax, the Florida intangibles personal property
tax or Florida sales or use tax.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Florida law. Ownership of the
Units may result in collateral Florida tax consequences to
certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral
consequences.
Louisiana Trusts. The following discussion regarding the
financial condition of the state government may not be relevant
to general obligation or revenue bonds issued by political
subdivisions of and other issuers in the State of Louisiana (the
"State"). Such information, and the following discussion
regarding the economy of the State, is based upon information
about general economic conditions that may or may not affect
issuers of the Louisiana obligations. The Sponsor has not
independently verified any of the information contained in such
publicly available documents, but is not aware of any facts which
would render such information inaccurate.
On December 19, 1990, the State received a rating upgrade on its
general obligation bonds to the current Standard & Poor's rating
of A from BBB-plus and was placed on Standard & Poor's
Corporation's positive credit watch. Standard & Poor's cited
improvements in the State's cash flow and fiscal reforms approved
by voters in the fall of 1990. The current Moody's rating on the
State's general obligation bonds remains unchanged at BBB-plus.
There can be no assurance that the economic conditions on which
these ratings were based will continue or that particular bond
issues may not be adversely affected by changes in economic or
political conditions.
The Revenue Estimating Conference (the "Conference") was
established by Act No. 814 of the 1987 Regular Session of the
State Legislature. The Conference was established by the
Legislature to provide an official estimate of anticipated State
revenues upon which the executive budget shall be based, to
provide for a more stable and accurate method of financial
planning and budgeting and to facilitate the adoption of a
balanced budget as is required by Article VII, Section 10(B) of
the State Constitution. Act No. 814 provides that the Governor
shall cause to be prepared an executive budget presenting a
complete financial and programmatic plan for the ensuing fiscal
year based only upon the official estimate of anticipated State
revenues as determined by the Revenue Estimating Conference. Act
No. 814 further provides that at no time shall appropriations or
expenditures for any fiscal year exceed the official estimate of
anticipated State revenues for that fiscal year. During the 1990
Regular Session of the Louisiana Legislature, a constitutional
amendment was approved (Act No. 1096), which was approved by the
State electorate, granting constitutional status to the existence
of the Revenue Estimating Conference without altering its
structure, powers, duties and responsibilities which are
currently provided by statute.
The State General Fund is the principal operating fund of the
State, and was established administratively to provide for the
distribution of funds appropriated by the State Legislature for
the ordinary expenses of the State government. Revenue is
provided from the direct deposit of federal grants and the
transfer of State revenues from the Bond Security and Redemption
Fund after general obligation debt requirements are met. The
Revenue Estimating Conference met in February of 1991 and
reported a projected $437.5 million State General Fund surplus
for the fiscal year ending June 30, 1991. This surplus will be
available for expenditures during the Fiscal Year 1991-92. The
beginning State General Fund surplus for fiscal year 1990-1991
was $702.3 million. The official recurring State General Fund
estimate for Fiscal Year 1990-91 (Revenue Estimating Conference
February 1991 as revised April 1991) is $4,173.5 million.
The Transportation Trust Fund was established pursuant to (i)
Section 27 of Article VII of the State Constitution and (ii) Act
No. 16 of the First Extraordinary Session of the Louisiana
Legislature for the year 1989 (collectively the "Act") for the
purpose of funding construction and maintenance of state and
federal roads and bridges, the statewide flood-control program,
ports, airports, transit and state police traffic control
projects and to fund the Parish Transportation Fund. The
Transportation Trust Fund is funded by a levy of $0.20 per gallon
on gasoline and motor fuels and on special fuels (diesel,
propane, butane and compressed natural gas) used, sold or
consumed in the state (the "Gasoline and Motor Fuels Taxes and
Special Fuels Taxes"). This levy was increased from $0.16 per
gallon (the "Existing Taxes") to the current $0.20 per gallon
pursuant to Act No. 16 of the First Extraordinary Session of the
Louisiana Legislature for the year 1989, as amended. The
additional tax of $0.04 per gallon (the "Act 16 Taxes") became
effective January 1, 1990 and will expire on the earlier of
January 1, 2005 or the date on which obligations secured by the
Act No. 16 taxes are no longer outstanding. The Transportation
Infrastructure Model for Economic Development Account (the "TIME
Account") was established in the Transportation Trust Fund.
Moneys in the TIME Account will be expended for certain projects
identified in the Act aggregating $1.4 billion and to fund not
exceeding $160 million of additional capital transportation
projects. The State issued $263,902,639.95 of Gasoline and Fuels
Tax Revenue Bonds, 1990 Series A, dated April 15, 1990 payable
from the (i) Act No. 16 Taxes, (ii) any Act No. 16 Taxes and
Existing Taxes deposited in the Transportation Trust Fund, and
(iii) any additional taxes on gasoline and motor fuels and
special fuels pledged for the payment of said Bonds.
The Louisiana Recovery District (the "Recovery District") was
created pursuant to Act No. 15 of the First Extraordinary Session
of the Legislature of Louisiana of 1988 to assist the State in
the reduction and elimination of a deficit existing at the time
and the delivery of essential services to its citizens and to
assist parishes, cities and other units of local government
experiencing cash flow difficulties. The Recovery District is a
special taxing district the boundaries of which are coterminous
with the State and is a body politic and corporate and a
political subdivision of the State. The Recovery District issued
$979,125,000 of Louisiana Recovery District Sales Tax Bonds,
Series 1988, dated July 1, 1988, secured by (i) the revenues
derived from the District's 1% statewide sales and use tax
remaining after the costs of collection and (ii) all funds and accounts
held under the Recovery District's General Bond
Resolution and all investment earnings on such funds and
accounts. As of June 30, 1990, the principal amount outstanding
was $851,880,000.
The Legislature passed tax measures which are projected to raise
approximately $418 million in additional revenues for Fiscal Year
1990-91, the most important of which include the following: sales
tax--$328.3 million hazardous waste tax--$41.3 million
severance tax--$39.2 million income tax--$14.9 million and
tobacco tax--$14.0 million. The Legislature also passed several
constitutional amendments which were approved by the state
electorate, resulting in comprehensive budgetary reforms
mandating that: both proposed and adopted budgets be balanced in
accordance with the official forecast of the Revenue Estimating
Conference any new tax proposal be tied to specific
expenditures all mineral revenues earned by the State in excess
of $750 million be placed in the Revenue Stabilization Mineral
Trust Fund, to be used as a "rainy day fund" and the regular
legislative session must end prior to the completion of the
fiscal year in order to streamline budgetary reporting and
planning. The Legislature also adopted a proposed constitutional
amendment which was approved by the State electorate permitting
the creation of a Louisiana lottery. The lottery is projected to
generate approximately $111 million per year in net revenues for
the State.
Only local governmental units levy ad valorem taxes at present.
Under the 1921 State Constitution, a 5.75 mills ad valorem tax
was being levied by the State until January 1, 1973, at which
time a constitutional amendment to the 1921 Constitution
abolished the ad valorem tax. Under the 1974 State Constitution,
a State ad valorem tax of up to 5.75 mills was provided for but
is not presently being levied. The property tax is underutilized
at the parish level due to a constitutional homestead exemption
from the property tax applicable to the first $75,000 of the full
market value of single family residences. Homestead exemptions
do not apply to ad valorem property taxes levied by
municipalities, with the exception of the City of New Orleans.
Since local governments are also prohibited from levying an
individual income tax by the constitution, their reliance on
State government is increased under the existing tax structure.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain
issuers of Bonds and does not purport to be a complete or
exhaustive description of all adverse conditions to which the
issuers of the Louisiana Trust are subject. Additionally, many
factors including national economic, social and environmental
policies and conditions, which are not within the control of the
issuers of Bonds, could affect or could have an adverse impact on
the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is
unable to predict whether or to what extent such factors may
affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds
acquired by the Louisiana Trust to pay interest on or principal of the Bonds.
At the time of the closing for each Louisiana Trust, Special
Counsel to each Louisiana Trust for Louisiana tax matters
rendered an opinion under then existing Louisiana income tax law
applicable to taxpayers whose income is subject to Louisiana
income taxation substantially to the effect that:
(1) The Louisiana Trust will be treated as a trust for
Louisiana income tax purposes and not as an association taxable
as a corporation.
(2) The Louisiana income tax on resident individuals is
imposed upon the "tax table income" of resident individuals. The
calculation of the "tax table income" of a resident individual
begins with federal adjusted gross income. Certain modifications
are specified, but no such modification requires the addition of
interest on obligations of the State of Louisiana and its
political subdivisions, public corporations created by them and
constitutional authorities thereof authorized to issue
obligations on their behalf. Accordingly, amounts representing
interest excludable from gross income for federal income tax
purposes received by the Louisiana Trust with respect to such
obligations will not be taxed to the Louisiana Trust or, except
as provided below, to the resident individual Unitholder, for
Louisiana income tax purposes. In addition to the foregoing,
interest on the respective Securities may also be exempt from
Louisiana income taxes pursuant to the statutes authorizing their
issuance.
(3) To the extent that gain from the sale, exchange or
other disposition of obligations held by the Louisiana Trust
(whether as a result of a sale or exchange of such obligations by
the Louisiana Trust or as a result of a sale or exchange of a
Unit by a Unitholder) is includable in the federal adjusted gross
income of a resident individual, such gain will be included in
the calculation of the Unitholder's Louisiana taxable income.
(4) Gain or loss on the Unit or as to underlying bonds for
Louisiana income tax purposes would be determined by taking into
account the basis adjustments for federal income tax purposes
described in this Prospectus.
As no opinion is expressed regarding the Louisiana tax
consequences of Unitholders other than individuals who are
Louisiana residents, tax counsel should be consulted by other
prospective Unitholders. The Internal Revenue Code of 1986, as
amended (the "1986 Code"), contains provisions relating to
investing in tax-exempt obligations (including, for example,
corporate minimum tax provisions which treat certain tax-exempt
interest and corporate book income which may include tax-exempt
interest, as tax preference items, provisions affecting the
deductibility of interest expense by financial institutions)
which could have a corresponding effect on the Louisiana tax
liability of the Unitholders.
In rendering the opinions expressed above, counsel has relied
upon the opinion of Counsel to the Sponsor that the Louisiana
Trust is not an association taxable as a corporation for Federal
income tax purposes, that each Unitholder of the Louisiana Trust
will be treated as the owner of a pro rata portion of such Louisiana
Trust under the 1986 Code and that the income of the
Louisiana Trust will be treated as income of the Unitholders
under the 1986 Code.
Tax counsel should be consulted as to the other Louisiana tax
consequences not specifically considered herein, and as to the
Louisiana tax status of taxpayers other than Louisiana resident
individuals who are Unitholders in the Louisiana Trust. In
addition, no opinion is being rendered as to Louisiana tax
consequences resulting from any proposed or future federal or
state tax legislation.
Massachusetts Trusts. The Massachusetts Trust will invest
substantially all of its net assets in obligations issued by or
on behalf of the Commonwealth of Massachusetts, political
subdivisions thereof, or agencies or instrumentalities of the
Commonwealth or its political subdivisions (the "Bonds"). The
Massachusetts Trust is therefore susceptible to general or
particular political, economic, or regulatory factors that may
affect issuers of such Massachusetts Investments. The following
information constitutes only a brief summary of some of the many
complex factors that may have an effect. The information may not
be applicable to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is
derived from official statements of the Commonwealth and certain
of its agencies or instrumentalities in connection with the
issuance of securities, and from other publicly available
documents, and is believed to be accurate. No independent
verification has been made of any of the following information.
.c3.The Massachusetts Economy. After declining since 1987,
Massachusetts employment in 1993 has shown positive annual
growth. While Massachusetts has benefitted from an annual job
growth rate of approximately 2% since the early 1980s, by 1989,
employment had started to decline. Nonagricultural employment
declined 0.7% in 1989, 4.0% in 1990, 5.5% in 1991, 0.9% in 1992,
and 1.7% in 1993. A comparison of total, nonagricultural
employment in November 1993 with that in November 1994 indicates
an increase of 2.4%.
From 1980 to 1989, Massachusetts' unemployment rate was
significantly lower than the national average. By 1990, however,
unemployment reached 6.0%, exceeding the national average for the
first time since 1977. The Massachusetts unemployment rate
peaked in 1991 at 9.0% and dropped to 6.9% in 1993.
In recent years, per capita personal income growth in
Massachusetts has slowed, after several years during which it was
among the highest in the nation. From 1992 to 1993, nominal per
capita income in Massachusetts increased 3.6% as compared to 3.2%
for the nation as a whole.
The Commonwealth, while the third most densely populated state
according to the 1990 census, has experienced only a modest
increase in population from 1980 to 1990 at a rate equal to less
than one-half the rate of increase in the United States
population as a whole.
Massachusetts possesses a diversified economic base which
includes traditional manufacturing, high technology and service
industries, served by an extensive transportation system and related
facilities. The Massachusetts service sector, at
approximately 34.3% of the state work force in November of 1994,
is the largest sector in the Massachusetts economy. Government
employment is below the national average, representing less than
14% of the Massachusetts work force. In recent years, the
construction, manufacturing and trade sectors have experienced
the greatest decreases in employment in Massachusetts, with more
modest declines taking place in the government, finance,
insurance and real estate, and service sectors. From 1990 to
November of 1994, manufacturing employment in Massachusetts
declined by some 15.5%. At the same time, there has occurred a
reversal of the dramatic growth which occurred during the 1980s
in the finance, insurance and real estate sector and in the
construction sector of the Massachusetts economy.
Over the next decade, Massachusetts has a very full public
construction agenda which is expected not only to improve
mobility, but to provide a substantial number of construction and
related employment opportunities, including the major Central
Artery/Tunnel project involving the construction of a third
tunnel under Boston Harbor linking the MassPike and downtown
Boston with Logan International Airport, and the depression into
tunnels of the Central Artery that traverses the City of Boston.
Federal funds are expected to cover approximately 90% of the cost
of this project. The Central Artery/Tunnel project is expected
to employ approximately 5,000 on-site workers and 10,000
auxiliary workers during the peak years of construction in the
mid-1990s.
.c3.State Finances. In fiscal years 1987 through 1991,
Commonwealth spending exceeded revenues. Spending in five major
expenditure categories _ Medicaid, debt service, public
assistance, group health insurance and transit subsidies _ grew
at rates well in excess of the rate of inflation for the
comparable period. During the same period, the Commonwealth's
tax revenues repeatedly failed to meet official forecasts. That
revenue shortfall combined with steadily escalating costs
contributed to serious budgetary and financial difficulties which
have affected the credit standing and borrowing abilities of
Massachusetts and certain of its public bodies and
municipalities, and which may have contributed to higher interest
rates on debt obligations issued by them.
More conservative revenue forecasting for fiscal 1992 together
with significant efforts to restrain spending during fiscal 1991
and reductions in budgeted program expenditures for fiscal 1992
and fiscal 1993 and fiscal 1994 have moderated these
difficulties, and the Commonwealth has shown significant
surpluses of revenues and other sources over expenditures and
other uses in the Commonwealth's budgeted operating funds for
those years. For fiscal 1995, the cash flow projection prepared
by the office of the State Treasurer in December 1994, based upon
actual results through October 1994, upon revenue and spending
estimates as of December 1994, and upon various other
assumptions, estimates the fiscal 1995 year-end cash position of
the Commonwealth to be approximately $447 million. Although the
Secretary for Administration and Finance has revised tax revenue
estimates downward since then, the fiscal 1995 non-tax revenue
estimate has been revised upon upward, and is projected to offset
the expected decline in tax revenues.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
obligations held by the Massachusetts Trust are subject.
Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within
the control of the issuers of Bonds, could affect or could have
an adverse impact on the financial condition of the Commonwealth
and various agencies and political subdivisions located in the
Commonwealth. The Sponsor is unable to predict whether or to
what extent such factors or other factors may affect the issuers
of the Bonds, the market value or marketability of the Bonds or
the ability of the respective issuers of the Bonds acquired by
the Massachusetts Trust to pay interest on or principal of the
Bonds.
At the time of the closing for each Massachusetts Trust, Special
Counsel to each Massachusetts Trust for Massachusetts tax matters
rendered an opinion under then existing Massachusetts income tax
law applicable to taxpayers whose income is subject to
Massachusetts income taxation substantially to the effect that:
(1) For Massachusetts income tax purposes, the
Massachusetts Trust will be treated as a corporate trust under
Section 8 of Chapter 62 of the Massachusetts General Laws and not
as a grantor trust under Section 10(e) of Chapter 62 of the
Massachusetts General Laws.
(2) The Massachusetts Trust will not be held to be engaging
in business in Massachusetts within the meaning of said Section 8
and will, therefore, not be subject to Massachusetts income tax.
(3) Massachusetts Unitholders who are subject to
Massachusetts income taxation under Chapter 62 of Massachusetts
General Laws will not be required to include their respective
shares of the earnings of or distributions from the Massachusetts
Trust in their Massachusetts gross income to the extent that such
earnings or distributions represent tax-exempt interest for
federal income tax purposes received by the Massachusetts Trust
on obligations issued by Massachusetts, its counties,
municipalities, authorities, political subdivisions or
instrumentalities, or issued by United States territories or
possessions.
(4) Any proceeds of insurance obtained by the Trustee of
the Trust or by the issuer of a Bond held by the Massachusetts
Trust which are paid to Massachusetts Unitholders and which
represent maturing interest on defaulted obligations held by the
Trustee will be excludable from Massachusetts gross income of a
Massachusetts Unitholder if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of
the defaulted Bond.
(5) The Massachusetts Trust's capital gains and/or capital
losses realized upon disposition of Bonds held by it will be
includable pro rata in the federal gross income of Massachusetts
Unitholders who are subject to Massachusetts income taxation
under Chapter 62 of the Massachusetts General Laws, and such
gains and/or losses will be included as capital gains and/or
losses in the Massachusetts Unitholders' Massachusetts gross
income, except where capital gain is specifically exempted from
income taxation under acts authorizing issuance of said Bonds.
(6) Gains or losses realized upon sale or redemption of
Units by Massachusetts Unitholders who are subject to
Massachusetts income taxation under Chapter 62 of the
Massachusetts General Laws will be includable in their
Massachusetts gross income.
(7) In determining such gain or loss Massachusetts
Unitholders will, to the same extent required for Federal tax
purposes, have to adjust their tax bases for their Units for
accrued interest received, if any, on Bonds delivered to the
Trustee after the Unitholders pay for their Units and for
amortization of premiums, if any, on obligations held by the
Massachusetts Trust.
(8) The Units of the Massachusetts Trust are not subject to
any property tax levied by Massachusetts or any political
subdivision thereof, nor to any income tax levied by any such
political subdivision. They are includable in the gross estate
of a deceased Massachusetts Unitholder who is a resident of
Massachusetts for purposes of the Massachusetts Estate Tax.
Michigan Trusts. Investors should be aware that the economy
of the State of Michigan has, in the past, proven to be cyclical,
due primarily to the fact that the leading sector of the State's
economy is the manufacturing of durable goods. While the State's
efforts to diversify its economy have proven successful, as
reflected by the fact that the share of employment in the State
in the durable goods sector has fallen from 33.1 percent in 1960
to 17.9 percent in 1990, durable goods manufacturing still
represents a sizable portion of the State's economy. As a
result, any substantial national economic downturn is likely to
have an adverse effect on the economy of the State and on the
revenues of the State and some of its local governmental units.
In July 1995, Moody's Investors Service, Inc. raised the State's
general obligation bond rating to "Aa." In October 1989,
Standard & Poor's Ratings Group raised its rating on the State's
general obligation bonds to "AA."
The State's economy could continue to be affected by changes in
the auto industry, notably consolidation and plant closings
resulting from competitive pressures and over-capacity. Such
actions could adversely affect State revenues and the financial
impact on the local units of government in the areas in which
plants are closed could be more severe. In addition, the State
is a party to various legal proceedings, some of which could, if
unfavorably resolved from the point of view of the State,
substantially affect State programs or finances.
In recent years, the State has reported its financial results in
accordance with generally accepted accounting principles. For
the fiscal years ending September 30, 1990 and 1991, the State
reported negative year-end balances in the General Fund/School
Aid Fund of $310.4 million and $169.4 million, respectively. The
State ended each of the 1992, 1993, 1994 and 1995 fiscal years
with its General Fund/School Aid Fund in balance, after having
made substantial transfers to the Budget Stabilization Fund in
1993, 1994, and 1995. A positive cash balance in the combined
General Fund/School Aid Fund was recorded at September 30, 1990.
In the 1991 through 1993 fiscal years, the State experienced
deteriorating cash balances which necessitated short-term
borrowing and the deferral of certain scheduled cash payments.
The State did not borrow for cash flow purposes in 1994, but
borrowed $500 million on March 9, 1995, which was repaid on
September 29, 1995 and $900 million on February 20, 1996, with a
maturity date of September 30, 1996. The State's Budget
Stabilization Fund received transfers of $283 million in 1993,
$464 million in 1994 and $320 million in 1995, bringing the
balance in the Budget Stabilization Fund after making certain
transfers out, to $988 million at September 30, 1995.
The Michigan Constitution of 1963 limits the amount of total
revenues of the State raised from taxes and certain other sources
to a level for each fiscal year equal to a percentage of the
State's personal income for the prior calendar year. In the
event that the State's total revenues exceed the limit by 1
percent or more, the Michigan Constitution of 1963 requires that
the excess be refunded to taxpayers.
On March 15, 1994, Michigan voters approved a school finance
reform amendment to the State's Constitution which, among other
things, increased the State sales tax rate from 4% to 6% and
placed a cap on property assessment increases for all property
taxes. Concurrent legislation cut the State's income tax rate
from 4.6% to 4.4.%, reduced some property taxes and altered local
school funding sources to a combination of property taxes and
state revenues, some of which is provided from other new or
increased State taxes. The legislation also contained other
provisions that alter (and, in some cases, may reduce) the
revenues of local units of government, and tax increment bonds
could be particularly affected. While the ultimate impact of the
constitutional amendment and related legislation cannot yet be
accurately predicted, investors should be alert to the potential
effect of such measures upon the operations and revenues of
Michigan local units of government.
In addition, the State Legislature recently adopted a package of
State tax cuts, including a phase out of the intangibles tax, an
increase in exemption amounts for personal income tax, and
reductions in the single business tax.
Although all or most of the Bonds in the Michigan Trust are
revenue obligations or general obligations of local governments
or authorities rather than general obligations of the State of
Michigan itself, there can be no assurance that any financial
difficulties the State may experience will not adversely affect
the market value or marketability of the Bonds or the ability of
the respective obligors to pay interest on or principal of the
Bonds, particularly in view of the dependency of local
governments and other authorities upon State aid and
reimbursement programs and, in the case of bonds issued by the
State Building Authority, the dependency of the State Building
Authority on the receipt of rental payments from the State to
meet debt service requirements upon such bonds. In the 1991
fiscal year, the State deferred certain scheduled cash payments
to municipalities, school districts, universities and community
colleges. While such deferrals were made up at specified later
dates, similar future deferrals could have an adverse impact on
the cash position of some local governmental units.
Additionally, the State reduced revenue sharing payments to
municipalities below that level provided under formulas by $10.9
million in the 1991 fiscal year, $34.4 million in the 1992 fiscal
year, $45.5 million in the 1993 fiscal year, $54.5 million in the
1994 fiscal year, and $67.0 million (budgeted) in the 1995 fiscal
year.
The Michigan Trust may contain general obligation bonds of local
units of government pledging the full faith and credit of the
local unit which are payable from the levy of ad valorem taxes on
taxable property within the jurisdiction of the local unit. Such
bonds issued prior to December 22, 1978, or issued after December
22, 1978 with the approval of the electors of the local unit, are
payable from property taxes levied without limitation as to rate
or amount. With respect to bonds issued after December 22, 1978,
and which were not approved by the electors of the local unit,
the tax levy of the local unit for debt service purposes is
subject to constitutional, statutory and charter tax rate
limitations. In addition, several major industrial corporations
have instituted challenges of their ad valorem property tax
assessments in a number of local municipal units in the State.
If successful, such challenges could have an adverse impact on
the ad valorem tax bases of such units which could adversely
affect their ability to raise funds for operation and debt
service requirements.
At the time of the closing for each Michigan Trust, Special
Counsel to each Michigan Trust for Michigan tax matters rendered
an opinion under then existing Michigan income tax law applicable
to taxpayers whose income is subject to Michigan income taxation
substantially to the effect that:
The Michigan Trust and the owners of Units will be treated for
purposes of the Michigan income tax laws and the Single Business
Tax in substantially the same manner as they are for purposes of
the Federal income tax laws, as currently enacted. Accordingly,
we have relied upon the opinion of Counsel to the Sponsor as to
the applicability of Federal income tax under the Internal
Revenue Code of 1986 to the Michigan Trust and the Unitholders.
Under the income tax laws of the State of Michigan, the Michigan
Trust is not an association taxable as a corporation the income
of the Michigan Trust will be treated as the income of the
Unitholders and be deemed to have been received by them when
received by the Michigan Trust. Interest on the underlying Bonds
which is exempt from tax under these laws when received by the
Michigan Trust will retain its status as tax exempt interest to
the Unitholders.
