<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1994
REGISTRATION NO. 33-52729
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
A. EXACT NAME OF TRUST:
TAX EXEMPT SECURITIES TRUST, SERIES 392
B. NAMES OF DEPOSITORS:
SMITH BARNEY INC.
KIDDER, PEABODY & CO. INCORPORATED
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
SMITH BARNEY INC. KIDDER, PEABODY & CO. INCORPORATED
1345 Avenue of the Americas 60 Broad Street
New York, New York 10105 New York, New York 10004
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
STEPHEN J. TREADWAY GILBERT R. OTT, JR.
Smith Barney Inc. Kidder, Peabody & Co. Incorporated
1345 Avenue of the Americas 10 Hanover Square
New York, New York 10105 New York, New York 10005
COPY TO:
PIERRE DE SAINT PHALLE, ESQ.
Davis Polk & Wardwell
450 Lexington Ave.
New York, New York 10017
E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
AN INDEFINITE NUMBER OF UNITS OF BENEFICIAL INTEREST PURSUANT TO RULE 24F-2
PROMULGATED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED.
F. PROPOSED MAXIMUM AGGREGATE OFFERING PRICE TO THE PUBLIC OF THE SECURITIES
BEING REGISTERED:
INDEFINITE
G. AMOUNT OF FILING FEE;
$500 (AS REQUIRED BY RULE 24F-2)
H. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
[X] Check box if it is proposed that this filing will become effective
immediately upon filing pursuant to Rule 487.
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<PAGE>
--------------------------------------------------------
TAX EXEMPT
SECURITIES
TRUST Series 392
National Trust 191 Maryland Trust 91
California Trust 135 New Jersey Trust 116
New York Trust 134
- ---------------------- ---------------------------------------------------
18,000 UNITS
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
IN THE OPINION OF COUNSEL UNDER EXISTING LAW, INTEREST INCOME TO THE TRUSTS AND
TO UNIT HOLDERS (EXCEPT IN CERTAIN INSTANCES DEPENDING UPON THE UNIT HOLDERS)
IS EXEMPT FROM REGULAR FEDERAL INCOME TAX AND FROM CERTAIN STATE AND LOCAL
PERSONAL INCOME TAXES, TO THE EXTENT INDICATED, IN THE STATE FOR WHICH A STATE
TRUST IS NAMED. CAPITAL GAINS, IF ANY, ARE SUBJECT TO TAX.
THE TAX EXEMPT SECURITIES TRUST, SERIES 392 consists of separate underlying
unit investment trusts designated as National Trust 191, the California Trust
135, Maryland Trust 91, New Jersey Trust 116 and New York Trust 134 (the
"National Trust," "the California Trust," the "Maryland Trust," the "New Jersey
Trust" and the "New York Trust," respectively ) (the "Trusts" or the "Trust" as
the context requires and in the case of a Trust designated by a state name, the
"State Trust" or the "State Trusts," as the context requires). Each Trust was
formed for the purpose of obtaining for its Unit holders tax-exempt interest
income and conservation of capital through investment in a fixed portfolio of
municipal bonds rated at the time of deposit in the category A or better by
Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Service,
Inc. ("Fitch"). (See "Portfolio of Securities".) Each State Trust is comprised
of a fixed portfolio of interest-bearing obligations issued primarily by or on
behalf of the state for which such State Trust is named and counties,
municipalities, authorities or political subdivisions thereof. Interest on all
bonds in each Trust is in the opinion of counsel under existing law, with
certain exceptions, exempt from regular Federal income taxes (see Part B,
"Taxes") and from certain state and local personal income taxes) in the state
for which a State Trust is named, but may be subject to other state and local
taxes. (See discussions of State and local taxes in Part C.)
THE PUBLIC OFFERING PRICE of the Units of each Trust during the initial public
offering period is equal to the aggregate offering price of the underlying
bonds in the Trust's portfolio divided by the number of Units outstanding in
such Trust, plus a sales charge. The Public Offering Price of the Units of each
Trust following the initial public offering period is equal to the aggregate
bid price of the underlying bonds in the Trust's portfolio divided by the
number of Units outstanding in such Trust, plus a sales charge. During the
initial public offering period the sales charge is equal to 4.70% of the Public
Offering Price (4.932% of the aggregate offering price of the bonds per Unit)
for each Trust, and following the initial public offering period this charge
will be equal to 5.00% of the Public Offering Price (5.263% of the aggregate
bid price of the bonds per Unit) for each Trust. See Part B, "Public Offering--
Distribution of Units" for a description of the initial public offering period.
If the Units had been available for sale on June 30, 1994, the Public Offering
Price per Unit (including the sales charge) would have been $1,009.18,
$1,020.87, $988.16, $1,015.47 and $992.31 for the National Trust, the
California Trust, the Maryland Trust, the New Jersey Trust and the New York
Trust, respectively. In addition, there will be added an amount equal to
accrued interest from the day after the Date of Deposit to the date of
settlement (normally five business days after purchase).
THE SPONSORS, although not obligated to do so, intend to maintain a market for
the Units of the Trusts at prices based upon the aggregate bid price of the
underlying bonds, as more fully described under "Public Offering--Market for
Units" in Part B. If such a market is not maintained, a Unit holder may be able
to dispose of his Units only through redemption, at prices that are also based
upon the aggregate bid price of the underlying bonds.
MONTHLY DISTRIBUTIONS of principal and interest received by each Trust will be
made on or shortly after the fifteenth day of each month to holders of record
on the first day of that month. For further information regarding the
distributions by each Trust, see "Summary of Essential Information".
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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The date of this Prospectus is July 1, 1994
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 392
SUMMARY OF ESSENTIAL INFORMATION AS OF JUNE 30, 1994+
SPONSORS RECORD DATES
Smith Barney Inc.
Kidder, Peabody & Co. The first day of each month,
Incorporated commencing August 1, 1994
DISTRIBUTION DATES
TRUSTEE
United States Trust Company of The fifteenth day of each
New York month,** commencing August 15,
1994
EVALUATOR EVALUATION TIME
Kenny S & P Evaluation As of 1:00 P.M. on the Date of
Services, Deposit. Thereafter, as of
a division of Kenny Information 4:00 P.M. New York Time.
Systems, Inc.
EVALUATOR'S FEE
DATE OF DEPOSIT AND OF TRUST
AGREEMENT
The Evaluator will receive a
fee of $.30 per bond per
evaluation. (See Part B,
"Evaluator--Responsibility"
and "Public Offering--Offering
Price".)
June 30, 1994
MANDATORY TERMINATION DATE*
Each Trust will terminate on the
date of maturity, redemption,
sale or other disposition of the
last Bond held in the Trust.
SPONSORS' ANNUAL PORTFOLIO
SUPERVISION FEE***
Maximum of $.25 per $1,000
face amount of the underlying
Bonds.
- -------
+The Date of Deposit. The Date of Deposit is the date on which the Trust
Agreement was signed and the deposit with the Trustee was made.
* The actual date of termination of each trust may be considerably earlier
(see Part B, "Amendment and Termination of the Trust Agreement--
Termination").
** The first monthly income distribution of $5.02, $5.07, $4.70, $4.79 and
$4.80 for the National Trust, the California Trust, the Maryland Trust,
the New Jersey Trust and the New York Trust, respectively, will be made on
August 15, 1994.
***In addition to this amount, the Sponsors may be reimbursed for bookkeeping
and other administrative expenses not exceeding their actual costs.
A-2
<PAGE>
<TABLE>
<CAPTION>
NATIONAL CALIFORNIA MARYLAND NEW JERSEY NEW YORK
TRUST 191 Trust 135 Trust 91 Trust 116 Trust 134
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Principal Amount of Bonds in Trust......................... $7,000,000 $3,000,000 $2,750,000 $2,500,000 $ 2,750,000
Number of Units............................................ 7,000 3,000 2,750 2,500 2,750
Principal Amount of Bonds in Trust per Unit................ $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Fractional Undivided Interest in Trust per Unit............ 1/7,000 1/3,000 1/2,750 1/2,500 1/2,750
Minimum Value of Trust:
Trust Agreement may be Terminated if Principal Amount
is less than......................................... $3,500,000 $1,500,000 $1,375,000 $1,250,000 $ 1,375,000
Calculation of Public Offering Price per Unit*:
Aggregate Offering Price of Bonds in Trust............. $6,732,278 $2,918,682 $2,589,698 $2,419,347 $ 2,600,605
========== ========== ========== ========== ===========
Divided by Number of Units............................. $ 961.75 $ 972.89 $ 941.71 $ 967.74 $ 945.67
Plus: Sales Charge (4.70% of the Public Offering Price
for each Trust)........................................ $ 47.43 $ 47.98 $ 46.45 $ 47.73 $ 46.64
---------- ---------- ---------- ---------- -----------
Public Offering Price per Interest*.................... $ 1,009.18 $ 1,020.87 $ 988.16 $ 1,015.47 $ 992.31
Plus: Accrued Interest*................................ $ 1.17 $ 1.18 $ 1.09 $ 1.11 $ 1.12
---------- ---------- ---------- ---------- -----------
Total................................................ $ 1,010.35 $ 1,022.05 $ 989.25 $ 1,016.58 $ 993.43
========== ========== ========== ========== ===========
Sponsors' Initial Repurchase Price per Unit (per Unit
Offering)
Price of Bonds)*........................................ $ 961.75 $ 972.89 $ 941.71 $ 967.74 $ 945.67
Approximate Redemption Price per Unit (per Unit Bid Price
of Bonds)**............................................ $ 957.75 $ 968.89 $ 937.34 $ 963.74 $ 941.67
---------- ---------- ---------- ---------- -----------
Difference Between per Unit Offering and Bid Prices of
Bonds $ 4.00 $ 4.00 $ 4.37 $ 4.00 $ 4.00
========== ========== ========== ========== ===========
Calculation of Estimated Net Annual Income per Unit:
Estimated Annual Income per Unit........................ $ 62.73 $ 63.32 $ 58.84 $ 59.88 $ 60.00
Less Estimated Trustee's Annual Fee***.................. $ 1.54 $ 1.54 $ 1.50 $ 1.51 $ 1.51
Less: Other Estimated Annual Expenses................... $ .95 $ .94 $ .94 $ .89 $ .89
---------- ---------- ---------- ---------- -----------
Estimated Net Annual Income per Unit.................... $ 60.24 $ 60.84 $ 56.40 $ 57.48 $ 57.60
========== ========== ========== ========== ===========
Calculation of Monthly Income Distribution per Unit
Estimated Net Annual Income per Unit................... $ 60.24 $ 60.84 $ 56.40 $ 57.48 $ 57.60
Divided by 12.......................................... $ 5.02 $ 5.07 $ 4.70 $ 4.79 $ 4.80
Accrued interest from the day after the Date of Deposit
to the first record date**............................ $ 5.02 $ 5.07 $ 4.70 $ 4.79 $ 4.80
First distribution per unit................................ $ 5.02 $ 5.07 $ 4.70 $ 4.79 $ 4.80
Daily Rate (360-day basis) of Income Accrual per Unit...... $ .1673 $ .1690 $ .1566 $ .1596 $ .1600
Estimated Current Return based on Public Offering Price**** 5.97% 5.96% 5.71% 5.66% 5.80%
Estimated Long-Term Return ****............................ 5.98% 5.84% 5.75% 5.71% 5.86%
</TABLE>
- --------------------
* Accrued interest will be added from the day after the Date of Deposit
to the date of settlement (normally five business days after purchase).
** This figure will also include accrued interest from the day after the
Date of Deposit to the date of settlement normally five business days
after purchase) and the net of cash on hand in the relevant Trust,
accrued expenses of such Trust and amounts distributable to holders of
record of Units of such Trust as of a date prior to the computation
date, on a pro rata share basis. (See Part B, "Redemption of Units -
Computation of Redemption Price per Unit.")
*** Per $1,000 principal amount of Bonds, plus expenses. (See Part B,
"Rights of Unit Holders - Distribution of Interest and Principal.")
**** The Estimated Current Return is calculated by dividing the Estimated
Net Annual Interest Income per Unit by the Public Offering Price per
Unit. The Estimated Net Annual Interest Income per Unit will vary with
changes in fees and expenses of the Trustee and the Evaluator and with
the principal prepayment, redemption, maturity, exchange or sale of
Bonds while the Public Offering Price will vary with changes in the
offering price of the underlying Bonds; therefore, there is no
assurance that the present Estimated Current Return indicated above
will be realized in the future. The Estimated Long-Term Return is
calculated using a formula which (1) takes into consideration, and
factors in the relative weightings of, the market values, yields (which
takes into account the amortization of premiums and the accretion of
discounts) and estimated retirements of all of the Bonds in the Trust
and (2) takes into account the expenses and sales charge associated
with each Unit. Since the market values and estimated retirements of
the Bonds and the expenses of the Trust will change, there is no
assurance that the present Estimated Long-Term Return as indicated
above will be realized in the future. The Estimated Current Return and
Estimated Long-Term Return are expected to differ because the
calculation of the Estimated Long-Term Return reflects the estimated
date and amount of principal returned while the Estimated Current
Return calculations include only Net Annual Interest Income and Public
Offering Price as of the Date of Deposit. The effect of the delay in
the payment to Unit holders for the first few months of Trust
operations, which results in a lower true return to Unit holders, is
not reflected in either calculation (a projected cash flow statement as
of the Date of Deposit is available upon request from the Trustee).
A-3
<PAGE>
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT
SERIES 392
NATIONAL TRUST 191
The Portfolio of the National Trust contains 18 issues of Bonds of issuers
located in 14 States. All of the issues are payable from the income of specific
projects or authorities and are not supported by the issuer's power to levy
taxes. Although income to pay such Bonds may be derived from more than one
source, the primary sources of such income and the percentage* of the Bonds in
this Trust deriving income from such sources are as follows: hospital and
health care facilities: 35.7%; housing facilities: 35.2%; transportation
facilities: 7.6%; water and sewer facilities: 7.1%; special tax: 6.9%; lease
rental payments: 7.5%. The Trust is considered to be concentrated in hospital
facilities and housing facilities issues.+ (See Part B, "Tax Exempt Securities
Trust--Portfolio--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) Ten Bonds in this Trust
have been issued with an "original issue discount." (See Part B, "Taxes.") The
average life to maturity of the Bonds in the National Trust is 27.7 years.
As of the Date of Deposit, 59.7% of the Bonds in this Trust are rated by
Standard & Poor's (13.8% rated AAA, 5.5% rated AA and 40.4% rated A), 40.3% are
rated by Moody's (21.5% rated Aa and 18.8% rated A). For a description of the
meaning of the applicable rating symbols as published by the rating agencies,
see Part B, "Bond Ratings." It should be emphasized, however, that the ratings
of the rating agencies represent their opinions as to the quality of the Bonds
which they undertake to rate, and that these ratings are general and are not
absolute standards of quality and may change from time to time.
25.0% of the Bonds in the National Trust were acquired from a Sponsor as sole
underwriter or from an underwriting syndicate in which a Sponsor participated,
or otherwise from a Sponsor's own organization. (See Part B, "Public Offering--
Sponsors' and Underwriters' Profits.")
CALIFORNIA TRUST 135
The Portfolio of the California Trust contains 8 issues of Bonds of issuers
located in the State of California . All of the issues are payable from the
income of specific projects or authorities and are not supported by the
issuer's power to levy taxes. Although income to pay such Bonds may be derived
from more than one source, the primary sources of such income and the
percentage* of the Bonds in this Trust deriving income from such sources are as
follows: hospital and health care facilities: 28.9%; power facilities: 8.1%;
educational facilities: 7.7%; tax allocation: 55.3% . The Trust is considered
to be concentrated in hospital facilities and tax allocation facilities
issues.+ (See Part B, "Portfolio--Risk Factors" for a brief summary of risk
factors relating to certain of these issues.) 15.7% of the Bonds in this Trust
are insured as to timely payment of principal and interest by certain insurance
companies (AMBAC, 7.6% and MBIA, 8.1%) (see Part B, "Portfolio--Insurance").
Four Bonds in this Trust have been issued with an "original issue discount."
(See Part B, "Taxes.") The average life to maturity of the Bonds in the
California Trust is 28.9 years.
As of the Date of Deposit, 92.3% of the Bonds in this Trust are rated by
Standard & Poor's (15.7% rated AAA and 76.6% rated A); 7.7% are rated Aa by
Moody's. For a description of the meaning of the applicable rating symbols as
published by the rating agencies, see Part B, "Bond Ratings." It should be
emphasized, however, that the ratings of the rating agencies represent their
opinions as to the quality of the Bonds which they undertake to rate, and that
these ratings are general and are not absolute standards of quality and may
change from time to time.
None of the Bonds in the California Trust were acquired from a Sponsor as
sole underwriter or from an underwriting syndicate in which a Sponsor
participated, or otherwise from a Sponsor's own organization. (See Part B,
"Public Offering--Sponsors' and Underwriters' Profits.")
- -------
*Percentages computed on the basis of the aggregate offering price of the Bonds
in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-4
<PAGE>
MARYLAND TRUST 91
The Portfolio of the Maryland Trust contains 7 issues of Bonds of issuers
located in the State of Maryland. All of the issues are payable from the income
of specific projects or authorities and are not supported by the issuer's power
to levy taxes. Although income to pay such Bonds may be derived from more than
one source, the primary sources of such income and the percentage* of the Bonds
in this Trust deriving income from such sources are as follows: hospital and
health care facilities: 35.4%; housing facilities: 47.6%; pollution control
facilities: 17.0%. The Trust is considered to be concentrated in hospital
facilities and housing facilities issues.+ (See Part B, "--Risk Factors" for a
brief summary of risk factors relating to certain of these issues.) 28.1% of
the Bonds in this Trust are insured as to timely payment of principal and
interest by certain insurance companies (AMBAC, 9% and Connie Lee, 19.1%) (see
Part B, "Portfolio--Insurance"). Three Bonds in this Trust have been issued
with an "original issue discount." (See Part B, "Taxes.") The average life to
maturity of the Bonds in the Maryland Trust is 28.9 years.
As of the Date of Deposit, 65.0% of the Bonds in this Trust are rated by
Standard & Poor's (48.0% rated AAA and 17.0% rated A); 35.0% are rated by
Moody's (18.7% rated Aa and 16.3% rated A). For a description of the meaning of
the applicable rating symbols as published by the rating agencies, see Part B,
"Bond Ratings." It should be emphasized, however, that the ratings of the
rating agencies represent their opinions as to the quality of the Bonds which
they undertake to rate, and that these ratings are general and are not absolute
standards of quality and may change from time to time.
8.2% of the Bonds in the Maryland Trust were acquired from a Sponsor as sole
underwriter or from an underwriting syndicate in which a Sponsor participated,
or otherwise from a Sponsor's own organization. (See Part B, "Public Offering--
Sponsors' and Underwriters' Profits.")
NEW JERSEY TRUST 116
The Portfolio of the New Jersey Trust contains 6 issues of Bonds of issuers
located in the State of New Jersey. All of the issues are payable from the
income of specific projects or authorities and are not supported by the
issuer's power to levy taxes. Although income to pay such Bonds may be derived
from more than one source, the primary sources of such income and the
percentage * of the Bonds in this Trust deriving income from such sources are
as follows: hospital and health care facilities: 51.4%; pollution control
facilities: 20.4%; educational facilities: 20.1%; solid waste disposal
facilities: 8.1%. The Trust is considered to be concentrated in hospital
facilities issues.+ (See Part B, "Portfolio--Risk Factors" for a brief summary
of risk factors relating to certain of these issues.) 91.9% of the Bonds in
this Trust are insured as to timely payment of principal and interest by
certain insurance companies (CGIC, 20.8%, FSA, 19.9% and MBIA, 51.2%) (see Part
B, "Portfolio--Insurance"). Three Bonds in this Trust have been issued with an
"original issue discount." (See Part B, "Taxes.") The average life to maturity
of the Bonds in the New Jersey Trust is 30.7 years.
As of the Date of Deposit, 100% of the Bonds in this Trust are rated by
Standard & Poor's (91.9% rated AAA and 8.1% rated A). For a description of the
meaning of the applicable rating symbols as published by the rating agencies,
see Part B, "Bond Ratings." It should be emphasized, however, that the ratings
of the rating agencies represent their opinions as to the quality of the Bonds
which they undertake to rate, and that these ratings are general and are not
absolute standards of quality and may change from time to time.
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-5
<PAGE>
35.0% of the Bonds in the New Jersey Trust were acquired from a Sponsor as
sole underwriter or from an underwriting syndicate in which a Sponsor
participated, or otherwise from a Sponsor's own organization. (See Part B,
"Public Offering--Sponsors' and Underwriters' Profits.")
NEW YORK TRUST 134
The Portfolio of the New York Trust contains 9 issues of Bonds of issuers
located in the State of New York. One of the issues (representing approximately
9.1%* of the Bonds in the Trust) is a general obligation of a governmental
entity and is backed by the taxing power of that entity. The remaining issues
are payable from the income of specific projects or authorities and are not
supported by the issuer's power to levy taxes. Although income to pay such
Bonds may be derived from more than one source, the primary sources of such
income and the percentage of the Bonds in this Trust deriving income from such
sources are as follows: hospital and health care facilities: 33.5%;
transportation facilities: 16.9%; correctional facilities: 11.8%; sales tax:
10.4%; lease rental payments: 18.3%; The Trust is considered to be concentrated
in hospital facilities issues.+ (See Part B, "Portfolio--Risk Factors" for a
brief summary of risk factors relating to certain of these issues.) Six Bonds
in this Trust have been issued with an "original issue discount." (See Part B,
"Taxes.") The average life to maturity of the Bonds in the New York Trust is
30.3 years.
As of the Date of Deposit, 61.8% of the Bonds in this Trust are rated by
Standard & Poor's (14.0% rated AAA, 28.3% rated AA and 19.5% rated A); 9.5% are
rated A by Moody's 28.7% are rated A by Fitch. For a description of the meaning
of the applicable rating symbols as published by the rating agencies, see Part
B, "Bond Ratings." It should be emphasized, however, that the ratings of the
rating agencies represent their opinions as to the quality of the Bonds which
they undertake to rate, and that these ratings are general and are not absolute
standards of quality and may change from time to time.
18.0% of the Bonds in the New York Trust were acquired from a Sponsor as sole
underwriter or from an underwriting syndicate in which a Sponsor participated,
or otherwise from a Sponsor's own organization. (See Part B, "Public Offering--
Sponsors' and Underwriters' Profits.")