For purposes of the foregoing Michigan tax laws, each Unitholder
will be considered to have received his pro rata share of Bond
interest when it is received by the Michigan Trust, and each Unitholder
will have a taxable event when the Michigan Trust
disposes of a Bond (whether by sale, exchange, redemption or
payment at maturity) or when the Unitholder redeems or sells his
Unit to the extent the transaction constitutes a taxable event
for Federal income tax purposes. The tax cost of each unit to a
Unitholder will be established and allocated for purposes of
these Michigan tax laws in the same manner as such cost is
established and allocated for Federal income tax purposes
Under the Michigan Intangibles Tax, the Michigan Trust is not
taxable and the pro rata ownership of the underlying Bonds, as
well as the interest thereon, will be exempt to the Unitholders
to the extent the Michigan Trust consists of obligations of the
State of Michigan or its political subdivisions or
municipalities, or of obligations of the Commonwealth of Puerto
Rico, Guam or of the United States Virgin Islands. The
Intangibles Tax is being phased out, with reductions of
twenty-five percent (25%) in 1994 and 1995, fifty percent (50%)
in 1996, and seventy-five percent (75%) in 1997, with total
repeal effective January 1, 1998.
The Michigan Single Business Tax replaced the tax on corporate
and financial institution income under the Michigan Income Tax,
and the Intangible Tax with respect to those intangibles of
persons subject to the Single Business Tax the income from which
would be considered in computing the Single Business Tax.
Persons are subject to the Single Business Tax only if they are
engaged in "business activity," as defined in the Act. Under the
Single Business Tax, both interest received by a Michigan Trust
on the underlying Bonds and any amount distributed from the
Michigan Trust to a Unitholder, if not included in determining
taxable income for Federal income tax purposes, is also not
included in the adjusted tax base upon which the Single Business
Tax is computed, of either the Michigan Trust or the Unitholders.
If the Michigan Trust or the Unitholders have a taxable event for
Federal income tax purposes when the Michigan Trust disposes of a
Bond (whether by sale, exchange, redemption or payment at
maturity) or the Unitholder redeems or sells his Unit, an amount
equal to any gain realized from such taxable event which was
included in the computation of taxable income for Federal income
tax purposes (plus an amount equal to any capital gain of an
individual realized in connection with such event but excluded in
computing that individual's Federal taxable income) will be
included in the tax base against which, after allocation,
apportionment and other adjustments, the Single Business Tax is
computed. The tax base will be reduced by an amount equal to any
capital loss realized from such a taxable event, whether or not
the capital loss was deducted in computing Federal taxable income
in the year the loss occurred. Unitholders should consult their
tax advisor as to their status under Michigan law.
Any proceeds paid under an insurance policy issued to the Trustee
of the Trust, or paid under individual policies obtained by
issuers of Bonds, which, when received by the Unitholders,
represent maturing interest on defaulted obligations held by the
Trustee, will be excludable from the Michigan income tax laws and the
Single Business Tax if, and to the same extent as, such
interest would have been so excludable if paid by the issuer of
the defaulted obligations. While treatment under the Michigan
Intangibles Tax is not premised upon the characterization of such
proceeds under the Internal Revenue Code, the Michigan Department
of Treasury should adopt the same approach as under the Michigan
income tax laws and the Single Business Tax.
As the Tax Reform Act of 1986 eliminates the capital gain
deduction for tax years beginning after December 31, 1986, the
federal adjusted gross income, the computation base for the
Michigan Income Tax, of a Unitholder will be increased
accordingly to the extent such capital gains are realized when
the Michigan Trust disposes of a Bond or when the Unitholder
redeems or sells a Unit, to the extent such transaction
constitutes a taxable event for Federal income tax purposes.
Minnesota Trusts. In the early 1980s, the State of
Minnesota experienced financial difficulties due to a downturn in
the State's economy resulting from the national recession. As a
consequence, the State's revenues were significantly lower than
anticipated in the July 1, 1979 to June 30, 1981 biennium and the
July 1, 1981 to June 30, 1983 biennium.
In response to revenue shortfalls, the legislature broadened and
increased the State sales tax, increased income taxes (by
increasing rates and eliminating deductions) and reduced
appropriations and deferred payment of State aid, including
appropriations for and aids to local governmental units. The
State's fiscal problems affected other governmental units within
the State, such as local government, school districts and state
agencies, which, in varying degrees, also faced cash flow
difficulties. In certain cases, revenues of local governmental
units and agencies were reduced by the recession.
Because of the State's fiscal problems, Standard & Poor's
Corporation reduced its rating on the State's outstanding general
obligation bonds from AAA to AA+ in August 1981 and to AA in
March 1982. Moody's Investors Service, Inc. lowered its rating
on the State's outstanding general obligation bonds from Aaa to
Aa in April 1982. The State's economy recovered in the July 1,
1983 to June 30, 1985 biennium, and substantial reductions in the
individual income tax were enacted in 1984 and 1985. Standard &
Poor's raised its rating on the State's outstanding general
obligation bonds to AA+ in January 1985. In 1986, 1987, 1991,
1992, and 1993, legislation was required to eliminate projected
budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher
education, reducing the State's budget reserve (cash flow
account), imposing a sales tax on purchases by local governmental
units, and making other budgetary adjustments. A budget forecast
released by the Minnesota Department of Finance on March 1, 1994
projects a balanced General Fund at the end of the current
biennium, June 30, 1995, plus an increase in the State's cash
flow account from $360 million to $500 million. Total projected
expenditures and transfers for the biennium are $17.0 billion.
The forecast also projects, however, a shortage of $29.5 million
in the Local Government Trust Fund at June 30, 1995, against total
projected expenditures from the Fund of $1.8 billion for
the biennium.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in
Minnesota. Even with respect to Bonds that are revenue
obligations of the issuer and not general obligations of the
State, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or
marketability of the Bonds or the ability of the respective
obligors to pay interest on and principal of the Bonds.
At the time of the closing for each Minnesota Trust, Special
Counsel to each Minnesota Trust for Minnesota tax matters
rendered an opinion under then existing Minnesota income tax law
applicable to taxpayers whose income is subject to Minnesota
income taxation substantially to the effect that:
We understand that the Minnesota Trust will only have income
consisting of (i) interest from bonds issued by the State of
Minnesota and its political and governmental subdivisions,
municipalities and governmental agencies and instrumentalities
(the "Minnesota Bonds") and bonds issued by possessions of the
United States (the "Possession Bonds") and, with the Minnesota
Bonds (the "Bonds") which would be exempt from federal and
Minnesota income taxation when paid directly to an individual,
trust or estate, (ii) gain on the disposition of such Bonds, and
(iii) proceeds paid under certain insurance policies issued to
the Trustee or to the issuers of the Bonds which represent
maturing interest or principal payments on defaulted Bonds held
by the Trustee.
Neither the Sponsor not its counsel have independently examined
the Bonds to be deposited in and held in the Trust. However,
although no opinion is expressed herein regarding such matters,
it is assumed that: (i) the Bonds were validly issued, (ii) the
interest thereon is excludable from gross income for federal
income tax purposes and (iii) the interest thereon is exempt from
income tax imposed by Minnesota that is applicable to
individuals, trusts and estates (the "Minnesota Income Tax"). It
should be noted that interest on the Minnesota Bonds is subject
to tax in the case of corporations subject to the Minnesota
Corporate Franchise Tax or the Corporate Alternative Minimum Tax
and is a factor in the computation of the Minimum Fee applicable
to financial institutions no opinion is expressed with respect
to the treatment of interest on the Possession Bonds for purposes
of such taxes. The opinion set forth below does not address the
taxation of persons other than full time residents of Minnesota.
Although Minnesota state law provides that interest on Minnesota
bonds is exempt from Minnesota state income taxation, the
Minnesota state legislature has enacted a statement of intent
that interest on Minnesota bonds should be subject to Minnesota
state income taxation if it is judicially determined that the
exemption discriminated against interstate commerce effective for
the calendar year in which such a decision becomes final. It
cannot be predicted whether a court would render such a decision
or whether, as a result thereof, interest on Minnesota bonds and
therefore distributions by the Minnesota Trust would become subject to
Minnesota state income taxation.
In the opinion of Counsel to the Sponsor, under existing
Minnesota income tax law as of the date of this prospectus and
based upon the assumptions above:
(1) The Minnesota Trust is not an association taxable as a
corporation and each Unitholder of the Minnesota Trust will be
treated as the owner of a pro rata portion of the Minnesota
Trust, and the income of such portion of the Minnesota Trust will
therefore be treated as the income of the Unitholder for
Minnesota Income Tax purposes
(2) Income on the Bonds which is excludable from Minnesota
taxable income for purposes of the Minnesota Income Tax when
received by the Minnesota Trust and which would be excludable
from Minnesota taxable income for purposes of the Minnesota
Income Tax if received directly by a Unitholder, will be
excludable from Minnesota taxable income for purposes of the
Minnesota Income Tax when received by the Minnesota Trust and
distributed to such Unitholder
(3) To the extent that interest on certain Bonds (except
with respect to Possession Bonds, as to which no opinion is
expressed) if any, is includible in the computation of
"alternative minimum taxable income" for federal income tax
purposes, such interest will also be includible in the
computation of "alternative minimum taxable income" for purposes
of the Minnesota Alternative Minimum Tax imposed on individuals,
estates and trusts
(4) Each Unitholder of the Minnesota Trust will recognize
gain or loss for Minnesota Income Tax purposes if the Trustee
disposes of a Bond (whether by redemption, sale or otherwise) or
if the Unitholder redeems or sells Units of the Minnesota Trust
to the extent that such a transaction results in a recognized
gain or loss to such Unitholder for federal income tax purposes
(5) Tax basis reduction requirements relating to
amortization of bond premium may, under some circumstances,
result in Unitholders realizing taxable gain for Minnesota Income
Tax purposes when their Units are sold or redeemed for an amount
equal to or less than their original cost
(6) Proceeds, if any, paid under individual insurance
policies obtained by issuers of Bonds or the Trustee which
represent maturing interest on defaulted obligations held by the
Trustee will be excludable from Minnesota net income if, and to
the same extent as, such interest would have been so excludable
from Minnesota net income if paid in the normal course by the
issuer of the defaulted obligation provided that, at the time
such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable
expectation that the issuer of the bonds, rather than the
insurer, will pay debt service on the bonds and
(7) To the extent that interest derived from the Minnesota
Trust by a Unitholder with respect to any Possession Bonds is
excludable from gross income for federal income tax purposes,
such interest will not be subject to the Minnesota Income Tax.
We have not examined any of the Bonds to be deposited and held in
the Minnesota Trust or the proceedings for the issuance thereof or the
opinions of bond counsel with respect thereto, and
therefore express no opinions to the exemption from State income
taxes of interest on the Bonds if received directly by a
Unitholder.
Counsel to the Sponsor has expressed no opinion with respect to
taxation under any other provision of Minnesota law. Ownership
of the Units may result in collateral Minnesota tax consequences
to certain taxpayers. Prospective investors should consult their
tax advisors as to the applicability of any such collateral
consequences.
Missouri Trusts. The following discussion regarding
constitutional limitations and the economy of the State of
Missouri is included for the purpose of providing general
information that may or may not affect issuers of the Bonds in
Missouri.
Missouri's population was 5,117,000 according to the 1990 census
of the United States Bureau of the Census, which represented an
increase of 200,000 or 4.1% from the 1980 census of 4,917,000 in
inhabitants. Based on the 1990 population, Missouri was the 15th
largest state in the nation and the third most populous state
west of the Mississippi River, ranking behind California and
Texas. In 1994, the State's population was estimated to be
5,278,000 by the United States Bureau of the Census.
Agriculture is a significant component of Missouri's economy.
According to data of the United States Department of Agriculture,
Missouri ranked 16th in the nation in 1993 in the value of cash
receipts from farm marketing, with over $4.1 billion. Missouri
is one of the nation's leading purebred livestock producers. In
1993, sales of livestock and livestock products constituted
nearly 56% of the State's total agricultural receipts.
Missouri is one of the leading mineral producers in the Midwest,
and ranked 15th nationally in 1993 in the production of nonfuel
minerals. Total preliminary value of mineral production in 1993
was approximately $832 million. The State continues to rank
first in the nation in the production of lead. Lead production
in 1993 was valued at over $193 million. Missouri also ranks
first in the production of refractory clay, third in barite,
fourth in production of zinc and is a leading producer of lime,
cement and stone.
According to data obtained by the Missouri Division of Employment
Security, in 1996, over 2.5 million workers had nonagricultural
jobs in Missouri. Over 27% of these workers were employed in
services, approximately 24% were employed in wholesale and retail
trade, and 16.7% were employed in manufacturing. In the last ten
years, Missouri has experienced a significant increase in
employment in the service sector and in wholesale and retail
trade.
In 1993, per capita personal income in Missouri was $19,463, a
2.6% increase over the 1992 figure of $18,970. For the United
States as a whole, per capita income in 1993 was $20,817, a 3.6%
increase over the 1992 per capita income of $20,105.
For fiscal year 1994, the majority of revenues for the State of
Missouri will be obtained from individual income taxes (53.1%),
sales and use taxes (30.0%), corporate income taxes (5.9%), and county
foreign insurance taxes (3.0%). Major expenditures for
fiscal year 1994 include elementary and secondary education
(30.6%), human services (25.4%), higher education (14.8%) and
desegregation (8.9%).
The fiscal year 1994 budget balances resources and obligations
based on the consensus revenue and refund estimate and an opening
balance resulting from continued withholdings and delayed
spending for desegregation capital projects. The total general
revenue operating budget for fiscal year 1994 exclusive of
desegregation is $3,844.6 million.
As of December 31, 1994, the state had spent $2.2 billion on the
desegregation cases in St. Louis and Kansas City. At the end of
fiscal year 1995, that total will rise to an estimated $2.6
billion. The revised estimate for fiscal year 1995 is $358.9
million and the projection for fiscal year 1996 is $344.4
million. This expected decline is due to the completion of many
of the court-ordered capital improvements projections. The
state's obligation for desegregation capital improvements was
paid for with one-time revenue sources. After deducting the
one-time capital improvements costs, the ongoing increase
required from general revenue growth is $42.3 million. The
increase is due to significant increases required by new St.
Louis magnet schools, general salary increases ordered by the
federal district court in Kansas City and the costs of voluntary
interdistrict transfers in both cases. These estimates are
subject to variables including actions of the school districts
and participating students, future court orders and the
expenditure rates of the school districts.
According to the United States Bureau of Labor Statistics, the
1995 unemployment rate in Missouri was 4.8% and the 1996 rate was
4.1%. This compares favorably with a nationwide unemployment
rate of 5.6% for 1995 and a projected rate of 5.4% for 1996.
Currently, Moody's Investors Service, Inc. rates Missouri general
obligation bonds "Aaa" and Standard & Poor's rates Missouri
general obligation bonds "AAA." Although these ratings indicate
that the State of Missouri is in relatively good economic health,
there can be, of course, no assurance that this will continue or
that particular bond issues may not be adversely affected by
changes in the State or local economic or political conditions.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
Bonds held by the Missouri Trust are subject. Additionally, many
factors including national economic, social and environmental
policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse
impact on the financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other
factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Missouri Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Missouri Trust, Special Counsel to
the Fund for Missouri tax matters rendered an opinion
under then existing Missouri income tax law applicable to
taxpayers whose income is subject to Missouri income taxation
substantially to the effect that:
(1) The Missouri Trust is not an association taxable as a
corporation for Missouri income tax purposes, and each Unitholder
of the Missouri Trust will be treated as the owner of a pro rata
portion of the Missouri Trust and the income of such portion of
the Missouri Trust will be treated as the income of the
Unitholder for Missouri State Income Tax purposes.
(2) Interest paid and original issue discount, if any, on
the Bonds which would be exempt from the Missouri State Income
Tax if received directly by a Unitholder will be exempt from the
Missouri State Income Tax when received by the Missouri Trust and
distributed to such Unitholder however, no opinion is expressed
herein regarding taxation of interest paid and original issue
discount, if any, on the Bonds received by the Missouri Trust and
distributed to Unitholders under any other tax imposed pursuant
to Missouri law, including but not limited to the franchise tax
imposed on financial institutions pursuant to Chapter 148 of the
Missouri Statutes.
(3) To the extent that interest paid and original issue
discount, if any, derived from the Missouri Trust by a Unitholder
with respect to Possession Bonds is excludable from gross income
for Federal income tax purposes pursuant to 48 U.S Section
745, 48 U.S Section 1423a, and 48 U.S Section 1403, such
interest paid and original issue discount, if any, will not be
subject to the Missouri State Income Tax however, no opinion is
expressed herein regarding taxation of interest paid and original
issue discount, if any, on the Bonds received by the Missouri
Trust and distributed to Unitholders under any other tax imposed
pursuant to Missouri law, including, but not limited to, the
franchise tax imposed on financial institutions pursuant to
Chapter 148 of the Missouri Statutes.
(4) Each Unitholder of the Missouri Trust will recognize
gain or loss for Missouri State Income Tax purposes if the
Trustee disposes of a bond (whether by redemption, sale, or
otherwise) or if the Unitholder redeems or sells Units of the
Missouri Trust to the extent that such a transaction results in a
recognized gain or loss to such Unitholder for Federal income tax
purposes. Due to the amortization of bond premium and other
basis adjustments required by the Internal Revenue Code, a
Unitholder, under some circumstances, may realize taxable gain
when his or her Units are sold or redeemed for an amount equal to
their original cost.
(5) Any insurance proceeds paid under policies which
represent maturing interest on defaulted obligations which are
excludable from gross income for Federal income tax purposes will
be excludable from Missouri State Income Tax to the same extent
as such interest would have been so excludable if paid by the
issuer of such Bonds held by the Missouri Trust however, no
opinion is expressed herein regarding taxation of interest paid
and original issue discount, if any, on the Bonds received by the
Missouri Trust and distributed to Unitholders under any other tax imposed
pursuant to Missouri law, including but not limited to
the franchise tax imposed on financial institutions pursuant to
Chapter 148 of the Missouri Statutes.
(6) The Missouri State Income Tax does not permit a
deduction of interest paid or incurred on indebtedness incurred
or continued to purchase or carry Units in the Trust, the
interest on which is exempt from such Tax.
(7) The Missouri Trust will not be subject to the Kansas
City, Missouri Earnings and Profits Tax and each Unitholder's
share of income of the Bonds held by the Missouri Trust will not
generally be subject to the Kansas City, Missouri Earnings and
Profits Tax or the City of St. Louis Earnings Tax (except in the
case of certain Unitholders, including corporations, otherwise
subject to the St. Louis City Earnings Tax).
New Jersey Trusts. The New Jersey Trust consists of a
portfolio of Bonds. The Trust is therefore susceptible to
political, economic or regulatory factors affecting issuers of
the Bonds. The following information provides only a brief
summary of some of the complex factors affecting the financial
situation in New Jersey (the "State") and is derived from sources
that are generally available to investors and is believed to be
accurate. It is based in part on information obtained from
various State and local agencies in New Jersey. No independent
verification has been made of any of the following information.
New Jersey is the ninth largest state in population and the fifth
smallest in land area. With an average of 1,062 people per
square mile, it is the most densely populated of all the states.
The state's economic base is diversified, consisting of a variety
of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial
agriculture. Historically, New Jersey's average per capita
income has been well above the national average, and in 1994, the
State ranked second among states in per capita personal income
($27,742).
The New Jersey Economic Policy Council, a statutory arm of the
New Jersey Department of Commerce and Economic Development, has
reported in New Jersey Economic Indicators, a monthly publication
of the New Jersey Department of Labor, Division of Labor Market
and Demographic Research, that in 1988 and 1989 employment in New
Jersey's manufacturing sector failed to benefit from the export
boom experienced by many Midwest states and the State's service
sectors, which had fueled the State's prosperity since 1982, lost
momentum. In the meantime, the prolonged fast growth in the
State in the mid 1980s resulted in a tight labor market
situation, which has led to relatively high wages and housing
prices. This means that, while the incomes of New Jersey
residents are relatively high, the State's business sector has
become more vulnerable to competitive pressures.
The onset of the national recession (which officially began in
July 1990 according to the National Bureau of Economic Research)
caused an acceleration of New Jersey's job losses in construction
and manufacturing. In addition, the national recession caused an
employment downturn in such previously growing sectors as
wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of
unemployment in the State rose from a low of 3.6% during the
first quarter of 1989 to an estimated 6.6% in April 1996, which
is higher than the national average of 5.4% in April 1996.
Economic recovery is likely to be slow and uneven in New Jersey,
with unemployment receding at a correspondingly slow pace, due to
the fact that some sectors may lag due to continued excess
capacity. In addition, employers even in rebounding sectors can
be expected to remain cautious about hiring until they become
convinced that improved business will be sustained. Also,
certain firms will continue to merge or downsize to increase
profitability.
.c3.Debt Service. The primary method for State financing of
capital projects is through the sale of the general obligation
bonds of the State. These bonds are backed by the full faith and
credit of the State tax revenues and certain other fees are
pledged to meet the principal and interest payments and if
provided, redemption premium payments, if any, required to repay
the bonds. As of June 30, 1995, there was a total authorized
bond indebtedness of approximately $9.48 billion, of which $3.65
billion was issued and outstanding, $4.0 billion was retired
(including bonds for which provision for payment has been made
through the sale and issuance of refunding bonds) and $1.83
billion was unissued. The appropriation for the debt service
obligation on such outstanding indebtedness was $4.663 million
for fiscal year 1996.
.c3.New Jersey's Budget and Appropriation System. The State
operates on a fiscal year beginning July 1 and ending June 30.
At the end of fiscal year 1989, there was a surplus in the
State's general fund (the fund into which all State revenues not
otherwise restricted by statute are deposited and from which
appropriations are made) of $411.2 million. At the end of fiscal
year 1990, there was a surplus in the general fund of $1 million.
At the end of fiscal year 1991, there was a surplus in the
general fund of $1.4 million. New Jersey closed its fiscal year
1992 with a surplus of $760.8 million and fiscal year 1993 with a
surplus of $937.4 million. It is estimated that New Jersey
closed its fiscal year 1994 with a surplus of $926.0 million and
fiscal year 1995 with a surplus of $569 million.
In order to provide additional revenues to balance future
budgets, to redistribute school aid and to contain real property
taxes, on June 27, 1990, and July 12, 1990, Governor Florio
signed into law legislation which was estimated to raise
approximately $2.8 billion in additional taxes (consisting of
$1.5 billion in sales and use taxes and $1.3 billion in income
taxes), the biggest tax hike in New Jersey history. There can be
no assurance that receipts and collections of such taxes will
meet such estimates.
The first part of the tax hike took effect on July 1, 1990, with
the increase in the State's sales and use tax rate from 6% to 7%
and the elimination of exemptions for certain products and
services not previously subject to the tax, such as telephone
calls, paper products (which has since been reinstated), soaps and
detergents, janitorial services, alcoholic beverages and
cigarettes. At the time of enactment, it was projected that
these taxes would raise approximately $1.5 billion in additional
revenue. Projections and estimates of receipts from sales and
use taxes, however, have been subject to variance in recent
fiscal years.
The second part of the tax hike took effect on January 1, 1991,
in the form of an increased state income tax on individuals. At
the time of enactment, it was projected that this increase would
raise approximately $1.3 billion in additional income taxes to
fund a new school aid formula, a new homestead rebate program and
state assumption of welfare and social services costs.
Projections and estimates of receipts from income taxes, however,
have also been subject to variance in recent fiscal years. Under
the legislation, income tax rates increased from their previous
range of 2% to 3.5% to a new range of 2% to 7%, with the higher
rates applying to married couples with incomes exceeding $70,000
who file joint returns, and to individuals filing single returns
with incomes of more than $35,000.
The Florio administration had contended that the income tax
package will help reduce local property tax increases by
providing more state aid to municipalities. Under the income tax
legislation, the State will assume approximately $289 million in
social services costs that previously were paid by counties and
municipalities and funded by property taxes. In addition, under
the new formula for funding school aid, an extra $1.1 billion was
proposed to be sent by the State to school districts beginning in
1991, thus reducing the need for property tax increases to
support education programs.
Effective July 1, 1992, the State's sales and use tax rate
decreased from 7% to 6%. Effective January 1, 1994, an
across-the-board 5% reduction in the income tax rates was enacted
and effective January 1, 1995, further reductions ranging from 1%
up to 10% in income tax rates took effect. Governor Whitman
recently signed into law further reductions up to 15% for some
taxpayers effective January 1, 1996, completing her campaign
promise to reduce income taxes by up to 30% for most taxpayers
within three years.
On June 30, 1995, Governor Whitman signed the New Jersey
Legislature's $16.0 billion budget for Fiscal Year 1996. The
balanced budget, which includes $541 million in surplus, is $300
million more than the 1995 budget. Whether the State can achieve
a balanced budget depends on its ability to enact and implement
expenditure reductions and to collect the estimated tax revenues.
.c3.Litigation. The State is a party in numerous legal
proceedings pertaining to matters incidental to the performance
of routine governmental operations. Such litigation includes,
but is not limited to, claims asserted against the State arising
from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal
laws. Included in the State's outstanding litigation are cases
challenging the following: the funding of teachers' pension funds,
the adequacy of medicaid reimbursement for hospital
services, the hospital assessment authorized by the Health Care
Reform Act of 1992, various provisions, and the constitutionality
of the Fair Automobile Insurance Reform Act of 1990, the State's
role in a consent order concerning the construction of a resource
facility in Passaic County, actions taken by the New Jersey
Bureau of Securities against an individual, the State's actions
regarding alleged chromium contamination of State-owned property
in Hudson County, the issuance of emergency redirection orders
and a draft permit by the Department of Environmental Protection
and Energy, refusal of the State to share with Camden County
federal funding the State recently received for disproportionate
share hospital payments made to county psychiatric facilities,
and the constitutionality of annual A-901 hazardous and solid
waste licensure renewal fees collected by the Department of
Environmental Protection and Energy. Adverse judgments in these
and other matters could have the potential for either a
significant loss of revenue or a significant unanticipated
expenditure by the State.
At any given time, there are various numbers of claims and cases
pending against the State, State agencies and employees seeking
recovery of monetary damages that are primarily paid out of the
fund created pursuant to the New Jersey Tort Claims Act. In
addition, at any given time, there are various numbers of
contract claims against the State and State agencies seeking
recovery of monetary damages. The State is unable to estimate
its exposure for these claims.
.c3.Debt Ratings. For many years, both Moody's Investors
Service, Inc. and Standard and Poor's Corporation rated New
Jersey general obligation bonds "Aaa" and "AAA," respectively.
On July 3, 1991, however, Standard and Poor's Corporation
downgraded New Jersey general obligation bonds to "AA+." On June
4, 1992, Standard and Poor's Corporation placed New Jersey
general obligation bonds on CreditWatch with negative
implications, citing as its principal reason for its caution the
unexpected denial by the federal government of New Jersey's
request for $450 million in retroactive Medicaid payments for
psychiatric hospitals. These funds were critical to closing a $1
billion gap in the State's $15 billion budget for fiscal year
1992 which ended on June 30, 1992. Under New Jersey state law,
the gap in the budget was required to be closed before the new
budget year began on July 1, 1992. Standard and Poor's suggested
the State could close fiscal 1992's budget gap and help fill
fiscal 1993's hole by a reversion of $700 million of pension
contributions to its general fund under a proposal to change the
way the State calculates its pension liability.
On July 6, 1992, Standard and Poor's Corporation reaffirmed its
"AA+" rating for New Jersey general obligation bonds and removed
the debt from its CreditWatch list, although it stated that New
Jersey's long-term financial outlook was negative. Standard and
Poor's Corporation was concerned that the State was entering
fiscal 1993 with only a $26 million surplus and remained
concerned about whether the State economy would recover quickly
enough to meet lawmakers' revenue projections. It also remained
concerned about the recent federal ruling leaving in doubt how
much the State was due in retroactive Medicaid reimbursements and
a ruling by a federal judge, now on appeal, of the State's method
for paying for uninsured hospital patients. However, on July 27,
1994, Standard and Poor's announced that it was changing the
State's outlook from negative to stable due to a brightening of
the State's prospects as a result of Governor Whitman's effort to
trim spending and cut taxes, coupled with an improving economy.
Standard and Poor's reaffirmed its "AA+" rating at the same time.
On August 24, 1992, Moody's Investors Service, Inc. downgraded
New Jersey general obligation bonds to "Aa1," stating that the
reduction reflected a developing pattern of reliance on
nonrecurring measures to achieve budgetary balance, four years of
financial operations marked by revenue shortfalls and operating
deficits, and the likelihood that serious financial pressures
will persist. On August 5, 1994, Moody's reaffirmed its "Aa1"
rating, citing on the positive side New Jersey's broad-based
economy, high income levels, history of maintaining a positive
financial position and moderate (albeit rising) debt ratios, and
on the negative side, a continued reliance on one-time revenue
and a dependence on pension-related savings to achieve budgetary
balance.
At the time of the closing for each New Jersey Trust Special
Counsel to each New Jersey Trust for New Jersey tax matters
rendered an opinion under then existing New Jersey income tax law
applicable to taxpayers whose income is subject to New Jersey
income taxation substantially to the effect that:
(1) Each New Jersey Trust will be recognized as a trust and
not an association taxable as a corporation. Each New Jersey
Trust will not be subject to the New Jersey Corporation Business
Tax or the New Jersey Corporation Income Tax.
(2) With respect to the non-corporate Unitholders who are
residents of New Jersey, the income of the New Jersey Trust which
is allocable to each such Unitholder will be treated as the
income of such Unitholder under the New Jersey Gross Income Tax.
Interest on the underlying Bonds which would be exempt from New
Jersey Gross Income Tax if directly received by such Unitholder
will retain its status as tax-exempt interest when received by
the New Jersey Trust and distributed to such Unitholder. Any
proceeds paid under the insurance policy issued to the Trustee of
the New Jersey Trust with respect to the Bonds or under
individual policies obtained by issuers of Bonds which represent
maturing interest on defaulted obligations held by the Trustee
will be exempt from New Jersey Gross Income Tax if, and to the
same extent as, such interest would have been so exempt if paid
by the issuer of the defaulted obligations.
(3) A non-corporate Unitholder will not be subject to the
New Jersey Gross Income Tax on any gain realized either when the
New Jersey Trust disposes of a Bond (whether by sale, exchange,
redemption, or payment at maturity), when the Unitholder redeems
or sells his Units or upon payment of any proceeds under the
insurance policy issued to the Trustee of the New Jersey Trust
with respect to the Bonds or under individual policies obtained
by issuers of Bonds which represent maturing principal on defaulted
obligations held by the Trustee. Any loss realized on
such disposition may not be utilized to offset gains realized by
such Unitholder on the disposition of assets the gain on which is
subject to the New Jersey Gross Income Tax.
(4) Units of the New Jersey Trust may be taxable on the
death of a Unitholder under the New Jersey Transfer Inheritance
Tax Law or the New Jersey Estate Tax Law.
(5) If a Unitholder is a corporation subject to the New
Jersey Corporation Business Tax or New Jersey Corporation Income
Tax, interest from the Bonds in a New Jersey Trust which is
allocable to such corporation will be includable in its entire
net income for purposes of the New Jersey Corporation Business
Tax or New Jersey Corporation Income Tax, less any interest
expense incurred to carry such investment to the extent such
interest expense has not been deducted in computing Federal
taxable income. Net gains derived by such corporation on the
disposition of the Bonds by a New Jersey Trust or on the
disposition of its Units will be included in its entire net
income for purposes of the New Jersey Corporation Business Tax or
New Jersey Corporation Income Tax. Any proceeds paid under the
insurance policy issued to the Trustee of a New Jersey Trust with
respect to the Bonds or under individual policies obtained by
issuers of Bonds which represent maturing interest or maturing
principal on defaulted obligations held by the Trustee will be
included in its entire net income for purposes of the New Jersey
Corporation Business Tax or New Jersey Corporation Income Tax if,
and to the same extent as, such interest or proceeds would have
been so included if paid by the issuer of the defaulted
obligations.
New York Trusts. A resident of New York State (or New York
City) will be subject to New York State (or New York City)
personal income tax with respect to gains realized when New York
Obligations held in the New York Trust are sold, redeemed or paid
at maturity or when his Units are sold or redeemed, such gain
will equal the proceeds of sale, redemption or payment less the
tax basis of the New York Obligation or Unit (adjusted to reflect
(a) the amortization of premium or discount, if any, on New York
Obligations held in the Trust, (b) accrued original issue
discount, with respect to each New York Obligation which, at the
time the New York Obligation was issued had original issue
discount, and (c) the deposit of New York Obligations with
accrued interest in the Trust after the Unitholder's settlement
date).
Interest or gain from the New York Trust derived by a Unitholder
who is not a resident of New York State (or New York City) will
not be subject to New York State (or New York City) personal
income tax, unless the Units are property employed in a business,
trade, profession or occupation carried on in New York State (or
New York City).
Amounts paid on defaulted New York Obligations held by the
Trustee under policies of insurance issued with respect to such
New York Obligations will be excludable from income for New York
State and New York City income tax purposes, if and to the same
extent as, such interest would have been excludable if paid by the
respective issuer.
For purposes of the New York State and New York City franchise
tax on corporations, Unitholders which are subject to such tax
will be required to include in their entire net income any
interest or gains distributed to them even though distributed in
respect of New York obligations.
If borrowed funds are used to purchase Units in the Trust, all
(or part) of the interest on such indebtedness will not be
deductible for New York State and New York City tax purposes.
The purchase of Units may be considered to have been made with
borrowed funds even though such funds are not directly traceable
to the purchase of Units in any New York Trust.
The Portfolio of the New York Trust includes obligations issued
by New York State (the "State"), by its various public bodies
(the "Agencies"), and/or by other entities located within the
State, including the City of New York (the "City").
Some of the more significant events relating to the financial
situation in New York are summarized below. This section
provides only a brief summary of the complex factors affecting
the financial situation in New York and is based in part on
Official Statements issued by, and on other information reported
by the State, the City and the Agencies in connection with the
issuance of their respective securities.
There can be no assurance that future statewide or regional
economic difficulties, and the resulting impact on State or local
government finances generally, will not adversely affect the
market value of New York Municipal Obligations held in the
portfolio of the Trust or the ability of particular obligors to
make timely payments of debt service on (or relating to) those
obligations.
The State has historically been one of the wealthiest states in
the nation. For decades, however, the State economy has grown
more slowly than that of the nation as a whole, gradually eroding
the State's relative economic affluence. Statewide, urban
centers have experienced significant changes involving migration
of the more affluent to the suburbs and an influx of generally
less affluent residents. Regionally, the older Northeast cities
have suffered because of the relative success that the South and
the West have had in attracting people and business. The City
has also had to face greater competition as other major cities
have developed financial and business capabilities which make
them less dependent on the specialized services traditionally
available almost exclusively in the City.
The State has for many years had a very high State and local tax
burden relative to other states. The burden of State and local
taxation, in combination with the many other causes of regional
economic dislocation, has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate
within, the State.
A national recession commenced in mid-1990. The downturn
continued throughout the State's 1990-91 fiscal year and was
followed by a period of weak economic growth during the 1991
calendar year. For calendar year 1992, the national economy
continued to recover, although at a rate below all post-war recoveries.
For calendar year 1993, the economy is expected to
grow faster than 1992, but still at a very moderate rate as
compared to other recoveries. The national recession has been
more severe in the State because of factors such as a significant
retrenchment in the financial services industry, cutbacks in
defense spending, and an overbuilt real estate market.
.c3.1993-94 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.
.c3.1992-93 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.
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.
.c3.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 projects that its borrowings for capital purposes
during the State's 1993-94 fiscal year will consist of $460
million in general obligation bonds and $140 million in new
commercial paper issuances. In addition, the State expects to
issue $140 million in bonds for the purpose of redeeming
outstanding bond anticipation notes. The Legislature has
authorized the issuance of up to $85 million in certificates of
participation during the State's 1993-94 fiscal year for personal
and real property acquisitions during the State's 1993-94 fiscal
year. The projection 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.
.c3.Ratings. The $850 million in TRANS issued by the State in
April 1993 were rated SP-1-Plus by S&P on April 26, 1993, and
MIG-1 by Moody's on April 23, 1993, which represents the highest
ratings given by such agencies and the first time the State's
TRANS have received these ratings since its May 1989 TRANS
issuance. Both agencies cited the State's improved fiscal
position as a significant factor in the upgrading of the April
1993 TRANS.
Moody's rating of the State's general obligation bonds stood at A
on April 23, 1993, and S&P's rating stood at A- with a stable
outlook on April 26, 1993, an improvement from S&P's negative
outlook prior to April 1993. Previously, Moody's lowered its rating
to A on June 6, 1990, its rating having been A1 since May
27, 1986. S&P lowered its rating from A to A- on January 13,
1992. S&P's previous ratings were A from March 1990 to January
1992, AA- from August 1987 to March 1990 and A+ from November
1982 to August 1987.
Moody's, in confirming its rating of the State's general
obligation bonds, and S&P, in improving its outlook on such bonds
from negative to stable, noted the State's improved fiscal
condition and reasonable revenue assumptions contained in the
1993-94 State budget.
The City accounts for approximately 41% of the State's population
and personal income, and the City's financial health affects the
State in numerous ways.
In response to the City's fiscal crisis in 1975, the State took a
number of steps to assist the City in returning to fiscal
stability. Among other actions, the State Legislature (i)
created MAC to assist with long-term financing for the City's
short-term debt and other cash requirements and (ii) created the
State Financial Control Board (the "Control Board") to review and
approve the City's budgets and City four-year financial plans
(the financial plans also apply to certain City-related public
agencies (the "Covered Organizations")).
In February, 1975, the New York State Urban Development
Corporation ("UDC"), which had approximately $1 billion of
outstanding debt, defaulted on certain of its short-term notes.
Shortly after the UDC default, the City entered a period of
financial crisis. Both the State Legislature and the United
States Congress enacted legislation in response to this crisis.
During 1975, the State Legislature (i) created MAC to assist with
long-term financing for the City's short-term debt and other cash
requirements and (ii) created the State Financial Control Board
(the "Control Board") to review and approve the City's budgets
and City four-year financial plans (the financial plans also
apply to certain City-related public agencies (the "Covered
Organizations")).
Over the past three years, the rate of economic growth in the
City has slowed substantially, and the City's economy is
currently in recession. The City projects, and its current
four-year financial plan assumes, a recovery early in the 1993
calendar year. The Mayor is responsible for preparing the City's
four-year financial plan, including the City's current financial
plan. The City Comptroller has issued reports concluding that
the recession of the City's economy will be more severe and last
longer than is assumed in the financial plan.
.c3.Fiscal Year 1993 and 1993-1996 Financial Plan. The City's
1993 fiscal year results are projected to be balanced in
accordance with generally accepted accounting principles
("GAAP"). The City was required to close substantial budget gaps
in its 1990, 1991 and 1992 fiscal years in order to maintain
balanced operating results.
The City's modified Financial Plan dated February 9, 1993
covering fiscal years 1993-1996 projects budget gaps for 1994
through 1996. The Office of the State Deputy Controller for the
City of New York has estimated that under the modified Financial Plan
budget gaps will be $102 million for fiscal year 1994, $196
million for fiscal year 1995 and $354 million for fiscal year
1996, primarily due to anticipated higher spending on labor
costs.
However, the City's modified Plan is dependent upon a gap-closing
program, certain elements of which the staff of Control Board
identified on March 25, 1993 to be at risk due to projected
levels of State and Federal aid and revenue and expenditures
estimates which may not be achievable. The Control Board
indicated that the City's modified Financial Plan does not make
progress towards establishing a balanced budget process. The
Control Board's report identified budget gap risks of $1.0
billion, $1.9 billion, $2.3 billion and $2.6 billion in fiscal
years 1994 through 1997, respectively.
On June 3, 1993, the Mayor announced that State and federal aid
for Fiscal Year 1993-94 would be $280 million less than projected
and that in order to balance the City's budget, $176 million of
previously announced contingent budget cuts would be imposed. The
Mayor indicated that further savings would entail serious
reductions in services. The State Comptroller, on June 14, 1993,
criticized efforts by the Mayor and City Council to balance the
City's budget which rely primarily on one-shot revenues. The
Comptroller added that the City's budget should be based on
"recurring revenues that fund recurring expenditures." Given the
foregoing factors, there can be no assurance that City will
continue to maintain a balanced budget, or that it can maintain a
balanced budget without additional tax or other revenue increases
or reductions in City services, which could adversely affect the
City's economic base.
Pursuant to State law, the City prepares a four-year annual
financial plan, which is reviewed and revised on a quarterly
basis and which includes the City's capital, revenue and expense
projections. The City is required to submit its financial plans
to review bodies, including the Control Board. If the City were
to experience certain adverse financial circumstances, including
the occurrence or the substantial likelihood and imminence of the
occurrence of an annual operating deficit of more than $100
million or the loss of access to the public credit markets to
satisfy the City's capital and seasonal financial requirements,
the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans,
proposed borrowings and certain contracts.
The City depends on the State for State aid both to enable the
City to balance its budget and to meet its cash requirements. As
a result of the national and regional economic recession, the
State's projections of tax revenues for its 1991 and 1992 fiscal
years were substantially reduced. For its 1993 fiscal year, the
State, before taking any remedial action reflected in the State
budget enacted by the State Legislature on April 2, 1992,
reported a potential budget deficit of $4.8 billion. If the
State experiences revenue shortfalls or spending increases beyond
its projections during its 1993 fiscal year or subsequent years,
such developments could also result in reductions in projected
State aid to the City. In addition, there can be no assurance that
State budgets 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 its financial plan are based
on various assumptions and contingencies which are uncertain and
which may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget as
required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies
include the timing of any regional and local economic recovery,
the absence of wage increases in excess of the increases assumed
in its financial plan, employment growth, provision of State and
Federal aid and mandate relief, State legislative approval of
future State budgets, levels of education expenditures as may be
required by State law, adoption of future City budgets by the New
York City Council, and approval by the Governor or the State
Legislature and the cooperation of MAC with respect to various
other actions proposed in such financial plan.
The City's ability to maintain a balanced operating budget is
dependent on whether it can implement necessary service and
personnel reduction programs successfully. As discussed above,
the City must identify additional expenditure reductions and
revenue sources to achieve balanced operating budgets for fiscal
years 1994 and thereafter. Any such proposed expenditure
reductions will be difficult to implement because of their size
and the substantial expenditure reductions already imposed on
City operations in the past two years.
Attaining a balanced budget is also dependent upon the City's
ability to market its securities successfully in the public
credit markets. The City's financing program for fiscal years
1993 through 1996 contemplates issuance of $15.7 billion of
general obligation bonds primarily to reconstruct and
rehabilitate the City's infrastructure and physical assets and to
make capital investments. A significant portion of such bond
financing is used to reimburse the City's general fund for
capital expenditures already incurred. In addition, the City
issues revenue and tax anticipation notes to finance its seasonal
working capital requirements. The terms and success of projected
public sales of City general obligation bonds and notes will be
subject to prevailing market conditions at the time of the sale,
and no assurance can be given that the credit markets will absorb
the projected amounts of public bond and note sales. In
addition, future developments concerning the City and public
discussion of such developments, the City's future financial
needs and other issues may affect the market for outstanding City
general obligation bonds and notes. If the City were unable to
sell its general obligation bonds and notes, it would be
prevented from meeting its planned operating and capital
expenditures.
The City Comptroller, the staff of the Control Board, the Office
of the State Deputy Comptroller for the City of New York (the
"OSDC") and other agencies and public officials have issued
reports and made public statements which, among other things, state
that projected revenues may be less and future expenditures
may be greater than those forecast in the financial plan. In
addition, the Control Board and other agencies have questioned
whether the City has the capacity to generate sufficient revenues
in the future to meet the costs of its expenditure increases and
to provide necessary services. It is reasonable to expect that
such reports and statements will continue to be issued and to
engender public comment.
.c3.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
determinations in certain of them might have a material adverse
effect upon the City's ability to carry out its financial plan.
As of June 30, 1992, legal claims in excess of $341 billion were
outstanding against the City for which the City estimated its
potential future liability to be $2.3 billion.
As of the date of this prospectus, Moody's rating of the City's
general obligation bonds stood at Baal and S&P's rating stood at
A-. On February 11, 1991, Moody's lowered its rating from A.
On March 30, 1993, in confirming the Baa1 rating, Moody's noted
that:
The financial plan for fiscal year 1994 and beyond shows an
ongoing imbalance between the City's expenditures and revenues.
The key indication of this structural imbalance is not
necessarily the presence of sizable out-year budget gaps, but the
recurring use of one-shot actions to close gaps. One-shots
constitute a significant share of the proposed gap-closing
program for fiscal year 1994, and they represent an even larger
share of those measures which the City seems reasonably certain
to attain. Several major elements of the program, including
certain state actions, federal counter cyclical aid and part of
the city's tax package, remain uncertain. However, the gap
closing plan may be substantially altered when the executive
budget is offered later this spring.
On March 30, 1993, S&P affirmed its A- rating with a negative
outlook, stating that:
The City's key credit factors are marked by a high and growing
debt burden, and taxation levels that are relatively high, but
stable. The City's economy is broad-based and diverse, but
currently is in prolonged recession, with slow growth prospects
for the foreseeable future.
The rating outlook is negative, reflecting the continued fiscal
pressure facing the City, driven by continued weakness in the
local economy, rising spending pressures for education and labor costs
of city employees, and increasing costs associated with
rising debt for capital construction and repair.
The current financial plan for the City assumes substantial
increases in aid from national and state governments.
Maintenance of the current rating, and stabilization of the
rating outlook, will depend on the City's success in realizing
budgetary aid from these governments, or replacing those revenues
with ongoing revenue-raising measures or spending reductions
under the City's control. However, increased reliance on
non-recurring budget balancing measures that would support
current spending, but defer budgetary gaps to future years, would
be viewed by S&P as detrimental to New York City's single-'A-'
rating.
Previously, Moody's had raised its rating to A in May, 1988, to
Baal in December, 1985, to Baa in November, 1983 and to Bal in
November, 1981. S&P had raised its rating to A- in November,
1987, to BBB+ in July, 1985 and to BBB in March, 1981.
On May 9, 1990, Moody's revised downward its rating on
outstanding City revenue anticipation notes from MIG-1 to MIG-2
and rated the $900 million Notes then being sold MIG-2. On April
30, 1991, Moody's confirmed its MIG-2 rating for the outstanding
revenue anticipation notes and for the $1.25 billion in notes
then being sold. On April 29, 1991, S&P revised downward its
rating on City revenue anticipation notes from SP-1 to SP-2.
As of December 31, 1992, the City and MAC had, respectively,
$20.3 billion and $4.7 billion of outstanding net long-term
indebtedness.
Certain Agencies of the State have faced substantial financial
difficulties which could adversely affect the ability of such
Agencies to make payments of interest on, and principal amounts
of, their respective bonds. The difficulties have in certain
instances caused the State (under so-called "moral obligation"
provisions which are non-binding statutory provisions for State
appropriations to maintain various debt service reserve funds) to
appropriate funds on behalf of the Agencies. Moreover, it is
expected that the problems faced by these Agencies will continue
and will require increasing amounts of State assistance in future
years. Failure of the State to appropriate necessary amounts or
to take other action to permit those Agencies having financial
difficulties to meet their obligations could result in a default
by one or more of the Agencies. Such default, if it were to
occur, would be likely to have a significant adverse effect on
investor confidence in, and therefore the market price of,
obligations of the defaulting Agencies. In addition, any default
in payment on any general obligation of any Agency whose bonds
contain a moral obligation provision could constitute a failure
of certain conditions that must be satisfied in connection with
Federal guarantees of City and MAC obligations and could thus
jeopardize the City's long-term financing plans.
As of September 30, 1992, the State reported that there were
eighteen Agencies that each had outstanding debt of $100 million
or more. These eighteen Agencies had an aggregate of $62.2
billion of outstanding debt, including refunding bonds, of which
the State was obligated under lease-purchase, contractual obligation
or moral obligation provisions on $25.3 billion.
The State is a defendant in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental
operations. Such litigation includes, but is not limited to,
claims asserted against the State arising from alleged torts,
alleged breaches of contracts, condemnation proceedings and other
alleged violations of State and Federal laws. Included in the
State's outstanding litigation are a number of cases challenging
the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily
involving the State's mental hygiene programs. Adverse judgments
in these matters generally could result in injunctive relief
coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs
in the future.
The State is also engaged in a variety of claims wherein
significant monetary damages are sought. Actions commenced by
several Indian nations claim that significant amounts of land
were unconstitutionally taken from the Indians in violation of
various treaties and agreements during the eighteenth and
nineteenth centuries. The claimants seek recovery of
approximately six million acres of land as well as compensatory
and punitive damages.
The U.S. Supreme Court on March 30, 1993, referred to a Special
Master for determination of damages in an action by the State of
Delaware to recover certain unclaimed dividends, interest and
other distributions made by issuers of securities held by New
York-based brokers incorporated in Delaware. (State of Delaware
v. State of New York.) The State had taken such unclaimed
property under its Abandoned Property Law. The State expects
that it may pay a significant amount in damages during fiscal
year 1993-94 but it has indicated that it has sufficient funds on
hand to pay any such award, including funds held in contingency
reserves. The State's 1993-94 Financial Plan includes the
establishment of a $100 million contingency reserve fund which
would be available to fund such an award which some reports have
estimated at $100-$800 million.
In Schulz v. State of New York, commenced May 24, 1993 ("Schulz
1993"), petitioners have challenged the constitutionality of mass
transportation bonding programs of the New York State Thruway
Authority and the Metropolitan Transportation Authority. On May
24, 1993, the Supreme Court, Albany County, temporarily enjoined
the State from implementing those bonding programs. In previous
actions, Mr. Schulz and others have challenged on similar grounds
bonding programs for the New York State Urban Development
Corporation and the New York Local Government Assistance
Corporation. While there have been no decisions on the merits in
such previous actions, by an opinion dated May 11, 1993, the New
York Court of Appeals held in a proceeding commenced on April 29,
1991 in the Supreme Court, Albany County (Schulz v. State of New
York), that petitioners had standing as voters under the State
Constitution to bring such action.
Petitioners in Schulz 1993 have asserted that issuance of bonds
by the two Authorities is subject to approval by statewide referendum.
At this time there can be no forecast of the
likelihood of success on the merits by the petitioners, but a
decision upholding this constitutional challenge could restrict
and limit the ability of the State and its instrumentalities to
borrow funds in the future. The State has not indicated that the
temporary injunction issued by the Supreme Court in this action
will have any immediate impact on its financial condition or
interfere with projects requiring immediate action.
Adverse developments in the foregoing proceedings or new
proceedings could adversely affect the financial condition of the
State in the future.
Certain localities in addition to New York City could have
financial problems leading to requests for additional State
assistance. Both the Revised 1992-93 State Financial Plan and
the recommended 1993-94 State Financial Plan includes a
significant reduction in State aid to localities in such programs
as revenue sharing and aid to education from projected base-line
growth in such programs. It is expected that such reductions
will result in the need for localities to reduce their spending
or increase their revenues. The potential impact on the State of
such actions by localities is not included in projections of
State receipts and expenditures in the State's 1993-94 fiscal
year.