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-6
<PAGE>
UNDERWRITING
The names and addresses of the Underwriters and the number of Units to be
sold by them are as follows:
<TABLE>
<CAPTION>
UNITS
--------------------------------------------------
NATIONAL CALIFORNIA MARYLAND NEW JERSEY NEW YORK
TRUST 191 TRUST 135 TRUST 91 TRUST 116 TRUST 134
--------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Smith Barney Inc. .......... 5,000 2,000 2,450 2,250 2,150
1345 Avenue of the Americas
New York, New York 10105
Kidder, Peabody & Co. Incor-
porated.................... 1,500 1,000 100 250 500
60 Broad Street
New York, New York 10004
Gruntal & Co. Incorporated.. 100 -- -- -- --
14 Wall Street
New York, New York 10005
Legg Mason Wood Walker,
Inc. ...................... -- -- 100 -- --
111 South Calvert Street
Baltimore, Maryland 21202
Oppenheimer & Co., Inc. .... 100 -- -- -- 100
Oppenheimer tower
One World Financial Center
New York, New York 10281
Rauscher Pierce Refsnes,
Inc. ...................... 100 -- -- -- --
2500 RPR Tower
Plaza of the Americas
Dallas, Texas 75201
Robert W. Baird & Co. Incor-
porated.................... 100 -- -- -- --
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Roosevelt & Cross, Inc. .... 100 -- -- -- --
20 Exchange Place
New York, New York 10005
Wheat First Securities,
inc. ...................... -- -- 100 -- --
901 East Byrd Street
Richmond, Virginia 23219
----- ----- ----- ----- -----
Total....................... 7,000 3,000 2,750 2,500 2,750
===== ===== ===== ===== =====
</TABLE>
A-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Sponsors and Unit Holders of
Tax Exempt Securities Trust, Series 392:
We have audited the accompanying statements of financial condition, including
the portfolios of securities, of Tax Exempt Securities Trust, Series 392
(comprising, respectively, National Trust 191, California Trust 135, Maryland
Trust 91, New Jersey Trust 116 and New York Trust 134) as of June 30, 1994.
These financial statements are the responsibility of the Trustee (see note 5 to
the statements of financial condition). 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 with the Trustee of an irrevocable letter of credit deposited on
June 30, 1994 for the purchase of securities, as shown in the statements of
financial condition and portfolios of securities. An audit also includes
assessing the accounting principles used and significant estimates made by the
Trustee, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our Opinion.
In our opinion, the financial statements referred to above present fairly, in
ail material respects, the financial position of each of the respective trusts
constituting Tax Exempt Securities Trust, Series 392 as of June 30, 1994, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
New York, New York
June 30, 1994
A-8
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 392
STATEMENTS OF FINANCIAL CONDITION
AS OF DATE OF DEPOSIT, JUNE 30, 1994
<TABLE>
<CAPTION>
SERIES 392
--------------------------------------------------------------------
TRUST PROPERTY
--------------------------------------------------------------------
National California Maryland NEW Jersey New York
Trust 191 Trust 135 Trust 91 Trust 116 Trust 134
--------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Investment in Tax-Exempt Securities:
Bonds represented by purchase contracts backed by
letter of credit (1)................................. $6,732,278 $2,918,682 $2,589,698 $2,419,347 $2,600,605
Accrued interest through the Date of Deposit on underlying
bonds (1)(2).......................................... 72,456 17,970 25,784 8,684 24,942
---------- ---------- ---------- ---------- ----------
Total .............................................. $6,804,734 $2,936,652 $2,615,482 $2,428,031 $2,625,547
========== ========== ========== ========== ==========
LIABILITY AND INTEREST OF UNIT HOLDERS
--------------------------------------------------------------------
Liability:
Accrued interest through the Date of Deposit
underlying bonds (1)(2).............................. $ 72,456 $ 17,970 $ 25,784 $ 8,684 $ 24,942
---------- ---------- ---------- ---------- ----------
Interest of Unit Holders:
Units of fractional undivided interest outstanding
(National Trust 191: 7,000; California Trust 135:
3,000; Maryland Trust 91: 2,750; New Jersey Trust
116: 2,500; New York Trust 134: 2,750)
Cost to investors (3) ............................... 7,064,314 3,062,631 2,717,422 2,538,669 2,728,867
Less-Gross underwriting commission (4)............... 332,036 143,949 127,724 119,322 128,262
---------- ---------- ---------- ---------- ----------
Net amount applicable to investors................... 6,732,278 2,918,682 2,589,698 2,419,347 2,600,605
---------- ---------- ---------- ---------- ----------
Total ............................................ $6,804,734 $2,936,652 $2,615,482 $2,428,031 $2,625,547
========== ========== ========== ========== ==========
</TABLE>
- --------------------
(1) Aggregate cost to each Trust of the bonds listed under the Portfolios of
Securities on the immediately following pages is based on offering prices
as of 1:00 P.M. on June 30, 1994, the Date of Deposit, determined by the
Evaluator on the basis set forth in Part B, "Public Offering - Offering
Price." Morgan Guaranty Trust Company of New York issued an irrevocable
letter of credit in the aggregate principal amount of $25,000,000 which was
deposited with the Trustee for the purchase of $18,000,000 principal amount
of Bonds pursuant to contracts to purchase such Bonds at the Sponsor's
aggregate cost of $17,155,649 plus $149,836 representing accrued interest
thereon through the Date of Deposit.
(2) The Indenture provides that the Trustee will advance amounts equal to the
accrued interest on the underlying securities of each Trust (net of accrued
expenses) through the Date of Deposit and that such amounts will be
distributed to the Sponsors as Unit holders of record on such date, as set
forth in Part B, "Rights of Unit Holders - Distribution of Interest and
Principal."
(3) Aggregate public offering price (exclusive of interest) computed on 7,000,
3,000, 2,750, 2,500 and 2,750 Units of National Trust, California Trust,
Maryland Trust, New Jersey Trust and New York Trust, respectively, on the
basis set forth in Part B, "Public Offering - Offering Price."
(4) Sales charge of 4.70% computed on 7,000 Units of the National Trust, 3,000
Units of the California Trust, 2,750 Units of the Maryland Trust, 2,500
Units of the New Jersey Trust and 2,750 Units of the New York Trust on the
basis set forth in Part B, "Public Offering - Offering Price."
(5) The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of each
Trust and is responsible for establishing and maintaining a system of
internal controls directly related to, and designed to provide reasonable
assurance as to the integrity and reliability of, financial reporting of
each Trust. The Trustee is also responsible for all estimates and accruals
reflected in each Trust's financial statements. The Evaluator determines
the price for each underlying Bond included in each Trust's Portfolio of
Securities on the basis set forth in Part B, "Public Offering - Offering
Price." Under the Securities Act of 1933, as amended (the "Act"), the
Sponsors are deemed to be issuers of each Trust's Units. As such, the
Sponsors have the responsibility of issuers under the Act with respect to
financial statements of each Trust included in the Registration Statement
under the Act and amendment thereto.
A-9
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 392
NATIONAL TRUST 191--PORTFOLIO OF SECURITES
As of June 30, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. $ 435,000 Alaska State Housing Finance Corporation,
Collateralized Revenue Bonds, Veterans Mortgage AAA 6/1/01 @ 102 $ 440,016 6.700% $ 29,906
Program, 6.875% Due 6/1/2033 SF 6/1/31 @ 100
2. 100,000 California Housing Finance Agency, Multi-Unit
Rental Housing Revenue Bonds, 6.70% Due 8/1/2015 A+ 8/1/02 @ 102 101,455 6.500 6,700
SF 2/1/07 @ 100
3. 500,000 City of Campbell, California, Redevelopment Agency,
Certificates of Participation, Civic Center A- 10/1/01 @ 102 506,785 6.550 33,750
Project, 6.75% Due 10/1/2017 SF 10/1/06 @ 100
4. 215,000 City and County of San Francisco, California,
Redevelopment Financing Authority, Tax Allocation A 8/1/04 @ 103 213,628 6.550 13,975
Revenue Bonds, San Francisco Redevelopment
Projects, 6.50% Due 8/1/2021
5. 500,000 Santa Barbara, California, Redevelopment Agency,
Certificates of Participation Refunding, Harbor A* 10/1/02 @ 102 508,265 6.550 33,750
Project, 6.75% Due 10/1/2027 SF 10/1/07 @ 100
6. 500,000 Central Lake County, Illinois, Joint Action Water
Agency, Water Refunding Revenue Bonds, 6.00% Due Aa* 2/1/03 @ 102 481,335 6.300 30,000
2/1/2019 SF 2/1/13 @ 100
7. 250,000 The Indianapolis, Indiana, Local Public Improvement
Bond Bank Bonds, 6.50% Due 1/15/2015 A 1/15/04 @ 102 250,000 6.500 16,250
SF 1/15/12 @ 100
8. 500,000 Prince George's County, Maryland, Project and
Refunding Revenue Bonds, Dimensions Health A* 7/1/04 @ 102 421,235 6.500 26,500
Corporation Issue, 5.30% Due 7/1/2024 SF 7/1/15 @ 100
9. 475,000 Massachusetts Housing Finance Agency, Residential
Development Bonds, 6.875% Due 11/15/2021 AAA 5/15/02 @ 102 491,278 6.400 32,656
SF 5/15/13 @ 100
10. 500,000 New Hampshire Higher Educational and Health
Facilities Authority, Hospital Revenue Bonds, A- 10/1/03 @ 102 470,090 6.550 30,000
Nashua Memorial Hospital Issue, 6.00% Due 10/1/2013 SF 10/1/09 @ 100
11. 500,000 New Hampshire Housing Finance Authority, Single
Family Mortgage Revenue Bonds, 6.05% Due 7/1/2025 Aa* 7/1/03 @ 102 470,145 6.500 30,250
SF 1/1/17 @ 100
12. 500,000 County of Erie, Ohio, Franciscan Services
Corporation Revenue Refunding Bonds, Providence A- 1/1/04 @ 102 463,800 6.600 30,000
Hospital, Inc., 6.00% Due 1/1/2019 SF 1/1/14 @ 100
13. 250,000 South Fork Municipal Authority, Cambria County,
Pennsylvania, Hospital Revenue Bonds, Lee Hospital A- 7/1/03 @ 102 214,667 6.600 13,750
Project, 5.50% Due 7/1/2023 SF 7/1/12 @ 100
14. 225,000 Rhode Island Housing and Mortgage Finance
Corporation, Homeownership Opportunity Bonds, AA+ 4/1/04 @ 102 227,781 5.545 15,075
6.70% Due 10/1/2014 SF 4/1/12 @ 100
15. 500,000 Harris County, Texas, Health Facilities
Development Corporation, Hospital Revenue Bonds, A- 6/1/04 @ 102 495,145 6.700 33,125
Memorial Hospital System Project, 6.625% Due SF 6/1/15 @ 100
6/1/2024
</TABLE>
A-10
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 392
NATIONAL TRUST 191--PORTFOLIO OF SECURITIES
As of June 30, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
16. $ 500,000 Utah Housing Finance Agency, Single Family Mortgage
Bonds, 6.55% Due 7/1/2026 Aa* 7/1/04 @ 102 $ 496,680 6.600% $ 32,750
SF 1/1/15 @ 100
17. 390,000 Industrial Development Authority of Albemarle
County, Virginia, Hospital Refunding Revenue A* 10/1/03 @ 102 336,773 6.600 21,450
Bonds, Martha Jefferson Hospital, 5.50% Due SF 10/1/16 @ 100
10/1/2020
18. 160,000 Wyoming Community Development Authority, Single
Family Mortgage Bonds, 5.80% Due 6/1/2025 AA 12/1/03 @ 102 143,200 6.600 9,280
SF 6/1/19 @ 100
----------- --------- ---------
$ 7,000,000 $6,732,278 $ 439,167
----------- --------- ---------
----------- --------- ---------
</TABLE>
A-11
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 392
CALIFORNIA TRUST 135--PORTFOLIO OF SECURITIES
AS OF JUNE 30, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. $ 250,000 The Regents of the University of California,
Refunding Certificates of Participation, UCLA Aa* 11/1/03 @ 102 $ 223,220 6.450% $ 14,000
Central Chiller/Cogeneration Facility, 5.60% Due SF 11/1/18 @ 100
11/1/2020
2. 500,000 Huntington Park, California, Public Financing
Authority, Local Agency Revenue Bonds, 6.50% Due A 9/1/04 @ 102 496,830 6.550 32,500
9/1/2020 SF 9/1/05 @ 100
3. 250,000 Long Beach, California, Financing Authority Revenue
Bonds, 5.50% Due 11/1/2022 AAA 11/1/02 @ 100 222,203 6.350 13,750
SF 11/1/18 @ 100
4. 250,000 Los Angeles, California, Department of Water and
Power, Electric Plant Refunding Revenue Bonds, AAA 9/1/03 @ 102 234,897 6.300 14,687
5.875% Due 9/1/2030 SF 9/1/24 @ 100
5. 400,000 Palmdale Civic Authority, Los Angeles County,
California, Merged Redevelopment Project Areas, A 9/1/04 @ 102 400,000 6.599 26,400
6.60% Due 9/1/2034 SF 9/1/25 @ 100
6. 350,000 San Benito, California, Hospital District, Insured
Health Facility Revenue Bonds, 6.75% Due 12/1/2021 A 12/1/01 @ 102 353,612 6.600 23,625
SF 12/1/11 @ 100
7. 500,000 City and County of San Francisco, California,
Redevelopment Financing Authority, Tax Allocation A 8/1/04 @ 103 496,810 6.550 32,500
Revenue Bonds, San Francisco Redevelopment
Projects, 6.50% Due 8/1/2021
8. 500,000 West Contra Costa Hospital District, Insured Health
Facility Refunding Revenue Bonds, 6.50% Due A+ 11/1/04 @ 102 491,110 5.650 32,500
11/1/2017 SF 11/1/12 @ 100
----------- --------- ----------
$ 3,000,000 $2,918,682 $ 189,962
----------- --------- ----------
----------- --------- ----------
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-12
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 392
MARYLAND TRUST 91--PORTFOLIO OF SECURITIES
AS OF JUNE 30, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. $ 250,000 Community Development Administration, Department of
Housing and Community Development, State of AAA 6/1/04 @ 102 $ 231,473 6.250% $ 14,250
Maryland, Infrastructure Financing Bonds, 5.70% Due SF 6/1/17 @ 100
6/1/2024
2. 500,000 Community Development Administration, Department of
Housing and Community Development, State of Aa* 5/15/03 @ 102 483,225 6.300 30,250
Maryland, Multi-Family Housing Revenue Bonds, 6.05% SF 5/15/14 @ 100
Due 5/15/2024
3. 300,000 Maryland Health and Higher Educational Facilities
Authority Project Revenue Bonds, Kernan Hospital AAA 7/1/04 @ 102 297,000 6.087 18,000
Issue, 6.00% Due 7/1/2014 SF 7/1/05 @ 100
4. 200,000 Maryland Health and Higher Educational Facilities
Authority Project Revenue Bonds, Kernan Hospital AAA 7/1/04 @ 102 198,000 6.174 12,200
Issue, 6.10% Due 7/1/2024 SF 7/1/05 @ 100
5. 500,000 Baltimore County, Maryland, Mortgage Revenue
Refunding Bonds, FHA Insured Mortgage Loan, Silver AAA 11/1/03 @ 102 517,500 6.312 33,750
Spring Station Apartments Project, 6.75% Due SF 5/1/20 @ 100
11/1/2024
6. 500,000 Montgomery County, Maryland, Pollution Control
Revenue Refunding Bonds, Potomac Electric Project, A+ 2/15/04 @ 102 441,265 6.250 26,875
5.375% Due 2/15/2024
7. 500,000 Prince George's County, Maryland, Project and
Refunding Revenue Bonds, Dimensions Health A* 7/1/04 @ 102 421,235 6.500 26,500
Corporation Issue, 5.30% Due 7/1/2024 SF 7/1/15 @ 100
----------- ---------- ----------
$ 2,750,000 $ 2,589,698 $ 161,825
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-13
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 392
NEW JERSEY TRUST 116--PORTFOLIO OF SECURITIES
AS OF JUNE 30, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. $ 500,000 New Jersey Educational Facilities Authority
Revenue Bonds, New Jersey Institute of Technology AAA 7/1/04 @ 102 $ 486,450 6.200% $ 30,000
Issue, 6.00% Due 7/1/2024 SF 7/1/16 @ 100
2. 500,000 New Jersey Health Care Facilities Financing
Authority Revenue Bonds, Monmouth Medical Center AAA 7/1/04 @ 102 505,000 6.131 31,250
Issue, 6.25% Due 7/1/2024 SF 7/1/17 @ 100
3. 500,000 New Jersey Health Care Facilities Financing
Authority Revenue Bonds, Newark Beth Israel Medical AAA 7/1/04 @ 102 483,150 6.250 30,000
Center Issue, 6.00% Due 7/1/2024 SF 7/1/17 @ 100
4. 300,000 New Jersey Health Care Facilities Financing
Authority Revenue Bonds, St. Peter's Medical Center AAA 7/1/03 @ 102 254,829 6.150 15,000
Issue, 5.00% Due 7/1/2021 SF 7/1/17 @ 100
5. 200,000 The Hudson County Improvement Authority, County of
Hudson, New Jersey, County Guaranteed Solid Waste A+ 7/1/04 @ 102 196,168 6.250 12,200
System Revenue Bonds, 6.10% Due 7/1/2020 SF 7/1/11 @ 100
6. 500,000 The Pollution Control Financing Authority of Salem
County, New Jersey, Pollution Control Revenue AAA 6/1/04 @ 102 493,750 6.338 31,250
Refunding Bonds, Public Service Electric and Gas
Company Project, 6.25% Due 6/1/2031
----------- ---------- ---------
$ 2,500,000 $ 2,419,347 $ 149,700
----------- ---------- ---------
----------- ---------- ---------
The Notes following the Portfolios are an integral part of each Portfolio of Securities.
</TABLE>
A-14
<PAGE>
TAX EXEMPT SECURITIES TRUST, SERIES 392
NEW YORK TRUST 134--PORTFOLIO OF SECURITIES
AS OF JUNE 30, 1994
<TABLE>
<CAPTION>
Cost of Yield on Annual
Redemption Securities Date of Interest
Aggregate Securities Represented By Ratings Provisions to Trust Deposit Income
Principal Purchase Contracts (1) (2) (3)(4) (4) to Trust
--------- ------------------------- ------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. $ 250,000 The City of New York, General Obligation Bonds,
6.00% Due 5/15/2016 A- 5/15/03 @ 101.5 $ 236,885 6.450% $ 15,000
2. 305,000 New York Local Government Assistance Corporation
Refunding Bonds, 5.50% Due 4/1/2021 A 4/1/03 @ 102 270,026 6.400 16,775
SF 4/1/17 @ 100
3. 500,000 New York State Medical Care Facilities Finance
Agency, Hospital and Nursing Home Insured Mortgage AA 2/15/04 @ 102 508,105 6.300 32,500
Revenue Bonds, 6.50% Due 2/15/2034 SF 2/15/97 @ 100
4. 400,000 New York State Medical Care Facilities Finance
Agency, St. Luke's-Roosevelt Hospital Center FHA, AAA 8/15/03 @ 102 363,720 6.350 22,800
Insured Mortgage Revenue Bonds, 5.70% Due 2/15/2029
5. 100,000 New York State Urban Development Corporation,
Correctional Capital Facilities Revenue Bonds, A** 1/1/04 @ 102 85,487 6.500 5,375
5.375% Due 1/1/2023 SF 1/1/14 @ 100
6. 250,000 New York State Urban Development Corporation,
Correctional Facilities Revenue Refunding Bonds, A** 1/1/04 @ 102 221,258 6.500 13,750
5.50% Due 1/1/2016 SF 1/1/15 @ 100
7. 250,000 Battery Park City Authority, New York, Revenue
Refunding Bonds, 5.70% Due 11/1/2020 AA 11/1/03 @ 102 229,317 6.350 14,250
8. 445,000 Metropolitan Transportation Authority, Commuter
Facilities Revenue Bonds, 6.50% Due 7/1/2024 A-** 7/1/04 @ 101.50 439,215 6.600 28,925
SF 7/1/19 @ 100
9. 250,000 United Nations Development Corporation Refunding
Bonds, 6.25% Due 7/1/2026 A* 7/1/03 @ 102 246,592 6.350 15,625
SF 7/1/12 @ 100
----------- ---------- ---------
$ 2,750,000 $ 2,600,605 $ 165,000
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-15
<PAGE>
NOTES TO PORTFOLIOS OF SECURITIES
(1) For a description of the meaning of the applicable rating symbols as
published by Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc., Moody's Investors Service, Inc. (*), and Fitch Investors Service,
Inc. (**),see Part B, "Bond Ratings.
(2) There is shown under this heading the year in which each issue of Bonds
initially is redeemable and the redemption price for that year; unless
otherwise indicated, each issue continues to be redeemable at declining
prices thereafter, but not below par. "SF indicates a sinking fund has been
or will be established with respect to an issue of Bonds. The prices at
which Bonds may be redeemed or called prior to maturity may or may not
include a premium and, in certain cases, may be less than the cost of the
Bonds to a Trust. Certain Bonds in a Portfolio, including Bonds listed as
not being subject to redemption provisions, may be redeemed in whole or in
part other than by operation of the stated redemption or sinking fund
provision under certain unusual or extraordinary circumstances specified in
the instruments setting forth the terms and provisions of such Bonds. For
example, see discussion of obligations of housing authorities in Part B,
"Tax Exempt Securities Trust--Portfolio."
(3) Contracts to purchase Bonds were entered into during the period December
13, 1993, through June 30, 1994, with the final settlement date on July 21,
1994. The Profit (Loss) to Sponsors on Deposit totals $61,636, $25,319,
$778, $(5,949) and $23,177 for the National Trust, California Trust,
Maryland Trust, New Jersey Trust and New York Trust, respectively.
(4) Evaluation of the Bonds by the Evaluator is made on the basis of current
offering prices for the Bonds. The current offering prices of the Bonds are
greater than the current bid prices of the Bonds. The Redemption Price per
Unit and the public offering price of the Units in the secondary market are
determined on the basis of the current bid prices of the Bonds. (See Part
B, "Public Offering - Offering Price" and "Rights of Unit Holders--
Redemption of Units.") Yield of Bonds was computed on the basis of offering
prices on the date of deposit. The aggregate bid price of the Bonds in the
National Trust, California Trust, Maryland Trust, New Jersey Trust and New
York Trust on June 30, 1994, was $6,704,278, $2,906,682, $2,577,698,
$2,409,347 and $2,589,605, respectively.
A-16
<PAGE>
PROSPECTUS--PART B:
- --------------------------------------------------------------------------------
NOTE THAT PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED
BY PART A.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST
THE TRUSTS
Each Trust is one of a series of similar but separate unit investment trusts
created under the laws of the State of New York by a Trust Indenture and
Agreement and related Reference Trust Agreement dated the Date of Deposit
(collectively, the "Trust Agreement"), among Smith Barney Inc. and Kidder,
Peabody & Co. Incorporated, as sponsors (the "Sponsors" or "Co-sponsors"),
United States Trust Company of New York, as Trustee, and Kenny Information
Systems, Inc., as Evaluator. Each Trust containing Bonds of a State for which
such Trust is named (a "State Trust") and each National Trust, Selected Term
Trust, Long-Intermediate Term Trust, Intermediate Term Trust, Short-
Intermediate Term Trust and Short Term Trust are referred to herein as the
"Trust" or "Trusts," unless the context requires otherwise. On the Date of
Deposit, the Sponsors deposited contracts and funds (represented by a certified
check or checks and/or an irrevocable letter or letters of credit, issued by a
major commercial bank) for the purchase of certain interest-bearing obligations
(the "Bonds") and/or Units of preceding Series of Tax Exempt Securities Trust
(such Bonds and Units of preceding Series of Tax Exempt Securities Trust, if
any, (the "Deposited Units") being referred to herein collectively as the
"Securities"). The Trustee thereafter delivered to the Sponsors registered
certificates of beneficial interest (the "Certificates") representing the units
(the "Units") comprising the entire ownership of each Trust, which Units are
being offered hereby. References to multiple Trusts in Part B herein should be
read as references to a single Trust if Part A indicates the creation of only
one Trust.
Notwithstanding the availability of the above-mentioned certified check or
checks and/or irrevocable letter or letters of credit, it is expected that the
Sponsors will pay for the Bonds as the contracts for their purchase become due.
A substantial portion of such contracts have not become due by the date of this
Prospectus. To the extent Units are sold prior to the settlement of such
contracts, the Sponsors will receive the purchase price on such Units prior to
the time at which they pay for Bonds pursuant to such contracts and have the
use of such funds during this period.
OBJECTIVES
The objectives of a Trust are tax-exempt income and conservation of capital
through an investment in a diversified portfolio of municipal bonds. There is,
of course, no guarantee that a Trust's objectives will be achieved since the
payment of interest and the preservation of principal are dependent upon the
continued ability of the issuers of the bonds to meet such obligations.
Subsequent to the Date of Deposit, the ratings of the Bonds set forth in Part
A--"Portfolio of Securities" may decline due to, among other factors, a decline
in creditworthiness of the issuer of said Bonds.
PORTFOLIO
The following factors, among others, were considered in selecting the Bonds
for each Trust: (1) the Bonds are obligations of the states, counties,
territories or municipalities of the United States and authorities or political
subdivisions thereof, so that the interest on them will, in the opinion of
recognized bond counsel to the issuing governmental authorities, be exempt from
Federal tax under existing law to the extent described in "Taxes", (2) all the
Bonds deposited in a State Trust are obligations of the State for which such
Trust is named or of the counties, territories or municipalities of such State,
and authorities or political subdivisions thereof, or of the Territory of Guam
or the Commonwealth of Puerto Rico, so that the interest on them will, in the
opinion of recognized bond counsel to the issuing governmental authorities, be
exempt from Federal income tax under existing law to the extent described in
"Taxes" and from state income taxes in the state for which such State Trust is
named to the extent described in Part C, (3) the Bonds were chosen in part on
the basis of their respective maturity dates, (4) the Bonds are diversified as
to purpose of issue and location of issuer, except in the case of a State Trust
where the Bonds are diversified only as to purpose of issue, and (5) in the
opinion of the Sponsors, the Bonds are fairly valued relative to other bonds of
comparable quality and maturity.
The Bonds in the Portfolio of a Trust were chosen in part on the basis of
their respective maturity dates. The Bonds in each Trust will have a dollar-
weighted average portfolio maturity as designated in Part A--"Portfolio Summary
as of Date of Deposit." For the actual maturity date of each of the Bonds
contained in a Trust, which date may be earlier or later than the dollar-
weighted average portfolio maturity of the Trust, see Part A, "Portfolio of
Securities." A sale or other disposition of a Bond by the Trust prior to the
maturity of such Bond may be at a price which results in a loss to the Trust.
The inability of an issuer to pay the principal amount due upon the maturity of
a Bond would result in a loss to the Trust.
B-1
<PAGE>
In the event that any contract for the purchase of any Bond fails, the
Sponsors are authorized under the Trust Agreement, subject to the conditions
set forth below, to instruct the Trustee to acquire other securities (the
"Replacement Bonds") for inclusion in the Portfolio of the affected Trust. Any
Replacement Bonds must be deposited not later than the earlier of (i) the first
monthly Distribution Date of the Trust and (ii) 90 days after such Trust was
established. The cost and aggregate principal amount of a Replacement Bond may
not exceed the cost and aggregate principal amount of the Bond which it
replaces. In addition, a Replacement Bond must (1) be a tax-exempt bond; (2)
have a fixed maturity or disposition date comparable to the Bond it replaces;
(3) be purchased at a price that results in a yield to maturity and in a
current return, in each case as of the execution and delivery of the Trust
Agreement, which is approximately equivalent to the yield to maturity and
current return of the Bond which it replaces; (4) be purchased within twenty
days after delivery of notice of the failed contracts and; (5) be rated in a
category A or better by Standard & Poor's, Moody's, Fitch, or Duff & Phelps.
Whenever a Replacement Bond has been acquired for a Trust, the Trustee shall,
within five days thereafter, notify all Unit holders of such Trust of the
acquisition of the Replacement Bond.
In the event that a contract to purchase Bonds fails and Replacement Bonds
are not acquired, the Trustee will, not later than the second monthly
Distribution Date, distribute to Unit holders the funds attributable to the
failed contract. The Sponsors will, in such a case, refund the sales charge
applicable to the failed contract. If less than all the funds attributable to a
failed contract are applied to purchase Replacement Bonds, the remaining moneys
will be distributed to Unit holders not later than the second monthly
Distribution Date. Moreover, the failed contract will reduce the Estimated Net
Annual Income per Unit, and may lower the Estimated Current Return and
Estimated Long-Term Return.
Risk Factors
Certain Bonds in a Trust may have been purchased by the Sponsors on a "when,
as and if issued" basis; that is, they had not yet been issued by their
governmental entity on the Date of Deposit (although such governmental entity
had committed to issue such Bonds). Contracts relating to such "when, as and if
issued" Bonds are not expected to be settled by the first settlement date for
Units. In the case of these and/or certain other Bonds, the delivery of the
Bonds may be delayed ("delayed delivery") or may not occur. Unit holders who
purchased their Units of a Trust prior to the date such Bonds are actually
delivered to the Trustee may have to make a downward adjustment in the tax
basis of their Units for interest accruing on such "when, as and if issued" or
"delayed delivery" Bonds during the interval between their purchase of Units
and delivery of such Bonds, since the Trust and the Unit holders will not be
reimbursing the Sponsors for interest accruing on such "when, as and if issued"
or "delayed delivery" Bonds during the period between the settlement date for
the Units and the delivery of such Bonds into the Trust. (See "Taxes.") Such
adjustment has been taken into account in computing the Estimated Current
Return and Estimated Long-Term Return set forth herein, which is slightly lower
than Unit holders may receive after the first year. (See Part A, "Summary of
Essential Information.") To the extent that the delivery of such Bonds is
delayed beyond their respective expected delivery dates, the Estimated Current
Return and Estimated Long-Term Return for the first year may be lower than
indicated in the "Summary of Essential Information" in Part A.
Most of the Bonds in the Portfolio of a Trust are subject to redemption prior
to their stated maturity date pursuant to sinking fund or call provisions. (See
Part A--"Portfolio Summary as of Date of Deposit" for information relating to
the particular Trust described therein.) In general, a call or redemption
provision is more likely to be exercised when the offering price valuation of a
bond is higher than its call or redemption price, as it might be in periods of
declining interest rates, than when such price valuation is less than the
bond's call or redemption price. To the extent that a Bond was deposited in a
Trust at a price higher than the price at which it is redeemable, redemption
will result in a loss of capital when compared with the original public
offering price of the Units. Conversely, to the extent that a Bond was acquired
at a price lower than the redemption price, redemption will result in an
increase in capital when compared with the original public offering price of
the Units. Monthly distributions will generally be reduced by the amount of the
income which would otherwise have been paid with respect to redeemed bonds. The
Estimated Current Return and Estimated Long-Term Return of the Units may be
affected by such redemptions. Each Portfolio of Securities in Part A contains a
listing of the sinking fund and call provisions, if any, with respect to each
of the Bonds in a Trust. Because certain of the Bonds may from time to time
under certain circumstances be sold or redeemed or will mature in accordance
with their terms and the proceeds from such events will be distributed to Unit
holders and will not be reinvested, no assurance can be given that a Trust will
retain for any length of time its present size and composition. NEITHER THE
SPONSORS NOR THE TRUSTEE SHALL BE LIABLE IN ANY WAY FOR ANY DEFAULT, FAILURE OR
DEFECT IN ANY BOND.
The Portfolio of the Trust may consist of some Bonds whose current market
values were below face value on the Date of Deposit. A primary reason for the
market value of such Bonds being less than face value at maturity is that the
interest coupons of such Bonds are at lower rates than the current market
interest rate for comparably rated Bonds, even though at the time of the
issuance of such Bonds the interest coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds selling at
market discounts tend to increase in market value as they approach maturity
when the principal amount is payable. A market discount tax-exempt Bond held to
maturity will have a larger portion of its total return in the form of taxable
ordinary income and less in the form of tax-exempt income than a comparable
Bond bearing interest at current market rates. Under the provisions of the
Internal Revenue
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Code in effect on the date of this Prospectus any ordinary income attributable
to market discount will be taxable but will not be realized until maturity,
redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit", the Trust may
contain or be concentrated in one or more of the classifications of Bonds
referred to below. A Trust is considered to be "concentrated" in a particular
category when the Bonds in that category constitute 25% or more of the
aggregate value of the Portfolio. (See Part A--"Portfolio Summary as of Date of
Deposit" for information relating to the particular Trust described therein.)
An investment in Units of the Trust should be made with an understanding of the
risks that these investments may entail, certain of which are described below.
GENERAL OBLIGATION BONDS. Certain of the Bonds in the Portfolio may be
general obligations of a governmental entity that are secured by the taxing
power of the entity. General obligation bonds are backed by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. However, the taxing power of any governmental entity may be limited
by provisions of state constitutions or laws and an entity's credit will depend
on many factors, including an erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse impact upon both their revenues
and expenditures, as well as other factors, many state and local governments
are confronting deficits and potential deficits which are the most severe in
recent years. Many issuers are facing highly difficult choices about
significant tax increases and/or spending reductions in order to restore
budgetary balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits or cash flow
needs.
In addition, certain of the Bonds in the Trust may be obligations of issuers
(including California issuers) who rely in whole or in part on ad valorem real
property taxes as a source of revenue. Certain proposals, in the form of state
legislative proposals or voter initiatives, to limit ad valorem real property
taxes have been introduced in various states, and an amendment to the
constitution of the State of California, providing for strict limitations on ad
valorem real property taxes, has had a significant impact on the taxing powers
of local governments and on the financial conditions of school districts and
local governments in California. It is not possible at this time to predict the
final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on their
abilities to make future payments on their outstanding debt obligations.
INDUSTRIAL DEVELOPMENT REVENUE BONDS ("IDRS"). IDRs, including pollution
control revenue bonds, are tax-exempt securities issued by states,
municipalities, public authorities or similar entities ("issuers") to finance
the cost of acquiring, constructing or improving various projects, including
pollution control facilities and certain industrial development facilities.
These projects are usually operated by corporate entities. IDRs are not general
obligations of governmental entities backed by their taxing power. Issuers are
only obligated to pay amounts due on the IDRs to the extent that funds are
available from the unexpended proceeds of the IDRs or receipts or revenues of
the issuer under arrangements between the issuer and the corporate operator of
a project. These arrangements 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 IDRs.
IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable under the
issuer's arrangements with the corporate operator of a particular project have
been assigned and pledged to the holders of the IDRs or a trustee for the
benefit of the holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the IDRs or a trustee as
additional security for the IDRs. In addition, IDRs are frequently directly
guaranteed by the corporate operator of the project or by another affiliated
company. Regardless of the structure, payment of IDRs is solely dependent upon
the creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors that are industrial companies 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 (including that of low-cost foreign companies), unfunded pension
fund liabilities or off-balance sheet items, and financial deterioration
resulting from leveraged buy-outs or takeovers. However, certain of the IDRs in
the Portfolio may be additionally insured or secured by letters of credit
issued by banks or otherwise guaranteed or secured to cover amounts due on the
IDRs in the event of default in payment by an issuer.
HOSPITAL AND HEALTH CARE FACILITY BONDS. The ability of hospitals and other
health care facilities to meet their obligations with respect to revenue bonds
issued on their behalf is dependent on various factors, including the level of
payments received from private third-party payors and government programs and
the cost of providing health care services.
A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government programs
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are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially decrease the rate of program payments for health care facilities.
Certain special revenue obligations (i.e., Medicare or Medicaid revenues) may
be payable subject to appropriations by state legislatures. There can be no
assurance that payments under governmental programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients participating in such programs. In addition, there
can be no assurance that a particular hospital or other health care facility
will continue to meet the requirements for participation in such programs.
The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures, rate-
setting, and compliance with building codes and environmental laws. Facilities
are subject to periodic inspection by governmental and other authorities to
assure continued compliance with the various standards necessary for licensing
and accreditation. These regulatory requirements are subject to change and, to
comply, it may be necessary for a hospital or other health care facility to
incur substantial capital expenditures or increased operating expenses to
effect changes in its facilities, equipment, personnel and services.
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. The Clinton
Administration may impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party payors or other
measures to reduce health care costs and make health care available to more
individuals, which would reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a hospital
cannot adjust to the new system by reducing expenses or raising rates,
financial difficulties may arise. Also, Blue Cross has denied reimbursement for
some hospitals for services other than emergency room services. The lost volume
would reduce revenues unless replacement patients were found.
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, if
the hospital becomes subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to perform
procedures against specified religious principles or to disclose information
that is considered confidential or privileged. Certain FHA-insured bonds may
provide that all or a portion of these bonds, otherwise callable at a premium,
can be called at par in certain circumstances. If a hospital defaults upon a
bond obligation, the realization of Medicare and Medicaid receivables may be
uncertain and, if the bond obligation is secured by the hospital facilities,
legal restrictions on the ability to foreclose upon the facilities and the
limited alternative uses to which a hospital can be put may severely reduce its
collateral value.
The Internal Revenue Service is currently engaged in a program of intensive
audits of certain large tax-exempt hospital and health care facility
organizations. Although these audits have not yet been completed, it has been
reported that the tax-exempt status of some of these organizations may be
revoked. At this time, it is uncertain whether any of the hospital and health
care facility bonds held by the Trust will be affected by such audit
proceedings.
SINGLE FAMILY AND MULTI-FAMILY HOUSING BONDS. Multi-family housing revenue
bonds and single family mortgage revenue bonds are state and local housing
issues that have been issued to provide financing for various housing projects.
Multi-family housing revenue bonds are payable primarily from the revenues
derived from mortgage loans to housing projects for low to moderate income
families. Single-family mortgage revenue bonds are issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages on
residences.
Housing obligations are not general obligations of the issuer although
certain obligations may be supported to some degree by Federal, state or local
housing subsidy programs. Budgetary constraints experienced by these programs
as well as the failure by a state or local housing issuer to satisfy the
qualifications required for coverage under these programs or any legal or
administrative determinations that the coverage of these programs is not
available to a housing issuer, probably will result in a decrease or
elimination of subsidies available for payment of amounts due on the issuer's
obligations. The ability of housing issuers to make debt service payments on
their obligations will also be affected by various economic and non-economic
developments including, among other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in multi-family
projects, the rate of default on mortgage loans underlying single family issues
and the ability of mortgage insurers to pay claims, employment and income
conditions prevailing in local markets, increases in construction costs, taxes,
utility costs and other operating expenses, the managerial ability of project
managers, changes in laws and governmental regulations and economic trends
generally in the localities in which the projects are situated. Occupancy of
multi-family housing projects may also be adversely affected by high rent
levels and income limitations imposed under Federal, state or local programs.
All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot be
determined. However, the average
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life of these obligations will ordinarily be less than their stated maturities.
Single-family issues are subject to mandatory redemption in whole or in part
from prepayments on underlying mortgage loans; mortgage loans are frequently
partially or completely prepaid prior to their final stated maturities as a
result of events such as declining interest rates, sale of the mortgaged
premises, default, condemnation or casualty loss. Multi-family issues are
characterized by mandatory redemption at par upon the occurrence of monetary
defaults or breaches or covenants by the project operator. Additionally,
housing obligations are generally subject to mandatory partial redemption at
par to the extent that proceeds from the sale of the obligations are not
allocated within a stated period (which may be within a year of the date of
issue). To the extent that these obligations were valued at a premium when a
Holder purchased Units, any prepayment at par would result in a loss of capital
to the Holder and, in any event, reduce the amount of income that would
otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends on qualification
under Section 143 of the Internal Revenue Code of 1986, as amended (the
"Code"), in the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in the case of certain
multi-family housing revenue bonds (including Section 8 assisted bonds). These
sections of the Code or other provisions of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of the
residences financed with the proceeds of the single family mortgage revenue
bonds and the income levels of tenants of the rental projects financed with the
proceeds of the multi-family housing revenue bonds. While the issuers of the
bonds and other parties, including the originators and servicers of the single-
family mortgages and the owners of the rental projects financed with the multi-
family housing revenue bonds, generally covenant to meet these ongoing
requirements and generally agree to institute procedures designed to ensure
that these requirements are met, there can be no assurance that these ongoing
requirements will be consistently met. The failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly retroactively
from the date of issuance, thereby reducing the value of the bonds, subjecting
the Holders to unanticipated tax liabilities and possibly requiring the Trustee
to sell the bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under the
applicable mortgage or permit the holder to accelerate payment of the bond or
require the issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage bonds.
POWER FACILITY BONDS. The ability of utilities to meet their obligations with
respect to revenue bonds issued on their behalf is dependent on various
factors, including the rates they may charge their customers, the demand for a
utility's services and the cost of providing those services. Utilities, in
particular investor-owned utilities, are subject to extensive regulations
relating to the rates which they may charge customers. Utilities can experience
regulatory, political and consumer resistance to rate increases. Utilities
engaged in long-term capital projects are especially sensitive to regulatory
lags in granting rate increases. Any difficulty in obtaining timely and
adequate rate increases could adversely affect a utility's results of
operations.
The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities,
for example, have experienced increased competition as a result of the
availability of other energy sources, the effects of conservation on the use of
electricity, self-generation by industrial customers and the generation of
electricity by co-generators and other independent power producers. Also,
increased competition will result if federal regulators determine that
utilities must open their transmission lines to competitors. Utilities which
distribute natural gas also are subject to competition from alternative fuels,
including fuel oil, propane and coal.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of capital,
the availability and cost of fuel and other factors. In addition, natural gas
pipeline and distribution companies have incurred increased costs as a result
of long-term natural gas purchase contracts containing "take or pay" provisions
which require that they pay for natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future they
will also incur increasing capital and operating expenses to comply with
environmental legislation such as the Clean Air Act of 1990, and other energy,
licensing and other laws and regulations relating to, among other things, air
emissions, the quality of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and siting and licensing of
facilities. Environmental legislation and regulations are changing rapidly and
are the subject of current public policy debate and legislative proposals. It
is increasingly likely that some or many utilities will be subject to more
stringent environmental standards in the future that could result in
significant capital expenditures. Future legislation and regulation could
include, among other things, regulation of so-called electromagnetic fields
associated with electric transmission and distribution lines as well as
emissions of carbon dioxide and other so-called greenhouse gases associated
with the burning of fossil fuels. Compliance with these requirements may limit
a utility's operations or require substantial investments in new equipment and,
as a result, may adversely affect a utility's results of operations.
The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new
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generating units, (c) uncertainties in predicting future load requirements, (d)
increased financing requirements coupled with limited availability of capital,
(e) exposure to cancellation and penalty charges on new generating units under
construction, (f) problems of cost and availability of fuel, (g) compliance
with rapidly changing and complex environmental, safety and licensing
requirements, (h) litigation and proposed legislation designed to delay or
prevent construction of generating and other facilities, (i) the uncertain
effects of conservation on the use of electric energy, (j) uncertainties
associated with the development of a national energy policy, (k) regulatory,
political and consumer resistance to rate increases and (l) increased
competition as a result of the availability of other energy sources. These
factors may delay the construction and increase the cost of new facilities,
limit the use of, or necessitate costly modifications to, existing facilities,
impair the access of electric utilities to credit markets, or substantially
increase the cost of credit for electric generating facilities. The Sponsors
cannot predict at this time the ultimate effect of such factors on the ability
of any issuers to meet their obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of
electricity access to its transmission system for wholesale customers, thereby
increasing competition for electric utilities. NEPA also mandated demand-side
management policies to be considered by utilities. NEPA prohibits the Federal
Energy Regulatory Commission from mandating electric utilities to engage in
retail wheeling, which is competition among suppliers of electric generation to
provide electricity to retail customers (particularly industrial retail
customers) of a utility. However, under NEPA, a state can mandate retail
wheeling under certain conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the "1990 Amendments"). The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ("EPA") must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two
phases. Phase I addresses specific generating units named in the 1990
Amendments. In Phase II the total U.S. emissions will be capped at 8.9 million
tons by the year 2000. The 1990 Amendments contain provisions for allocating
allowances to power plants based on historical or calculated levels. An
allowance is defined as the authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of toxic air
emissions from electric generating units pending the results of several federal
government studies to be conducted over the next three to four years with
respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decomissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various
plant systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial liability also arise
from the operation of nuclear facilities and from the use, handling, and
possible radioactive emissions associated with nuclear fuel. Insurance may not
cover all types or amounts of loss which may be experienced in connection with
the ownership and operation of a nuclear plant and severe financial
consequences could result from a significant accident or occurrence. The
Nuclear Regulatory Commission has promulgated regulations mandating the
establishment of funded reserves to assure financial capability for the
eventual decommissioning of licensed nuclear facilities. These funds are to be
accrued from revenues in amounts currently estimated to be sufficient to pay
for decommissioning costs.
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, Oregon
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 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.
WATER AND SEWER REVENUE BONDS. Water and sewer bonds are generally payable
from user fees. The ability of state and local water and sewer authorities to
meet their obligations may be affected by failure of municipalities to utilize
fully the facilities constructed by
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these authorities, economic or population decline and resulting decline in
revenue from user charges, rising construction and maintenance costs and delays
in construction of facilities, impact of environmental requirements, failure or
inability to raise user charges in response to increased costs, the difficulty
of obtaining or discovering new supplies of fresh water, the effect of
conservation programs and the impact of "no growth" zoning ordinances. In some
cases this ability may be affected by the continued availability of Federal and
state financial assistance and of municipal bond insurance for future bond
issues.
UNIVERSITY AND COLLEGE BONDS. 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, demographic trends, geographic location, geographic diversity
and quality of the student body, quality of the faculty and the diversity of
program offerings.
Legislative or regulatory action in the future at the Federal, state or local
level may directly or indirectly affect eligibility standards or reduce or
eliminate the availability of funds for certain types of student loans or grant
programs, including student aid, research grants and work-study programs, and
may affect indirect assistance for education.
LEASE RENTAL BONDS. Lease rental bonds are issued for the most part by
governmental authorities that have no taxing power or other means of directly
raising revenues. Rather, the authorities are financing vehicles created solely
for the construction of buildings (administrative offices, convention centers
and prisons, for example) or the purchase of equipment (police cars and
computer systems, for example) that will be used by a state or local government
(the "lessee"). Thus, the bonds are subject to the ability and willingness of
the lessee government to meet its lease rental payments which include debt
service on the bonds. Willingness to pay may be subject to changes in the views
of citizens and government officials as to the essential nature of the finance
project. Lease rental bonds are subject, in almost all cases, to the annual
appropriation risk, i.e., the lessee government is not legally obligated to
budget and appropriate for the rental payments beyond the current fiscal year.