Fiscal difficulties experienced by the City of Yonkers
("Yonkers") resulted in the creation of the Financial Control
Board for the City of Yonkers (the "Yonkers Board") by the State
in 1984. The Yonkers Board is charged with oversight of the
fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in
allocation of State resources in amounts that cannot yet be
determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1991, the total
indebtedness of all localities in the State was approximately
$31.6 billion, of which $16.8 billion was debt of New York City
(excluding $6.7 billion in MAC debt). State law requires the
Comptroller to review and make recommendations concerning the
budgets of those local government units other than New York City
authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Fifteen
localities had outstanding indebtedness for state financing at
the close of their fiscal year ending in 1991. In 1992, an
unusually large number of local government units requested
authorization for deficit financings. According to the
Comptroller, ten local government units have been authorized to
issue deficit financing in the aggregate amount of $131.1
million.
Certain proposed Federal expenditure reductions could reduce, or
in some cases eliminate, Federal funding of some local programs
and accordingly might impose substantial increased expenditure
requirements on affected localities. If the State, New York City
or any of the Agencies were to suffer serious financial
difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State, including notes or bonds in the New
York Trust, could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending
litigation, judicial decisions, and long-range economic trends.
The longer-range potential problems of declining urban
population, increasing expenditures, and other economic trends
could adversely affect localities and require increasing State
assistance in the future.
At the time of the closing for each New York Trust, Special
Counsel to each New York Trust for New York tax matters rendered
an opinion under then existing New York income tax law applicable
to taxpayers whose income is subject to New York income taxation
substantially to the effect that:
The New York Trust is not an association taxable as a corporation
and the income of the New York Trust will be treated as the
income of the Unitholders under the income tax laws of the State
and City of New York. Individuals who reside in New York State
or City will not be subject to State and City tax on interest
income which is exempt from Federal income tax under section 103
of the Internal Revenue Code of 1986 and derived from obligations
of New York State or a political subdivision thereof, although
they will be subject to New York State and City tax with respect
to any gains realized when such obligations are sold, redeemed or
paid at maturity or when any such Units are sold or redeemed.
North Carolina Trusts. General obligations of a city, town
or county in North Carolina are payable from the general revenues
of the entity, including ad valorem tax revenues on property
within the jurisdiction. Revenue bonds issued by North Carolina
political subdivisions include (1) revenue bonds payable
exclusively from revenue-producing governmental enterprises and
(2) industrial revenue bonds, college and hospital revenue bonds
and other "private activity bonds" which are essentially
non-governmental debt issues and which are payable exclusively by
private entities such as non-profit organizations and business
concerns of all sizes. State and local governments have no
obligation to provide for payment of such private activity bonds
and in many cases would be legally prohibited from doing so. The
value of such private activity bonds may be affected by a wide
variety of factors relevant to particular localities or
industries, including economic developments outside of North
Carolina.
Section 23-48 of the North Carolina General Statutes appears to
permit any city, town, school district, county or other taxing
district to avail itself of the provisions of Chapter 9 of the
United States Bankruptcy Code, but only with the consent of the
Local Government Commission of the State and of the holders of
such percentage or percentages of the indebtedness of the issuer
as may be required by the Bankruptcy Code (if any such consent is
required). Thus, although limitations apply, in certain
circumstances political subdivisions might be able to seek the
protection of the Bankruptcy Code.
.c3.State Budget and Revenues. The North Carolina State
Constitution requires that the total expenditures of the State
for the fiscal period covered by each budget not exceed the total of
receipts during the fiscal period and the surplus remaining in
the State Treasury at the beginning of the period. The State's
fiscal year runs from July 1st through June 30th.
In 1990 and 1991, the State had difficulty meeting its budget
projections. The General Assembly responded by enacting a number
of new taxes and fees to generate additional revenue and reduce
allowable departmental operating expenditures and continuation
funding. The spending reductions were based on recommendations
from the Governor, the Government Performance Audit Committee and
selected reductions identified by the General Assembly.
The State, like the nation, has experienced economic recovery
since 1991. In the opinion of the State Controller, the growth
in the economy and the legislative actions taken in 1991 had a
positive effect on the State's revenue collections over the past
several years. The State had a budget surplus of approximately
$865 million at the end of fiscal 1993-94. After review of the
1994-95 continuation budget adopted in 1993, the General Assembly
approved spending expansion funds, in part to restore certain
employee salaries to budgeted levels, which amounts had been
deferred to balance the budgets in 1989-1993, and to authorize
funding for new initiatives for economic development, education,
human services and environmental programs. (The cutback in
funding for infrastructure and social development projects had
been cited by agencies rating State obligations, following the
1991 reductions, as cause for concern about the long-term
consequences of those reductions on the economy of the State and
the State's fiscal prospects.)
Because of growth in State tax and fee revenues, the General Fund
balance at the end of the 1994-95 fiscal year was reported at
approximately $300 million.
The State budget is based upon estimated revenues and a multitude
of existing and assumed State and non-State factors including
State and national economic conditions, international activity
and federal government policies and legislation. The Congress of
the United States is considering a number of matters affecting
the federal government's relationship with state governments
that, if enacted into law, could affect fiscal and economic
policies of the states, including North Carolina.
In April 1995, the North Carolina General Assembly repealed,
effective for taxable years beginning on or after January 1,
1995, the tax levied on various forms of intangible personal
property. The intangibles tax revenues receivable by counties
and municipalities will no longer be received. Instead, the
legislature has provided for specific appropriations to counties
and municipalities.
It is unclear what effect these developments at the State level
may have on the value of the Bonds in the North Carolina Trust.
.c3.Litigation. Litigation against the State includes the
following.
Leandro, et al. v. State of North Carolina and State Board of
Education _ In May, 1994, students and boards of education in
five counties in the State filed suit in state court requesting a
declaration that the public education system of North Carolina,
including its system of funding, violated the State constitution by
failing to provide adequate or substantially equal educational
opportunities and denying due process of law, and violates
various statutes relating to public education. The suit is
similar to a number of suits in other states, some of which
resulted in holdings that the respective systems of public
education funding were unconstitutional under the applicable
state law. The defendants in such suit have filed a motion to
dismiss, which was denied. After trial at the Superior Court
level, the plaintiff petitioned the North Carolina Supreme Court
for discretionary review prior to a determination by the Court of
Appeals this motion was denied. The North Carolina Attorney
General's Office believes that sound legal arguments support the
State's position, but no significant financial impact is expected
to result from the ultimate resolution of this case, even if
adverse to the State.
Francisco Case _ In August, 1994, a class action lawsuit was
filed in state court against the Superintendent of Public
Instruction and the State Board of Education on behalf of a class
of parents and their children who are characterized as limited
English proficient. The complaint alleges that the State has
failed to provide funding for the education of these students and
has failed to supervise local school systems in administering
programs for them. The complaint does not allege an amount in
controversy, but asks the Court to order the defendants to fund a
comprehensive program to ensure equal educational opportunities
for children with limited English proficiency. The North
Carolina Attorney General's Office believes that sound legal
arguments support the State's position, but no significant
financial impact is expected to result from the ultimate
resolution of this case, even if adverse to the State.
Faulkenbury v. Teachers' and State Employees' Retirement System
Peele v. Teachers' and State Employees' Retirement System
Woodward v. Local Governmental Employees' Retirement System _
Plaintiffs are disability retirees who brought class actions in
state court challenging changes in the formula for payment of
disability retirement benefits and claiming impairment of
contract rights, breach of fiduciary duty, violation of other
federal constitutional rights, and violation of state
constitutional and statutory rights. The State estimates that
the cost in damages and higher prospective benefit payments to
class members would probably amount to $50 million or more in
Faulkenbury, $50 million or more in Peele, and $15 million or
more in Woodward, all ultimately payable, at least initially,
from the State retirement systems funds.
Upon review in Faulkenbury, the North Carolina Court of Appeals
and Supreme Court have held that claims made in Faulkenbury
substantially similar to those in Peele and Woodward _ for breach
of fiduciary duty and violation of federal constitutional rights
brought under the federal Civil Rights Act _ either do not state
a cause of action or are barred by the statute of limitations.
In 1994, plaintiffs took voluntary dismissals of their claims for
impairment of contract rights in violation of the United States
Constitution and filed new actions in federal court asserting the
same claims, along with claims for violation of constitutional rights
in the taxation of retirement benefits. The remaining
state court claims in all cases are yet to be heard.
Fulton Corporation v. Justus, Secretary of Revenue _ The State's
intangible personal property tax levied on certain shares of
stock (repealed as of the tax year beginning January 1, 1995) was
challenged by the plaintiff on grounds that it violates the
Commerce Clause of the United States Constitution by
discriminating against stock issued by corporations that do all
or part of their business outside the State. The plaintiff, a
North Carolina corporation, paid the intangibles tax on stock it
owns in other corporations. The plaintiff sought to invalidate
the tax in its entirety and to recover the intangibles taxes it
paid for the 1990 tax year.
The North Carolina Court of Appeals invalidated the taxable
percentage deduction and excised it from the statute beginning
with the 1994 tax year. The effect of this ruling was to
increase collections by rendering all stock taxable on 100% of
its value. The North Carolina Supreme Court reversed the Court
of Appeals and held that the tax is valid and constitutional.
The plaintiff appealed to the U.S. Supreme Court which agreed
with plaintiff that the tax was unconstitutionally
discriminatory. The U.S. Supreme Court remanded the case for the
State Supreme Court to decide whether to issue refunds or to levy
a similar tax retroactively on holdings in North Carolina firms.
In response, the State's Revenue Secretary has proposed that
taxpayers who paid the tax under protest in compliance with State
law be issued refunds. The estimated $123 million in refunds
would be paid from a State reserve fund. The proposal is
currently being considered by the State Supreme Court as a
possible remedy, but the State legislature would also have to
approve this expenditure of funds.
Other Tax Cases: In Davis v. Michigan (1989), the United States
Supreme Court ruled that a Michigan income tax statute which
taxed federal retirement benefits while exempting those paid by
state and local governments violated the constitutional doctrine
of intergovernmental tax immunity. At the time of the Davis
decision, North Carolina law contained similar exemptions in
favor of state and local retirees. Those exemptions were
repealed prospectively, beginning with the 1989 tax year. All
public pension and retirement benefits are now entitled to a
$4,000 annual exclusion.
The Swanson Cases _ Following Davis, federal retirees filed a
class action suit in federal court in 1989 seeking damages equal
to the North Carolina income tax paid on federal retirement
income by the class members. A companion suit was filed in state
court in 1990. The complaints alleged that the amount in
controversy exceeded $140 million. The North Carolina Department
of Revenue estimated refunds and interest liability of $280.89
million as of June 30, 1994.
The North Carolina Supreme Court ultimately held in favor of the
State in the case brought in State court, and the United States
Supreme Court denied the plaintiffs' request for review of that
decision, thereby concluding the State litigation. Plaintiffs
also were unsuccessful in the federal court action. The federal retirees
continue to seek relief through State legislation.
Patton v. State _ In connection with the legislature's repeal of
the tax exemption for state retirees in 1989, certain adjustments
were adopted that reduced the state retirees' tax burden. In May
1995, federal retirees filed a lawsuit in State court for tax
refunds for the years 1989 through 1994 alleging that these
adjustments also constitute unlawful discrimination against
federal retirees. The amount of the claim has not been set
forth. This case is still pending in superior court.
The Bailey Cases _ State and local government retirees filed a
class action suit in 1990 as a result of the repeal of the income
tax exemptions for state and local government retirement
benefits. The original suit was dismissed after the North
Carolina Supreme court ruled in 1991 that the plaintiffs had
failed to comply with state law requirements for challenging
unconstitutional taxes and the United States Supreme Court denied
review.
In 1992, many of the same plaintiffs filed a new lawsuit alleging
essentially the same claims, including breach of contract,
unconstitutional impairment of contract rights by the State in
taxing benefits that were allegedly promised to be tax-exempt,
and violation of several state constitutional provisions.
Although the Superior Court ruled largely in the plaintiff's
favor, appeals are expected from both sides. Additional suits
have been filed to recover taxes subsequently paid. The North
Carolina Attorney General's office estimates that the amount in
controversy is approximately $40-45 million annually for the tax
years 1989 through 1992. The North Carolina Attorney General's
office believes that sound legal arguments support the State's
position.
.c3.General. The population of the State has increased 13% from
1980, from 5,880,095 to 6,647,351 as reported by the 1990 federal
census and the State rose from twelfth to tenth in population.
The State's estimate of population as of June 30, 1994 is
7,165,298. Notwithstanding its rank in population size, North
Carolina is primarily a rural state, having only five
municipalities with populations in excess of 100,000.
The labor force has undergone significant change during recent
years as the State has moved from an agricultural to a service
and goods producing economy. Those persons displaced by farm
mechanization and farm consolidations have, in large measure,
sought and found employment in other pursuits. Due to the wide
dispersion of non-agricultural employment, the people have been
able to maintain, to a large extent, their rural habitation
practices. During the period 1980 to 1994, the State labor force
grew about 26% (from 2,855,200 to 3,609,000). Per capita income
during the period 1980 to 1993 grew from $7,999 to $18,702, an
increase of 133.8%.
The current economic profile of the State consists of a
combination of industry, agriculture and tourism. As of November
1994, the State was reported to rank ninth among the states in
non-agricultural employment and eighth in manufacturing
employment. Employment indicators have varied somewhat in the
annual periods since June of 1990, but have demonstrated an upward
trend since 1991.
The seasonally adjusted unemployment rate in October 1995 was
estimated to be 3.9% of the labor force, as compared with 5.5%
nationwide.
As of 1994, the State was ninth in the nation in gross
agricultural income of which nearly the entire amount
(approximately $5.5 billion) was from commodities. According to
the State Commissioner of Agriculture, in 1994, the State ranked
first in the nation in the production of flue-cured tobacco,
total tobacco, turkeys and sweet potatoes second in hog
production, trout and the production of cucumbers for pickles
fourth in commercial broilers, blueberries and strawberries
fifth in burley tobacco and sixth in peaches.
The diversity of agriculture in North Carolina and a continuing
push in marketing efforts have protected farm income from some of
the wide variations that have been experienced in other states
where most of the agricultural economy is dependent on a small
number of agricultural commodities. North Carolina is the third
most diversified agricultural state in the nation.
Tobacco production, which has been the leading source of
agricultural income in the State, declined in 1994, based on
preliminary figures. For 1994, commercial broiler production and
pork production surpassed tobacco among sources of agricultural
income, providing 30% and 15.5%, respectively, of gross
agricultural income compared to 14.8% for tobacco. Tobacco
farming in North Carolina has been and is expected to continue to
be affected by major Federal legislation and regulatory measures
regarding tobacco production and marketing and by international
competition. Measures adverse to tobacco farming could have
negative effects on farm income and the North Carolina economy
generally.
The number of farms has been decreasing in 1995 there were
approximately 58,000 farms in the State, down from approximately
72,000 in 1987 (a decrease of about 19% in eight years).
However, a strong agribusiness sector also supports farmers with
farm inputs (fertilizer, insecticide, pesticide and farm
machinery) and processing of commodities produced by farmers
(vegetable canning and cigarette manufacturing). North
Carolina's agriculture industry, including food, fiber and forest
products, contributes over $42 billion annually to the State's
economy.
The State Department of Commerce, Travel and Tourism Division
reports that in 1993 more than $803 billion was spent on tourism
in the State. The Department estimates that two-thirds of total
expenditures came from out-of-state travelers, and that
approximately 250,000 people were employed in tourism-related
jobs.
.c3.Bond Ratings. Currently, Moody's rates North Carolina
general obligation bonds as Aaa and Standard & Poor's rates such
bonds as AAA. Standard & Poor's also reaffirmed its stable
outlook for the State in January 1994.
Standard & Poor's reports that North Carolina's rating reflects
the State's strong economic characteristics, sound financial
performance, and low debt levels.
The Sponsor believes the information summarized above describes
some of the more significant events relating to the North
Carolina Trust. The sources of this information are the official
statements of issuers located in North Carolina, State agencies,
publicly available documents, publications of rating agencies and
statements by, or news reports of statements by State officials
and employees and by rating agencies. The Sponsor and its
counsel have not independently verified any of the information
contained in the official statements and other sources and
counsel have not expressed any opinion regarding the completeness
or materiality of any matters contained in this Prospectus other
than the tax opinions set forth below under North Carolina Taxes.
The Sponsor believes the information summarized above describes
some of the more significant events relating to the North
Carolina Trust. The sources of this information are the official
statements of issuers located in North Carolina, State agencies,
publicly available documents, publications of ratings agencies
and news reports of statements by State officials and employees
and by rating agencies. The Sponsor and its counsel have not
independently verified any of the information contained in the
official statements and other sources and counsel have not
expressed any opinion regarding the completeness or materiality
of any contained in this Prospectus other than the tax opinions
set forth below under North Carolina Taxes.
At the time of the closing for each North Carolina Trust, Special
Counsel to the fund for North Carolina tax matters rendered an
opinion under then existing North Carolina income tax law
applicable to taxpayers whose income is subject to North Carolina
income taxation substantially to the effect that:
Upon the establishing of the North Carolina Trust and the Units
thereunder:
(1) The North Carolina Trust is not an "association"
taxable as a corporation under North Carolina law with the result
that income of the North Carolina Trust will be deemed to be
income of the Unitholders.
(2) Interest on the Bonds that is exempt from North
Carolina income tax when received by the North Carolina Trust
will retain its tax-exempt status when received by the
Unitholders.
(3) Unitholders will realize a taxable event when the North
Carolina Trust disposes of a Bond (whether by sale, exchange,
redemption or payment at maturity) or when a Unitholder redeems
or sells his Units (or any of them), and taxable gains for
Federal income tax purposes may result in gain taxable as
ordinary income for North Carolina income tax purposes. However,
when a Bond has been issued under an act of the North Carolina
General Assembly that provides that all income from such Bond,
including any profit made from the sale thereof, shall be free
from all taxation by the State of North Carolina, any such profit
received by the North Carolina Trust will retain its tax-exempt
status in the hands of the Unitholders.
(4) Unitholders must amortize their proportionate shares of
any premium on a Bond. Amortization for each taxable year is
accomplished by lowering the Unitholder's basis (as adjusted) in his
Units with no deduction against gross income for the year.
(5) The Units are exempt from the North Carolina tax on
intangible personal property so long as the corpus of the North
Carolina Trust remains composed entirely of Bonds or, pending
distribution, amounts received on the sale, redemption or
maturity of the Bonds and the Trustee periodically supplies to
the North Carolina Department of Revenue at such times as
required by the Department of Revenue a complete description of
the North Carolina Trust and also the name, description and value
of the obligations held in the corpus of the North Carolina
Trust.
Ohio Trusts. The Ohio Trust will invest most of its net
assets in securities issued by or on behalf of (or in
certificates of participation in lease-purchase obligations of)
the State of Ohio, political subdivisions of the State, or
agencies or instrumentalities of the State, or its political
subdivisions ("Ohio Obligations"). The Ohio Trust is therefore
susceptible to general or particular economic, political or
regulatory factors that may affect issuers of Ohio Obligations.
The following information constitutes only a brief summary of
some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the
public issuer itself has no financial responsibility. This
information is derived from official statements of certain Ohio
issuers published in connection with their issuance of securities
and from other publicly available information, and is believed to
be accurate. No independent verification has been made of any of
the following information.
Generally, the creditworthiness of Ohio Obligations of local
issuers is unrelated to that of obligations of the State itself,
and the State has no responsibility to make payments on those
local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in
those obligations of particular Ohio issuers. It is possible
that the investment may be in particular Ohio Obligations, or in
those of particular issuers, as to which those factors apply.
However, the information below is intended only as a general
summary and is not intended as a discussion of any specific
factors that may affect any particular obligation or issuer.
The timely payment of principal of and interest on Ohio
Obligations has been guaranteed by bond insurance purchased by
the issuers, the Ohio Trust or other parties. Those Ohio
Obligations may not be subject to the factors referred to in this
section of the Prospectus.
Ohio is the seventh most populous state. The 1990 Census count
of 10,847,000 indicated a 0.5% population increase from 1980.
The Census estimate for 1994 is 11,102,000.
While diversifying more into the service and other
non-manufacturing areas, the Ohio economy continues to rely in
part on durable goods manufacturing largely concentrated in motor
vehicles and equipment, steel, rubber products and household
appliances. As a result, general economic activity, as in many
other industrially-developed states, tends to be more cyclical than
in some other states and in the nation as a whole.
Agriculture is an important segment of the economy, with over
half the State's area devoted to farming and approximately 16% of
total employment in agribusiness.
In prior years, the State's overall unemployment rate was
commonly somewhat higher than the national figure. For example,
the reported 1990 average monthly State rate was 5.7%, compared
to the 5.5% national figure. However, for the last five years,
the State rates were below the national rates (4.8% versus 5.6%
in 1995). The unemployment rate and its effects vary among
geographic areas of the State.
There can be no assurance that future national, regional or
state-wide economic difficulties, and the resulting impact on
State or local government finances generally, will not adversely
affect the market value of Ohio Obligations held in the Ohio
Trust or the ability of particular obligors to make timely
payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from
ending its July 1 to June 30 fiscal year ("FY") or fiscal
biennium in a deficit position. Most State operations are
financed through the General Revenue Fund ("GRF"), for which the
personal income and sales-use taxes are the major sources.
Growth and depletion of GRF ending fund balances show a
consistent pattern related to national economic conditions, with
the ending FY balance reduced during less favorable and increased
during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary
actions to ensure resource/expenditure balances during less
favorable economic periods. Those procedures included general
and selected reductions in appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1
million in the GRF and $353 million in the Budget Stabilization
Fund (BSF, a cash and budgetary management fund). June 30, 1991
ending fund balances were $135.3 million (GRF) and $300 million
(BSF).
The next biennium, 1992-93, presented significant challenges to
State finances, which were successfully addressed. To allow time
to resolve certain budget differences, an interim appropriations
act was enacted effective July 1, 1991 it included GRF debt
service and lease rental appropriations for the entire biennium,
while continuing most other appropriations for a month. Pursuant
to the general appropriations act for the entire biennium, passed
on July 11, 1991, $200 million was transferred from the BSF to
the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY,
both in light of the continuing uncertain nationwide economic
situation, there was projected and then timely addressed an FY
1992 imbalance in GRF resources and expenditures. In response,
the Governor ordered most State agencies to reduce GRF spending
in the last six months of FY 1992 by a total of approximately
$184 million the $100.4 million BSF balance and additional
amounts from certain other funds were transferred late in the FY to the
GRF and adjustments made in the timing of certain tax
payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate
legislative and administrative actions, including the Governor's
ordering $300 million in selected GRF spending reductions and
subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993
ending GRF fund balance was approximately $111 million, of which,
as a first step to BSF replenishment, $21 million was deposited
in the BSF.
None of the spending reductions were applied to appropriations
needed for debt service on or lease rentals relating to any State
obligations.
The 1994-95 biennium presented a more affirmative financial
picture. Based on June 30, 1994 balances, an additional $260
million was deposited in the BSF. The biennium ended June 30,
1995 with a GRF ending fund balance of $928 million, of which
$535.2 million has been transferred into the BSF (which had an
April 3, 1996 balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed on
June 28, 1995 and promptly signed (after selective vetoes) by the
Governor. All necessary GRF appropriations for State debt service
and lease rental payments then projected for the biennium were
included in that act. In accordance with the appropriations act,
the significant June 30, 1995 GRF fund balance, after leaving in
the GRF an unreserved and undesignated balance of $70 million,
was transferred to the BSF and other funds including school
assistance funds and, in anticipation of possible federal program
changes, a human services stabilization fund.
The State's incurrence or assumption of debt without a vote of
the people is, with limited exceptions, prohibited by current
State constitutional provisions. The State may incur debt,
limited in amount to $750,000, to cover casual deficits or
failures in revenues or to meet expenses not otherwise provided
for. The Constitution expressly precludes the State from
assuming the debts of any local government or corporation. (An
exception is made in both cases for any debt incurred to repel
invasion, suppress insurrection or defend the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio
voters have authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At April 3, 1996,
$892 million (excluding certain highway bonds payable primarily
from highway use charges) of this debt was outstanding. The only
such State debt at that date still authorized to be incurred were
portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and development may be
outstanding at any one time ($39.6 million outstanding) (b) $240
million of obligations previously authorized for local
infrastructure improvements, no more than $120 million of which
may be issued in any calendar year ($805.4 million outstanding)
and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resources purposes which may be
outstanding at any one time ($47.2 million outstanding with no more than
$50 million to be issued in any one year).
The electors approved, in November 1995, a constitutional
amendment that extends the local infrastructure bond program
(authorizing an additional $1.2 billion of State full faith and
credit obligations to be issued over 10 years for that purpose),
and authorizes additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the
prior $500 million highway obligation authorization, and
authorizes not more than $1.2 billion to be outstanding at any
time and not more than $220 million to be issued in a fiscal
year.
Common resolutions are pending in both houses of the General
Assembly that would submit a constitutional amendment relating to
certain other aspects of the State debt. The proposal would
authorize, among other things, the issuance of State general
obligation debt for a variety of purposes, with debt service on
all State general obligation debt and GRF-supported obligations
not to exceed 5% of the preceding fiscal year's GRF expenditures.
The Constitution also authorizes the issuance of State
obligations for certain purposes, the owners of which do not have
the right to have excises or taxes levied to pay debt service.
Those special obligations include obligations issued by the Ohio
Public Facilities Commission and the Ohio Building Authority, and
certain obligations issued by the State Treasurer, over $4.8
billion of which were outstanding or awaiting delivery at April
3, 1996.