These bonds are also subject to the risk of abatement in many states--rental
bonds cease in the event that damage, destruction or condemnation of the
project prevents its use by the lessee. (In these cases, insurance provisions
and reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the lessee
government, in the event it defaults on its rental payments, from the purchase
or use of similar equipment for a certain period of time. This safeguard is
designed to insure that the lessee government will appropriate the necessary
funds even though it is not legally obligated to do so, but its legality
remains untested in most, if not all, states.
CAPITAL IMPROVEMENT FACILITY BONDS. The Portfolio of a Trust may contain
Bonds which are in the capital improvement facilities category. Capital
improvement bonds are bonds issued to provide funds to assist political
subdivisions or agencies of a state through acquisition of the underlying debt
of a state or local political subdivision or agency which bonds are secured by
the proceeds of the sale of the bonds, proceeds from investments and the
indebtedness of a local political subdivision or agency. The risks of an
investment in such bonds include the risk of possible prepayment or failure of
payment of proceeds on and default of the underlying debt.
SOLID WASTE DISPOSAL BONDS. Bonds issued for solid water disposal facilities
are generally payable from tipping fees and from revenues that may be earned by
the facility on the sale of electrical energy generated in the combustion of
waste products. The ability of solid waste disposal facilities to meet their
obligations depends upon the continued use of the facility, the successful and
efficient operation of the facility and, in the case of waste-to-energy
facilities, the continued ability of the facility to generate electricity on a
commercial basis. All of these factors may be affected by a failure of
municipalities to fully utilize the facilities, an insufficient supply of waste
for disposal due to economic or population decline, rising construction and
maintenance costs, any delays in construction of facilities, lower-cost
alternative modes of waste processing and changes in environmental regulations.
Because of the relatively short history of this type of 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, for
incinerators or waste-to-energy facilities, 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-to-energy facilities are concerned with many of the
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same issues facing utilities insofar as they derive revenues from the sale of
energy to local power utilities (see Power Facility Bonds above).
MORAL OBLIGATION BONDS. The Trust may also include "moral obligation" bonds.
If an issuer of moral obligation bonds is unable to meet its obligations, the
repayment of the 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.
REFUNDED BONDS. Refunded Bonds are typically secured by direct obligations of
the U.S. Government, or in some cases obligations guaranteed by the U.S.
Government, placed in an escrow account maintained by an independent trustee
until maturity or a predetermined redemption date. These obligations are
generally noncallable prior to maturity or the predetermined redemption date.
In a few isolated instances to date, however, bonds which were thought to be
escrowed to maturity have been called for redemption prior to maturity.
AIRPORT, PORT AND HIGHWAY REVENUE BONDS. Certain facility revenue bonds are
payable from and secured by the revenues from the ownership and operation of
particular facilities, such as airports (including airport terminals and
maintenance facilities), bridges, marine terminals, turnpikes and port
authorities. For example, the major portion of gross airport operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, facilities, service fees, concessions and leases.
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 aviation fuel, deregulation,
traffic constraints, the current recession and other factors. As a result,
several airlines are experiencing severe financial difficulties. Several
airlines including America West Airlines have sought protection from their
creditors under Chapter 11 of the Bankruptcy Code. In addition, other airlines
such as Eastern Airlines, Inc. and Pan American Corporation have been
liquidated. However, over the last 13 months, Continental Airlines and Trans
World Airlines have emerged from bankruptcy. The Sponsors 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. Furthermore, there is a bill in
Congress that would provide the U.S. Secretary of Transportation with the
temporary authority to freeze airport fees upon the occurrence of disputes
between a particular airport facility and the airlines utilizing that facility.
Finally, bonds issued for the yet-to-be opened Denver International Airport
have the added risk that the opening date may be further delayed. To date, it
has been delayed on four occasions and no new opening date has been announced.
Similarly, payment on bonds related to other facilities is dependent on
revenues from the projects, such as use 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 and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
SPECIAL TAX BONDS. Special tax bonds are payable from and secured by the
revenues derived by a municipality from a particular tax such as a tax on the
rental of a hotel room, on the purchase of food and beverages, on the rental of
automobiles or on the consumption of liquor. Special tax bonds are not secured
by the general tax revenues of the municipality, and they do not represent
general obligations of the municipality. Therefore, payment on special tax
bonds may not be adversely affected by a reduction in revenues realized from
the underlying special tax due to a general decline in the local economy or
population or due to a decline in the consumption, use or cost of the goods and
services that are subject to taxation. Also, should spending on the particular
goods or services that are subject to the special tax decline, the municipality
may be under no obligation to increase the rate of the special tax to ensure
that sufficient revenues are raised from the shrinking taxable base.
TAX ALLOCATION BONDS. Tax allocation bonds are typically secured by
incremental tax revenues collected on property within the areas where
redevelopment projects, financed by bond proceeds are located ("project
areas"). Such payments are expected to be made from projected increases in tax
revenues derived from higher assessed values of property resulting from
development in the particular project area and not from an increase in tax
rates. Special risk considerations include: reduction of, or a less than
anticipated increase in, taxable values of property in the project area, caused
either by economic factors beyond the Issuer's control (such as a relocation
out of the project area by one or more major property owners) or by destruction
of property due to natural or other disasters; successful appeals by property
owners of assessed valuations; substantial delinquencies in the payment of
property taxes; or imposition of any constitutional or legislative property tax
rate decrease.
TRANSIT AUTHORITY BONDS. Mass transit is generally not self-supporting from
fare revenues. Therefore, additional financial resources must be made available
to ensure operation of mass transit systems as well as the timely payment of
debt service. Often such financial resources include Federal and state
subsidies, lease rentals paid by funds of the state or local government or a
pledge of a special tax such as a sales tax or a property tax. If fare revenues
or the additional financial resources do not increase appropriately to pay for
rising operating expenses, the ability of the issuer to adequately service the
debt may be adversely affected.
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CONVENTION FACILITY BONDS. The Portfolio of a Trust may contain Bonds of
issuers in the convention facilities category. Bonds in the convention
facilities category include special limited obligation securities issued to
finance convention and sports facilities payable from rental payments and
annual governmental appropriations. The governmental agency is not obligated to
make payments in any year in which the monies have not been appropriated to
make such payments. In addition, these facilities are limited use facilities
that may not be used for purposes other than as convention centers or sports
facilities.
PUERTO RICO. The Portfolio may contain bonds of issuers which will be
affected by general economic conditions in Puerto Rico. Puerto Rico's
unemployment rate remains significantly higher than the U.S. unemployment rate.
Furthermore, the economy is largely dependent for its development upon U.S.
policies and programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of Commonwealth and Federal
investment incentive programs. For example, Section 936 of the Internal Revenue
Code (the "Code") provides for a credit against Federal income taxes for U.S.
companies operating on the island if certain requirements are met. The Omnibus
Budget Reconciliation Act of 1993 imposes limits on such credit, effective for
tax years beginning after 1993. In addition, from time to time proposals are
introduced in Congress which, if enacted into law, would eliminate some or all
of the benefits of Section 936. Although no assessment can be made at this time
of the precise effect of such limitation, it is expected that the limitation of
Section 936 credits would have a negative impact on Puerto Rico's economy.
Aid for Puerto Rico's economy has traditionally depended heavily on Federal
programs, and current Federal budgetary policies suggest that an expansion of
aid to Puerto Rico is unlikely. An adverse effect on the Puerto Rican economy
could result from other U.S. policies, including a reduction of tax benefits
for distilled products, further reduction in transfer payment programs such as
food stamps, curtailment of military spending and policies which could lead to
a stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican electorate chose to
continue Puerto Rico's Commonwealth status. Previously proposed legislation,
which was not enacted, would have preserved the federal tax exempt status of
the outstanding debts of Puerto Rico and its public corporations regardless of
the outcome of the referendum, to the extent that similar obligations issued by
states are so treated and subject to the provisions of the Code currently in
effect. There can be no assurance that any pending or future legislation
finally enacted will include the same or similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both direct and
indirect consequences on such matters as the basic characteristics of future
Puerto Rico debt obligations, the markets for these obligations, and the types,
levels and quality of revenue sources pledged for the payment of existing and
future debt obligations. Such possible consequences include, without
limitation, legislative proposals seeking restoration of the status of Section
936 benefits otherwise subject to the limitations discussed above. However, no
assessment can be made at this time of the economic and other effects of a
change in federal laws affecting Puerto Rico as a result of the November 1993
plebiscite.
INSURANCE. Certain Bonds (the "Insured Bonds") may be insured or guaranteed
by AMBAC Indemnity Corporation ("AMBAC"), Asset Guaranty Reinsurance Company
("Asset Guaranty"), Capital Guaranty Insurance Company ("CGIC"), Capital
Markets Assurance Corp. ("CAPMAC"), Connie Lee Insurance Company ("Connie
Lee"), Continental Casualty Company ("Continental"), Financial Guaranty
Insurance Company "Financial Guaranty"), Financial Security Assurance Inc.
("FSA"), Firemen's Insurance Company of Newark, New Jersey ("Firemen's"),
Municipal Bond Investors Assurance Corporation ("MBIA") or National Union Fire
Insurance Company of Pittsburgh, Pa. ("National Union") (collectively, the
"Insurance Companies"). The claims-paying ability of each of these companies,
unless otherwise indicated, is rated AAA by Standard & Poor's or another
acceptable national rating service. The ratings are subject to change at any
time at the discretion of the rating agencies. In determining whether to insure
bonds, the Insurance Companies severally apply their own standards. The cost of
this insurance is borne either by the issuers or previous owners of the bonds
or by the Sponsors. The insurance policies are non-cancellable and will
continue in force so long as the Insured Bonds are outstanding and the insurers
remain in business. The insurance policies guarantee the timely payment of
principal and interest on but do not guarantee the market value of the Insured
Bonds or the value of the Units. The insurance policies generally do not
provide for accelerated payments of principal or, except in the case of any
portfolio insurance policies, cover redemptions resulting from events of
taxability. If the issuer of any Insured Bond should fail to make an interest
or principal payment, the insurance policies generally provide that the Trustee
or its agent shall give notice of nonpayment to the Insurance Company or its
agent and provide evidence of the Trustee's right to receive payment. The
Insurance Company is then required to disburse the amount of the failed payment
to the Trustee or its agent and is thereafter subrogated to the Trustee's right
to receive payment from the issuer.
The following are brief descriptions of certain of the insurance companies
that may insure or guarantee certain Bonds. The financial information presented
for each company has been determined on a statutory basis and is unaudited.
AMBAC is a Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of the State of Wisconsin, and licensed to do business in
various states, with admitted assets of approximately $1,956,000,000 and
policyholders' surplus of approximately $737,000,000 as of December 31, 1993.
AMBAC is a wholly-owned subsidiary of AMBAC Inc., a financial holding company
which is publicly owned following a complete divestiture by Citibank during the
first quarter of 1992.
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CGIC, a monoline bond insuror headquartered in San Francisco, California, was
established in November 1986 to assume the financial guaranty business of
United States Fidelity and Guaranty Company ("USF&G"). It is a wholly-owned
subsidiary of Capital Guaranty Corporation ("CGC") whose stock is owned by:
Constellation Investments, Inc., an affiliate of Baltimore Gas & Electric,
Fleet/Norstar Financial Group, Inc., Safeco Corporation, Sibag Finance
Corporation, an affiliate of Siemens AG, and USF&G, the 8th largest
property/casualty company in the U.S. as measured by net premiums written, and
CGC management. As of December 31, 1993, CGIC had total admitted assets of
approximately $285,000,000 and policyholders' surplus of approximately
$168,000,000.
Connie Lee is a wholly owned subsidiary of College Construction Loan
Insurance Association ("CCLIA"), a government-sponsored enterprise established
by Congress to provide American academic institutions with greater access to
low-cost capital through enhancement. Connie Lee, the operating insurance
company, was incorporated in 1987 and began business as a reinsurer of tax-
exempt bonds of colleges, universities, and teaching hospitals with a
concentration on the hospital sector. During the fourth quarter of 1991 Connie
Lee began underwriting primary bond insurance which will focus largely on the
college and university sector. CCLIA's founding shareholders are the U.S.
Department of Education, which owns 36% of CCLIA, and the Student Loan
Marketing Association ("Sallie Mae"), which owns 14%. The other principle
owners are: Pennsylvania Public School Employees' Retirement System,
Metropolitan Life Insurance Company, Kemper Financial Services, Johnson family
funds and trusts, Northwestern University, Rockefeller & Co., Inc. administered
trusts and funds, and Stanford University. Connie Lee is domiciled in the state
of Wisconsin and has licenses to do business in 47 states and the District of
Columbia. As of December 31, 1993, its total admitted assets were approximately
$182,000,000 and policyholders' surplus was approximately $105,000,000.
FSA is a monoline property and casualty insurance company incorporated in New
York in 1984. It is a wholly-owned subsidiary of Financial Security Assurance
Holdings Ltd., which was acquired in December 1989 by US West, Inc., the
regional Bell Telephone Company serving the Rocky Mountain and Pacific
Northwestern states. U.S. West is currently seeking to sell FSA. FSA is
licensed to engage in the surety business in 42 states and the District of
Columbia. FSA is engaged exclusively in the business of writing financial
guaranty insurance on both tax-exempt and non-municipal securities. As of
December 31, 1993, PSA had policyholders' surplus of approximately $357,000,000
and total admitted assets of approximately $748,000,000.
MBIA is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally Aetna Casualty and Surety Company,
The Fund American Companies, Inc., subsidiaries of CIGNA Corporation and Credit
Local de France, CAECL, S.A. These principal shareholders now own approximately
13% of the outstanding common stock of MBIA Inc., following a series of four
public equity offerings over a five-year period. As of December 31, 1993, MBIA
had admitted assets of approximately $3,051,000,000 and policyholders' surplus
of approximately $978,000,000.
Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate, among
other things, to: the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; deposits of securities for the benefit of policyholders; approval
of policy forms and premium rates; periodic examinations of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. Regulatory
agencies require that premium rates not be excessive, inadequate or unfairly
discriminatory. Insurance regulation in many states also includes "assigned
risk" plans, reinsurance facilities, and joint underwriting associations, under
which all insurers writing particular lines of insurance within the
jurisdiction must accept, for one or more of those lines, risks unable to
secure coverage in voluntary markets. A significant portion of the assets of
insurance companies is required by law to be held in reserve against potential
claims on policies and is not available to general creditors.
Although the Federal government does not regulate the business of insurance,
Federal initiatives can significantly impact the insurance business. Current
and proposed Federal measures which may significantly affect the insurance
business include pension regulation (ERISA), controls on medical care costs,
minimum standards for no-fault automobile insurance, national health insurance,
personal privacy protection, tax law changes affecting life insurance companies
or the relative desirability of various personal investment vehicles and repeal
of the current antitrust exemption for the insurance business. (If this
exemption is eliminated, it will substantially affect the way premium rates are
set by all property-liability insurers.) In addition, the Federal government
operates in some cases as a co-insurer with the private sector insurance
companies.
Insurance companies are also affected by a variety of state and Federal
regulatory measures and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These include judicial
redefinitions of risk exposure in areas such as products liability and state
and Federal extension and protection of employee benefits, including pension,
workers' compensation, and disability benefits. These developments may result
in short-term adverse effects on the profitability of various lines of
insurance. Longer-term adverse affects can often be minimized through prompt
repricing of coverages and revision of policy terms. In some instances these
developments may create new opportunities for business growth. All insurance
companies write policies and set premiums based on actuarial assumptions about
mortality, injury, the occurrence of accidents and other insured events. These
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assumptions, while well supported by past experience, necessarily do not take
account of future events. The occurrence in the future of unforeseen
circumstances could affect the financial condition of one or more insurance
companies. The insurance business is highly competitive and with the
deregulation of financial service businesses, it should become more
competitive. In addition, insurance companies may expand into non-traditional
lines of business which may involve different types of risks.
The above financial information relating to the Insurance Companies has been
obtained from publicly available information. No representation is made as to
the accuracy or adequacy of the information or as to the absence of material
adverse changes since the information was made available to the public.
LITIGATION AND LEGISLATION. To the best knowledge of the Sponsors, there is
no litigation pending as of the Initial Date in respect of any Bonds which
might reasonably be expected to have a material adverse effect upon the Trust.
At any time after the Initial Date of Deposit, litigation may be initiated on a
variety of grounds, or legislation may be enacted, with respect to Bonds in the
Trust. Litigation, for example, challenging the issuance of pollution control
revenue bonds under environmental protection statutes may affect the validity
of Bonds or the tax-free nature of their interest. While the outcome of
litigation of this nature can never be entirely predicted, opinions of bond
counsel are delivered on the date of issuance of each Bond to the effect that
the Bond has been validly issued and that the interest thereon is exempt from
Federal income tax. In addition, other factors may arise from time to time
which potentially may impair the ability of issuers to make payments due on the
Bonds.
Under the Federal Bankruptcy Act, a political subdivision or public agency or
instrumentality of any state, including municipalities, may proceed to
restructure or otherwise alter the terms of its obligations, including those of
the type comprising the Trust's Portfolio. The Sponsors are unable to predict
what effect, if any, this legislation might have on the Trust.
From time to time Congress considers proposals to tax the interest on state
and local obligations, such as the Bonds. The Supreme Court clarified in South
Carolina v. Baker (decided April 20, 1988) that the U.S. Constitution does not
prohibit Congress from passing a nondiscriminatory tax on interest on state and
local obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult their own
tax advisers.
TAX EXEMPTION. In the opinion of bond counsel rendered on the date of
issuance of each Bond, the interest on each Bond is excludable from gross
income under existing law for regular Federal income tax purposes (except in
certain circumstances depending on the Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of the
Bonds may become subject to regular Federal income tax, perhaps retroactively
to their date of issuance, as a result of changes in Federal law or as a result
of the failure of issuers (or other users of the proceeds of the Bonds) to
comply with certain ongoing requirements.
Moreover, the Internal Revenue Service announced on June 14, 1993 that it
will be expanding its examination program with respect to tax-exempt bonds. The
expanded examination program will consist of, among other measures, increased
enforcement against abusive transactions, broader audit coverage (including the
expected issuance of audit guidelines) and expanded compliance achieved by
means of expected revisions to the tax-exempt bond information return forms. At
this time, it is uncertain whether the tax exempt status of any of the Bonds
would be affected by such proceedings, or whether such effect, if any, would be
retroactive.
In certain cases, a Bond may provide that if the interest on the Bond should
ultimately be determined to be taxable, the Bond would become due and payable
by its issuer, and, in addition, may provide that any related letter of credit
or other security could be called upon if the issuer failed to satisfy all or
part of its obligation. In other cases, however, a Bond may not provide for the
acceleration or redemption of the Bond or a call upon the related letter of
credit or other security upon a determination of taxability. In those cases in
which a Bond does not provide for acceleration or redemption or in which both
the issuer and the bank or other entity issuing the letter of credit or other
security are unable to meet their obligations to pay the amounts due on the
Bond as a result of a determination of taxability, the Trustee would be
obligated to sell the Bond and, since it would be sold as a taxable security,
it is expected that it would have to be sold at a substantial discount from
current market price. In addition, as mentioned above, under certain
circumstances Holders could be required to pay income tax on interest received
prior to the date on which the interest is determined to be taxable.
THE UNITS
On the Date of Deposit, each Unit in a Trust represented a fractional
undivided interest in the principal and net income of such Trust as is set
forth in Part A, "Summary of Essential Information."
If any Units are redeemed after the date of this Prospectus by the Trustee,
the principal amount of Bonds in the affected Trust will be reduced by an
amount allocable to redeemed Units and the fractional undivided interest in the
affected Trust represented by each unredeemed Unit will be increased. Units
will remain outstanding until redeemed upon tender to the Trustee by any Unit
holder, which may include the Sponsors, or until the termination of the Trust
Agreement. (See "Amendment and Termination of the Trust Agreement--
Termination.")
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TAXES
The following discussion addresses only the tax consequences of Units held as
capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:
The Trusts are not associations taxable as corporations for Federal
income tax purposes, and income received by the Trusts will be treated as
the income of the Unit holders ("Holders") in the manner set forth below.
Each Holder of Units of a Trust will be considered the owner of a pro
rata portion of each Bond in the Trust under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to determine the face amount of a Holder's pro rata
portion of each Bond on the Date of Deposit, see "Aggregate Principal"
under "Portfolio of Securities". The total cost to a Holder of his Units,
including sales charges, is allocated to his pro rata portion of each Bond,
in proportion to the fair market values thereof on the date the Holder
purchases his Units, in order to determine his tax cost for his pro rata
portion of each Bond. In order for a Holder who purchases his Units on the
Date of Deposit to determine the fair market value of his pro rata portion
of each Bond on such date, see "Cost of Securities to Trust" under
"Portfolio of Securities".
Each Holder of Units of a Trust will be considered to have received the
interest on his pro rata portion of each Bond when interest on the Bond is
received by the Trust. In the opinion of bond counsel (delivered on the
date of issuance of each Bond), such interest will be excludable from gross
income for regular Federal income tax purposes (except in certain limited
circumstances referred to below). Amounts received by a Trust pursuant to a
bank letter of credit, guarantee or insurance policy with respect to
payments of principal, premium or interest on a Bond in the Trust will be
treated for Federal income tax purposes in the same manner as if such
amounts were paid by the issuer of the Bond.
The Trusts may contain Bonds which were originally issued at a discount
("original issue discount"). The following principles will apply to each
Holder's pro rata portion of any Bond originally issued at a discount. In
general, original issue discount is defined as the difference between the
price at which a debt obligation was issued and its stated redemption price
at maturity. Original issue discount on a tax-exempt obligation issued
after September 3, 1982, is deemed to accrue as tax-exempt interest over
the life of the obligation under a formula based on the compounding of
interest. Original issue discount on a tax-exempt obligation issued before
July 2, 1982 is deemed to accrue as tax-exempt interest ratably over the
life of the obligation. Original issue discount on any tax-exempt
obligation issued during the period beginning July 2, 1982 and ending
September 3, 1982 is also deemed to accrue as tax-exempt interest over the
life of the obligation, although it is not clear whether such accrual is
ratable or is determined under a formula based on the compounding of
interest. If a Holder's tax cost for his pro rata portion of a Bond issued
with original issue discount is greater than its "adjusted issue price" but
less than its stated redemption price at maturity (as may be adjusted for
certain payments), the Holder will be considered to have purchased his pro
rata portion of the Bond at an "acquisition premium." A Holder's adjusted
tax basis for his pro rata portion of a Bond issued with original issue
discount will include original issue discount accrued during the period
such Holder held his Units. Such increases to the Holder's tax basis in his
pro rata portion of the Bond resulting from the accrual of original issue
discount, however, will be reduced by the amount of any such acquisition
premium.
If a Holder's tax basis for his pro rata portion of a Bond in the
Holder's Trust exceeds the redemption price at maturity thereof (subject to
certain adjustments), the Holder will be considered to have purchased his
pro rata portion of the Bond with "amortizable bond premium". The Holder is
required to amortize such bond premium over the term of the Bond. Such
amortization is only a reduction of basis for his pro rata portion of the
Bond and does not result in any deduction against the Holder's income.