A 1990 constitutional amendment authorizes greater State and
political subdivision participation (including financing) in the
provision of housing. The General Assembly may for that purpose
authorize the issuance of State obligations secured by a pledge
of all or such portion as it authorizes of State revenues or
receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and credit
and taxing power of the State to meeting certain guarantees under
the State's tuition credit program which provides for purchases
of tuition credits, for the benefit of State residents,
guaranteed to cover a specified amount when applied to the cost
of higher education tuition. (A 1965 constitutional provision
that authorized student loan guarantees payable from available
State moneys has never been implemented, apart from a "guarantee
fund" approach funded especially from program revenues.)
The House has adopted a resolution that would submit to the
electors a constitutional amendment prohibiting the General
Assembly from imposing a new tax or increasing an existing tax
unless approved by a three-fifths vote of each house or by a
majority vote of the electors. It cannot be predicted whether
required Senate concurrence to submission will be received.
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from
taxes). By judicial interpretation, these obligations are not
"debt" within constitutional provisions. In general, payment
obligations under lease-purchase agreements of Ohio public
agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are
renewable only upon appropriations being made available for the
subsequent fiscal period.
Local school districts in Ohio receive a major portion
(state-wide aggregate approximately 44% in recent years) of their
operating moneys from State subsidies, but are dependent on local
property taxes, and in 120 districts from voter-authorized income
taxes, for significant portions of their budgets. Litigation,
similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. The trial
court concluded that aspects of the system (including basic
operating assistance) are unconstitutional, and ordered the State
to provide for and fund a system complying with the Ohio
Constitution. The State appealed and a court of appeals reversed
the third court's findings for plaintiff districts. The case is
now pending on appeal in the Ohio Supreme Court. A small number
of the State's 612 local school districts have in any year
required special assistance to avoid year-end deficits. A
current program provides for school district cash need borrowing
directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under
this program totalled $94.5 million for 27 districts (including
$75 million for one district) in FY 1993, $41.1 million for 28
districts in FY 1994, and $71.1 million for 29 districts in FY
1995.
Ohio's 943 incorporated cities and villages rely primarily on
property and municipal income taxes for their operations. With
other subdivisions, they also receive local government support
and property tax relief moneys distributed by the State. For
those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint
State/local commission to monitor the municipality's fiscal
affairs and for development of a financial plan to eliminate
deficits and cure any defaults. Since inception in 1979, these
procedures have been applied to 23 cities and villages for 18 of
them the fiscal situation was resolved and the procedures
terminated.
At present, the State itself does not levy ad valorem taxes on
real or tangible personal property. Those taxes are levied by
political subdivisions and other local taxing districts. The
Constitution has since 1934 limited to 1% of true value in money
the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping
subdivisions, without a vote of the electors or a municipal
charter provision, and statutes limit the amount of that
aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general
obligations of subdivisions are payable from property taxes that
are unlimited as to amount or rate.
At the time of the closing for each Ohio Trust, Special Counsel
to each Ohio Trust for Ohio tax matters rendered an opinion under
then existing Ohio income tax law applicable to taxpayers whose
income is subject to Ohio income taxation substantially to the
effect that:
The Ohio Trust is not taxable as a corporation or otherwise for
purposes of the Ohio personal income tax, Ohio school district
income taxes, the Ohio corporation franchise tax, or the Ohio
dealers in intangibles tax.
Income of an Ohio Trust will be treated as the income of the
Unitholders for purposes of the Ohio personal income tax, Ohio
school district income taxes, Ohio municipal income taxes, and
the Ohio corporation franchise tax in proportion to the
respective interest therein of each Unitholder.
Interest on Ohio Obligations and Territorial Obligations held by
the Ohio Trust is exempt from the Ohio personal income tax, Ohio
municipal income taxes, and Ohio school district income taxes and
is excluded from the net income base of the Ohio corporation
franchise tax when distributed or deemed distributed to
Unitholders.
Proceeds paid under insurance policies, if any, to the Trustee of
an Ohio Trust, representing maturing interest on defaulted
obligations held by the Ohio Trust will be exempt from the Ohio
personal income tax, Ohio school district income taxes, Ohio
municipal income taxes and the net income base of the Ohio
corporation franchise tax if, and to the same extent as, such
interest would be exempt from such taxes if paid directly by the
issuer of such obligations.
Gains and losses realized on the sale, exchange or other
disposition by the Ohio Trust of Ohio Obligations are excluded in
determining adjusted gross and taxable income for purposes of the
Ohio personal income tax, Ohio municipal income taxes and Ohio
school district income taxes, and are excluded from the net
income base of the Ohio corporation franchise tax when
distributed or deemed distributed to Unitholders.
Pennsylvania Trusts. Investors should be aware of certain
factors that might affect the financial conditions of the
Commonwealth of Pennsylvania. Pennsylvania historically has been
identified as a heavy industry state although that reputation has
changed recently as the industrial composition of the
Commonwealth diversified when the coal, steel and railroad
industries began to decline. A more diversified economy was
necessary as the traditionally strong industries in the
Commonwealth declined due to a long-term shift in jobs,
investment and workers away from the northeast part of the
nation. The major sources of growth in Pennsylvania are in the
service sector, including trade, medical and the health services,
education and financial institutions. Pennsylvania's
agricultural industries are also an important component of the
Commonwealth's economic structure, accounting for more than $3.6
billion in crop and livestock products annually, while
agribusiness and food related industries support $39 billion in
economic activity annually.
Non-agricultural employment in the Commonwealth declined by 5.1
percent during the recessionary period from 1980 to 1983. In
1984, the declining trend was reversed as employment grew by 2.9
percent over 1983 levels. From 1983 to 1990, Commonwealth
employment continued to grow each year, increasing an additional
14.3 percent. For the three years ended 1993, unemployment in the
Commonwealth declined 1.2 percent.
Back to back recessions in the early 1980s reduced the
manufacturing sector's employment levels moderately during 1980
and 1981, sharply during 1982, and even further in 1983.
Non-manufacturing employment has increased steadily since 1980 to
its 1993 level of 81.6 percent of total Commonwealth employment.
Consequently, manufacturing employment constitutes a diminished
share of total employment within the Commonwealth.
Manufacturing, contributing 18.4 percent of 1993 non-agricultural
employment, has fallen behind both the services sector and the
trade sector as the largest single source of employment within
the Commonwealth. In 1993, the services sector accounted for
29.9 percent of all non-agricultural employment while the trade
sector accounted for 22.4 percent.
From 1983 to 1989, Pennsylvania's annual average unemployment
rate dropped from 11.8 percent to 4.5 percent, falling below the
national rate in 1986 for the first time in over a decade.
Pennsylvania's annual average unemployment rate remained below
the national average from 1986 until 1990. Slower economic
growth caused the unemployment rate in the Commonwealth to rise
to 6.9 percent in 1991 and 7.5 percent in 1992. The resumption
of faster economic growth resulted in a decrease in the
Commonwealth's unemployment rate to 7.1 percent in 1993. As of
March 1995, the seasonally adjusted unemployment rate for the
Commonwealth was 6.0 percent compared to 5.5 percent for the
United States.
The five-year period from fiscal 1990 through fiscal 1994 was
marked by public health and welfare costs growing at a rate
double the growth rate for all the state expenditures. Rising
caseloads, increased utilization of services and rising prices
joined to produce the rapid rise of public health and welfare
costs at a time when a national recession caused tax revenues to
stagnate and even decline. During the period from fiscal 1989
through fiscal 1993, public health and welfare costs rose by an
average annual rate of 9.4 percent while tax revenues were
growing at an average annual rate of 5.8 percent. Consequently,
spending on other budget programs was restrained to a growth rate
below 4.7 percent and sources of revenues other than taxes became
larger components of fund revenues. Among those sources are
transfers from other funds and hospital and nursing home pooling
of contributions to use as federal matching funds.
Tax revenues declined in fiscal 1991 as a result of the recession
in the economy. A $2.7 billion tax increase enacted for fiscal
1992 brought financial stability to the General Fund. That tax
increase included several taxes with retroactive effective dates
which generated some one-time revenues during fiscal 1992. The
absence of those revenues in fiscal 1993 contributed to the
decline in tax revenues shown for fiscal 1993. Fiscal 1994
revenues increased 4.1 percent, but a decline in other revenues
caused by the end of medical assistance pooled financing in
fiscal 1993 held total revenues to a 1.8 percent gain.
Expenditures for fiscal 1994 rose by 4.3 percent.
It should be noted that the creditworthiness of obligations
issued by local Pennsylvania issuers may be unrelated to the
creditworthiness of obligations issued by the Commonwealth of
Pennsylvania, and there is no obligation on the part of the
Commonwealth to make payment on such local obligations in the
event of default.
Financial information for the principal operating funds of the
Commonwealth is maintained on a budgetary basis of accounting. A
budgetary basis of accounting is used for the purpose of ensuring
compliance with the enacted operating budget and is governed by
applicable statutes of the Commonwealth and by administrative
procedures. The Commonwealth also prepares annual financial
statements in accordance with generally accepted accounting
principles ("GAAP"). The budgetary basis financial information
maintained by the Commonwealth to monitor and enforce budgetary
control is adjusted at fiscal year-end to reflect appropriate
accruals for financial reporting in conformity with GAAP.
.c3.Fiscal 1992 Financial Results. GAAP Basis: During fiscal
1992, the General Fund reported a $1.1 billion operating surplus.
This operating surplus was achieved through legislated tax rate
increases and tax base broadening measures enacted in August 1991
and by controlling expenditures through numerous cost reduction
measures implemented throughout the fiscal year. As a result of
the fiscal 1992 operating surplus, the fund balance increased to
$87.5 million and the unreserved-undesignated deficit dropped to
$138.6 million from its fiscal 1991 level of $1,146.2 million.
Budgetary Basis: Total revenues for the fiscal year were
$14,516.8 million, a $2,654.5 million increase over cash revenues
during fiscal 1991. Largely due to the tax revisions enacted for
the budget, corporate tax receipts totalled $3,761.2 million, up
from $2,656.3 million in fiscal 1991, sales tax receipts
increased by $302 million to $4,499.7 million, and personal
income tax receipts totalled $4,807.4 million, an increase of
$1,443.8 million over receipts in fiscal 1991.
Spending increases in the fiscal 1992 budget were largely
accounted for by increases for education, social services and
corrections programs. Commonwealth funds for the support of
public schools were increased by 9.8 percent to provide a $438
million increase to $4.9 billion for fiscal 1992. Child welfare
appropriations supporting county operated child welfare programs
were increased $67 million, more than 31.5 percent over fiscal
1991. Other social service areas such as medical and cash
assistance also received significant funding increases as costs
rose quickly as a result of the economic recession and high
inflation rates of medical care costs. The costs of corrections
programs, reflecting the marked increase in the prisoner
population, increased by 12 percent. Economic development
efforts, largely funded from bond proceeds in fiscal 1991, were
continued with General Fund appropriations for fiscal 1992.
The budget included the use of several Medicaid pooled financing
transactions. These pooling transactions replaced $135 million
of Commonwealth funds, allowing total spending under the budget
to increase by an equal amount.
.c3.Fiscal 1993 Financial Results. GAAP Basis: The fund
balance of the General Fund increased by $611.4 million during the
fiscal year, led by an increase in the unreserved balance of
$576.8 million over the prior fiscal year balance. At June 30,
1993, the fund balance totalled $698.9 and the
unreserved/undesignated balance totalled $64.4 million. The
increase in the fund balance and a return to a positive
unreserved-undesignated balance provided indication of a
continuing recovery of the Commonwealth's financial condition.
Budgetary Basis: The 1993 fiscal year closed with revenues
higher than anticipated and expenditures about as projected,
resulting in an ending unappropriated balance surplus (prior to
the ten percent transfer to the Tax Stabilization Reserve Fund)
of $242.3 million, slightly higher than estimated. Cash revenues
were $41.5 million above the budget estimate and totalled $14.633
billion representing less than a one percent increase over
revenues for the 1992 fiscal year. A reduction in the personal
income tax rate in July 1992 and the one-time receipt of revenues
from retroactive corporate tax increases in fiscal 1992 were
responsible, in part, for the low revenue growth in fiscal 1993.
Appropriations less lapses totalled $13.870 billion representing
a 1.1 percent increase over expenditures during fiscal 1992. The
low growth in spending is a consequence of a low rate of revenue
growth, significant one-time expenses during fiscal 1992,
increased tax refund reserves to cushion against adverse
decisions on pending litigations, and the receipt of federal
funds for expenditures previously paid out of Commonwealth funds.
By the statue, ten percent of the budgetary basis unappropriated
surplus at the end of a fiscal year is to be transferred to the
Tax Stabilization Reserve Fund. The transfer for the fiscal 1993
balance was $24.2 million. The remaining unappropriated surplus
of $218.0 million was carried forward into the 1994 fiscal year.
.c3.Fiscal 1994 Financial Results. GAAP Basis: The fund
balance increased $194.0 million due largely to an increased
reserve for encumbrances and an increase in other designated
funds. The unreserved-undesignated balance increased by $14.8
million to $72.2 million. Revenues and other sources increased
by 1.8 percent over the prior fiscal year while expenditures and
other uses increased by 4.3 percent. Consequently, the operating
surplus declined to $179.4 million for fiscal 1994 from $686.3
million for fiscal 1993.
Budgetary Basis: Commonwealth revenues during the fiscal year
totalled $15,210.7 million, $38.6 million above the fiscal year
estimate, and 3.9 percent over Commonwealth revenues during the
previous fiscal year. The sales tax was an important contributor
to the higher than estimated revenues. Collections from the
sales tax were $5.124 billion, a 6.1 percent increase from the
prior fiscal year and $81.3 million above estimate. The strength
of collections from the sales tax offset the lower than budgeted
performance of the personal income tax which ended the fiscal
year $74.4 million below estimate. The shortfall in the personal
income tax was largely due to shortfalls in income not subject to
withholding such as interest, dividends and other income. Tax
refunds in fiscal 1994 were reduced substantially below the $530
million amount provided in fiscal 1993. The higher fiscal 1993
amount and the reduced fiscal 1994 amount occurred because reserves
of approximately $160 million were added to fiscal 1993
tax refunds to cover potential payments if the Commonwealth lost
litigation known as Philadelphia Suburban Corp. v. Commonwealth.
Those reserves were carried into fiscal 1994 until the litigation
was decided in the Commonwealth's favor in December 1993 and
$147.3 million of reserves for tax refunds were released.
Expenditures, excluding pooled financing expenditures and net of
all fiscal 1994 appropriation lapses, totalled $14,934.4 million
representing a 7.2 percent increase over fiscal 1993
expenditures. Medical assistance and corrections spending
contributed to the rate of spending growth for the fiscal year.
The Commonwealth maintained an operating balance on a budgetary
basis for fiscal 1994 producing a fiscal year ending
unappropriated surplus of $335.8 million. By state statute, ten
percent ($33.6 million) of that surplus transferred to the Tax
Stabilization Reserve Fund and the remaining balance was carried
over into the fiscal 1995 fiscal year. The balance in the Tax
Stabilization Reserve Fund as of March 31, 1995 was $65.3
million.
.c3.Fiscal 1995 Budget. The approved fiscal 1995 budget
provided for $15,665.7 million of appropriations from
Commonwealth funds, an increase of 4.0 percent over
appropriations, including supplemental appropriations, for fiscal
1994. Medical assistance expenditures represent the largest
single increase in the budget ($221 million) representing a nine
percent increase over the prior fiscal year. The budget includes
a reform of the state-funded public assistance program that added
certain categories of eligibility to the program but also limited
the availability of such assistance to other eligible persons.
Education subsidies to local school districts were increased by
$132.2 million to continue the increased funding for the poorest
school districts in the state.
Several tax reductions were enacted with the fiscal 1995 budget.
Low income working families will benefit from an increase of the
dependent exemption to $3,000 from $1,500 for the first dependent
and from $1000 for all additional dependents. A reduction to the
corporate net income tax rate from 12.25 percent to 9.99 percent
to be phased in over a period of four years was enacted. A net
operating loss provision has been added to the corporate net
income tax and will be phased in over three years with an annual
$500,000 cap on losses used to offset profits. Several other tax
changes to the sales tax, the inheritance tax and the capital
stock and franchise tax were also enacted. Estimated
commonwealth revenue reductions from these tax cuts have been
raised from $166.4 million to $173.4 million based on upward
revised estimates of commonwealth revenues for the fiscal 1995 to
6.3 percent, excluding the effect of the fiscal 1995 tax
reductions, and is largely due to actual and anticipated higher
collections of the corporate net income tax, the sales and use
tax and miscellaneous collections.
After a review of the fiscal 1994 budget in January 1995, $64.9
million of additional appropriation needs were identified for the
fiscal year. Of this amount, the largest are for medical
assistance ($21.8 million) and general assistance cash grants ($10.3 million).
The balance of the additional appropriation
needs are for other public welfare programs, educational
subsidies and office relocation costs due to a fire. The
supplemental appropriations requested are proposed to be funded
from appropriation lapses estimated to total $172 million for the
fiscal year.
With the revised estimates for revenues, appropriations and
lapses for the 1994 fiscal year, an unappropriated balance prior
to transfers to the Tax Stabilization Reserve Fund of $395.5
million is projected, an increase from the $335.8 million fiscal
year 1993 ending balance (prior to transfers).
.c3.Fiscal 1996 Budget. The fiscal 1996 budget was approved by
the Governor on June 30, 1995. The budget includes spending
growth of 2.7%. It includes a reduction of the Corporate Net
Income Tax from 10.99% to 9.99% retroactive to January 1, 1995.
The budget includes a proportionate increase in funds for public
safety and education and a proportionate decrease in funds for
welfare.
.c3.Proposed Fiscal 1997 Budget. On February 6, 1996,
Pennsylvania Governor Tom Ridge presented his proposed budget to
the General Assembly for the fiscal year beginning July 1, 1996.
Ridge's budget proposes that state spending be reduced from
$16.22 billion to $16.19 billion, a $30 million cut. The
proposed budget provides a $60 million tax cut to spur economic
growth, including a new $30 million Job Creation Tax Credit, and
the partial elimination of the sales tax on computer services.
The General Assembly will proceed with its consideration of the
fiscal 1997 budget.
All outstanding general obligation bonds of the Commonwealth are
rated AA- by S&P and A1 by Moody's.
Any explanation concerning the significance of such ratings must
be obtained from the rating agencies. There is no assurance that
any ratings will continue for any period of time or that they
will not be revised or withdrawn.
The City of Philadelphia ("Philadelphia") is the largest city in
the Commonwealth, with an estimated population of 1,585,577
according to the 1990 Census. Philadelphia functions both as a
city of the first-class and a county for the purpose of
administering various governmental programs.
For the fiscal year ending June 30, 1991, Philadelphia
experienced a cumulative General Fund balance deficit of $153.5
million. The audit findings for the fiscal year ending June 30,
1992, place the Cumulative General Fund balance deficit at
$224.9.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first
class cities in remedying fiscal emergencies was enacted by the
General Assembly and approved by the Governor in June, 1991.
PICA is designed to provide assistance through the issuance of
funding debt to liquidate budget deficits and to make factual
findings and recommendations to the assisted city concerning its
budgetary and fiscal affairs. An intergovernmental cooperation
agreement between Philadelphia and PICA was approved by City
Council on January 3, 1992, and approved by the PICA Board and signed
by the Mayor on January 8, 1992. At this time,
Philadelphia is operating under a five year fiscal plan approved
by PICA on April 30, 1996 in which Philadelphia projects a
balanced budget in each of the five years (fiscal years 1997
through 2001) covered by the plan.
In June 1992, PICA issued $474,555,000 of its Special Tax Revenue
Bonds (the "1992 Bonds") to provide financial assistance to
Philadelphia and to liquidate the cumulative General Fund balance
deficit. PICA issued $643,430,000 in July 1993 and $178,675,000
in August 1993 of Special Tax Revenue Bonds to refund certain
general obligation bonds of the city and to fund additional
capital projects. In May 1996, PICA issued $343,030,000 of
Special Tax Revenue Refunding Bonds to (i) advance refund the
1992 Bonds and the 1994 Bonds (ii) pay the premium for a surety
bond to satisfy the Debt Service Reserve Fund Requirement for the
1996 Bonds and, (iii) pay the costs of issuing the 1996 Bonds.
As of the date hereof, the ratings on the City's long-term
obligations supported by payments from the City's General Fund
are rated Baa by Moody's and BBB- by S&P. Any explanation
concerning the significance of such ratings must be obtained from
the rating agencies. There is no assurance that any ratings will
continue for any period of time or that they will not be revised
or withdrawn.
The foregoing information constitutes only a brief summary of
some of the financial difficulties which may impact certain
issuers of bonds and does not purport to be a complete or
exhaustive description of all adverse conditions to which the
issuers of the Bonds in the Pennsylvania Trust are subject.
Additionally, many factors including national economic, social
and environmental policies and conditions, which are not within
the control of the issuers of Bonds, could have an adverse impact
on the financial condition of the State and various agencies and
political subdivisions located in the State. The Sponsor is
unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or
marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Pennsylvania Trust to pay
interest on or principal of the Bonds.
At the time of the closing for each Pennsylvania Trust, Special
Counsel to each Pennsylvania Trust for Pennsylvania tax matters
rendered an opinion under then existing Pennsylvania income tax
law applicable to taxpayers whose income is subject to
Pennsylvania income taxation substantially to the effect that:
(1) Units evidencing fractional undivided interest in a
Pennsylvania Trust, to the extent represented by obligations
issued by the Commonwealth of Pennsylvania, any public authority,
commission, board or other agency created by the Commonwealth of
Pennsylvania, any political subdivision of the Commonwealth of
Pennsylvania or any public authority created by any such
political subdivision, are not taxable under any of the personal
property taxes presently in effect in Pennsylvania
(2) Distributions of interest income to Unitholders that
would not be taxable if received directly by a Pennsylvania
resident are not subject to personal income tax under the Pennsylvania
Tax Reform Code of 1971 nor will such interest be
taxable under the Philadelphia School District Investment Income
Tax imposed on Philadelphia resident individuals
(3) A Unitholder will have a taxable event under the
Pennsylvania state and local income tax referred to in the
preceding paragraph upon the redemption or sale of his Units
(4) Units are subject to Pennsylvania inheritance and
estate taxes
(5) A Unitholder which is a corporation will have a taxable
event under the Pennsylvania Corporate Net Income Tax upon the
redemption or sale of its Units. Interest income distributed to
Unitholders which are corporations is not subject to Pennsylvania
Corporate Net Income Tax or Mutual Thrift Institutions Tax.
However, banks, title insurance companies and trust companies may
be required to take the value of Units into account in
determining the taxable value of their shares subject to Shares
Tax
(6) Gains derived by the Pennsylvania Trust from the sale,
exchange or other disposition of Bonds may be subject to
Pennsylvania personal or corporate income taxes. Those gains
which are distributed by the Pennsylvania Trust to Unitholders
who are individuals may be subject to Pennsylvania Personal
Income Tax. For Unitholders which are corporations, the
distributed gains may be subject to Corporate Net Income Tax or
Mutual Thrift Institutions Tax. Gains which are not distributed
by the Pennsylvania Trust may nevertheless be taxable to
Unitholders if derived by the Pennsylvania Trust from the sale,
exchange or other disposition of Bonds issued on or after
February 1, 1994. Gains which are not distributed by the
Pennsylvania Trust will remain nontaxable to Unitholders if
derived by the Pennsylvania Trust from the sale, exchange or
other disposition of Bond issued prior to February 1, 1994
(7) Any proceeds paid under insurance policies issued to
the Trustee or obtained by issuers or the underwriters of the
Bonds, the Sponsor or others which represent interest on
defaulted obligations held by the Trustee will be excludable from
Pennsylvania gross income if, and to the same extent as, such
interest would have been so excludable if paid in the normal
course by the issuer of the defaulted obligations and
(8) The Pennsylvania Trust is not taxable as a corporation
under Pennsylvania tax laws applicable to corporations.
In rendering its opinion, Special Counsel has not, for timing
reasons, made an independent review of proceedings related to the
issuance of the Bonds. It has relied on the Sponsor for
assurance that the Bonds have been issued by the Commonwealth of
Pennsylvania or by or on behalf of municipalities or other
governmental agencies within the Commonwealth.
Texas Trusts. This summary is derived from sources that are
generally available to investors and is believed to be accurate.
It is based in part on information obtained from various State
and local agencies in Texas, including information provided in
official statements of recent Texas State issues. Historical
data on economic conditions in Texas is presented for background
information only, and should not be relied on to suggest future economic
conditions in the State.
Historically, the primary sources of the State's revenues have
been sales taxes, mineral severance taxes and federal grants.
Due to the collapse of oil and gas prices in 1986 and a resulting
enactment by recent legislatures of new tax measures, including
those increasing the rates of existing taxes and expanding the
tax base for certain taxes, there has been a reordering in the
relative importance of the State's taxes in terms of their
contribution to the State's revenue in any year. Due to the
State's expansion in Medicaid spending and other Health and Human
Services programs requiring federal matching revenues, federal
receipts was the State's number one source of income in fiscal
1994. Sales tax, which had been the main source of revenue for
the previous 12 years prior to fiscal 1993, was second,
accounting for 26.7% of total revenues in fiscal 1994. Licenses,
fees and permits are now the third largest revenue source,
contributing 8.6% of total revenues in fiscal 1994. The motor
fuels tax is now the State's fourth largest revenue source and
second largest tax, accounting for approximately 5.9% of total
revenue in fiscal year 1994. Interest and investment income, the
State's fifth largest revenue source, accounted for 4.6% of the
total revenue in fiscal year 1994. The remainder of the State's
revenues are derived primarily from other excise taxes. The
State currently has no personal or corporate income tax. The
State does, however, impose a corporate franchise tax based in
certain circumstances in part on a corporation's profits.