Therefore, under some circumstances, a Holder may recognize taxable gain
when his pro rata portion of a Bond is disposed of for an amount equal to
or less than his original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Bond in his Trust is disposed of by the Trust for an
amount greater or less than his adjusted tax basis. Any such taxable gain
or loss will be capital gain or loss, except that any gain from the
disposition of a Holder's pro rata portion of a Bond acquired by the Holder
at a "market discount" (i.e., where the Holder's original basis for his pro
rata portion of the Bond (plus any original issue discount which will
accrue thereon until its maturity) is less than its stated redemption price
at maturity) would be treated as ordinary income to the extent the gain
does not exceed the accrued market discount. Capital gains are generally
taxed at the same rate as ordinary income. However, the excess of net long-
term capital gains over net short-term capital losses may be taxed at a
lower rate than ordinary income for certain noncorporate taxpayers. A
capital gain or loss is long-term if the asset is held for more than one
year and short-term if held for one year or less. The deduction of capital
losses is subject to limitations. A Holder will also be considered to have
disposed of all or part of his pro rata portion of each Bond when he sells
or redeems all or some of his Units.
Under Section 265 of the Code, a Holder (except a corporate Holder) is
not entitled to a deduction for his pro rata share of fees and expenses of
a Trust because the fees and expenses are incurred in connection with the
production of tax-exempt income.
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Further, if borrowed funds are used by a Holder to purchase or carry Units
of any Trust, interest on such indebtedness will not be deductible for
Federal income tax purposes. In addition, under rules used by the Internal
Revenue Service, the purchase of Units may be considered to have been made
with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of Units. Similar rules may be applicable for
state tax purposes.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on
the tax-exempt status of the Bonds. It is impossible to predict whether any
legislation in respect of the tax status of interest on such obligations
may be proposed and eventually enacted at the Federal or state level.
The forgoing discussion relates only to Federal income taxes. Depending
on their state of residence, Holders may be subject to state and local
taxation and should consult their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August 7, 1986 will be a
preference item for purposes of the alternative minimum tax ("AMT"). The
Sponsors believe that interest (including any original issue discount) on the
Bonds should not be subject to the AMT for individuals or corporations under
this rule. A corporate Holder should be aware, however, that the accrual or
receipt of tax-exempt interest not subject to the AMT may give rise to an
alternative minimum tax liability (or increase an existing liability) because
the interest income will be included in the corporation's "adjusted current
earnings" for purposes of the adjustment to alternative minimum taxable income
required by Section 56(g) of the Code and will be taken into account for
purposes of the environmental tax on corporations under Section 59A of the
Code, which is based on an alternative minimum taxable income.
In addition, interest on the Bonds must be taken into consideration in
computing the portion, if any, of social security benefits that will be
included in an individual's gross income and subject to Federal income tax.
Holders are urged to consult their own tax advisers concerning an investment in
Units.
At the time of issuance of each Bond, an opinion relating to the validity of
the Bond and to the exemption of interest thereon from regular Federal income
taxes was or will be rendered by bond counsel. Neither the Sponsors nor Davis
Polk & Wardwell have made or will make any review of the proceedings relating
to the issuance of the Bonds or the basis for these opinions. The tax exemption
is dependent upon the issuer's (and other users') compliance with certain
ongoing requirements, and the opinion of bond counsel assumes that these
requirements will be complied with. However, there can be no assurance that the
issuer (and other users) will comply with these requirements, in which event
the interest on the Bond could be determined to be taxable retroactively from
the date of issuance.
In the case of certain of the Bonds, the opinions of bond counsel indicate
that interest on such Bonds received by a "substantial user" of the facilities
being financed with the proceeds of such Bonds, or persons related thereto, for
periods while such Bonds are held by such a user or related person, will not be
exempt from regular Federal income taxes, although interest on such Bonds
received by others would be exempt from regular Federal income taxes.
"Substantial user" is defined under U.S. Treasury Regulations to include only a
person from regular Federal income taxes. "Substantial user" is defined under
U.S. Treasury Regulations to include only a person whose gross revenue derived
with respect to the facilities financed by the issuance of bonds is more than
5% of the total revenue derived by all users of such facilities, or who
occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" are defined to include certain related natural
persons, affiliated corporations, partners and partnerships. Similar rules may
be applicable for state tax purposes.
After the end of each calendar year, the Trustee will furnish to each Holder
an annual statement containing information relating to the interest received by
the Trust on the Bonds, the gross proceeds received by the Trust from the
disposition of any Bond (resulting from redemption or payment at maturity of
any Bond or the sale by the Trust of any Bond), and the fees and expenses paid
by the Trust. The Trustee will also furnish annual information returns to each
Holder and to the Internal Revenue Service. Holders are required to report to
the Internal Revenue Service the amount of tax-exempt interest received during
the year.
EXPENSES AND CHARGES
Initial Expenses
At no cost to a Trust, the Sponsors have borne all the expenses of creating
and establishing a Trust, including the cost of the initial preparation and
execution of the Trust Agreement, initial preparation and printing of the
certificates for Units, the fees of the Evaluator during the initial public
offering, legal expenses, advertising and selling expenses and other out-of-
pocket expenses.
Trustee's, Sponsors' and Evaluator's Fees
The Trustee will receive for its ordinary recurring services to a Trust an
annual fee in the amount set forth under Part A, "Summary of Essential
Information." For a discussion of the services performed by the Trustee
pursuant to its obligations under the Trust Agreement, see "Rights of Unit
Holders." The Trustee will receive the benefit of any reasonable cash balances
in the Income and Principal Accounts.
B-13
<PAGE>
The Portfolio supervision fee (the "Supervision Fee") which is earned for
Portfolio supervisory services is based upon the greatest face amount of Bonds
in the Trust at any time during the calendar year with respect to which the fee
is being computed.
The Supervision Fee, which is not to exceed the amount set forth in Part A--
"Summary of Essential Information", may exceed the actual costs of providing
Portfolio supervisory services for such Trust, but at no time will the total
amount the Sponsors receive for Portfolio supervisory services rendered to all
series of Tax Exempt Securities Trust in any calendar year exceed the aggregate
cost to them of supplying such services in such year. In addition, the Sponsors
may also be reimbursed for bookkeeping and other administrative services
provided to the Trust in amounts not exceeding their costs of providing these
services.
The Evaluator will receive a fee in the amount set forth under Part A,
"Summary of Essential Information," for each evaluation of the Bonds in a
Trust. For a discussion of the services performed by the Evaluator pursuant to
its obligations under the Trust Agreement, see "Evaluator--Responsibility" and
"Public Offering--Offering Price."
Any of such fees may be increased without approval of the Unit holders by
amounts not exceeding proportionate increases in consumer prices for services
as measured by the United States Department of Labor's Consumer Price Index
entitled "All Services Less Rent" or, if such Index is no longer published, in
a similar Index to be determined by the Trustee and the Sponsors.
Other Charges
The following additional charges are or may be incurred by a Trust: all
expenses of the Trustee (including fees and expenses of counsel and auditors)
incurred in connection with its activities under the Trust Agreement, including
reports and communications to Unit holders; expenses and costs of any action
undertaken by the Trustee to protect a Trust and the rights and interests of
the Unit holders; fees of the Trustee for any extraordinary services performed
under the Trust Agreement; indemnification of the Trustee for any loss or
liability accruing to it without gross negligence, bad faith or willful
misconduct on its part, arising out of or in connection with its acceptance or
administration of a Trust; to the extent lawful, expenses (including legal,
accounting and printing expenses) of maintaining registration or qualification
of the Units and/or a Trust under Federal or state securities laws subsequent
to initial registration so long as the Sponsors are maintaining a market for
the Units and all taxes and other governmental charges imposed upon the Bonds
or any part of a Trust (no such taxes or charges are being levied or made or,
to the knowledge of the Sponsors, contemplated). The above expenses, including
the Trustee's fee, when paid by or owing to the Trustee, are secured by a lien
on the Trust. In addition, the Trustee is empowered to sell Bonds in order to
make funds available to pay all expenses.
PUBLIC OFFERING
OFFERING PRICE
During the initial public offering period, the Public Offering Price of the
Units of a Trust is determined by adding to the Evaluator's determination of
the aggregate OFFERING price of the Bonds per Unit a sales charge equal to a
percentage of the Public Offering Price of the Units of the Trust, as set forth
in the table below. After the initial public offering period, the Public
Offering Price of the Units of a Trust will be determined by adding to the
Evaluator's determination of the aggregate BID price of the Bonds per Unit a
sales charge equal to 5.00% of the Public Offering Price (5.263% of the
aggregate bid price of the Bonds per Unit) for a Trust whose Units had a sales
charge (prior to any reduction) during the initial offering period of 4.70%. A
proportionate share of accrued and undistributed interest on the Bonds in a
Trust at the date of delivery of the Units of such Trust to the purchaser is
also added to the Public Offering Price. (See "Rights of Unit Holders--
Distribution of Interest and Principal.")
During the initial public offering period, the sales charge and dealer
concession for a Trust will be reduced pursuant to the following scales (see
Part A, "The Public Offering Price" for the unreduced sales charge to determine
the applicable table):
<TABLE>
<CAPTION>
------------------------------------
PERCENT OF PERCENT OF
PUBLIC NET AMOUNT DEALER
UNITS PURCHASED+ OFFERING PRICE INVESTED CONCESSION
- ---------------- -------------- ---------- ----------
<S> <C> <C> <C>
1- 99.................................. 4.70% 4.932% $33.00
100-249.................................. 4.25% 4.439% $32.00
250-499.................................. 4.00% 4.167% $30.00
500-999.................................. 3.50% 3.627% $25.00
1,000 or more.............................. 3.00% 3.093% $20.00
</TABLE>
The Sponsors may at any time change the amount by which the sales charge is
reduced, or discontinue the discount completely.
- -------
+ The reduced sales charge is also applied on a dollar basis utilizing a
breakpoint equivalent in the above table of $1,000 for one Unit, etc.
B-14
<PAGE>
Pursuant to employee benefit plans, Units of a Trust are available to
employees of certain of the Sponsors, during the initial public offering
period, at a Public Offering Price equal to the Evaluator's determination of
the aggregate offering price of the Bonds of a Trust per Unit plus a sales
charge of 1.25% of the Public Offering Price and after the initial public
offering period, at a Public Offering Price equal to the Evaluator's
determination of the aggregate bid price of the Bonds of a Trust per Unit plus
a sales charge of 1.25% of the Public Offering Price. Sales through such plans
to employees of the Sponsors result in less selling effort and selling expenses
than sales to the general public.
METHOD OF EVALUATION
During the initial public offering period, the aggregate offering price of
the Bonds is determined by the Evaluator (1) on the basis of current offering
prices for the Bonds*, (2) if offering prices are not available for any Bonds,
on the basis of current offering prices for comparable securities, (3) by
appraisal, or (4) by any combination of the above. Such determinations are made
each business day as of the Evaluation Time set forth in the "Summary of
Essential Information," in Part A, effective for all sales made subsequent to
the last preceding determination. Following the initial public offering period,
the aggregate bid price of the Bonds (which is used to calculate the price at
which the Sponsors repurchase and sell Units in the secondary market and the
Redemption Price at which Units may be redeemed) will be determined by the
Evaluator (1) on the basis of the current bid prices for the Bonds*, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices of
comparable securities, (3) by appraisal, or (4) by any combination of the
above. Such determinations will be made each business day as of the Evaluation
Time set forth in the "Summary of Essential Information," in Part A, effective
for all sales made subsequent to the last preceding determination. The term
"business day," as used herein shall exclude Saturdays, Sundays and any day on
which the New York Stock Exchange is closed. The difference between the bid and
offering prices of the Bonds may be expected to average approximately 1 1/2% of
principal amount. In the case of actively traded securities, the difference may
be as little as 1/2 of 1%, and in the case of inactively traded securities such
difference will usually not exceed 3%. The price at which Units may be
repurchased by the Sponsors in the secondary market could be less than the
price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per Unit by the amounts set forth under "Summary of Essential
Information" in Part A. For information relating to the calculation of the
Redemption Price per Unit, which is also based upon the aggregate bid price of
the underlying Bonds and which may be expected to be less than the Public
Offering Price per Unit, see "Rights of Unit Holders--Redemption of Units."
DISTRIBUTION OF UNITS
During the initial public offering period Units of a Trust will be
distributed to the public at the Public Offering Price determined in the manner
provided above (see "Public Offering--Offering Price") through the Underwriters
and dealers. The initial public offering period is 30 days unless all Units of
a Trust are sold prior thereto, in which case the initial public offering
period terminates with the sale of all Units. So long as all Units initially
offered have not been sold, the Sponsors may extend the initial public offering
period for up to four additional successive 30-day periods. Upon completion of
the initial public offering, Units which remain unsold or which may be acquired
in the secondary market (see "Public Offering--Market for Units") may be
offered by this Prospectus at the Public Offering Price determined in the
manner provided above (see "Public Offering--Offering Price").
It is the Sponsors' intention to qualify Units of a Trust for sale in several
states through the Underwriters and dealers who are members of the National
Association of Securities Dealers, Inc. Units of a State Trust will not be
offered for sale in the State of Virginia. Units will initially be sold to
dealers at prices which represent a concession equal to the amount designated
in the tables under "Public Offering--Offering Price" herein, for a Trust with
an unreduced sales charge as specified in Part A--"The Public Offering Price."
The Sponsors reserve the right to change the amount of the concession to
dealers from time to time. After the initial offering period the dealer
concession is negotiated on a case-by-case basis.
Sales will be made only with respect to whole Units, and the Sponsors reserve
the right to reject, in whole or in part, any order for the purchase of Units.
A purchaser does not become a Unit holder (Certificate holder) or become
entitled to exercise the rights of a Unit holder (including the right to redeem
his Units) until he has paid for his Units. Generally, such payment must be
made within five business days after an order for the purchase of Units has
been placed. The price paid by a Unit holder is the Public Offering Price in
effect at the time his order is received, plus accrued interest (see "Public
Offering--Method of Evaluation"). This price may be different from the Public
Offering Price in effect on any other day, including the day on which he made
payment for the Units.
MARKET FOR UNITS
Following the initial public offering period the Sponsors, although not
obligated to do so, presently intend to maintain a market for the Units of a
Trust and continuously to offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds. For information relating to the
method and frequency of the Evaluator's determination of the aggregate bid
price of the underlying
- -------
* Current offering or bid prices of the Deposited Units, if any, are based on
prevailing weekly evaluations of the obligations underlying such Deposited
Units.
B-15
<PAGE>
Bonds, see "Public Offering--Method of Evaluation." The Sponsors may cease to
maintain such a market at any time and from time to time without notice if the
supply of Units of a Trust of this Series exceeds demand or for any other
reason. In this event the Sponsors may nonetheless purchase Units, as a service
to Unit holders, at prices based on the current Redemption Price of those
Units. In the event that a market is not maintained for the Units of a Trust, a
Unit holder of such Trust desiring to dispose of his Units may be able to do so
only by tendering such Units to the Trustee for redemption at the Redemption
Price, which is based upon the aggregate bid price of the underlying Bonds. The
aggregate bid price of the underlying Bonds of a Trust may be expected to be
less than the aggregate offering price.
EXCHANGE OPTION
Unit holders may elect to exchange any or all of their Units of this series
for units of one or more of any series of Tax Exempt Securities Trust (the
"Exchange Trust") available for sale in the state in which the Unit holder
resides at a Public Offering Price for the units of the Exchange Trust to be
acquired based on a fixed sales charge of $25 per unit. The Sponsors reserve
the right to modify, suspend or terminate this plan at any time without further
notice to Unit holders. Therefore, there is no assurance that a market for
units will in fact exist on any given date on which a Unit holder wishes to
sell his Units of this series and thus there is no assurance that the Exchange
Option will be available to a Unit holder. Exchanges will be effected in whole
units ONLY. If the proceeds from the Units being surrendered are less than the
cost of a whole number of units being acquired, the exchanging Holder will be
permitted to add cash in an amount to round up to the next highest number of
whole units.
An exchange of Units pursuant to the Exchange Option for units of an Exchange
Trust will generally constitute a "taxable event" under the Code, i.e., a
Holder will recognize a gain or loss at the time of exchange. However, an
exchange of Units of this Trust for units of any other series of the Tax Exempt
Securities Trust which are grantor trusts for U.S. Federal income tax purposes
will not constitute a taxable event to the extent that the underlying
securities in each trust do not differ materially either in kind or in extent.
Unit holders are urged to consult their own tax advisors as to the tax
consequences to them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the Exchange Option at the bid
prices of the underlying securities in the particular portfolio involved per
unit plus a fixed charge of $25 per unit. As an example, assume that a Unit
holder, who has three units of a trust with a current price of $1,020 per unit
based on the bid prices of the underlying securities, desires to exchange his
Units for units of a series of an Exchange Trust with a current price of $880
per unit based on the bid prices of the underlying securities. In this example,
the proceeds from the Unit holder's units will aggregate $3,060. Since only
whole units of an Exchange Trust may be purchased under the Exchange Option,
the Unit holder would be able to acquire four units in the Exchange Trust for a
total cost of $3,620 ($3,520 for the units and $100 for the sales charge).
REINVESTMENT PROGRAMS
Distributions of interest and principal, if any, are made to Unit holders
monthly. The Unit holder will have the option of either receiving his monthly
income check from the Trustee or participating in one of the reinvestment
programs offered by certain of the Sponsors provided such Unit holder meets the
minimum qualifications of the reinvestment program and such program lawfully
qualifies for sale in the jurisdiction in which the Unit holder resides. Upon
enrollment in a reinvestment program, the Trustee will direct monthly interest
distributions and principal distributions, if any, to the reinvestment program
selected by the Unit holder. Since each Sponsor has arranged for different
reinvestment alternatives, Unit holders should contact the Sponsors for more
complete information, including charges and expenses. The appropriate
prospectus will be sent to the Unit holder. The Unit holder should read the
prospectus for a reinvestment program carefully before deciding to participate.
Participation in the reinvestment program will apply to all Units of a Trust
owned by a Unit holder and may be terminated at any time by the Unit holder, or
the program may be modified or terminated by the Trustee or the program's
Sponsor.
SPONSORS' AND UNDERWRITERS' PROFITS
For their services the Underwriters (see Part A, "Underwriting") receive a
commission based on the sales charge of a particular Trust (see "Public
Offering--Offering Price") as adjusted pursuant to the Agreement Among
Underwriters. The Sponsors receive a gross commission equal to the applicable
sales charge for any Units they have underwritten, and receive the difference
between the applicable sales charge and the Underwriter's commission for the
remainder of the Units. In addition, the Sponsors may realize profits or
sustain losses, as the case may be, in the amount of any difference between the
cost of the Bonds to a Trust (which is based on the aggregate offering price of
the underlying Bonds on the Date of Deposit) and the purchase price of such
Bonds to the Sponsors (which is the cost of the Bonds at the time they were
acquired for the account of a Trust and the cost of the Deposited Units at the
time they were acquired by the Sponsors). (See Part A, "Portfolio of
Securities"--Note (3).) Under certain circumstances, an Underwriter may be
entitled to share in such profits, if any, realized by the Sponsors. A Sponsor
may also realize profits or sustain losses with respect to
B-16
<PAGE>
Bonds deposited in a Trust which were acquired from its own organization or
from underwriting syndicates of which it was a member. During the initial
public offering period the Underwriters also may realize profits or sustain
losses as a result of fluctuations after the Date of Deposit in the offering
prices of the Bonds and hence in the Public Offering Price received by the
Underwriters for Units. Cash, if any, made available to the Sponsors prior to
the anticipated first settlement date for the purchase of Units may be used in
the Sponsors' businesses to the extent permitted by applicable regulations and
may be of use to the Sponsors.
In maintaining a market for the Units of a Trust (see "Public Offering--
Market for Units"), the Sponsors will also realize profits or sustain losses in
the amount of any difference between the price at which they buy such Units and
the price at which they resell or redeem such Units (see "Public Offering--
Offering Price").
RIGHTS OF UNIT HOLDERS
CERTIFICATES
Ownership of Units of a Trust is evidenced by registered certificates
executed by the Trustee and the Sponsors. Certificates are transferable by
presentation and surrender to the Trustee properly endorsed or accompanied by a
written instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or any multiple
thereof. A Unit holder may be required to pay $2.00 per certificate reissued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. For new certificates issued
to replace destroyed, stolen or lost certificates, the Unit holder must furnish
indemnity satisfactory to the Trustee and must pay such expenses as the Trustee
may incur. Mutilated certificates must be surrendered to the Trustee for
replacement.
DISTRIBUTION OF INTEREST AND PRINCIPAL
Interest and principal received by a Trust will be distributed on each
monthly Distribution Date on a pro rata basis to Unit holders in such Trust of
record as of the preceding Record Date. All distributions will be net of
applicable expenses and funds required for the redemption of Units and, if
applicable, reimbursements to the Trustee for interest payments advanced to
Unit holders on previous Monthly Distribution Dates. (See Part A, "Summary of
Essential Information," "Tax Exempt Securities Trust--Expenses and Charges" and
"Rights of Unit Holders--Redemption of Units.")
The Trustee will credit to the Interest Account of a Trust all interest
received by such Trust, including that part of the proceeds of any disposition
of Bonds of such Trust which represents accrued interest. Other receipts will
be credited to the Principal Account of a Trust. The pro rata share of the
Interest Account and the pro rata share of cash in the Principal Account
represented by each Unit of a Trust will be computed by the Trustee each month
as of the Record Date. (See Part A, "Summary of Essential Information.")
Proceeds received from the disposition of any of the Bonds subsequent to a
Record Date and prior to the next succeeding Distribution Date will be held in
the Principal Account and will not be distributed until the following
Distribution Date. The distribution to the Unit holders as of each Record Date
will be made on the following Distribution Date or shortly thereafter and shall
consist of an amount substantially equal to one-twelfth of such holders' pro
rata share of the estimated annual income to the Interest Account after
deducting estimated expenses (the "Monthly Income Distribution") plus such
holders' pro rata share of the cash balance in the Principal Account computed
as of the close of business on the preceding Record Date. Persons who purchase
Units between a Record Date and a Distribution Date will receive their first
distribution on the second Distribution Date following their purchase of Units.
No distribution need be made from the Principal Account if the balance therein
is less than an amount sufficient to distribute $1.00 per Unit. The Monthly
Income Distribution per Unit initially will be in the amount shown under Part
A, "Summary of Essential Information" for a Trust and will change as the income
and expenses of such Trust change and as Bonds are exchanged, redeemed, paid or
sold.
Normally, interest on the Bonds in the Portfolio of a Trust is paid on a
semi-annual basis. Because Bond interest is not received by a Trust at a
constant rate throughout the year, any Monthly Income Distribution may be more
or less than the amount credited to the Interest Account as of the Record Date.