Heavy reliance on the energy and agricultural sectors for jobs
and income resulted in a general downturn in the Texas economy
beginning in 1982 as those industries suffered significantly.
The effects of this downturn continue to adversely affect the
State's real estate industry and its financial institutions for
several years. As a result of these problems, the general
revenue fund had a $231 million cash deficit at the beginning of
the 1987 fiscal year and ended the 1987 fiscal year with a $745
million cash deficit. In 1987, the Texas economy began to move
toward a period of recovery. The expansion continued in 1988 and
1989. In fiscal year 1994, the State ended the year with a
general revenue fund cash surplus of $2,225 million. This was
the seventh consecutive year that Texas ended a fiscal year with
a positive balance.
The 73rd Legislature meeting in 1993 passed the 1994-1995
biennial all funds budget of $71.2 billion without increasing
state taxes. This was accomplished by cutting spending in
certain areas and increasing federal funding. The State
Comptroller has estimated that total State revenues from all
sources would total $74.1 billion for the 1994-1995 biennium.
The Comptroller has estimated that total revenues for fiscal 1995
will be $37.44 billion, compared to actual revenues of $36.7
billion for fiscal 1994. The revenue estimate for fiscal 1995 is
based on an assumption that the Texas economy will show a steady
growth.
The Texas Constitution prohibits the State from levying ad
valorem taxes on property for general revenue purposes and limits
the rate of such taxes for other purposes to $.35 per $100 of valuation.
The Constitution also permits counties to levy, in
addition to all other ad valorem taxes permitted by the
Constitution, ad valorem taxes on property within the county for
flood control and road purposes in an amount not to exceed $.30
per $100 of valuation. The Constitution prohibits counties,
cities and towns from levying a tax rate exceeding $.80 per $100
of valuation for general fund and other specified purposes.
With certain specific exceptions, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the
State unless the voters of the State, by constitutional
amendment, authorize the issuance of debt (including general
obligation indebtedness backed by the State's taxing power and
full faith and credit). In excess of $8.49 billion of general
obligation bonds have been authorized in Texas and almost $4.54
billion of such bonds are currently outstanding. Of these,
approximately 78.6% were issued by the Veterans' Land Board and
the Texas Public Finance Authority.
Though the full faith and credit of the State are pledged for the
payment of all general obligations issued by the State, much of
that indebtedness is designed to be eventually self-supporting
from fees, payments, and other sources of revenues in some
instances, the receipt of such revenues by certain issuing
agencies has been in sufficient amounts to pay the principal of
and interest on the issuer's outstanding bonds without requiring
the use of appropriated funds.
Pursuant to Article 717k-2, Texas Revised Civil Statutes, as
presently amended, the net effective interest rate for any issue
or series of Bonds in the Texas Trust is limited to 15%.
From the time Standard & Poor's began rating Texas general
obligation bonds in 1956 until early 1986, that firm gave such
bonds its highest rating, "AAA." In April 1986, in response to
the State economic problems, Standard & Poor's downgraded its
rating of Texas general obligation bonds to "AA+." Such rating
was further downgraded in July 1987 to "AA." Moody's Investors
Service, Inc. has rated Texas bonds since prior to the Great
Depression. Moody's upgraded its rating of Texas general
obligation bonds in 1962 from "Aa" to "Aaa," its highest rating,
following the imposition of a statewide sales tax by the
Legislature. Moody's downgraded such rating to "Aa" in March
1987. No prediction can be made concerning future changes in
ratings by national rating agencies of Texas general obligation
bonds or concerning the effect of such ratings changes on the
market for such issues.
The same economic and other factors affecting the State of Texas
and its agencies also have affected cities, counties, school
districts and other issuers of bonds located throughout the
State. Declining revenues caused by the downturn in the Texas
economy in the mid-1980s forced these various other issuers to
raise taxes and cut services to achieve the balanced budget
mandated by their respective charters or applicable State law
requirements. Standard & Poor's and Moody's Investors Service,
Inc. assign separate ratings to each issue of bonds sold by these
other issuers. Such ratings may be significantly lower than the
ratings assigned by such rating agencies to Texas general obligation bonds.
In March, 1993, the Legislature passed a proposed constitutional
amendment which would allow a limited amount of money to be
"recaptured" from wealthy school districts and redistributed to
property-poor school districts. However, the amendment was
rejected by the voters on May 1, 1993, requiring the Legislature
to develop a new school finance plan. At the end of May, 1993,
the Legislature passed a new school finance bill that provides
school districts with certain choices to achieve funding
equalization. The Texas Supreme Court upheld this school finance
law in January, 1995.
A wide variety of Texas laws, rules and regulations affect,
directly, or indirectly, the payment of interest on, or the
repayment of the principal of, Bonds in the Texas Trust. The
impact of such laws and regulations on particular Bonds may vary
depending upon numerous factors including, among others, the
particular type of Bonds involved, the public purpose funded by
the Bonds and the nature and extent of insurance or other
security for payment of principal and interest on the Bonds. For
example, Bonds in the Texas Trust which are payable only from the
revenues derived from a particular facility may be adversely
affected by Texas laws or regulations which make it more
difficult for the particular facility to generate revenues
sufficient to pay such interest and principal, including, among
others, laws and regulations which limit the amount of fees,
rates or other charges which may be imposed for use of the
facility or which increase competition among facilities of that
type or which limit or otherwise have the effect of reducing the
use of such facilities generally, thereby reducing the revenues
generated by the particular facility. Bonds in the Texas Trust,
the payment of interest and principal on which is payable from
annual appropriations, may be adversely affected by local laws or
regulations that restrict the availability of monies with which
to make such appropriations. Similarly, Bonds in the Texas
Trust, the payment of interest and principal on which is secured,
in whole or in part, by an interest in real property may be
adversely affected by declines in real estate values and by Texas
laws that limit the availability of remedies or the scope of
remedies available in the event of a default on such Bonds.
Because of the diverse nature of such laws and regulations and
the impossibility of predicting the nature or extent of future
changes in existing laws or regulations or the future enactment
or adoption of additional laws or regulations, it is not
presently possible to determine the impact of such laws and
regulations on the Bonds in the Texas Trust and, therefore, on
the Units.
The foregoing information constitutes only a brief summary of
some of the general factors which may impact certain issuers of
Bonds and does not purport to be a complete or exhaustive
description of all adverse conditions to which the issuers of
Bonds held by the Texas Trust are subject. Additionally, many
factors including national economic, social and environmental
policies and conditions, which are not within the control of the
issuers of the Bonds, could affect or could have an adverse impact on the
financial condition of the issuers. The Sponsor is
unable to predict whether or to what extent such factors or other
factors may affect the issuers of the Bonds, the market value or
marketability of the Bonds or the ability of the respective
issuers of the Bonds acquired by the Texas Trust to pay interest
on or principal of the Bonds.
At the time of the closing for the Texas Trust, Special Counsel
to the Fund for Texas tax matters rendered an opinion under then
existing Texas income tax law applicable to taxpayers whose
income is subject to Texas income taxation substantially to the
effect that:
(1) Neither the State nor any political subdivision of the
State currently imposes an income tax on individuals. Therefore,
no portion of any distribution received by an individual
Unitholder of the Trust in respect of his Units, including a
distribution of the proceeds of insurance in respect of such
Units, is subject to income taxation by the State or any
political subdivision of the State
(2) Except in the case of certain transportation
businesses, savings and loan associations and insurance
companies, no Unit of the Trust is taxable under any property tax
levied in the State
(3) The "inheritance tax" of the State, imposed upon
certain transfers of property of a deceased resident individual
Unitholder, may be measured in part upon the value of Units of
the Trust included in the estate of such Unitholder and
(4) With respect to any Unitholder which is subject to the
State corporate franchise tax, Units in the Trust held by such
Unitholder, and distributions received thereon, will be taken
into account in computing the "taxable capital" of the Unitholder
allocated to the State, one of the bases by which such franchise
tax is currently measured (the other being a corporation's "net
capital earned surplus," which is, generally, its net corporate
income plus officers and directors income).
The opinion set forth in clause (2), above, is limited to the
extent that Units of the Trust may be subject to property taxes
levied in the State if held on the relevant date: (i) by a
transportation business described in V.TA., Tax Code,
Subchapter A, Chapter 24 (ii) by a savings and loan association
formed under the laws of the State (but only to the extent
described in section 11.09 of the Texas Savings and Loan Act,
Vernon's Ann. Civ. St. art. 852a) or (iii) by an insurance
company incorporated under the laws of the State (but only to the
extent described in V.A.T.S., Insurance Code, Art. 4.01). Each
Unitholder described in the preceding sentence should consult its
own tax advisor with respect to such matters.
Corporations subject to the State franchise tax should be aware
that in its first called 1991 session, the Texas Legislature
adopted, and the Governor has signed into law, certain
substantial amendments to the State corporate franchise tax, the
effect of which may be subject to taxation all or a portion of
any gains realized by such a corporate Unitholder upon the sale,
exchange or other disposition of a Unit. The amendments are
applicable to taxable periods commencing January 1991, and to each taxable
period thereafter. Because no authoritative
judicial, legislative or administrative interpretation of these
amendments has issued, and there remain many unresolved questions
regarding its potential effect on corporate franchise taxpayers,
each corporation which is subject to the State franchise tax and
which is considering the purchase of Units should consult its tax
advisor regarding the effect of these amendments.
PUBLIC OFFERING OF UNITS
Public Offering Price. Units of each State Trust are
offered at the Public Offering Price thereof. The Public Offering
Price per Unit is equal to the aggregate bid side evaluation of
the Municipal Bonds in the State Trust's portfolio (as determined
pursuant to the terms of a contract with the Evaluator, by a
non-affiliated firm regularly engaged in the business of
evaluating, quoting or appraising comparable securities), plus or
minus cash, if any, in the Principal Account, held or owned by
the State Trust, plus accrued interest to the settlement date
divided by the number of outstanding Units of the State Trust,
plus the sales charge applicable to a Unit of such State Trust.
The sales charge is based upon the dollar weighted average
maturity of the State Trust and is determined in accordance with
the table set forth below. For purposes of this computation,
Municipal Bonds will be deemed to mature on their expressed
maturity dates unless: (a) the Municipal Bonds have been called
for redemption or funds or securities have been placed in escrow
to redeem them on an earlier call date, in which case such call
date will be deemed to be the date upon which they mature or (b)
such Municipal Bonds are subject to a "mandatory tender," in
which case such mandatory tender will be deemed to be the date
upon which they mature. The effect of this method of sales
charge computation will be that different sales charge rates will
be applied to the State Trust based upon the dollar weighted
average maturity of such State Trust's portfolio, in accordance
with the following schedule:
<TABLE>
<CAPTION> PERCENT OF PERCENT
DOLLAR WEIGHTED PUBLIC OF NET
AVERAGE YEARS OFFERING AMOUNT
TO MATURITY PRICE INVESTED
<S> <C> <C>
0 to .99 years 0.00% 0.000%
1 to 3.99 years 2.00 2.041%
4 to 7.99 years 3.50 3.627
8 to 14.99 years 4.50 4.712
15 or more years 5.50 5.820
</TABLE>
The sales charge per Unit will be reduced as set forth below:
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
AMOUNT OF INVESTMENT SALES CHARGE (% OF PUBLIC OFFERING PRICE)
<S> <C> <C> <C>
$1,000 to $99,999 3.50% 4.50% 5.50%
$100,000 to $499,999 3.25 4.25 5.00
$500,000 to $999,999 3.00 4.00 4.50
$1,000,000 or more 2.75 3.75 4.00
</TABLE>
_________________________
* If the dollar weighted average maturity of a State Trust is from
1 to 3.99 years, the sales charge is 2% and 1.5% of the
Public Offering Price for purchases of $1,000 to $249,999 and
$250,000 or more, respectively.
The reduced sales charges as shown on the preceding charts will
apply to all purchases of Units on any one day by the same person
from the same Underwriter or dealer and for this purpose,
purchases of Units of a State Trust will be aggregated with
concurrent purchases of Units as any other unit investment trust
that may be offered by the Sponsor. Additionally, Units
purchased in the name of a spouse or child (under 21) of such
purchaser will be deemed to be additional purchases by such
purchaser. The reduced sales charges will also be applicable to
a trust or other fiduciary purchasing for a single trust estate
or single fiduciary account.
The Sponsor intends to permit officers, directors and employees
of the Sponsor and Evaluator, and at the discretion of he
Sponsor, registered representatives of selling firms to purchase
Units of the Trust without a sales charge, although a transaction
processing fee may be imposed on such trades.
Units may be purchased in the primary or secondary market at the
Public Offering Price less the concession the Sponsor typically
allows to dealers and other selling agents for purchases (see
"Public Distribution of Units") by investors who purchase Units
through registered investment advisers, certified financial
planners or registered broker-dealers who in each case either
charge periodic fees for financial planning, investment advisory
or asset management services, or provide such services in
connection with the establishment of an investment account for
which a comprehensive "wrap fee" charge is imposed.
The Public Offering Price per Unit of a State Trust on the date
shown on the cover page of Part Two of the Prospectus or on any
subsequent date will vary from the amounts stated under
"Essential Information" in Part Two in accordance with
fluctuations in the prices of the underlying Municipal Bonds and
the amount of accrued interest on the Units. The aggregate bid
side evaluation of the Municipal Bonds shall be determined (a) on
the basis of current bid prices of the Municipal Bonds, (b) if
bid prices are not available for any particular Municipal Bonds,
on the basis of current bid prices for comparable bonds, (c) by
determining the value of the Municipal Bonds on the bid side of
the market by appraisal, or (d) by any combination of the above.
Except as described in "Insurance on the Portfolios" above, the
Evaluator will not attribute any value to the insurance obtained
by a State Trust. On the other hand, the value of insurance
obtained by an issuer of Municipal Bonds is reflected and
included in the market value of such Municipal Bonds.
In any case, the Evaluator will consider the ability of an
insurer to meet its commitments under the Trust's insurance
policy (if any). For example, if a State Trust were to hold a
municipality's Municipal Bonds which had significantly
deteriorated in credit quality, the Evaluator would first
consider in its evaluation the market price of the Municipal
Bonds at their lower credit rating. The Evaluator would also
attribute a value to the insurance feature of the Municipal Bonds which
would be equal to the difference between the market value
of such Municipal Bonds and the market value of bonds of a
similar nature which were of investment grade rating. It is the
position of the Sponsor that this is a fair method of valuing
insured Municipal Bonds and reflects a proper valuation method in
accordance with the provisions of the Investment Company Act of
1940. For a description of the circumstances under which a full
or partial suspension of the right of Unitholders to redeem their
Units may occur, see "Redemption" below.
The foregoing evaluations and computations shall be made as of
the Evaluation Time stated under "Essential Information" in Part
Two, on each business day effective for all sales made during the
preceding 24-hour period.
The interest on the Municipal Bonds in each State Trust, less the
related estimated fees and expenses, is estimated to accrue in
the annual amounts per Unit set forth under "Essential
Information" in Part Two. The amount of net interest income
which accrues per Unit may change as Municipal Bonds mature or
are redeemed, exchanged or sold, or as the expenses of a State
Trust change or as the number of outstanding Units of such State
Trust changes.
Payment for Units must be made on or before the third business
day following the order for purchase (the "settlement date"). A
purchaser becomes the owner of Units on the settlement date.
Cash, if any, made available to the Sponsor prior to the date of
settlement for the purchase of Units may be used in the Sponsor's
business and may be deemed to be a benefit to the Sponsor,
subject to the limitations of the Securities Exchange Act of
1934. If a Unitholder desires to have certificates representing
Units purchased, such certificates will be delivered as soon as
possible following a written request therefor, or shortly
thereafter. For information with respect to redemption of Units
purchased, but as to which certificates requested have not been
received, see "Redemption" below.
.c3.Accrued Interest_Kemper Tax-Exempt Insured Income Trust and
Ohio Tax-Exempt Bond Trust. In the case of series of Kemper
Tax-Exempt Insured Income Trust, Multi-State Series and Ohio
Tax-Exempt Bond Trust Series 11-22 accrued interest consist of
two elements as described in this section. The first element
arises as a result of accrued interest which is the accumulation
of unpaid interest on a bond from the last day on which interest
thereon was paid. Interest on Bonds in the State Trusts is
actually paid either monthly or semi-annually to the State Trust.
However, interest on the bonds in the State Trusts is accounted
for daily on an accrual basis. Because of this, a State Trust
always has an amount of interest earned but not yet collected by
the Trustee because of coupons that are not yet due. For this
reason, the Public Offering Price of Units will have added to it
the proportionate share of accrued and undistributed interest to
the date of settlement.
The Trustee advanced the amount of accrued interest as of the
First Settlement Date (which is three business days following the
Date of Deposit of the applicable State Trust) and the same was distributed
to the Sponsor. Such advance was repaid to the
Trustee through the first receipts of interest received on the
Municipal Bonds. Consequently, the amount of accrued interest
added to the Public Offering Price of Units included only accrued
interest arising after the First Settlement Date of a State
Trust, less any distributions from the Interest Account
subsequent to this First Settlement Date. Since the First
Settlement Date was the date of settlement for anyone who ordered
Units on the Date of Deposit, no accrued interest was added to
the Public Offering Price of Units ordered on the Date of
Deposit.
The second element of accrued interest arises because of the
structure of the Interest Account. The Trustee has no cash for
distribution to Unitholders until it receives interest payments
on the Bonds in a State Trust. The Trustee is obligated to
provide its own funds, at times, in order to advance interest
distributions. The Trustee will recover these advancements when
such interest is received. Interest Account balances are
established so that it will not be necessary on a regular basis
for the Trustee to advance its own funds in connection with such
interest distributions. The Interest Account balances are also
structured so that there will generally be positive cash balances
and since the funds held by the Trustee will be used by it to
earn interest thereon, it benefits thereby (see "Expenses of the
Trust").
Accrued interest is computed as of the initial Record Date of the
State Trusts. On the date of the first distribution of interest
to Unitholders after the First Settlement Date, the interest
collected by the Trustee will be sufficient to repay its
advances, to allow for accrued interest under the monthly,
quarterly and semi-annual plans of distribution and to generate
enough cash to commence distributions to Unitholders. If a
Unitholder sells or redeems all or a portion of his Units or if
the Bonds in a State Trust are sold or otherwise removed or if a
State Trust is liquidated, he will receive at that time his
proportionate share of the accrued interest computed to the
settlement date in the case of sale or liquidation and to the
date of tender in the case of redemption in such State Trust.
.c3.Purchased and Daily Accrued Interest. In the case of a
State Trust in Series 1-18 of Kemper Defined Funds, accrued
interest consists of two elements as described in this section.
The first element arises as a result of accrued interest which is
the accumulation of unpaid interest on a bond from the later of
the last day on which interest thereon was paid or the date of
original issuance of the bond. Interest on the coupon Bonds in a
State Trust is paid semi-annually to the State Trust. A portion
of the aggregate amount of such accrued interest on the Bonds in
the Trust to the First Settlement Date (which is three business
days following the Date of Deposit of the applicable State Trust)
of the State Trust is referred to herein as "Purchased Interest."
Included in the Public Offering Price of the State Trust Units is
the Purchased Interest. In an effort to reduce the amount of
Purchased Interest which would otherwise have to be paid by Unitholders,
the Trustee may have advanced a portion of the
accrued interest to the Sponsor as the Unitholder of record as of
the First Settlement Date. The second element of accrued
interest arises because the estimated net interest on the Units
in the State Trust is accounted for daily on an accrual basis
(herein referred to as "Daily Accrued Interest"). Because of
this, the Units always have an amount of interest earned but not
yet paid or reserved for payment. For this reason, the Public
Offering Price of Units in any series of Kemper Defined Funds
will include the proportionate share of Daily Accrued Interest to
the date of settlement.
If a Unitholder in Series 1-18 of Kemper Defined Funds sells or
redeems all or a portion of his Units or if the bonds are sold or
otherwise removed or if the State Trust is liquidated, he will
receive at that time his proportionate share of the Purchased
Interest and Daily Accrued Interest computed to the settlement
date in the case of sale or liquidation and to the date of tender
in the case of redemption in the State Trust.
.c3.Accrued Interest_Kemper Defined Funds and EVEREN Unit
Investment Trusts. In the case of Kemper Defined Funds Series
19 and subsequent series and all series of EVEREN Unit Investment
Trusts, accrued interest is treated as described in this section.
Accrued interest is the accumulation of unpaid interest on a
security from the last day on which interest thereon was paid.
Interest on Securities generally is paid semi-annually (monthly
in the case of Ginnie Maes, if any) although a Trust accrues such
interest daily. Because of this, a Trust always has an amount of
interest earned but not yet collected by the Trustee. For this
reason, with respect to sales settling subsequent to the First
Settlement Date, the Public Offering Price of Units will have
added to it the proportionate share of accrued interest to the
date of settlement. Unitholders will receive on the next
distribution date of a Trust the amount, if any, of accrued
interest paid on their Units.
In an effort to reduce the amount of accrued interest which would
otherwise have to be paid in addition to the Public Offering
Price in the sale of Units to the public, the Trustee will
advance the amount of accrued interest as of the First Settlement
Date and the same will be distributed to the Sponsor as the
Unitholder of record as of the First Settlement Date.
Consequently, the amount of accrued interest to be added to the
Public Offering Price of Units will include only accrued interest
from the First Settlement Date to the date of settlement, less
any distributions from the Interest Account subsequent to the
First Settlement Date.
Because of the varying interest payment dates of the Securities,
accrued interest at any point in time will be greater than the
amount of interest actually received by the Trusts and
distributed to Unitholders. Therefore, there will always remain
an item of accrued interest that is added to the value of the
Units. If a Unitholder sells or redeems all or a portion his
Units, he will be entitled to receive his proportionate share of
the acrued interest from the purchaser of his Units. Since the Trustee
has the use of the funds held in the Interest Account for
distributions to Unitholders and since such Account is
non-interest-bearing to Unitholders, the Trustee benefits
thereby.
Public Distribution of Units. The Sponsor has qualified
Units of each State Trust for sale in the State for which such
State Trust is named. Units will be sold through the
Underwriters, through dealers who are members of the National
Association of Securities Dealers, Inc. and through others.
Sales may be made to or through dealers at prices which represent
discounts from the Public Offering Price as set forth in the
table below. Certain commercial banks are making Units of the
Trust available to their customers on an agency basis. A portion
of the sales charge paid by their customers is retained by or
remitted to the banks, in the amounts shown in the table below.
Under the Glass-Steagall Act, banks are prohibited from
underwriting Trust Units however, the Glass-Steagall Act does
permit certain agency transactions and the banking regulators
have indicated that these particular agency transactions are
permitted under such Act. In addition, state securities laws on
this issue may differ from the interpretations of federal law
expressed herein and banks and financial institutions may be
required to register as dealers pursuant to State law.
<TABLE>
<CAPTION>
DOLLAR WEIGHTED AVERAGE YEARS TO MATURITY*
4 TO 7.99 8 TO 14.99 15 OR MORE
AMOUNT OF INVESTMENT DISCOUNT PER UNIT (% OF PUBLIC OFFERING PRICE)
<S> <C> <C> <C>
$1 to $99,999 2.00% 3.00% 4.00%
$100,000 to $499,999 1.75 2.75 3.50
$500,000 to $999,999 1.50 2.50 3.00
$1,000,000 or more 1.25 2.25 2.50
</TABLE>
_______________
* If the dollar weighted average maturity of a Trust is from 1
to 3.99 years, the concession or agency commission is 1.00% of
the Public Offering Price.
In addition to such discounts, the Sponsor may, from time to
time, pay or allow an additional discount, in the form of cash or
other compensation, to dealers employing registered
representatives who sell, during a specified time period, a
minimum dollar amount of Units of the Trust and other unit
investment trusts underwritten by the Sponsor. The Sponsor
reserves the right to change the levels of discounts at any time.
The difference between the discount allowed to firms and the
sales charge will be retained by the Sponsor. The Sponsor
reserves the right to reject, in whole or in part, any order for
the purchase of Units.
Profits of Sponsor. The Sponsor will retain a portion of
the sales charge on each Unit sold representing the difference
between the Public Offering Price of the Units and the discounts
allowed to firms selling such Units. The Sponsor may realize
additional profit or loss as a result of the possible change in
the daily evaluation of the Municipal Bonds in the State Trusts,
since the value of its inventory of Units may increase or decrease.
MARKET FOR UNITS
While not obligated to do so, the Sponsor intends to, subject to
change at any time, maintain a market for Units of the State
Trusts offered hereby and to offer to purchase said Units at
prices, as determined by the Evaluator, based on the aggregate
bid prices of the underlying Municipal Bonds of such State
Trusts, together with accrued interest to the expected date of
settlement. Accordingly, Unitholders who wish to dispose of
their Units should inquire of their broker or bank as to current
market prices of the Units in order to determine whether there is
in existence any price in excess of the redemption price and, if
so, the amount there of prior to making a tender for redemption
to the Trustee.
The offering price of any Units resold by the Sponsor will be in
accord with that described in the currently effective Prospectus
describing such Units. Any profit or loss resulting from the
resale of such Units will belong to the Sponsor. The Sponsor may
suspend or discontinue purchase of Units of any State Trust if
the supply of Units exceeds demand, or for other business
reasons.