In order to eliminate fluctuations in Monthly Income Distributions resulting
from such variances, the Trustee is required by the Trust Agreement to advance
such amounts as may be necessary to provide Monthly Income Distributions of
approximately equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available from the Interest Account on the
next ensuing Record Date or Record Dates, as the case may be. If all or a
portion of the Bonds for which advances have been made subsequently fail to pay
interest when due, the Trustee may recoup advances made by it in anticipation
of receipt of interest payments on such Bonds by reducing the amount
distributed per Unit in one or more Monthly Interest Distributions. If units
are redeemed subsequent to such advances by the Trustee, but prior to receipt
by the Trustee of actual notice of such failure to pay interest, the amount of
which was so advanced by the Trustee, each remaining Unit holder will be
subject to a greater pro rata reduction in his Monthly Interest Distribution
than would have occurred absent such redemptions. Funds which are available for
future distributions, payments of expenses and redemptions are in accounts
which are non-interest bearing to Unit holders and are available for use by
B-17
<PAGE>
United States Trust Company of New York, pursuant to normal banking procedures.
The Trustee is entitled to the benefit of any reasonable cash balances in the
Income and Principal Accounts. Because of the varying interest payment dates of
the Bonds comprising a Trust Portfolio, accrued interest at any point in time
will be greater than the amount of interest actually received by a Trust and
distributed to Unit holders. This excess accrued but undistributed interest
amount will be added to the value of the units on any purchase made after the
Date of Deposit. If a Unit holder sells all or a portion of his Units a portion
of his sale proceeds will be allocable to his proportionate share of the
accrued interest. Similarly, if a Unit holder redeems all or a portion of his
Units, the Redemption Price per Unit which he is entitled to receive from the
Trustee will also include his accrued interest on the Bonds. (See "Rights of
Unit Holders--Redemption of Units--Computation of Redemption Price per Unit.")
The Trustee is also entitled to withdraw from the Interest Account, and to the
extent funds are not sufficient therein, from the Principal Account, on one or
more Record Dates as may be appropriate, amounts sufficient to recoup advances
which it has made in anticipation of the receipt by the Trust of interest in
respect of Bonds which subsequently fail to pay interest when due.
As of the first day of each month the Trustee will deduct from the Interest
Account of a Trust and, to the extent funds are not sufficient therein, from
the Principal Account of such Trust, amounts necessary to pay the expenses of
such Trust. (See "Tax Exempt Securities Trust--Expenses and Charges.") The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out of a
Trust. Amounts so withdrawn shall not be considered a part of the Trust's
assets until such time as the Trustee shall return all or any part of such
amounts to the appropriate account. In addition, the Trustee may withdraw from
the Interest Account and the Principal Account such amounts as may be necessary
to cover redemption of Units by the Trustee. (See "Rights of Unit Holders--
Redemption of Units.")
The Trustee has agreed to advance to a Trust the amount of accrued interest
due on the Bonds of such Trust from their respective issue dates or previous
interest payment dates through the Date of Deposit. This accrued interest
amount will be paid to the Sponsors as the holders of record of all Units on
the first settlement date for the Units. Consequently, when the Sponsors sell
Units of a Trust, the amount of accrued interest to be added to the Public
Offering Price of the Units purchased by an investor will include only accrued
interest from the day after the Date of Deposit, to, but not including, the
date of settlement of the investor's purchase (normally five business days
after purchase), less any distributions from the Interest Account. The Trustee
will recover its advancements to a Trust (without interest or other cost to
such Trust) from interest received on the Bonds deposited in such Trust.
REPORTS AND RECORDS
The Trustee shall furnish Unit holders in connection with each distribution a
statement of the amount of interest, if any, and the amount of other receipts,
if any, which are being distributed, expressed in each case as a dollar amount
per Unit. In the event that the issuer of any of the Bonds fails to make
payment when due of any interest or principal and such failure results in a
change in the amount which would otherwise be distributed as a monthly
distribution, the Trustee will, with the first such distribution following such
failure, set forth in an accompanying statement, the issuer and the Bond, the
amount of the reduction in the distribution per Unit resulting from such
failure, the percentage of the aggregate principal amount of Bonds which such
Bond represents and, to the extent then determined, information regarding any
disposition or legal action with respect to such Bond. Within a reasonable time
after the end of each calendar year, the Trustee will furnish to each person
who at any time during the calendar year was a Unit holder of record, a
statement (1) as to the Interest Account: interest received (including amounts
representing interest received upon any disposition of Bonds), deductions for
payment of applicable taxes and for fees and expenses of a Trust, redemptions
of Units and the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount representing the
pro rata share of each Unit outstanding on the last business day of such
calendar year; (2) as to the Principal Account: the dates of disposition of any
Bonds and the net proceeds received therefrom (excluding any portion
representing interest), deductions for payments of applicable taxes and for
fees and expenses of a Trust, redemptions of Units, and the balance remaining
after such distributions and deductions, expressed both as a total dollar
amount and as a dollar amount representing the pro rata share of each Unit
outstanding on the last business day of such calendar year; (3) a list of the
Bonds held and the number of Units outstanding on the last business day of such
calendar year; (4) the Redemption Price per Unit based upon the last
computation thereof made during such calendar year; and (5) amounts actually
distributed during such calendar year from the Interest Account and from the
Principal Account, separately stated, expressed both as total dollar amounts
and as dollar amounts representing the pro rata share of each Unit outstanding.
The accounts of a Trust shall be audited not less frequently than annually by
independent auditors designated by the Sponsors, and the report of such
auditors shall be furnished by the Trustee to Unit holders upon request.
The Trustee shall keep available for inspection by Unit holders at all
reasonable times during usual business hours, books of record and account of
its transactions as Trustee including records of the names and addresses of
Unit holders, certificates issued or held, a current list of Bonds in the
Portfolio of a Trust and a copy of the Trust Agreement.
B-18
<PAGE>
REDEMPTION OF UNITS
Units may be tendered to the Trustee for redemption at its unit investment
trust office at 770 Broadway, New York, New York 10003, upon payment of any
relevant tax. At the present time there are no specific taxes related to the
redemption of the Units. No redemption fee will be charged by the Sponsors or
the Trustee. Units redeemed by the Trustee will be cancelled.
Certificates for Units to be redeemed must be properly endorsed or
accompanied by a written instrument of transfer. Unit holders must sign exactly
as their name appears on the face of the certificate with the signature
guaranteed by an officer of a national bank or trust company or by a member of
either the New York, Midwest or Pacific Stock Exchange. In certain instances
the Trustee may require additional documents such as, but not limited to, trust
instruments, certificates of death, appointments as executor or administrator
or certificates of corporate authority.
Within seven calendar days following such tender, the Unit holder will be
entitled to receive in cash an amount for each Unit tendered equal to the
Redemption Price per Unit computed as of the Evaluation Time set forth in the
"Summary of Essential Information" in Part A on the date of tender. (See
"Redemption of Units--Computation of Redemption Price per Unit.") The "date of
tender" is deemed to be the date on which Units are received by the Trustee,
except as regards Units received after the close of trading on the New York
Stock Exchange, the date of tender is the next day on which such Exchange is
open for trading, and such Units will be deemed to have been tendered to the
Trustee on such day for redemption at the Redemption Price computed on that
day. For information relating to the purchase by the Sponsors of Units tendered
to the Trustee for redemption at prices in excess of the Redemption Price, see
"Redemption of Units--Purchase by the Sponsors of Units Tendered for
Redemption."
Accrued interest paid on redemption shall be withdrawn from the Interest
Account, or, if the balance therein is insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn from the
Principal Account. The Trustee is empowered to sell Bonds in order to make
funds available for redemption. Such sales, if required, could result in a sale
of Bonds by the Trustee at a loss. To the extent Bonds are sold, the size and
diversity of a Trust will be reduced.
The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than weekend and
holiday closings, or trading on that Exchange is restricted or during which (as
determined by the Securities and Exchange Commission) an emergency exists as a
result of which disposal or evaluation of the underlying Bonds is not
reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted.
COMPUTATION OF REDEMPTION PRICE PER UNIT--The Redemption Price per Unit of a
Trust is determined by the Trustee on the basis of the bid prices of the Bonds
in such Trust as of the Evaluation Time on the date any such determination is
made. The Redemption Price per Unit of a Trust is each Unit's pro rata share,
determined by the Trustee, of: (1) the aggregate value of the Bonds in such
Trust on the bid side of the market (determined by the Evaluator as set forth
below), (2) cash on hand in such Trust (other than funds covering contracts to
purchase Bonds), and accrued and unpaid interest on the Bonds as of the date of
computation, less (a) amounts representing taxes or governmental charges
payable out of such Trust, (b) the accrued expenses of such Trust, and (c) cash
held for distribution to Unit holders of such Trust of record as of a date
prior to the evaluation. The Evaluator may determine the value of the Bonds in
the Trust (1) on the basis of current bid prices for the Bonds, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices for
comparable securities, (3) by appraisal, or (4) by any combination of the
above.
The difference between the bid and offering prices of the Bonds may be
expected to average approximately 1 1/2% of principal amount. In the case of
actively traded securities, the difference may be as little as 1/2 of 1%, and
in the case of inactively traded securities such difference usually will not
exceed 3%. The price at which Units may be redeemed could be less than the
price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per Unit by the amounts set forth under Part A, "Summary of
Essential Information."
PURCHASE BY THE SPONSORS OF UNITS TENDERED FOR REDEMPTION--The Trust
Agreement requires that the Trustee notify the Sponsors of any tender of Units
for redemption. So long as the Sponsors are maintaining a bid in the secondary
market, the Sponsors, prior to the close of business on the second succeeding
business day, will purchase any Units tendered to the Trustee for redemption at
the price so bid by making payment therefor to the Unit holder in an amount not
less than the Redemption Price not later than the day on which the Units would
otherwise have been redeemed by the Trustee. (See "Public Offering--Market for
Units.")
The offering price of any Units resold by the Sponsors will be the Public
Offering Price determined in the manner provided in this Prospectus. (See
"Public Offering--Offering Price.") Any profit resulting from the resale of
such Units will belong to the Sponsors which likewise will bear any loss
resulting from a lower offering or redemption price subsequent to their
acquisition of such Units. (See "Public Offering--Sponsors' and Underwriters'
Profits.")
B-19
<PAGE>
SPONSORS
Smith Barney Inc., 1345 Avenue of the Americas, New York, New York 10105
("Smith Barney"), was incorporated in Delaware in 1960 and traces its history
through predecessor partnerships to 1873. Smith Barney, an investment banking
and securities broker-dealer firm, is a member of the New York Stock Exchange,
Inc. and other major securities and commodities exchanges, the National
Association of Securities Dealers, Inc. and the Securities Industry
Association. Smith Barney is an indirect wholly-owned subsidiary of The
Travelers Inc.
Kidder, Peabody & Co. Incorporated, 60 Broad Street, New York, New York 10004
("Kidder, Peabody"), was incorporated in Delaware in 1956 and traces its
history through predecessor partnerships to 1865. Kidder, Peabody, an
investment banking and securities broker-dealer firm, is a member of the New
York Stock Exchange, Inc. and other major securities and option exchanges, the
National Association of Securities Dealers, Inc. and the Securities Industry
Association.
Smith Barney or an affiliate is investment adviser, principal underwriter or
distributor of thirty-three open-end investment companies and investment
manager of ten closed-end investment companies. Smith Barney also sponsors all
Series of Corporate Securities Trust, Government Securities Trust, Harris,
Upham Tax-Exempt Fund and Tax Exempt Securities Trust, and acts as co-sponsor
of most Series of Defined Assets Funds. Kidder, Peabody sponsors Target
Corporate High Yield Series Unit Trust and a family of open-end investment
companies, presently including: Kidder, Peabody Government Money Fund, Inc.,
Kidder, Peabody Premium Account Fund, Kidder, Peabody Tax Exempt Money Fund,
Inc., Kidder, Peabody Cash Reserve Fund, Inc., Kidder, Peabody Equity Income
Fund, Inc., Kidder, Peabody Government Income Fund, Inc., Kidder, Peabody
California Tax Exempt Money Fund, Liquid Institutional Reserves (Government
Securities Income Fund, Money Market Fund and Treasury Securities Fund),
Kidder, Peabody Global Equity Fund, Kidder, Peabody Intermediate Fixed Income
Fund, Kidder, Peabody Adjustable Rate Government Fund, Kidder, Peabody Global
Fixed Income Fund, Kidder, Peabody Municipal Money Market Series (Connecticut,
New Jersey and New York), Kidder, Peabody Municipal Bond Fund, Kidder, Peabody
Emerging Markets Equity Fund, Kidder, Peabody Small Cap Equity Fund,
Institutional Adjustable Rate Government Portfolio and Kidder, Peabody Asset
Allocation Fund. Kidder Peabody Asset Management, Inc., a subsidiary of Kidder,
Peabody, is the investment adviser and/or manager of each of these open-end
investment companies. The Sponsors have acted previously as managing
underwriters of other investment companies. In addition to participating as a
member of various underwriting and selling groups or as agent of other
investment companies, the Sponsors also execute orders for the purchase and
sale of securities of investment companies and sell securities to such
companies in their capacities as brokers or dealers in securities.
LIMITATIONS ON LIABILITY
The Sponsors are jointly and severally liable for the performance of their
obligations arising from their responsibilities under the Trust Agreement, but
will be under no liability to Unit holders for taking any action or refraining
from any action in good faith or for errors in judgment or responsible in any
way for depreciation or loss incurred by reason of the sale of any Bonds,
except in cases of willful misfeasance, bad faith, gross negligence or reckless
disregard of their obligations and duties. (See "Tax Exempt Securities Trust--
Portfolio" and "Sponsors--Responsibility.")
RESPONSIBILITY
The Sponsors are empowered to direct the Trustee to dispose of Bonds when
certain events occur that adversely affect the value of the Bonds, including
default in payment of interest or principal, default in payment of interest or
principal on other obligations of the same issuer, institution of legal
proceedings, default under other documents adversely affecting debt service,
decline in price or the occurrence of other market or credit factors, or
decline in projected income pledged for debt service on revenue Bonds and
advanced refunding that, in the opinion of the Sponsors, may be detrimental to
the interests of the Unit holders.
The Sponsors intend to provide portfolio services for each Trust in order to
determine whether the Trustee should be directed to dispose of any such Bonds.
It is the responsibility of the Sponsors to instruct the Trustee to reject
any offer made by an issuer of any of the Bonds to issue new obligations in
exchange and substitution for any Bonds pursuant to a refunding or refinancing
plan, except that the Sponsors may instruct the Trustee to accept such an offer
or to take any other action with respect thereto as the Sponsors may deem
proper if the issuer is in default with respect to such Bonds or in the
judgment of the Sponsors the issuer will probably default in respect to such
Bonds in the foreseeable future.
Any obligations so received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the Trust Agreement to the same
extent as Bonds originally deposited thereunder. Within five days after the
deposit of obligations in exchange or substitution for underlying Bonds, the
Trustee is required to give notice thereof to each Unit holder, identifying the
Bonds eliminated and the Bonds substituted therefor. Except as stated in this
and the preceding paragraph, the acquisition by a Trust of any securities other
than the Bonds initially deposited in the Trust is prohibited.
B-20
<PAGE>
Smith Barney Inc. has been appointed by Kidder, Peabody & Co. Incorporated as
agent for purposes of taking any action required or permitted to be taken by
the Sponsors under the Trust Agreement. If the Sponsors are unable to agree
with respect to action to be taken jointly by them under the Trust Agreement
and they cannot agree as to which Sponsor shall act as sole Sponsor, then Smith
Barney Inc. shall act as sole Sponsor. If one of the Sponsors fails to perform
its duties under the Trust Agreement or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, that Sponsor is
automatically discharged under the Trust Agreement and the remaining Sponsor
acts as Sponsor.
RESIGNATION
Any Sponsor may resign provided that at the time of such resignation each
remaining Sponsor maintains a net worth of $1,000,000 and is agreeable to such
resignation. Concurrently with or subsequent to such resignation a new Sponsor
may be appointed by the remaining Sponsors and the Trustee to assume the duties
of the resigning Sponsor. If all Sponsors resign or otherwise fail or become
unable to perform their duties under the Trust Agreement, and no express
provision is made for action by the Trustee in such event, the Trustee may
appoint a successor sponsor or terminate the Trust Agreement and liquidate the
Trusts.
TRUSTEE
The Trustee is United States Trust Company of New York, with its principal
place of business at 114 West 47th Street, New York, New York 10036. United
States Trust Company of New York has, since its establishment in 1853, engaged
primarily in the management of trust and agency accounts for individuals and
corporations. The Trustee is a member of the New York Clearing House
Association and is subject to supervision and examination by the Superintendent
of Banks of the State of New York, the Federal Deposit Insurance Corporation
and the Board of Governors of the Federal Reserve System. In connection with
the storage and handling of certain Bonds deposited in the Trust, the Trustee
may use the services of The Depository Trust Company. These services may
include safekeeping of the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery services. The Depository Trust Company is a
limited purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System and a clearing agency
registered under the Securities Exchange Act of 1934.
LIMITATIONS ON LIABILITY
The Trustee shall not be liable or responsible in any way for depreciation or
loss incurred by reason of the disposition of any moneys, securities or
certificates or in respect of any evaluation or for any action taken in good
faith reliance on prima facie properly executed documents except in cases of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties. In addition, the Trustee shall not be personally liable
for any taxes or other governmental charges imposed upon or in respect of a
Trust which the Trustee may be required to pay under current or future law of
the United States or any other taxing authority having jurisdiction. (See "Tax
Exempt Securities Trust-- Portfolio.") For information relating to the
responsibilities and indemnification of the Trustee under the Trust Agreement,
reference is made to the material set forth under "Rights of Unit Holders",
"Sponsors--Resignation" and "Other Charges."
RESIGNATION
By executing an instrument in writing and filing the same with the Sponsors,
the Trustee and any successor may resign. In such an event the Sponsors are
obligated to appoint a successor trustee as soon as possible. If the Trustee
becomes incapable of acting or becomes bankrupt or its affairs are taken over
by public authorities, the Sponsors may remove the Trustee and appoint a
successor as provided in the Trust Agreement. Such resignation or removal shall
become effective upon the acceptance of appointment by the successor trustee.
If no successor has accepted the appointment within thirty days after notice of
resignation, the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The resignation or removal of
a trustee becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor trustee.
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a division of Kenny
Information Systems, Inc., with main offices located at 65 Broadway, New York,
New York 10006.
LIMITATIONS ON LIABILITY
The Trustee, Sponsors and Unit holders may rely on any evaluation furnished
by the Evaluator and shall have no responsibility for the accuracy thereof.
Determination by the Evaluator under the Trust Agreement shall be made in good
faith upon the basis of the best information available to it; provided,
however, that the Evaluator shall be under no liability to the Trustee, the
Sponsors, or Unit holders for errors in judgment. But this provision shall not
protect the Evaluator in cases of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
B-21
<PAGE>
RESPONSIBILITY
The Trust Agreement requires the Evaluator to evaluate the Bonds of a Trust
on the basis of their bid prices on the last business day of June and December
in each year, on the day on which any Unit of such Trust is tendered for
redemption and on any other day such evaluation is desired by the Trustee or is
requested by the Sponsors. For information relating to the responsibility of
the Evaluator to evaluate the Bonds on the basis of their offering prices, see
"Public Offering--Offering Price."
RESIGNATION
The Evaluator may resign or may be removed by the joint action of the
Sponsors and the Trustee, and in such event, the Sponsors and the Trustee are
to use their best efforts to appoint a satisfactory successor. Such resignation
or removal shall become effective upon the acceptance of appointment by a
successor evaluator. If upon resignation of the Evaluator no successor has
accepted appointment within thirty days after notice of resignation, the
Evaluator may apply to a court of competent jurisdiction for the appointment of
a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
AMENDMENT
The Sponsors and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unit holders when such an amendment is (1) to
cure any ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein, or (2) to make such other provisions as shall not adversely
affect the interests of the Unit holders; provided, that the Trust Agreement is
not amended to increase the number of Units issuable thereunder or to permit
the deposit or acquisition of securities either in addition to or in
substitution for any of the Bonds initially deposited in a Trust, except for
the substitution of certain refunding securities for such Bonds or to permit
the Trustee to engage in business or investment activities not specifically
authorized in the Trust Agreement as originally adopted. In the event of any
amendment, the Trustee is obligated to notify promptly all Unit holders of the
substance of such amendment.
TERMINATION
The Trust Agreement provides that if the principal amount of Bonds held in
Trust is less than 50% of the principal amount of the Bonds originally
deposited in such Trust, the Trustee may in its discretion and will, when
directed by the Sponsors, terminate such Trust. A Trust may be terminated at
any time by 100% of the Unit holders. However, in no event may a Trust continue
beyond the Mandatory Termination Date set forth under Part A, "Summary of
Essential Information." In the event of termination, written notice thereof
will be sent by the Trustee to all Unit holders. Within a reasonable period
after termination, the Trustee will sell any Bonds remaining in the affected
Trust, and, after paying all expenses and charges incurred by such Trust, will
distribute to each Unit holder, upon surrender for cancellation of his
certificate for Units, his pro rata share of the balances remaining in the
Interest and Principal Account of such Trust.
LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell, 450
Lexington Avenue, New York, New York 10017, as special counsel for the
sponsors.
AUDITORS
The Statements of Financial Condition and the Portfolios of Securities
included in this Prospectus have been audited by KPMG Peat Marwick, independent
auditors, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing.
BOND RATINGS+
ALL RATINGS SHOWN UNDER PART A, "PORTFOLIO OF SECURITIES", EXCEPT THOSE
IDENTIFIED OTHERWISE, ARE BY STANDARD & POOR'S.
- -------
+As described by the rating agencies.
B-22
<PAGE>
STANDARD & POOR'S
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and in the majority of instances they differ from AAA issues only in
small degrees.
A--Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse affects 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 weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher-rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings: The letter "p" following a rating indicates the rating
is provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of 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, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to such
likelihood and risk.
Conditional rating(s), indicated by "Con" are given to bonds for which the
continuance of the security rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows and/or the security rating is conditional upon the
issuance of insurance by the respective insurance company.
MOODY'S
A brief description of the applicable Moody's rating symbols and their
meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or 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.
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. Aa bonds are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as 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.
B-23
<PAGE>
Rating symbols may include numerical modifiers "1," "2," or "3." The
numerical modifier "1" indicates that the security ranks at the high end, "2"
in the mid-range, and "3" nearer the low end of the generic category. These
modifiers of rating symbols "Aa," "A" and "Baa" are to give investors a more
precise indication of relative debt quality in each of the historically defined
categories.
FITCH
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong,
is somewhat less than for AAA rated securities or more subject to possible
change over the term of the issue.
A--These bonds are considered to be investment grade and of good quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however are more likely to weaken this ability than bonds with
higher ratings.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
DUFF & PHELPS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
FEDERAL TAX FREE VS. TAXABLE INCOME
This table shows the approximate yields which taxable securities must earn in
various income brackets to produce, after Federal income tax, returns
equivalent to specified tax-exempt bond yields. The table is computed on the
theory that the taxpayer's highest bracket tax rate is applicable to the entire
amount of any increase or decrease in his or her taxable income resulting from
a switch from taxable to tax-exempt securities or vice versa. The table
reflects the Federal income tax rates and the tax brackets for the 1993 taxable
year under the Code as in effect on the date of this Prospectus. Because the
Federal rate brackets are subject to adjustment based on changes in the
Consumer Price Index, the taxable equivalent yields for subsequent years may
vary somewhat from those indicated in the table. Use this table to find your
tax bracket. Read across to determine the approximate taxable yield you would
need to equal a return free of Federal income tax.
1994 TAX YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE INCOME BRACKET* TAX EXEMPT YIELD
JOINT RETURN SINGLE RETURN % TAX RATE 3.5% 4% 4.5% 5.00% 5.50% 6.00% 6.50% 7.00%
TAXABLE EQUIVALENT YIELD
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UP TO $36,900 UP TO $22,100 15.0% 4.117 4.705 5.294 5.882 6.470 7.059 7.647 8.235
$ 36,900- 89,150 $ 22,100- 53,500 28.0% 4.861 5.555 6.250 6.944 7.638 8.333 9.028 9.722
$ 89,150-140,000 $ 53,500-115,000 31.0% 5.072 5.797 6.521 7.246 7.971 8.696 9.420 10.145
$140,000-250,000 $115,000-250,000 36.0% 5.468 6.250 7.031 7.812 8.593 9.375 10.156 10.937
OVER $250,000 OVER $250,000 39.6% 5.794 6.622 7.450 8.278 9.105 9.933 10.761 11.589
- --------------------------------------------------------------------------------------------------
</TABLE>
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions or the standard
deduction. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should take into account the
provisions of the Code under which the benefit of certain itemized deductions
and the benefit of personal exemptions are limited in the case of higher
income individuals. Under the Code, individual taxpayers with adjusted gross
income in excess of a $111,800 threshold amount are subject to an overall
limitation on certain itemized deductions, requiring a reduction equal to the
lesser of (i) 3% of adjusted gross income in excess of the $111,800 threshold
amount or (ii) 80% of the amount of such itemized deductions otherwise
allowable. The benefit of each personal exemption is phased-out for married
taxpayers filing a joint return with adjusted gross income in excess of
$167,700 and for single taxpayers with adjusted gross income in excess of
$111,800. Personal exemptions are phased out at the rate of two percentage
points for each $2,500 (or fraction thereof) of adjusted gross income in
excess of the applicable threshold amount. The first three Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will
be adjusted for inflation for each year. The 36.0% and 39.6% Federal tax
brackets will be adjusted for inflation for each year after 1994.
B-24
<PAGE>
PROSPECTUS--PART C:
- --------------------------------------------------------------------------------
NOTE: PART C OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PARTS A AND B.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST--THE STATE TRUSTS
Potential purchasers of the Units of a State Trust should consider the fact
that the Trust's Portfolio consists primarily of Bonds issued by the state for
which such State Trust is named or its municipalities or authorities and
realize the substantial risks associated with an investment in such Bonds. Each
State Trust is subject to certain additional risk factors. The Sponsors believe
the discussions of risk factors summarized below describe some of the more
significant aspects of the State Trusts. The sources of such information are
the official statements of issuers as well as other publicly available
documents. While the Sponsors have not independently verified this information,
they have no reason to believe that such information is not correct in all
material respects. Investment in a State Trust should be made with an
understanding that the value of the underlying Portfolio may decline with
increases in interest rates.
CALIFORNIA TRUST
RISK FACTORS--The economy of California (the "State") is the largest among
the 50 states and one of the largest in the world. The State's July 1, 1992
population of 31 million represented over 12.0% of the total United States
population. Total employment is about 14 million, the majority of which was in
the service, trade and manufacturing sectors.
Since the start of the 1990-91 fiscal year, the State has faced the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), exports and financial services, among
others, have all been severely affected. Job losses have been the worst of any
post-war recession. Employment levels are expected to stabilize by late 1993.
However, pre-recession job levels are not expected to be reached for several
more years. Unemployment reached 10% in November 1992 and is expected to remain
above 9% through 1993 and 1994. According to the Department of Finance,
recovery from the recession in California is not expected in meaningful terms
until late 1993 or 1994, notwithstanding signs of recovery elsewhere in the
nation.
After three years of recession, California's economy seems to be stabilizing,
however, economic signals remain mixed. On the plus side, nonfarm employment in
April was essentially unchanged from the December level. The unemployment rate
seems to be moving down, although the large April drop, from 9.4% to 8.6%,
probably exaggerates the improvement. Personal income growth is improving
gradually, from gains of 2% or less in 1991 to slightly over 3% at the
beginning of 1993, and taxable sales are stabilizing after a lengthy decline.
There are still ample signs of weakness. Manufacturing employment continues
to decline, with deep losses in aerospace, reflecting defense cuts and weak
commercial markets. Despite strong output and sales gains, electronics firms
continue to cut payrolls. All manufacturing industries, with the exception of
apparel and textiles, are posting employment losses. Housing, usually an engine
of recovery, remains in a slump. Permit volume has averaged a 95,000 unit
annual rate in recent months, actually somewhat below 1992's 98,000 total.
Nonresidential construction continues to hit new recession lows, reflecting
oversupplied commercial office, retail and hotel markets. Employment continues
to decline in normally stable industries such as banking, the utilities and
most segments of wholesale and retail trade. Food, department and apparel
stores are shedding jobs, and government employment is down 30,000 jobs over
the past year.
The Department of Finance, in its May 1993 Revision of the Governor's 1993-94
Budget, states that it expects this essentially flat pattern of economic
activity to persist throughout 1993, with employment by year end only
marginally higher than in April. Gains in service industries, mainly health
care, temporary agencies (in business services), motion picture production and
amusements are expected to continue. There should be modest increases in
wholesale and retail trade. The finance and transportation and utilities groups
will be stable to down slightly. Assuming a modest pickup in homebuilding,
construction employment will also be flat this year. Against these,
manufacturing and government will continue to lose jobs. The largest losses in
percentage terms will be in aerospace manufacturing and the Federal Department
of Defense, reflecting cuts in the military budget. Budget constraints will
also affect State and local government.
The recession has seriously affected State tax revenues, which basically
mirror economic conditions. It has also caused increased expenditures for
health and welfare programs. The State has also been facing a structural
imbalance in its budget with the largest programs supported by the General
Fund--K-14 education (kindergarten through community college), health, welfare
and corrections--growing at rates significantly higher than the growth rates
for the principal revenue sources of the General Fund. As a result, the State
has experienced recurring budget deficits; the State Controller reports that
expenditures exceeded revenues for four of the last five completed fiscal
years. Revenues declined in 1990-91 over 1989-90, the first time since the
1930s. By June 30, 1993, according to the
C-1
<PAGE>
Department of Finance, the State's Reserve for Economic Uncertainties had a
deficit, on a budget basis, of approximately $2.75 billion. A further
consequence of the large budget imbalances over the last three fiscal years has
been that the State depleted its available cash resources and has had to use a
series of external borrowings to meet its cash needs.
1992-93 BUDGET. By the time the 1992-93 Governor's Budget was presented in
January 1992, it was evident the recession was much deeper than earlier
anticipated. To balance the proposed budget, program reductions totalling
$4.365 billion and revenue and transfer increases of $872 million were proposed
for the 1991-92 and 1992-93 fiscal years. By the time of the Governor's May
Revision, issued on May 20, 1992, the Administration estimated that the 1992-93
Budget needed to address a gap of about $7.9 billion, much of which was needed
to repay the accumulated budget deficits of the previous two years.
The severity of the budget actions needed led to a long delay in adopting the
budget. With the failure to adopt a budget by July 1, 1992, which would have
allowed the State to carry out its normal annual cash flow borrowing, the
Controller was forced to issue registered warrants to pay a variety of
obligations representing prior 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 revenue anticipations
warrants. Between July 1 and September 4, 1992, the 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
redemption from proceeds of the issuance of 1992 Interim Notes after the budget
was adopted.
The 1992-93 Budget Act, signed by the Governor on September 2, 1992, provided
for expenditures of $57.4 billion and consisted of General Fund expenditures of
$40.8 billion and Special Fund and Bond Fund expenditures of $16.6 billion. The
Department of Finance estimated in September 1992 that there would be a balance
in the Special Fund for Economic Uncertainties of $28 million on June 30, 1993.
The $7.9 billion budget gap was closed through a combination of increased
revenues and transfers and expenditure cuts such as:
1. General Fund savings in health and welfare programs totalling $1.6
billion.
2. General Fund reductions of $1.9 billion for K-12 schools and community
colleges.
3. General Fund savings of $1.3 billion by revising the State aid program
to local governments originally enacted after Proposition 13.
4. Program cuts for higher education totaling $415 million.
5. A total of $1.6 billion of transfers and accelerated collections of
State revenues.
6. Approximately $1.0 billion from various additional program reductions.
Shortly after the 1992-93 Budget Act was enacted, it became evident the
economic conditions in the State were not beginning to improve in the second
half of 1992, as assumed by the Department of Finance's May 1992 economic
estimates. This was exacerbated by enactment of an initiative measure in
November 1992 repealing a sales tax for certain candy, snack foods and bottled
water, reducing revenues by about $300 million for a full fiscal year ($200
million in 1992-93). The Governor's Budget proposal for 1993-94, released on
January 8, 1993 (the "January Governor's Budget"), confirmed the earlier
forecasts about the State's economy and the 1992-93 Budget Act. The January
Governor's Budget projected that the economy would not start meaningful
recovery from the recession until late 1993 or 1994. With the economy
continuing in recession throughout the 1992-93 fiscal year, revenues were
projected about $2.5 billion lower than anticipated when the 1992-93 Budget Act
was signed, leading to a projected $2.1 billion budget deficit at June 30, 1993
(compared to the Budget Act projection of a $28 million balance). That deficit
amount was projected if, by March 1993, the Legislature adopted several actions
proposed by the Governor to save about $475 million in the 1992-93 fiscal year.
The Legislature did not adopt any of the Governor's proposals.
On May 20, 1993, the Department of Finance released its May Revision to the
January Governor's Budget (the "May Revision"), updating revenue and
expenditure projections and proposals for the 1992-93 and 1993-94 fiscal years.
The May Revision projected that the General Fund will end the fiscal year on
June 30, 1993 with an accumulated budget deficit of about $2.8 billion, and a
negative fund balance of about $2.2 billion (the difference being certain
reserves for encumbrances and school funding costs). The Governor projected
revenues for 1992-93 of $41.0 billion, $1.0 billion less than in the 1991-92
fiscal year. On the expenditure side, the continued recession increased health
and welfare costs above the original Budget Act projections. Also, property tax
receipts at the local level were less than projected, so that the State will
not get the full $1.3 billion benefit from the property tax shift enacted in
the 1992-93 Budget Act. Overall, the May Revision projected total General Fund
expenditures of $41.1 billion for the 1992-93 fiscal year, about $300 million
higher than the Budget Act and $2.2 billion less than fiscal year 1991-92.
The January Governor's Budget had projected that, because of severely reduced
revenues, the State would face a cash flow shortfall in May 1993, necessitating
additional external borrowing. The State met this cash flow need by issuing
$3.0 billion of revenue anticipation notes on April 26, 1993, which matured on
June 24, 1993. The State also issued the 1993 Revenue Participation Warrants in
the principal amount of $2.0 billion to meet cash flow requirements for the end
of the 1992-93 fiscal year and the start of the 1993-94 fiscal year.
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1993-94 BUDGET. The 1993-94 fiscal year represents the third consecutive year
the Governor and the Legislature were faced with a very difficult budget
environment, requiring revenue actions and expenditure cuts totalling multiple
billions of dollars to produce a balanced budget.
The Governor's Budget introduced on January 8, 1993 proposed General Fund
expenditures of $37.33 billion, with projected revenues of $39.87 billion. It
also proposed Special Fund expenditures of $12.35 billion and Special Fund
Revenues of $12.10 billion. To balance the budget in the face of declining
revenues, the Governor proposed a series of revenue shifts from local
government, reliance on increased federal aid, and reductions in State
spending.
The May Revision of the Governor's Budget, released on May 20, 1993,
indicated that the revenue projections of the January Budget Proposal were
tracking well, with the full year 1992-93 about $80 million higher than the
January projection. Personal income tax revenue was higher than projected,
sales tax was close to target, and bank and corporation taxes were lagging
behind projections. The May Revision projected the State would have about $2.7
billion accumulated deficit by June 30, 1993. The Governor proposed to repay
this deficit over an 18-month period. He also agreed to retain the 0.5% sales
tax scheduled to expire June 30 for a six-month period, dedicated to local
public safety purposes, with a November election to determine a permanent
extension. Unlike previous years, the Governor's Budget and May Revision did
not calculate a "gap" to be closed, but rather set forth revenue and
expenditure forecasts and proposals designed to produce a balanced budget.
The 1993-94 Budget Act, signed by the Governor on June 30, 1993, is
predicated on revenue and transfer estimates of $40.6 billion, about $700
million higher than the January Governor's Budget, but still about $400 million
below 1992-93 (and the second consecutive year of actual decline). The
principal reasons for this decline are the continued weak economy and the
expiration (or repeal) of three fiscal steps taken in 1991--a half cent
temporary sales tax (which generates about $1.5 billion annually), a deferral
of operating loss carry forwards ($440 million), and repeal by initiative of a
sales tax on candy and snack foods ($300 million). The Governor also proposes a
number of fiscal steps (tax credits and the like) to stimulate job growth,
which could result in short-term revenue costs. The 1993-94 Budget Act assumes
Special Fund revenues of $11.8 billion, an increase of 5.0% over 1992-93.
The 1993-94 Budget Act includes General Fund expenditures of $38.5 billion (a
6.5% reduction from projected 1992-93 expenditures of $41.2 billion), in order
to keep a balanced budget within the available revenues. The Budget also
includes Special Fund expenditures of $12.1 billion, a 4.2% increase. The
Budget Act reflects the following major adjustments:
1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts.
2. The Budget keeps K-12 Proposition 98 funding on a cash basis at the
same per-pupil level as 1992-93 by providing schools a loan payable from
future years' Proposition 98 funds.
3. Receipt in 1993-94 of about $550 million in aid from the federal
government to offset health and welfare costs associated with foreign
immigrants living in the State, which would reduce a like amount of General
Fund expenditures.
4. Reductions of $0.3 billion in health and welfare programs.
5. Reductions of $400 million in support for higher education.
6. A 2 year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
7. Various miscellaneous cuts (totalling approximately $150 million) in
State government services in many agencies, up to 15%.
8. Miscellaneous one-time items, including deferral of payment to the
Public Employees Retirement Fund and a change in accounting for debt
service from accrual to cash basis, saving $107 million.
A key feature of the 1993-94 Budget Act is a plan to retire the projected
$2.8 billion accumulated deficit over an 18-month period by the use of external
borrowing. The Budget Act estimates that about $1.6 billion of the deficit
elimination loan would be repaid by December 23, 1993 from the proceeds of the
$2.0 billion Revenue Anticipation Warrants issued on June 23, 1993.
The 1993-94 Budget Act continues to predict that population growth in the
1990's will keep upward pressure on major State programs, such as K-14
education, health, welfare and corrections, outstripping projected revenue
growth in an economy only very slowly emerging from a deep recession. The
Governor's health, welfare and local government reductions continue his efforts
to keep expenditures in line with resources in the long term. The Budget Act
also proposes significant restructuring of State government, with elimination
and consolidation of several agencies and numerous smaller boards, and change
to a "performance budgeting" concept which would be more efficient and cost-
effective (with a pilot project to be implemented in 1994-95). The Governor
also proposes initiatives in the field of information technology to increase
governmental productivity.
On June 2, 1993, the Commission on State Finance ("COSF") issued its
Quarterly General Fund Forecast, which assessed the Governor's May Revision.
The COSF report projected stagnant economic conditions through 1994, and agreed
generally with the
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Governor's economic projections, although the COSF showed slightly lower growth
than the Governor in some California economic factors. The COSF projects lower
revenues and higher expenditures in 1993-94 than the May Revision, and notes
that the May Revision continues the use of off-book loans to schools and has no
built-in protection against downside risk.
The COSF projects about $700 million lower revenues in 1993-94 than the May
Revision, principally because COSF believes most of the increase in personal
income taxes seen late in 1992-93 came from a one-time income shift, rather
than reflecting a permanent base of greater tax revenues. COSF also shows other
major taxes (and local property taxes) a little weaker than the May Revision,
with a resulting increase in expenditures to make up the property tax shortfall
for school financing. Altogether, COSF projects in its "primary forecast" that
the fund balance at June 30, 1994 would be over $800 million more negative than
the May Revision forecast, and the negative difference would grow to $1.9
billion by June 30, 1995.
The COSF report includes two alternative forecasts based on either continued
recession, or stronger recovery. The pessimistic forecast is $3.8 billion worse
at June 30, 1995 than the Primary Forecast, and the optimistic forecast is
about $3.8 billion better. The COSF also expressed concern that the proposed
$2.6 billion shift of property taxes could materially impact local governments'
fiscal stability.
THE FOREGOING DISCUSSION OF THE 1993-94 FISCAL YEAR BUDGET IS BASED IN LARGE
PART ON STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL STATEMENT"
DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT DOCUMENT, THE STATE INDICATED
THAT ITS DISCUSSION OF THE 1993-94 FISCAL YEAR BUDGET IS BASED ON ESTIMATES AND
PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND MUST
NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE NOTED FURTHER THAT THE
ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE
AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE
AND THE NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE
ACHIEVED.
STATE APPROPRIATIONS LIMIT. The State is subject to an annual appropriations
limit imposed by Article XIIIB of the State Constitution (the "Appropriations
Limit"), and is prohibited from spending "appropriations subject to limitation"
in excess of the Appropriations Limit. Article XIIIB, originally adopted in
1979, was modified substantially by Propositions 98 and 111 in 1988 and 1990,
respectively "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed the reasonable cost of providing the
regulation, product or service. The Appropriations Limit is based on the limit
for the prior year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of taxes
received over such two-year period above the combined Appropriation Limits for
those two years is divided equally between transfers to K-14 districts and
refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax revenues
dedicated to specific uses and expressly exempted from the Article XIIIB
limits. The Appropriations Limit may also be exceeded in cases of emergency
arising from civil disturbance or natural disaster declared by the Governor and
approved by two-thirds of the Legislature. If not so declared and approved, the
Appropriations Limit for the next three years must be reduced by the amount of
the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in Proposition 98. During fiscal year 1991-92 revenues
were smaller than expected, thus reducing the payment owed to schools in 1991-
92 under alternate "test" provisions. In response to the changing revenue
situation, and to fully fund the Proposition 98 guarantee in the 1991-92 and
1992-93 fiscal years without exceeding it, the Legislature enacted legislation
to reduce 1991-92 appropriations. The amount budgeted to schools but which
exceeded the reduced appropriation was treated as a non-Proposition 98 short-
term loan in 1991-92. As part of the 1992-93 Budget, $1.1 billion of the amount
budgeted to K-14 schools was designated to "repay" the prior year loan, thereby
reducing cash outlays in 1992-93 by that amount.
Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Sponsors cannot predict the impact of this or related legislation on the Bonds
in the Trust Portfolio. Other Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If any
such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate revenues as
mandated by such initiatives. Propositions such as Proposition 98 and others
that may be adopted in the future, may place increasing pressure on the State's
budget over future years, potentially reducing resources available for other
State programs, especially to the extent the Article XIIIB spending limit would
restrain the State's ability to fund such other programs by raising taxes.
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STATE INDEBTEDNESS. As of June 30, 1993, the State had over $17.64 billion
aggregate amount of its general obligation bonds outstanding. General
obligation bond authorizations in the aggregate amount of approximately $7.24
billion remained unissued as of June 30, 1993. The State also builds and
acquires capital facilities through the use of lease purchase borrowing. As of
June 30, 1992, the State had approximately $2.88 billion of outstanding Lease-
Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $21.87 billion aggregate principal amount of revenue bonds
and notes outstanding as of March 31, 1993. Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects,
which are not payable from the General Fund, and conduit obligations payable
only from revenues paid by private users of facilities financed by such revenue
bonds. Such enterprises and projects include transportation projects, various
public works and exposition projects, educational facilities (including the
California State University and University of California systems), housing,
health facilities and pollution control facilities.
LITIGATION. The State is a party to numerous legal proceedings, many of which
normally occur in governmental operations. In addition, the State is involved
in certain other legal proceedings that, if decided against the State, might
require the State to make significant future expenditures or impair future
revenue sources. Examples of such cases include challenges to the State's
method of taxation of certain businesses, challenges to certain vehicle license
fees, and challenges to the State's use of Public Employee Retirement System
funds to offset future State and local pension contributions. Other cases which
could significantly impact revenue or expenditures involve reimbursement to
school districts for voluntary school desegregation and state mandated costs,
challenges to Medi-Cal eligibility, recovery for flood damages, and liability
for toxic waste cleanup. Because of the prospective nature of these
proceedings, it is not presently possible to predict the outcome of such
litigation or estimate the potential impact on the ability of the State to pay
debt service on its obligations.
On November 1, 1993 the United States Supreme Court agreed to review the
California court decisions in Barclays Bank International, Ltd. v. Franchise
Tax Board and Colgate-Palmolive Company, Inc. v. Franchise Tax Board which
upheld California's worldwide combined reporting ("WWCR") method of taxing
corporations engaged in a unitary business operation against challenges under
the foreign commerce and due process clauses. In 1983, in Container Corporation
v. Franchise Tax Board, the Supreme Court held that the WWCR method did not
violate the foreign commerce clause in the case of a domestic-based unitary
business group with foreign-domiciled subsidiaries, but specifically left open
the question of whether a different result would obtain for a foreign-based
multinational unitary business. Barclays concerns a foreign-based multinational
and Colgate-Palmolive concerns a domestic-based multinational in light of
federal foreign policy developments since 1983. In a brief filed at the Supreme
Court's request, the Clinton Administration had argued that the Court should
not hear the Barclays case, even though there are "serious questions" about the
California Supreme Court's analysis and holdings, because the recent changes in
the law noted below means the issue in Barclays "lacks substantial recurring
importance." The Clinton Administration had previously decided not to become
involved in the Barclays petition. The United States Government under the Bush
Administration, along with various foreign Governments, had appeared as amicus
on behalf of Barclays before the California Courts. The Clinton Administration
has filed an amicus brief on the merits supporting the California Franchise Tax
Board, arguing that the Court should judge WWCR by looking at federal policies
in effect at the time the taxes were collected and stating that the federal
government had not indicated to the States during the 1970s and 1980s that it
objected to WWCR. The fiscal impact on the State of California has been
reported as follows: the State would have a refund $1.730 billion to taxpayers
($530 million due to Barclays; 41.2 billion due to Colgate), and cancel another
$2.35 billion of pending assessments ($350 million due to Barclays; $1.9
billion due to Colgate), if the Supreme Court ultimately strikes down the WWCR
method and rules its decision has retrospective effect.
RATINGS. As a result of the deterioration in the State's budget and cash
situation in fiscal year 1991-92, and the delay in adopting the 1992-93 budget
which resulted in issuance of registered warrants, rating agencies reduced the
State's credit rating. Between November 1991 and September 30, 1992, the rating
on the State's general obligation bonds was reduced by Standard & Poor's
Corporation from "AAA" to "A+", by Moody's Investors Service from "Aaa" to
"Aa", and by Fitch Investors Service, Inc. from "AAA" to "AA". There can be no
assurance that such ratings will continue for any given period of time or that
they will not in the future be further revised or withdrawn.