REDEMPTION
A Unitholder who does not dispose of Units in the secondary
market described above may cause their Units to be redeemed by
the Trustee by making a written request to the Trustee, The Bank
of New York, 101 Barclay Street, New York, New York 10286 and, in
the case of Units evidenced by a certificate, by tendering such
certificate to the Trustee, properly endorsed or accompanied by a
written instrument or instruments of transfer in a form
satisfactory to the Trustee. Unitholders must sign such written
request, and such certificate or transfer instrument, exactly as
their names appear on the records of the Trustee and on any
certificate representing the Units to be redeemed. If the amount
of the redemption is $25,000 or less and the proceeds are payable
to the Unitholder(s) of record at the address of record, no
signature guarantee is necessary for redemptions by individual
account owners (including joint owners). Additional
documentation may be requested, and a signature guarantee is
always required, from corporation, executors, administrators,
trustees, guardians or associations. The signatures must be
guaranteed by a participant in the Securities Transfer Agents
Medallion Program ("STAMP") or such other guarantee program in
addition to, or in substitution for, STAMP, as may be acceptable
to the Trustee. A certificate should only be sent by registered
or certified mail for the protection of the Unitholder. Since
tender of the certificate is required for redemption when one has
been issued, Units represented by a certificate cannot be
redeemed until the certificate representing the Units has been
received by the purchaser.
Redemption shall be made by the Trustee on the third business day
following the day on which a tender for redemption is received
(the "Redemption Date"), by payment of cash equivalent to the
Redemption Price for such State Trust, determined as set forth
below under "Computation of Redemption Price," as of the Evaluation Time
stated under "Essential Information" in Part Two,
next following such tender, multiplied by the number of Units
being redeemed. The price received upon redemption might be more
or less than the amount paid by the Unitholder depending on the
value of the Municipal Bonds in the State Trust's portfolio at
the time of redemption. Any Units redeemed shall be cancelled
and any undivided fractional interest in the State Trust will be
extinguished.
Under regulations issued by the Internal Revenue Service, the
Trustee is required to withhold a specified percentage of the
principal amount of a Unit redemption if the Trustee has not been
furnishing the redeeming Unitholder's tax identification number
in the manner required by such regulations. Any amount so
withheld is transmitted to the Internal Revenue Service and may
be recovered by the Unitholder only when filing a tax return.
Under normal circumstances the Trustee obtains the Unitholder's
tax identification number from the selling broker. However, any
time a Unitholder elects to tender Units for redemption, such
Unitholder should make sure that the Trustee has been provided a
certified tax identification number in order to avoid this
possible "back-up withholding." In the event the Trustee has not
been previously provided such number, one must be provided at the
time redemption is requested.
Any amounts paid on redemption representing interest shall be
withdrawn from the Interest Account of such State Trust to the
extent that funds are available for such purpose. All other
amounts paid on redemption shall be withdrawn from the Principal
Account for such State Trust. The Trustee is empowered to sell
Municipal Bonds from the portfolio of a State Trust in order to
make funds available for the redemption of Units of such State
Trust. Such sale may be required when Municipal Bonds would not
otherwise be sold and might result in lower prices than might
otherwise be realized. To the extent Municipal Bonds are sold,
the size and diversity of such State Trust will be reduced.
The Trustee is irrevocably authorized in its discretion, if the
Sponsor does not elect to purchase any Units tendered for
redemption, in lieu of redeeming such Units, to sell such Units
in over-the-counter market for the account of tendering
Unitholders at prices which will return to such Unitholders
amounts in cash, net after brokerage commissions, transfer taxes
and other charges, equal to or in excess of the Redemption Price
for such Units. In the event of any such sale, the Trustee shall
pay the net proceeds thereof to the Unitholders on the day they
would otherwise be entitled to receive payment of the Redemption
Price.
The right of redemption may be suspended and payment postponed
(1) for any period during which the New York Stock Exchange is
closed, other than customary weekend and holiday closings, or
during which (as determined by the Securities and Exchange
Commission) trading on the New York Stock Exchange is restricted
(2) for any period during which an emergency exists as a result
of which disposal by the Trustee of Municipal Bonds is not
reasonably practicable or it is not reasonably practicable to
fairly determine the value of the underlying Municipal Bonds in accordance
with the Agreement or (3) for such other period as
the Securities and Exchange Commission may by order permit. The
Trustee is not liable to any person in any way for any loss or
damage which may result from any such suspension or postponement.
Computation of Redemption Price. The Redemption Price for
Units of each State Trust is computed by the Evaluator as of the
Evaluation Time stated under "Essential Information" on Part Two
next occurring after the tendering of a Unit for redemption and
on any other business day desired by it, by:
A. adding (1) the principal cash on hand held or owed by
the State Trust (2) the aggregate value of the Municipal Bonds
held in the State Trust, as determined by the Evaluator on the
basis of bid prices therefor and (3) interest accrued and unpaid
on the Municipal Bonds in the State Trust as of the date of
computation and
B. deducting therefrom (1) amounts representing any
applicable taxes or governmental charges payable out of the State
Trust and for which no deductions have been previously made for
the purpose of additions to the Reserve Account described under
"Expenses of the Trust" (2) amounts representing estimated
accrued expenses of the State Trust including, but not limited
to, unpaid fees and expenses of the Trustee (including legal and
auditing fees and insurance costs), the Evaluator, the Sponsor
and bond counsel, if any (3) cash held for distribution to
Unitholders of record as of the business day prior to the
evaluation being made and (4) other liabilities incurred by the
State Trust and
C. finally, dividing the results of such computation by
the number of Units of the State Trust outstanding as of the date
thereof.
UNITHOLDERS
Ownership of Units. Ownership of Units of any State Trust
will not be evidenced by a certificate unless a Unitholder or the
Unitholder's registered broker/dealer or the clearing agent for
such broker/dealer makes a written request to the Trustee.
Certificates, if issued, will be so noted on the confirmation
statement sent to the Underwriter and broker. Non-receipt of
such certificate(s) must be reported to the Trustee within one
year otherwise, a 2% surety bond fee will be required for
replacement.
Units are transferable by making a written request to the Trustee
and, in the case of Units evidenced by a certificate, presenting
and surrendering such certificate to the Trustee properly
endorsed or accompanied by a written instrument or instruments of
transfer. Unitholders must sign such written request, and such
certificate or transfer instrument, exactly as their names appear
on the records of the Trustee and on any certificate representing
the Units to be transferred. Such signatures must be guaranteed
by a participant in the Securities Transfer Agents Medallion
Program ("STAMP") or such other signature guarantee program in
addition to, or in substitution for, STAMP, as may be acceptable
to the Trustee.
Units may be purchased and certificates, if requested, will be issued in
denominations of one Unit or any multiple thereof
subject to any minimum investment requirement established by the
Sponsor from time to time. Any certificate issued will be
numbered serially for identification, issued in fully registered
form and will be transferable only on the books of the Trustee.
The Trustee may require a Unitholder to pay a fee for each
certificate reissued or transferred, and to pay any governmental
charge that may be imposed in connection with each such transfer
or interchange. The Trustee at the present time does not intend
to charge for the normal transfer or interchange of certificates.
Destroyed, stolen, mutilated or lost certificates will be
replaced upon delivery to the Trustee of satisfactory indemnity
(generally amounting to not more than 3% of the market value of
the Units), affidavit of loss, evidence of ownership and payment
of expenses incurred.
Distributions to Unitholders. Interest Distributions:
Interest received by each State Trust, including any portion of
the proceeds (including insurance proceeds) from a disposition of
Municipal Bonds which represents accrued interest, is credited by
the Trustee to the Interest Account for such State Trust. All
other receipts are credited by the Trustee to a separate
Principal Account for the State Trust. The Trustee normally has
no cash for distribution to Unitholders until it receives
interest payments on the Bonds in the State Trust. Since
municipal interest usually is paid semi-annually, during the
initial months of the Trust, the Interest Account of each State
Trust, consisting of accrued but uncollected interest and
collected interest (cash), will be predominantly the uncollected
accrued interest that is not available for distribution. On the
dates set forth under "Essential Information" for each State
Trust in Part Two the Trustee will commence distributions, in
part from funds advanced by the Trustee.
Thereafter, assuming the State Trust retains its original size
and composition, after deduction of the fees and expenses of the
Trustee, the Sponsor and Evaluator and reimbursements (without
interest) to the Trustee for any amount advanced to a State
Trust, the Trustee will normally distribute on each Interest
Distribution Date (the fifteenth of the month) or shortly
thereafter to Unitholders of record of such State Trust on the
preceding Record Date. Unitholders of the State Trusts will
receive an amount substantially equal to one-twelfth, one-fourth
or one-half (depending on the distribution option selected except
in series of Kemper Defined Funds in which case only monthly
distributions are available) of such Unitholders' pro rata share
of the estimated net annual interest income to the Interest
Account of such State Trust. However, interest earned at any
point in time will be greater than the amount actually received
by the Trustee and distributed to the Unitholders. Therefore,
there will always remain an item of accrued interest that is
added to the daily value of the Units. If Unitholders of a State
Trust sell or redeem all or a portion of their Units, they will
be paid their proportionate share of the accrued interest of such
State Trust to, but not including, the fifth business day after the
date of a sale or to the date of tender in the case of a
redemption.
In order to equalize distributions and keep the undistributed
interest income of the Trusts at a low level, all Unitholders of
record in such State Trust on the first Record Date received and
interest distribution on the first Interest Distribution Date.
Because the period of time between the first Interest
Distribution Date and the regular distribution dates may not have
been a full period, the first regular distributions may have been
partial distributions.
Persons who purchase Units between a Record Date and a
Distribution Date will receive their first distribution on the
second Distribution Date following their purchase of Units.
Since interest on Municipal Bonds in the State Trusts is payable
at varying intervals, usually in semi-annual installments, and
distributions of income are made to Unitholders at different
intervals from receipt of interest, the interest accruing to a
State Trust may not be equal to the amount of money received and
available for distribution from the Interest Account. Therefore,
on each Distribution Date the amount of interest actually
deposited in the Interest Account of a State Trust and available
for distribution may be slightly more or less than the interest
distribution made. In order to eliminate fluctuations in
interest distributions resulting from variances, the Trustee is
authorized by the Trust Agreements to advance such amounts as may
be necessary to provide interest distributions of approximately
equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available in the Interest
Account for such State Trust.
Unitholders of any series of Kemper Tax-Exempt Income Trust,
Multi-State Series or Ohio Tax-Exempt Bond Trust, Series 11-22
who desire to receive distributions on a quarterly or semi-annual
basis may elect to do so, however, only monthly distributions are
available for other Trust. Record Dates for monthly
distributions will be the first day of each month Record Dates
for quarterly distributions will be the first day of January,
April, July and October and Record Dates for semi-annual
distributions will be the first day of January and July. The
distribution option selected by a Unitholder of any series of
Kemper Tax-Exempt Income Trust, Multi-State Series or Ohio
Tax-Exempt Bond Trust, Series 1-10 will remain in effect until
changed by written notice to the Trustee.
Unitholders of any series of Kemper Tax-Exempt Insured Income
Trust, Multi-State Series or Ohio Tax-Exempt Bond Trust, Series
11-22 purchasing Units of the State Trusts in the secondary
market will initially receive distributions in accordance with
the election of the prior owner. Unitholders of such Trusts
desiring to change their distribution option may do so by sending
written notice to the Trustee, together with their certificate
(if one was issued). Certificates should only be sent by
registered or certified mail to minimize the possibility of loss.
If written notice and any certificate are received by the Trustee
not later than January 1 or July 1 of a year, the change will become
effective for distributions commencing with February 15 or
August 15, respectively, of that year. If notice is not received
by the Trustee, the Unitholder will be deemed to have elected to
continue with the same option.
Principal Distributions. The Trustee will distribute on
each semi-annual Distribution Date (or, in the case of certain
Trusts, on each Distribution Date) or shortly thereafter, to each
Unitholder of record of the State Trust of the preceding Record
Date, an amount substantially equal to such Unitholder's pro rata
share of the cash balance, if any, in the Principal Account of
such State Trust computed as of the close of business on the
preceding Record Date. However, no distribution will be required
if the balance in the Principal Account is less than $1.00 per
Unit (or $.001 per Unit for certain Series). Except for Series
of certain Trusts, if such balance is between $5.00 and $10.00
per Unit, distributions will be made on each quarterly
Distribution Date and if such balance exceeds $10.00 per Unit,
such amounts will be distributed on the next monthly Distribution
Date.
Statements to Unitholders. With each distribution, the
Trustee will furnish each Unitholder a statement of the amount of
interest and the amount of other receipts, if any, which are
being distributed, expressed in each case as a dollar amount per
Unit.
The accounts of each State Trust are required to be audited
annually by independent certified public accountants designated
by the Sponsor, unless the Trustee determines that such an audit
would not be in the best interest of the Unitholders of such
State Trust. The accountants' report will be furnished by the
Trustee to any Unitholder of such State Trust upon written
request.
Within a reasonable period of time after the end of each calendar
year, the Trustee shall furnish to each person who at any time
during the calendar year was a Unitholder of a State Trust a
statement covering the calendar year, setting forth: A. As to
the Interest Account: 1. The amount of interest received on the
Municipal Bonds in such State Trust, and the percentage of such
amount by states and territories in which the issuers of such
Municipal Bonds are located 2. The amount paid from the Interest
Account of such State Trust representing accrued interest of any
Units redeemed 3. The deductions from the Interest Account of
such State Trust for applicable taxes, if any, fees and expenses
(including insurance costs and auditing fees) of the Trustee, the
Evaluator, the Sponsor and of bond counsel, if any 4. Any
amounts credited by the Trustee to a Reserve Account for such
State Trust described under "Expenses of the Trust" and 5. The
net amount remaining after such payments and deductions,
expressed both as a total dollar amount and a dollar amount per
Unit outstanding on the last business day of such calendar year
B. As to the Principal Account: 1. The dates of the maturity,
liquidation or redemption of any of the Municipal Bonds in such
State Trust and the net proceeds received therefrom excluding any
portion credited to the Interest Account 2. The amount paid from
the Principal Account of such Series representing the principal of any
Units redeemed 3. The deductions from the Principal
Account of such Series for payment of applicable taxes, if any,
fees and expenses (including insurance costs and auditing
expenses) of the Trustee, the Evaluator, the Sponsor and of bond
counsel, if any 4. Any amounts credited by the Trustee to a
Reserve Account for such Series described under "Expenses of the
Trust" and 5. The net amount remaining after distributions of
principal and deductions, expressed both as a dollar amount and
as a dollar amount per Unit outstanding on the last business day
of such calendar year C. The following information: 1. A list
of the Municipal Bonds in such State Trust as of the last
business day of such calendar year 2. The number of Units of
such State Trust outstanding on the last business day of such
calendar year 3. The Redemption Price of such State Trust based
on the last Trust Fund Evaluation made during such calendar year
and 4. The amount actually distributed during such calendar year
from the Interest and Principal Accounts of such State Trust
separately stated, expressed both as total dollar amounts and as
dollar amounts per Unit of such State Trust outstanding on the
Record Date for each such distribution.
Rights of Unitholders. A Unitholder may at any time tender
Units to the Trustee for redemption. No Unitholder of a State
Trust shall have the right to control the operation and
management of the Trust or such State Trust in any manner, except
to vote with respect to amendment of the Agreement or termination
of the Trust or such State Trust. The death or incapacity of any
Unitholder will not operate to terminate the Trust or any State
Trust nor entitle legal representatives or heirs to claim an
accounting or to bring any action or proceeding in any court for
partition or winding up of the Trust or any State Trust.
INVESTMENT SUPERVISION
The Sponsor may not alter the portfolio of the State Trusts by
the purchase, sale or substitution of Municipal Bonds, except in
the special circumstances noted below. Thus, with the exception
of the redemption or maturity of Municipal Bonds in accordance
with their terms, and/or the sale of Municipal Bonds to meet
redemption requests, the assets of the State Trusts will remain
unchanged under normal circumstances.
The Sponsor may direct the Trustee to dispose of Municipal Bonds
the value of which has been affected by certain adverse events,
including institution of certain legal proceedings, a decline in
their price or the occurrence of other market factors, including
advance refunding, so that in the opinion of the Sponsor the
retention of such Municipal Bonds in a State Trust would be
detrimental to the interest of its Unitholders. The proceeds
from any such sales, exclusive of any portion which represents
accrued interest, will be credited to the Principal Account of
such Trust Fund for distribution to its Unitholders.
The Trustee is permitted to utilize the option to obtain
Permanent Insurance only in circumstances where the value added
to the Municipal Bonds exceeds the costs of acquiring such
Permanent Insurance. Unless such Permanent Insurance may be
obtained at an acceptable price, the Sponsor will not direct the
Trustee to dispose of Municipal Bonds which are in default or imminent
danger of default but to retain such Municipal Bonds in
the portfolio so that the Trust may realize the benefits of the
insurance on the portfolio.
The Sponsor is required to instruct the Trustee to reject any
offer made by an issuer of the Municipal Bonds to issue new
obligations in exchange or substitution for any of such Municipal
Bonds pursuant to a refunding financing plan except that the
Sponsor may instruct the Trustee to accept or reject such an
offer or to take any other action with respect thereto as the
Sponsor may deem proper if (1) the issuer is in default with
respect to such Bonds or (2) in the written opinion of the
Sponsor the issuer will probably default with respect to such
Bonds in the reasonably foreseeable future. Any obligation so
received in exchange or substitution will be held by the Trustee
subject to the terms and conditions of the Trust Agreement to the
same extent as Bonds originally deposited thereunder. Within
five days after the deposit of obligations in exchange or
substitution for underlying Bonds, the Trustee is required to
give notice thereof to each Unitholder, identifying the Bonds
eliminated and the Bonds substituted therefor.
The Trustee may sell Municipal Bonds, designated by the Sponsor,
from a State Trust for the purpose of redeeming Units of such
State Trust tendered for redemption and the payment of expenses.
To the extent that Municipal Bonds are sold which are current in
payment of principal and interest by one of the Insured Trust
Funds in order to meet redemption requests and defaulted
Municipal Bonds are retained in the portfolio of an Insured Trust
Fund in order to preserve the related insurance protection
applicable to said Municipal Bonds, the overall quality of the
Municipal Bonds remaining in such Insured Trust Fund's portfolio
will tend to diminish. Because of such restrictions on the
Trustee, under certain circumstances the Sponsor may seek a full
or partial suspension of the right of Unitholders to redeem their
Units. See "Redemption."
ADMINISTRATION OF THE TRUST
The Trustee. The Trustee is The Bank of New York, a trust
company organized under the laws of New York. The Bank of New
York has its offices at 101 Barclay Street, New York, New York
10286, telephone 1 (800) 701-8178. The Bank of New York is the
successor trustee to Investors Fiduciary Trust Company for
certain State Trusts under their respective Trust Agreements.
The Bank of New York is subject to supervision and examination by
the Superintendent of Banks of the State of New York and the
Board of Governors of the Federal Reserve System, and its
deposits are insured by the Federal Deposit Insurance Corporation
to the extent permitted by law.
The Trustee, whose duties are ministerial in nature, has not
participated in selecting the portfolio of any Trust Fund. For
information relating to the responsibilities of the Trustee under
the Agreements, reference is made to the material set forth under
"Unitholders."
In accordance with the Agreements, the Trustee shall keep proper
books of record and account of all transactions at its office.
Such records shall include the name and address of, and the number of
Units held by, every Unitholder of each Trust Fund.
Such books and records shall be open to inspection by any
Unitholder of such Trust Fund at all reasonable times during
usual business hours. The Trustee shall make such annual or
other reports as may from time to time be required under any
applicable State or Federal statute, rule or regulation. The
Trustee shall keep a certified copy or duplicate original of the
Agreement on file in its office available for inspection at all
reasonable times during usual business hours by any Unitholder,
together with a current list of the Municipal Bonds held in the
State Trust. Pursuant to the Agreement, the Trustee may employ
one or more agents for the purpose of custody and safeguarding of
Municipal Bonds comprising the portfolios.
Under the Agreement, the Trustee or any successor trustee may
resign and be discharged of the trust created by the Agreement by
executing an instrument in writing and filing the same with the
Sponsor.
The Trustee or successor trustee must mail a copy of the notice
of resignation to all Unitholders then of record, not less than
sixty days before the date specified in such notice when such
resignation is to take effect. The Sponsor upon receiving notice
of such resignation is obligated to appoint a successor trustee
promptly. If, upon such resignation, no successor trustee has
been appointed and has accepted the appointment within thirty
days after notification, the retiring Trustee may apply to a
court of competent jurisdiction for the appointment of a
successor. The Sponsor may at any time remove the Trustee with
or without cause and appoint a successor trustee as provided in
the Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a
written acceptance of such appointment by a successor trustee,
all the rights, powers, duties and obligations of the original
Trustee shall vest in the successor.
The Trustee shall be a corporation organized under the laws of
the United States or any state thereof, which is authorized under
such laws to exercise trust powers. The Trustee shall have at
all times an aggregate capital, surplus and undivided profits of
not less than $5,000,000.
The Evaluator. EVEREN Unit Investment Trusts, a service of
EVEREN Securities, Inc., the Sponsor, also serves as Evaluator.
The Evaluator may resign or be removed by the Trustee, which is
to use its best efforts to appoint a satisfactory successor.
Such resignation or removal shall become effective upon
acceptance of appointment by the successor evaluator. If, upon
resignation of the Evaluator no successor has accepted
appointment within thirty days after notice of resignation, the
Evaluator may apply to a court of competent jurisdiction for the
appointment of a successor. Notice of such resignation or
removal and appointment shall be mailed by the Trustee to each
Unitholder. At the present time, pursuant to a contract with the
Evaluator, Muller Data Corporation, a non-affiliated firm
regularly engaged in the business of evaluating, quoting or
appraising comparable securities, provides portfolio evaluations
of the Municipal Bonds in the State Trusts which are then reviewed by
the Evaluator. In the event the Sponsor is unable to
obtain current evaluations from Muller Data Corporation, it may
make its own evaluations or it may utilize the services of any
other non-affiliated evaluator or evaluators it deems
appropriate.
Amendment and Termination. The Agreement may be amended by
the Trustee and the Sponsor without the consent of any of the
Unitholders: (1) to cure any ambiguity or to correct or
supplement any provision which may be defective or inconsistent
(2) to change any provision thereof as may be required by the
Securities and Exchange Commission or any successor governmental
agency or (3) to make such provisions as shall not adversely
affect the interests of the Unitholders. The Agreement with
respect to any State Trust may also be amended in any respect by
the Sponsor and the Trustee, or any of the provisions thereof may
be waived, with the written consent of the holders of Units
representing 66-2/3% of the Units then outstanding of such State
Trust, provided that no such amendment or waiver will reduce the
interest in the State Trust of any Unitholder thereof without the
consent of such Unitholder or reduce the percentage of Units
required to consent to any such amendment or waiver without the
consent of all Unitholders of such State Trust. In no event
shall the Agreement be amended to increase the number of Units of
a State Trust issuable thereunder or to permit, except in
accordance with the provisions of the Agreement, the acquisition
of any Municipal Bonds in addition to or in substitution for
those in a State Trust. The Trustee shall promptly notify
Unitholders of the substance of any such amendment.
The Agreement provides that each State Trust shall terminate upon
the maturity, redemption or other disposition, as the case may
be, of the last of the Municipal Bonds held in such State Trust.
If the value of the State Trust shall be less than the applicable
minimum value stated under "Essential Information" in Part Two
the Trustee may, in its discretion, and shall, when so directed
by the Sponsor, terminate the State Trust. A State Trust may be
terminated at any time by the holders of Units representing
66-2/3% of the Units thereof then outstanding. Notwithstanding
the foregoing, in no event shall any State Trust continue beyond
the mandatory termination date shown in Part Two under "Essential
Information." In the event of termination of a State Trust,
written notice thereof will be sent by the Trustee to all
Unitholders of such State Trust. Within a reasonable period
after termination, the Trust will sell any Municipal Bonds
remaining in the State Trust and, after paying all expenses and
charges incurred by the State Trust, will distribute to
Unitholders thereof (upon surrender for cancellation of
certificates for Units, if issued) their pro rata share of the
balances remaining in the Interest and Principal Accounts of such
State Trust.
Limitations on Liability. The Sponsor: The Sponsor is
liable for the performance of its obligations arising from its
responsibilities under the Agreement, but will be under no
liability to the Unitholders for taking any action or refraining
from any action in good faith pursuant to the Agreement or for errors in
judgment, except in cases of its own gross negligence,
bad faith or willful misconduct. The Sponsor shall not be liable
or responsible in any way for depreciation or loss incurred by
reason of the sale of any Municipal Bonds.
The Trustee: The Agreement provides that the Trustee shall be
under no liability for any action taken in good faith in reliance
upon prima facie properly executed documents or for the
disposition of monies, Municipal Bonds, or Certificates except by
reason of its own gross negligence, bad faith or willful
misconduct, nor shall the Trustee be liable or responsible in any
way for depreciation or loss incurred by reason of the sale by
the Trustee of any Municipal Bonds. In the event that the
Sponsor shall fail to act, the Trustee may act and shall not be
liable for any such action taken by it in good faith. The
Trustee shall not be personally liable for any taxes or other
governmental charges imposed upon or in respect of the Municipal
Bonds or upon the interest thereon. In addition, the Agreement
contains other customary provisions limiting the liability of the
Trustee. The Trustee, whose duties are ministerial, did not
participate in the selection of Municipal Bonds for the State
Trusts.
The Evaluator: The Trustee and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no
responsibility for the accuracy thereof. The Agreement provides
that the determinations made by the Evaluator shall be made in
good faith upon the basis of the best information available to
it provided, however, that the Evaluator shall be under no
liability to the Trustee or Unitholders for errors in judgment,
but shall be liable only for its gross negligence, lack of good
faith or willful misconduct.
EXPENSES OF THE TRUST
Except with respect to those series indicated in the next
sentence, the Sponsor will not charge the Trust an advisory fee
and will receive no fee from the Trust for services performed as
Sponsor. The Sponsor will charge Kemper Tax-Exempt Income Trust,
Multi-State Series 45 and subsequent series an annual
surveillance fee for services performed for such Trust Funds in
an amount not to exceed the amount shown under "Essential
Information" in Part Two, but in no event will such compensation
when combined with all compensation received from other unit
investment trusts for which the Sponsor acts as sponsor and
provides portfolio surveillance, exceed the aggregate cost to the
Sponsor for providing such services. Such fee shall be based on
the total number of Units of such State Trust Fund outstanding as
of the January Record Date for any annual period. The Sponsor
and other Underwriters paid all the expenses of creating and
establishing the Trust, including the cost of the initial
preparation, printing and execution of the Prospectus, Agreement
and the certificates, legal and accounting expenses, advertising
and selling expenses, payment of closing fees, expenses of the
Trustee, initial evaluation fees during the initial public
offering and other out-of-pocket expenses.
The Trustee receives for its services a fee calculated on the
basis of the annual rate set forth under "Essential Information" in
Part Two per $1,000 principal amount of Municipal Bonds in
each State Trust, based on the largest aggregate principal amount
of Municipal Bonds in the State Trust at any time during the
monthly, quarterly or semi-annual period, as appropriate. In no
event shall the Trustee receive less than $2000 annual
compensation in any single year for any Trust. The Trustee also
receives indirect benefits to the extent that it holds funds on
deposit in the various non-interest bearing accounts created
pursuant to the Agreement however, the Trustee is also
authorized by the Agreement to make from time to time certain
non-interest bearing advances to the State Trusts. See
"Unitholders_Distributions to Unitholders."
For evaluation of Municipal Bonds in the State Trusts, the
Evaluator receives a fee, calculated on an annual rate as set
forth under "Essential Information" in Part Two, based upon the
largest aggregate principal amount of Municipal Bonds in such
State Trust at any time during such monthly period.
The Trustee's, Sponsor's (if any) and Evaluator's fees for the
State Trusts are payable monthly on or before each Distribution
Date by deductions from the Interest Accounts thereof to the
extent funds are available and then from the Principal Accounts.
Such fees may be increased without approval of the Unitholders by
amounts not exceeding a proportionate increase in the Consumer
Price Index entitled "All Services Less Rent of Shelter,"
published by the United States Department of Labor, or any
equivalent index substituted therefor.
The following additional charges are or may be incurred by a
State Trust: (a) fees for the Trustee's extraordinary services
(b) expenses of the Trustee (including legal and auditing
expenses and insurance costs, but not including any fees and
expenses charged by any agent for custody and safeguarding of
Municipal Bonds) and of bond counsel, if any (c) various
governmental charges (d) expenses and costs of any action taken
by the Trustee to protect the Trust or such State Trust, or the
rights and interest of the Unitholders (e) indemnification of
the Trustee for any loss, liability or expense incurred by it in
the administration of the Trust or such State Trust without gross
negligence, bad faith or willful misconduct on its part (f)
indemnification of the Sponsor for any loss, liability or expense
incurred in acting as Sponsor of the State Trust without gross
negligence, bad faith or willful misconduct and (g) expenditures
incurred in contacting Unitholders upon termination of the State
Trust. The fees and expenses set forth herein are payable out of
the appropriate State Trust and, when owed to the Trustee, are
secured by a lien on such State Trust.
Fees and expenses of a State Trust shall be deducted from the
Interest Account thereof, or, to the extent funds are not
available in such Account, from the Principal Account. The
Trustee may withdraw from the Principal Account or the Interest
Account of any State Trust such amounts, if any, as it deems
necessary to establish a reserve for any taxes or other
governmental charges or other extraordinary expenses payable out
of the State Trust. Amounts so withdrawn shall be credited to a
separate account maintained for the State Trust known as the Reserve
Account and shall not be considered a part of the State
Trust when determining the value of the Units until such time as
the Trustee shall return all or any part of such amounts to the
appropriate account.
THE SPONSOR
The Sponsor, EVEREN Unit Investment Trusts (formerly known as
Kempen Unit Investment Trusts), with an office at 77 West Wacker
Drive, 29th Floor, Chicago, Illinois 60601, (800) 621-5024, is a
service of EVEREN Securities, Inc. (formerly known as Kemper
Securities, Inc.), which is a wholly-owned subsidiary of EVEREN
Capital Corporation. The Sponsor acts as underwriter of a number
of other unit investment trusts and will act as underwriter of
any other unit investment trust products developed by the Sponsor
in the future. As of December 31, 1995, the total stockholder's
equity of EVEREN Securities, Inc. was $261,286,862.
If at any time the Sponsor shall fail to perform any of its
duties under the Agreement or shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or its affairs are
taken over by public authorities, then the Trustee may (a)
appoint a successor sponsor at rates of compensation deemed by
the Trustee to be reasonable and not exceeding such reasonable
amounts as may be prescribed by the Securities and Exchange
Commission, or (b) terminate the Agreement and liquidate the
Trust or any State Trust as provided therein or (c) continue to
act as Trustee without terminating the Agreement.
The foregoing financial information with regard to the Sponsor
relates to the Sponsor only and not to this Trust or any State
Trust. Such information is included in this Prospectus only for
the purpose of informing investors as to the financial
responsibility of the Sponsor and its ability to carry out its
contractual obligations with respect to the State Trusts. More
comprehensive financial information can be obtained upon request
from the Sponsor.
LEGAL OPINIONS
The legality of the Units offered hereby and certain matters
relating to federal tax law were originally passed upon by
Chapman and Cutler, 111 West Monroe Street, Chicago, Illinois
60603, as counsel for the Sponsor.
AUDITORS
The statement of net assets, including the Schedule of
Investments, appearing in Part Two of this Prospectus and
Registration Statement, with information pertaining to the
specific Series of the Trust to which such statement relates, has
been audited by Ernst & Young LLP, independent auditors, as set
forth in their report appearing in Part Two and is included in
reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor's, a division of The McGraw-Hill Companies _
A brief description of the applicable Standard & Poor's rating
symbols and their meanings as described by Standard & Poor's
follows:
A Standard & Poor's corporate or municipal bond rating is a
current assessment of the creditworthiness of an obligor with respect
to a specific debt obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or
lessees.
The bond rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer and obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit
in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default _ capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation
II. Nature of and provisions of the obligation and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangement, under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA _ Bonds rated AAA have the highest rating assigned by
Standard & Poor's to a debt obligation. Capacity to pay interest
and repay principal is extremely strong.
AA _ Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only
in small degree.
A _ Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB _ Bonds rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for bonds
in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "A" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the bonds being rated
and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and
risk.
Moody's Investors Service, Inc. _ A brief description of the
applicable Moody's rating symbols and their meanings as described
by Moody's follows:
Aaa _ Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues. Their safety is so absolute that with the occasional
exception of oversupply in a few specific instances,
characteristically, their market value is affected solely by
money market fluctuations.
Aa _ Bonds which are rated Aa are judged to be the high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger
than in Aaa securities. Their market value is virtually immune
to all but money market influences, with the occasional exception
of oversupply in a few specific instances.
A _ Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
The market value of A-rated bonds may be influenced to some
degree by economic performance during a sustained period of
depressed business conditions, but, during periods of normalcy,
A-rated bonds frequently move in parallel with Aaa and Aa
obligations, with the occasional exception of oversupply in a few
specific instances.
A1 _ Bonds which are rated A1 offer the maximum in security
within their quality group, can be bought for possible upgrading
in quality, and additionally, afford the investor an opportunity
to gauge more precisely the relative attractiveness of offerings
in the marketplace.
Baa _ Bonds which are rated Baa are considered as lower medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as
well. The market value of Baa-rated bonds is more sensitive to
changes in economic circumstances and, aside from occasional
speculative factors applying to some bonds of this class, Baa
market valuations move in parallel with Aaa, Aa and A obligations
during periods of economic normalcy, expect in instances of
oversupply.
Conditional Ratings: Bonds rated "Con(-)" are ones for which the
security depends upon the completion of some act or the fulfillment
of some condition. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical ratings denote
probable credit stature upon completion of construction or
elimination of basis of condition.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in certain areas
of its bond rating system. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category
the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
[1] Reference is hereby made to said Trust Agreement, and any
statements contained herein are qualified in ther entirety by the
provisions of said Trust Agreement.
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Part Two
Dated December 20, 1996
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NOTE: Part Two of this Prospectus May Not Be Distributed Unless Accompanied by
Part One.
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Essential Information
As of August 31, 1996
Sponsor and Evaluator: EVEREN Unit Investment Trusts
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
General Information
<S> <C>
Principal Amount of Municipal Bonds $3,410,000
Number of Units 341,009
Fractional Undivided Interest in the Trust per Unit 1/341,009
Principal Amount of Municipal Bonds per Unit $10.000
Public Offering Price:
Aggregate Bid Price of Municipal Bonds in the Portfolio $3,387,426
Aggregate Bid Price of Municipal Bonds per Unit $9.934
Cash per Unit (1) $.006
Pricing accrued interest to date of settlement $.005
Sales Charge of 2.041% (2.00% of Public Offering Price) $.203
Public Offering Price per Unit (inclusive of accrued
interest) (2) $10.148
Redemption Price per Unit (inclusive of accrued interest) $9.945
Excess of Public Offering Price per Unit Over Redemption
Price per Unit $.203
Minimum Value of the Trust under which Trust Agreement
may be terminated $750,000
</TABLE>
Date of Trust September 14, 1994
Mandatory Termination Date December 31, 2003
Annual Evaluation and Portfolio Surveillance Fees: Evaluation fee of $.30 per
$1,000 principal amount of Municipal Bonds. Evaluations for purpose of sale,
purchase or redemption of Units are made as of the close of business of the
Sponsor next following receipt of an order for a sale or purchase of Units or
receipt by The Bank of New York Co. of Units tendered for redemption. Portfolio
surveillance fee of $.20 per 100 Units.
[FN]
1. This amount, if any, represents principal cash or overdraft which is an
asset or liability of the Trust and is included in the Public Offering Price.
2. Units are offered at the Public Offering Price which includes interest to
the date of settlement (three business days after purchase).
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Essential Information (continued)
As of August 31, 1996
Sponsor and Evaluator: EVEREN Unit Investment Trusts
Trustee: The Bank of New York Co.
<TABLE>
<CAPTION>
Special Information Based on Various Distribution Options
Monthly
<S> <C>
---------
Calculation of Estimated Net Annual
Interest Income per Unit (3):
Estimated Annual Interest Income $.479826
Less: Estimated Annual Expense .021605
---------
Estimated Net Annual Interest Income $.458221
=========
Calculation of Interest Distribution
per Unit:
Estimated Net Annual Interest Income $.458221
Divided by 12 $.038185
Estimated Daily Rate of Net Interest
Accrual per Unit $.001273
Estimated Current Return Based on Public
Offering Price (3) 4.52%
Estimated Long-Term Return (3) 4.81%
</TABLE>
Trustee's Annual Fees and Expenses (including Evaluator's and Portfolio
Surveillance Fees): $.021605 ($.009366 of which represents expenses) per Unit.
Record and Computation Dates: First day of the month.
Distribution Dates: Fifteenth day of the month.
[FN]
3. The Estimated Long-Term Return and Estimated Current Return will vary. For
detailed explanation, see Part One of this prospectus.
<PAGE>
Report of Independent Auditors
Unitholders
Kemper Defined Funds
Insured California
Series 9
We have audited the accompanying statement of assets and liabilities of Kemper
Defined Funds Insured California Trust Series 9, including the schedule of
investments, as of August 31, 1996, and the related statements of operations and
changes in net assets for the year then ended and for the period from September
14, 1994 (Date of Deposit) to August 31, 1995. These financial statements are
the responsibility of the Trust's sponsor. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of investments owned as of August 31, 1996, by
correspondence with the custodial bank. An audit also includes assessing the
accounting principles used and significant estimates made by the sponsor, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kemper Defined Funds Insured
California Trust Series 9 at August 31, 1996, and the results of its operations
and changes in its net assets for the periods indicated above in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
December 17, 1996
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Statement of Assets and Liabilities
August 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Municipal Bonds, at value (cost $3,392,998) $3,387,426
Interest receivable 50,599
---------
Total assets 3,438,025
Liabilities and net assets
Cash overdraft 34,672
Accrued liabilities 1,350
---------
36,022
Net assets, applicable to 341,009 Units outstanding:
Cost of Trust assets, exclusive of interest $3,392,998
Unrealized depreciation (5,572)
Distributable funds 14,577
--------- ---------
Net assets $3,402,003
=========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Statements of Operations
<TABLE>
<CAPTION>
Period from
September 14,
Year ended 1994 to
August 31, August 31,
1996 1995
<S> <C> <C>
--------- ---------
Investment income - interest $172,285 $173,799
Expenses:
Trustee's fees and related expenses 6,242 5,791
Evaluator's fees and portfolio surveillance fees 1,949 1,807
--------- ---------
Total expenses 8,191 7,598
--------- ---------
Net investment income 164,094 166,201
Realized and unrealized gain (loss) on investments:
Realized gain 5,028 -
Unrealized appreciation (depreciation) during
the period (68,865) 63,293
--------- ---------
Net gain (loss) on investments (63,837) 63,293
--------- ---------
Net increase in net assets resulting from operations $100,257 $229,494
========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Period from
September 30,
Year ended 1994 to
August 31, August 31,
1996 1995
<S> <C> <C>
--------- ---------
Operations:
Net investment income $164,094 $166,201
Realized gain on investments 5,028 -
Unrealized appreciation (depreciation) on
investments during the period (68,865) 63,293
--------- ---------
Net increase in net assets resulting from operations 100,257 229,494
Distributions to Unitholders:
Net investment income (165,793) (151,984)
Capital transactions:
Issuance of Units - 3,732,507
Redemption of Units (342,487) -
--------- ---------
Total increase (decrease) in net assets (408,023) 3,810,017
Net assets:
At the beginning of the period 3,810,017 -
--------- ---------
At the end of the year (including distributable
funds, applicable to Trust Units of $14,568 and
$14,217 at August 31, 1996 and 1995,
respectively) $3,401,994 $3,810,017
========= =========
Trust Units outstanding at the end of the period 341,009 375,000
========= =========
Net asset value at the end of the period $9.976 $10.160
========= =========
</TABLE>
[FN]
See accompanying notes to financial statements.
<PAGE>
<TABLE>
Kemper Defined Funds
Insured California
Series 9
Schedule of Investments
August 31, 1996
<CAPTION>
Coupon Maturity Redemption Principal
Name of Issuer and Title of Bond (4) Rate Date Provisions(2) Rating(1) Amount Value(3)
<S> <C> <C> <C> <C> <C> <C>
- --------------------- --- --- ----- --- --------- ---
State of California, Various Purpose General 5.100% 8/01/2001 Non-Callable AAA $675,000 $675,088
Obligation Bonds. Insured by AMBAC.
California Statewide Communities Development 4.800 10/01/2000 Non-Callable AAA 690,000 680,492
Authority, Insured Health Facilities Revenue
Certificates of Participation (Unihealth America),
1993 Series A. Insured by AMBAC.
California Statewide Communities Development 4.750 5/01/1997 Non-Callable AAA 450,000 452,304
Authority, Certificates of Participation (Good
Samaritan Health System). Insured by CapMAC.
California Statewide Communities Development 5.000 5/01/1998 Non-Callable AAA 450,000 447,025
Authority, Certificates of Participation (Good
Samaritan Health System). Insured by CapMAC.
Sacramento Municipal Utility District, Electric 4.800 11/15/1999 Non-Callable AAA 690,000 681,285
Revenue Refunding Bonds, 1993 Series D. Insured by
MBIA.
Simi Valley Public Financing Authority, 1993 Revenue 4.100 9/01/1997 Non-Callable AAA 240,000 240,180
Refunding Bonds. Insured by MBIA.
Simi Valley Public Financing Authority, 1993 Revenue 4.300 9/01/1998 Non-Callable AAA 215,000 211,052
Refunding Bonds. Insured by MBIA.
--------- ---------
$3,410,000 $3,387,426
========= =========
</TABLE>
[FN]
See accompanying notes to Schedule of Investments.
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Notes to Schedule of Investments
1. All ratings are by Standard & Poor's Corporation, unless marked with the
symbol "*", in which case the rating is by Moody's Investors Service, Inc. The
symbol "NR" indicates Bonds for which no rating is available.
2. There is shown under this heading the year in which each issue of Bonds is
initially redeemable and the redemption price for that year or, if currently
redeemable, the redemption price currently in effect; unless otherwise
indicated, each issue continues to be redeemable at declining prices thereafter,
but not below par value. In addition, certain Bonds in the Portfolio may be
redeemed in whole or in part other than by operation of the stated redemption or
sinking fund provisions under certain unusual or extraordinary circumstances
specified in the instruments setting forth the terms and provisions of such
Bonds. "S.F." indicates a sinking fund is established with respect to an issue
of Bonds. Redemption pursuant to call provisions generally will, and redemption
pursuant to sinking fund provisions may, occur at times when the redeemed Bonds
have a valuation which represents a premium over the call price or par.
To the extent that the Bonds were deposited in the Trust at a price higher
than the price at which they are redeemed, this will represent a loss of capital
when compared with the original Public Offering Price of the Units. To the
extent that the Bonds were acquired at a price lower than the redemption price,
this may represent an increase in capital when compared with the original Public
Offering Price of the Units. Distributions of net income will generally be
reduced by the amount of the income which would otherwise have been paid with
respect to redeemed Bonds and, unless utilized to pay for Units tendered for
redemption, there will be distributed to Unitholders the principal amount and
any premium received on such redemption. In this event the estimated current
return and estimated long-term return may be affected by such redemptions.
3. See Note 1 to the accompanying financial statements for a description of the
method of determining cost and value.
4. Insurance on the Bonds in the Trust was obtained by the issuers of such
Bonds.
See accompanying notes to financial statements.
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Notes to Financial Statements
1. Significant Accounting Policies
Trust Sponsor and Evaluator
From the Trust's date of deposit through November 26, 1996, the Trust's sponsor
and evaluator was EVEREN Unit Investment Trusts (EVEREN), or its predecessor
entity, Kemper Unit Investment Trusts. On that date, Zurich Kemper Investments,
Inc. acquired EVEREN and assigned substantially all of its unit investment trust
business to Ranson & Associates, Inc., which will serve as the Trust's sponsor
and evaluator.
Valuation of Municipal Bonds
Municipal Bonds (Bonds) are stated at bid prices as determined by EVEREN Unit
Investment Trusts, the "Evaluator" of the Trust. The aggregate bid prices of
the Bonds are determined by the Evaluator based on (a) current bid prices of the
Bonds, (b) current bid prices for comparable bonds, (c) appraisal, (d)
insurance, or (e) any combination of the above (See Note 4 - Insurance).
Cost of Municipal Bonds
Cost of the Trust's Bonds was based on the offering prices of the Bonds on
September 14, 1994 (Date of Deposit). The premium or discount (including any
original issue discount) existing at September 14, 1994, is not being amortized.
Realized gain (loss) from Bond transactions is reported on an identified cost
basis.
2. Unrealized Appreciation and Depreciation
Following is an analysis of net unrealized depreciation at August 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $6,208
Gross unrealized depreciation (11,780)
----------
Net unrealized depreciation $(5,572)
=========
</TABLE>
3. Federal Income Taxes
The Trust is not an association taxable as a corporation for federal income tax
purposes. Each Unitholder is considered to be the owner of a pro rata portion
of the Trust under Subpart E, Subchapter J of Chapter 1 of the Internal Revenue
Code of 1986, as amended. Accordingly, no provision has been made for federal
income taxes.
4. Other Information
Cost to Investors
The cost to original investors of Units of the Trust was based on the aggregate
offering price of the Bonds on the date of an investor's purchase, plus a sales
charge of 3.00% of the Public Offering Price (equivalent to 3.095% of the net
amount invested). The Public Offering Price for secondary market transactions
is based on the aggregate bid price of the Bonds plus or minus a pro rata share
of cash or overdraft in the Principal Account, if any, on the date of an
investor's purchase, plus a sales charge of 2.00% of the Public Offering Price
(equivalent to 2.041% of the net amount invested).
<PAGE>
Kemper Defined Funds
Insured California
Series 9
Notes to Financial Statements (continued)
Insurance
Insurance guaranteeing the payment of all principal and interest on the Bonds in
the portfolio has been obtained from independent companies by the respective
issuers of such Bonds. Insurance obtained by a Bond issuer is effective as long
as such Bonds are outstanding. As a result of such insurance, the Units of
Trust have received a rating of "AAA" by Standard & Poor's Corporation. No
representation is made as to any insurer's ability to meet its commitments.
Distributions
Distributions of net investment income to Unitholders are declared and paid
monthly. Income distributions, on a record date basis, are as follows:
<TABLE>
<CAPTION>
Period from
Year ended September 14, 1994 to
Distribution August 31, 1996 August 31, 1995
Plan Per Unit Total Per Unit Total
<S> <C> <C> <C> <C> <C> <C>
- ----- --------- ---------- --------- ----------
Monthly $.455 $165,368 $.405* $151,984*
* Includes $3,506 ($.009 per Unit) distributed to the Underwriters of the Trust,
representing interest income from the Date of Deposit to September 21, 1994
(First Settlement Date).
</TABLE>
In addition, the Trust redeemed Units with proceeds from the sale of Bonds as
follows:
<TABLE>
<CAPTION>
Year ended
August 31,
1996
<S> <C> <C> <C>
----------
Principal portion $342,487
Net interest accrued 425
----------
$342,912
=========
Units 33,991
=========
</TABLE>
5. Change of Trustee
On March 1, 1996, The Bank of New York Co. assumed all trustee responsibilities
from Investors Fiduciary Trust Company.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated December 17, 1996, in this Post-Effective
Amendment to the Registration Statement (Form S-6) and related Prospectus of
Kemper Defined Funds Insured California Trust Series 9 dated December 20, 1996.
Ernst & Young LLP
Kansas City, Missouri
December 20, 1996
<PAGE>
Contents of Post-Effective Amendment
To Registration Statement
This Post-Effective amendment to the Registration Statement comprises
the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, The
Registrant, Kemper Defined Funds Series 23, certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wichita, and State of
Kansas, on the 27th day of December, 1996.
Kemper Defined Funds Series 23
Registrant
By: Ranson & Associates, Inc.
Depositor
By: Robin Pinkerton
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below on December 27,
1996 by the following persons, who constitute a majority of the Board of
Directors of Ranson & Associates, Inc.
Signature Title
- -------------------- ------------------------
Douglas K. Rogers Executive Vice and
- -------------------- President and Director
Douglas K. Rogers
Alex R. Meitzner Chairman of the Board
- -------------------- and Director
Alex R. Meitzner
Robin K. Pinkerton President, Secretary,
- -------------------- Treasurer and Director
Robin K. Pinkerton
Robin Pinkerton
-----------------
Robin Pinkerton
An executed copy of each of the related powers of attorney was filed
with the Securities and Exchange Commission in connection with the
Registration Statement on Form S-6 of The Kansas Tax-Exempt Trust, Series 51
(File No. 33-46376) and Series 52 (File No. 33-47687) and the same are hereby
incorporated herein by this reference.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM KEMPER DEFINED FUNDS INSURED NATIONAL SERIES 12
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<SERIES>
<NUMBER> 12
<NAME> KEMPER DEFINED FUNDS INSURED NATIONAL
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Aug-31-1996
<PERIOD-END> Aug-31-1996
<INVESTMENTS-AT-COST> 8,273,055
<INVESTMENTS-AT-VALUE> 8,243,571
<RECEIVABLES> 84,207
<ASSETS-OTHER> 51,033
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,378,811
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 99,924
<TOTAL-LIABILITIES> 99,924
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,308,371
<SHARES-COMMON-STOCK> 828,374
<SHARES-COMMON-PRIOR> 986,711
<ACCUMULATED-NII-CURRENT> 77,131
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (29,484)
<NET-ASSETS> 8,278,887
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 469,528
<OTHER-INCOME> 0
<EXPENSES-NET> 21,429
<NET-INVESTMENT-INCOME> 448,099
<REALIZED-GAINS-CURRENT> 19,552
<APPREC-INCREASE-CURRENT> (251,946)
<NET-CHANGE-FROM-OPS> 215,705
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 455,890
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 158,337
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1,839,696)
<ACCUMULATED-NII-PRIOR> 41,310
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM KEMPER DEFINED FUNDS INSURED CALIFORNIA SERIES 9
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<SERIES>
<NUMBER> 09
<NAME> KEMPER DEFINED FUNDS INSURED CALIFORNIA
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Aug-31-1996
<PERIOD-END> Aug-31-1996
<INVESTMENTS-AT-COST> 3,392,998
<INVESTMENTS-AT-VALUE> 3,387,426
<RECEIVABLES> 50,599
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,438,025
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 36,022
<TOTAL-LIABILITIES> 36,022
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,407,575
<SHARES-COMMON-STOCK> 341,009
<SHARES-COMMON-PRIOR> 375,000
<ACCUMULATED-NII-CURRENT> 12,519
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (5,572)
<NET-ASSETS> 3,402,003
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 172,285
<OTHER-INCOME> 0
<EXPENSES-NET> 8,191
<NET-INVESTMENT-INCOME> 164,094
<REALIZED-GAINS-CURRENT> 5,028
<APPREC-INCREASE-CURRENT> (68,865)
<NET-CHANGE-FROM-OPS> 100,257
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 165,793
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 33,991
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (408,023)
<ACCUMULATED-NII-PRIOR> 14,217
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