The January 1994 Los Angeles earthquake may negatively impact the ability of
certain issuers to make scheduled interest and principal payments, for example,
if the specific project for which bonds were issued is damaged or if revenues
backing certain bonds decline. In addition, the impact on tourism and business
spending resulting from earthquake damage and any delay in its repair could
negatively impact the ability of certain issuers to make timely debt payments.
Further, as with the October 1989 Loma Prieta earthquake that struck San
Francisco, lawsuits may be filed against state agencies. Both Moody's Investors
Service and Standard & Poor's Corporation have said that it is too soon to
offer official assessments of the damage and its effect on bondholders.
However, Moody's has also stated that because the pledge to make debt service
payments for general obligation bonds and essential purpose revenue bonds is
absolute and unconditional, it does not expect any rating adjustment over the
short-term for such bonds. The Sponsors are unable to predict the effects of
this earthquake or any other future natural disaster on the bonds in the
Portfolio of the California Trust.
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CALIFORNIA TAXES
In the opinion of Messrs. Adams, Duque & Hazeltine, Los Angeles, California,
special counsel on California tax matters, under existing law:
The California Trust is not an association taxable as a corporation under
the income tax laws of the State of California;
The income, deductions and credits against tax of the California Trust
will be treated as the income, deductions and credits against tax of the
holders of Units in the California Trust under the income tax laws of the
State of California;
Interest on the bonds held by the California Trust to the extent that
such interest is exempt from taxation under California law will not lose
its character as tax-exempt income merely because that income is passed
through to the holders of Units; however, a corporation subject to the
California franchise tax is required to include that interest income in its
gross income for purposes of determining its franchise tax liability;
Each holder of a Unit in the California Trust will have a taxable event
when the California Trust disposes of a bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Unit holder redeems or
sells his Units. The total tax cost of each Unit to a holder of a Unit in
the California Trust 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 the holder's per Unit
tax cost for each bond issue, and the tax cost reduction requirements
relating to amortization of bond premium will apply separately to the per
Unit tax cost of each bond issue. Therefore, under some circumstances, a
holder of a Unit may realize taxable gain when the California Trust which
issued such Unit disposes of a bond or the holder's Units are sold or
redeemed for an amount equal to or less than his original cost of the bond
or Unit;
Each holder of a Unit in the California Trust is deemed to be the owner
of a pro rata portion of the California Trust under the personal property
tax laws of the State of California; and
Each Unit holder's pro rata ownership of the bonds held by the California
Trust, as well as the interest income therefrom, is exempt from California
personal property taxes.
MARYLAND TRUST
RISK FACTORS--The Public indebtedness of the State of Maryland (the "State")
and its instrumentalities is divided into three general types. The State issues
general obligation bonds for capital improvements and for various State
projects to the payment of which the State ad valorem property tax is
exclusively pledged. In addition, the Maryland Department of Transportation
issues for transportation purposes its limited, special obligation bonds
payable primarily from specific, fixed-rate excise taxes and other revenues
related mainly to highway use. Certain authorities issue obligations payable
solely from specific non-tax, enterprise fund revenues and for which the State
has no liability and has given no moral obligation assurance.
General obligation bonds of the State are authorized and issued primarily to
provide funds for State-owned capital improvements, including institutions of
higher learning, and the construction of locally owned public schools. Bonds
have also been issued for local government improvements, including grants and
loans for water quality improvement projects and correctional facilities, to
provide funds for repayable loans or outright grants to private, non-profit
cultural or educational institutions, and to fund certain loan and grant
programs.
The Maryland Constitution prohibits the contracting of State debt unless it
is authorized by a law levying an annual tax or taxes sufficient to pay the
debt service within 15 years and prohibiting the repeal of the tax or taxes or
their use for another purpose until the debt is paid. As a uniform practice,
each separate enabling act which authorizes the issuance of general obligation
bonds for a given object or purpose has specifically levied and directed the
collection of an ad valorem property tax on all taxable property in the State.
The Board of Public Works is directed by law to fix by May 1 of each year the
precise rate of such tax necessary to produce revenue sufficient for debt
service requirements of the next fiscal year, which begins July 1. However, the
taxes levied need not be collected if or to the extent that funds sufficient
for debt service requirements in the next fiscal year have been appropriated in
the annual State budget. Accordingly, the Board, in annually fixing the rate of
property tax after the end of the regular legislative session in April, takes
account of appropriations of general funds for debt service.
In the opinion of counsel, the courts of Maryland have jurisdiction to
entertain proceedings and power to grant mandatory injunctive relief to (i)
require the Governor to include in the annual budget a sufficient appropriation
to pay all general obligation bond debt service for the ensuing fiscal year;
(ii) prohibit the General Assembly from taking action to reduce any such
appropriation below the level required for that debt service; (iii) require the
Board of Public Works to fix and collect a tax on all property in the State
subject to assessment for State tax purposes at a rate and in an amount
sufficient to make such payments to the extent that adequate funds are not
provided in the annual budget; and (iv) provide such other relief as might be
necessary to enforce the collection of such taxes and payment of the proceeds
of the tax collection to the holders of general obligation bonds, pari passu,
subject to the inherent constitutional limitations referred to below.
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It is also the opinion of counsel that, while the mandatory injunctive
remedies would be available and while the general obligation bonds of the State
are entitled to constitutional protection against the impairment of the
obligation of contracts, such constitutional protection and the enforcement of
such remedies would not be absolute. Enforcement of a claim for payment of the
principal of or interest on the bonds could be subject to the provisions of any
statutes that may be constitutionally enacted by the United States Congress or
the Maryland General Assembly extending the time for payment or imposing other
constraints upon enforcement.
There is no general debt limit imposed by the Maryland Constitution or public
general laws, but a special committee created by statute annually submits to
the Governor an estimate of the maximum amount of new general obligation debt
that prudently may be authorized. Although the committee's responsibilities are
advisory only, the Governor is required to give due consideration to the
committee's findings in preparing a preliminary allocation of new general debt
authorization for the next ensuing fiscal year.
Consolidated Transportation Bonds are limited obligations issued by the
Maryland Department of Transportation, the principal of which must be paid
within 15 years from the date of issue, for highway, port, transit, rail or
aviation facilities or any combination of such facilities. Debt service on
Consolidated Transportation Bonds is payable from those portions of the excise
tax on each gallon of motor vehicle fuel and the motor vehicle titling tax, all
mandatory motor vehicle registration fees, motor carrier fees, and the
corporate income tax as are credited to the Maryland Department of
Transportation, plus all departmental operating revenues and receipts. Holders
of such bonds are not entitled to look to other sources for payment.
The Maryland Department of Transportation also issues its bonds to provide
financing of local road construction and various other county transportation
projects and facilities. Debt service on these bonds is payable from the
subdivisions' share of highway user revenues held to their credit in a special
State fund.
The Maryland Transportation Authority operates certain highway, bridge and
tunnel toll facilities in the State. The tolls and other revenues received from
these facilities are pledged as security for revenue bonds of the Authority
issued under and secured by a trust agreement between the Authority and a
corporate trustee.
Certain other instrumentalities of the State government are authorized to
borrow money under legislation which expressly provides that the loan
obligations shall not be deemed to constitute a debt or a pledge of the faith
and credit of the State. The Community Development Administration of the
Department of Housing and Community Development, the Board of Trustees of St.
Mary's College of Maryland, the Maryland Environmental Service, the Board of
Regents of the University of Maryland System, the Board of Regents of Morgan
State University, and the Maryland Food Center Authority have issued and have
outstanding bonds of this type. The principal of and interest on bonds issued
by these bodies are payable solely from various sources, principally fees
generated from use of the facilities or enterprises financed by the bonds.
Under a Comprehensive Plan of Financing, as amended, of the Maryland Stadium
Authority, the Authority is authorized to finance the acquisition and
construction of sports facilities at a site within the City of Baltimore. Under
the Plan of Financing, the Authority has engaged in a series of borrowings,
together with certain equity contributions, to finance acquisition of the site,
construction of a baseball stadium and ancillary facilities, and, if a lease
agreement is executed between the Authority and a professional football
franchise, proposes to finance the construction of a football stadium.
The Authority's financings as well as any future financings for a football
stadium are lease-backed revenue obligations, payment of which is secured by,
among other things, an assignment of revenues to be received under a lease of
the sports facilities from the Authority to the State of Maryland; rental
payments due from the State under that lease will be subject to annual
appropriation by the Maryland General Assembly. The State anticipates that
revenues to fund the lease payments will be generated from a variety of
sources, including in each year sports lottery revenues, the net operating
revenues of the Authority and funds from the City of Baltimore.
The Water Quality Revolving Loan Fund is administered by the Water Quality
Financing Administration in the Department of the Environment. The Fund may be
used to provide loans, subsidies and other forms of financial assistance to
local government units for wastewater treatment projects as contemplated by the
1987 amendments to the federal Water Pollution Control Act. The Administration
is authorized to issue bonds secured by revenues of the Fund, including loan
repayments, federal capitalization grants, and matching State grants.
The University of Maryland System, Morgan State University, and St. Mary's
College of Maryland are authorized to issue revenue bonds for the purpose of
financing academic and auxiliary facilities. Auxiliary facilities are any
facilities that furnish a service to students, faculty, or staff, and that
generate income. Auxiliary facilities include housing, eating, recreational,
campus, infirmary, parking, athletic, student union or activity, research
laboratory, testing, and any related facilities.
On August 7, 1989, the Governor issued an Executive Order assigning to the
Department of Budget and Fiscal Planning responsibility to review certain
proposed issuances of revenue and enterprise debt other than private activity
bonds. The Executive Order also provides that the Governor may establish a
ceiling of such debt to be issued during the fiscal year, which ceiling may be
amended by the Governor.
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Although the State has authority to make short-term borrowings in
anticipation of taxes and other receipts up to a maximum of $100 million, in
the past it has not issued short-term tax anticipation and bond anticipation
notes or made any other similar short-term borrowings. However, the State has
issued certain obligations in the nature of bond anticipation notes for the
purpose of assisting several savings and loan associations in qualifying for
Federal insurance and in connection with the assumption by a bank of the
deposit liabilities of an insolvent savings and loan association.
The State has financed the construction and acquisition of various facilities
through conditional purchase, sale-leaseback, and similar transactions. All of
the lease payments under these arrangements are subject to annual appropriation
by the Maryland General Assembly. In the event that appropriations are not
made, the State may not be held contractually liable for the payments.
SAVINGS AND LOAN MATTERS. During the first half of calendar year 1985,
several State-chartered savings and loan associations, the savings accounts of
which were privately insured, experienced unusually heavy withdrawals of funds
by depositors. The resulting decline in the associations' liquid assets led to
the appointment of receivers for the assets of six associations and the
creation of an agency of the State to succeed, by statutory merger, the private
insurer. The savings accounts of all savings and loan associations operating in
the State of Maryland must be insured by either the State agency or the Federal
Savings and Loan Insurance Corporation. The State agency assumed the insurance
liabilities of the private insurance agency with respect to deposits made prior
to May 18, 1985, and insures amounts deposited after that date up to a certain
limit. The legislation establishing the insurance agency provides that "It is
the policy of this State that funds will be appropriated to the [insurance
agency] to the extent necessary to protect holders of savings accounts in
member associations." As of December 31, 1989, depositors of all non-disputed
insured accounts at associations in receivership have been paid in full. The
insurance agency believes that the allowance for estimated insurance losses
will be sufficient to provide for the agency's ultimate liability.
LOCAL SUBDIVISION DEBT. The counties and incorporated municipalities in
Maryland issue general obligation debt for general governmental purposes. The
general obligation debt of the counties and incorporated municipalities is
generally supported by ad valorem taxes on real estate, tangible personal
property and intangible personal property subject to taxation. The issuer
typically pledges its full faith and credit and unlimited taxing power to the
prompt payment of the maturing principal and interest on the general obligation
debt and to the levy and collection of the ad valorem taxes as and when such
taxes become necessary in order to provide sufficient funds to meet the debt
service requirements. The amount of debt which may be authorized may in some
cases be limited by the requirement that it not exceed a stated percentage of
the assessable base upon which such taxes are levied.
In the opinion of counsel, the issuer may be sued in the event that it fails
to perform its obligations under the general obligation debt to the holders of
the debt, and any judgments resulting from such suits would be enforceable
against the issuer. Nevertheless, a holder of the debt who has obtained any
such judgment may be required to seek additional relief to compel the issuer to
levy and collect such taxes as may be necessary to provide the funds from which
a judgment may be paid. Although there is no Maryland law on this point, it is
the opinion of counsel that the appropriate courts of Maryland have
jurisdiction to entertain proceedings and power to grant additional relief,
such as a mandatory injunction, if necessary, to enforce the levy and
collection of such taxes and payment of the proceeds of the collection of the
taxes to the holders of general obligation debt, pari passu, subject to the
same constitutional limitations on enforcement, as described above, as apply to
the enforcement of judgments against the State.
Local subdivisions, including counties and municipal corporations, are also
authorized by law to issue special and limited obligation debt for certain
purposes other than general governmental purposes. The source of payment of
that debt is limited to certain revenues of the issuer derived from commercial
activities operated by the issuer, payments made with respect to certain
facilities or loans, and any funds pledged for the benefit of the holders of
the debt. That special and limited obligation debt does not constitute a debt
of the State, the issuer or any other political subdivision of either within
the meaning of any constitutional or statutory limitation. Neither the State
nor the issuer or any other political subdivision of either is obligated to pay
the debt or the interest on the debt except from the revenues of the issuer
specifically pledged to the payment of the debt. Neither the faith and credit
nor the taxing power of the State, the issuer or any other political
subdivision of either is pledged to the payment of the debt. The issuance of
the debt is not directly or indirectly or contingently an obligation, moral or
other, of the State, the issuer or any other political subdivision of either to
levy any tax for its payment.
WASHINGTON SUBURBAN SANITARY DISTRICT DEBT. The Washington Suburban Sanitary
District operates as a public corporation of the State to provide, as
authorized, water, sewerage and drainage systems, including water supply,
sewage disposal, and storm water drainage facilities for Montgomery County,
Maryland and Prince George's County, Maryland. For the purpose of paying the
principal of and interest on bonds of the District, Maryland law provides for
the levy, annually, against all the assessable property within the District by
the County Council of Montgomery County and the County Council of Prince
George's County of ad valorem taxes sufficient to pay such principal and
interest when due and payable.
Storm water drainage bonds for specific projects are payable from an ad
valorem tax upon all of the property assessed for county tax purposes within
the portion of the District situated in the county in which the storm water
project was, or is to be, constructed.
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Storm water drainage bonds of the District are also guaranteed by such county,
which guaranty operates as a pledge of the full faith and credit of the county
to the payment of the bonds and obligates the county council, to the extent
that the tax revenues referred to above and any other money available or to
become available are inadequate to provide the funds necessary to pay the
principal of and the interest on the bonds, to levy upon all property subject
to taxation within the county ad valorem taxes in rate and in amount sufficient
to make up any such deficiency.
Substantially all of the debt service on the bonds, except storm water
drainage bonds, is being paid from revenues derived by the District from water
consumption charges, front foot benefit charges, and sewage usage charges.
Notwithstanding the payment of principal of and interest on those bonds from
those charges, the underlying security of all bonds of the District is the levy
of ad valorem taxes on the assessable property as stated above.
SPECIAL AUTHORITY DEBT. The State and local governments have created several
special authorities with the power to issue debt on behalf of the State or
local government for specific purposes, such as providing facilities for non-
profit health care and higher educational institutions, facilities for the
disposal of solid waste, funds to finance single family and low-to-moderate
income housing, and similar purposes. The Maryland Health and Higher
Educational Facilities Authority, the Northeast Maryland Waste Disposal
Authority, the Housing Opportunities Commission of Montgomery County, and the
Housing Authority of Prince George's County are some of the special authorities
which have issued and have outstanding debt of this type.
The debts of the authorities issuing debt on behalf of the State and the
local governments are limited obligations of the authorities payable solely
from and secured by a pledge of the revenues derived from the facilities or
loans financed with the proceeds of the debt and from any other funds and
receipts pledged under an indenture with a corporate trustee. The debt does not
constitute a debt, liability or pledge of the faith and credit of the State or
of any political subdivision or of the authorities. Neither the State nor any
political subdivision thereof nor the authorities shall be obligated to pay the
debt or the interest on the debt except from such revenues, funds and receipts.
Neither the faith and credit nor the taxing power of the State or of any
political subdivision of the State or the authorities is pledged to the payment
of the principal of or the interest on such debt. The issuance of the debt is
not directly or indirectly an obligation, moral or other, of the State or of
any political subdivision of the State or of the authority to levy or to pledge
any form of taxation whatsoever, or to make any appropriation, for their
payment. The authorities have no taxing power.
HOSPITAL BONDS. The rates charged by non-governmental Maryland hospitals are
subject to review and approval by the Maryland Health Services Cost Review
Commission. Maryland hospitals subject to regulation by the Commission are not
permitted to charge for services at rates other than those established by the
Commission. In addition, the Commission is required to permit any nonprofit
institution subject to its jurisdiction to charge reasonable rates which will
permit the institution to provide, on a solvent basis, effective and efficient
service in the public interest.
Under an agreement between Medicare and the Commission, Medicare agrees to
pay Maryland hospitals on the basis of Commission-approved rates, less a 6%
differential. Under this so-called "Medicare Waiver", Maryland hospitals are
exempt from the Medicare Prospective Payment System which pays hospitals fixed
amounts for specific services based upon patient diagnosis. No assurance can be
given that Maryland will continue to meet any current or future tests for the
continuation of the Medicare Waiver.
In setting hospital rates, the Commission takes into account each hospital's
budgeted volume of services and cash financial requirements for the succeeding
year. It then establishes the rates of the hospital for the succeeding year
based upon the projected volume and those financial requirements of the
institution which the Commission has deemed to be reasonable. Financial
requirements allowable for inclusion in rates generally include budgeted
operating costs, a "capital facilities allowance", other financial
considerations (such as charity care and bad debts) and discounts allowed
certain payors for prompt payment. Variations from projected volumes of
services are reflected in the rates for the succeeding year. The Commission, on
a selective basis by the application of established review criteria, grants
Maryland hospitals increases in rates to compensate for inflation experienced
by hospitals and for other factors beyond the hospitals' control.
Regulations of the Commission provide that overcharges will in certain
circumstances be deducted from prospective rates. Similarly, undercharges will
in certain circumstances not be recoverable through prospective rates.
The Commission has entered into agreements with certain hospitals to adjust
rates in accordance with a prospectively approved, guaranteed inpatient revenue
per admission program. Those agreements are in addition to the rate adjustment
methodology discussed above. Under the program, a hospital's revenue per
admission is compared to the revenue per admission, as adjusted, for a base
year. Variations from the adjusted base year revenues per admission are added
or deducted, as the case may be, from the hospital's gross revenue and rates
for the following year.
There can be no assurance that the Commission will continue to utilize its
present rate-setting methodology or approve rates which will be sufficient to
ensure payment on an individual hospital's obligations. Future actions by the
Commission or the loss of the Medicare Waiver may adversely affect the
operations of individual hospitals.
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MARYLAND TAXES
In the opinion of Messrs. Weinberg & Green, special Maryland counsel on
Maryland tax matters, under existing law applicable to individuals who are
Maryland residents:
The Maryland Trust will not be treated as an association taxable as a
corporation, and the income of the Maryland Trust will be treated as the
income of the Holders. The Maryland Trust is not a "financial institution"
subject to the Maryland Franchise Tax measured by net earnings. The
Maryland Trust is not subject to Maryland property taxes imposed on the
intangible personal property of certain corporations.
Except as described below in the case of interest paid on private
activity bonds constituting a tax preference for Federal income tax
purposes, a Holder will not be required to include such Holder's pro-rata
share of the earnings of, or distributions from, the Maryland Trust in such
Holder's Maryland taxable income to the extent that such earnings or
distributions represent interest excludable from gross income for Federal
income tax purposes received by the Maryland Trust on obligations of the
State of Maryland, the Government of Puerto Rico, or the Government of Guam
and their respective political subdivisions and authorities. Interest on
Bonds is subject to the Maryland Franchise Tax imposed on "financial
institutions" and measured by net earnings.
In the case of taxpayers who are individuals, Maryland presently imposes
an income tax on items of tax preference with reference to such items as
defined in the Internal Revenue Code, as amended, for purposes of
calculating the Federal alternative minimum tax. Interest paid on certain
private activity bonds is a preference item for purposes of calculating the
Federal alternative minimum tax. Accordingly, if the Maryland Trust holds
such bonds, 50% of the interest on such bonds in excess of a threshold
amount is taxable by Maryland.
A Holder will recognize taxable gain or loss, except in the case of an
individual Holder who is not a Maryland resident, when the Holder disposes
of all or part of such Holder's pro rata portion of the Bonds in the
Maryland Trust. A Holder will be considered to have disposed of all or part
of such Holder's pro rata portion of each Bond when the Holder sells or
redeems all or some of such Holder's Units. A Holder will also be
considered to have disposed of all or part of such Holder's pro rata
portion of a Bond when all or part of the Bond is disposed of by the
Maryland Trust or is redeemed or paid at maturity. Gain included in the
gross income of Holders for federal income tax purposes is, however,
subtracted from income for Maryland income tax purposes to the extent that
the gain is derived from the disposition of Bonds issued by the State of
Maryland and its political subdivisions. Profits realized on the sale or
exchange of Bonds are subject to the Maryland Franchise Tax imposed on
"financial institutions" and measured by net earnings.
Units of the Maryland Trust will be subject to Maryland inheritance and
estate tax only if held by Maryland residents.
Neither the Bonds nor the Units will be subject to Maryland personal
property tax.
The sales of Units in Maryland or the holding of Units in Maryland will
not be subject to Maryland Sales or Use Tax.
NEW JERSEY TRUST
RISK FACTORS--Prospective investors should consider the recent financial
difficulties and pressures which the State of New Jersey (the "State") and
certain of its public authorities have undergone.
The State's 1994 fiscal year budget became law on June 30, 1993.
Economic recovery is likely to be slow and uneven in New Jersey. Some
sectors, like commercial and industrial construction, will undoubtedly lag
because of continued excess capacity. Also, employers in rebounding sectors can
be expected to remain cautious about hiring until they become convinced that
improved business will be sustained. Other firms will continue to merge or
downsize to increase profitability. As a result, job gains will probably come
grudgingly and unemployment will recede at a correspondingly slow pace.
Pursuant to the State Constitution, no money may be drawn from the State
Treasury except for appropriations made by law. In addition, all monies for the
support of State purposes must be provided for in one general appropriation law
covering one and the same fiscal year.
In addition to the Constitutional provisions, the New Jersey statutes contain
provisions concerning the budget and appropriation system. Under these
provisions, each unit of the State requests an appropriation from the Director
of the Division of Budget and Accounting, who reviews the budget requests and
forwards them with his recommendations to the Governor. The Governor then
transmits his recommended expenditures and sources of anticipated revenue to
the legislature, which reviews the Governor's Budget Message and submits an
appropriations bill to the Governor for his signature by July 1 of each year.
At the time of signing the bill, the Governor may revise appropriations or
anticipated revenues. That action can be reversed by a two-thirds vote of each
House. No supplemental appropriation may be enacted after adoption of the act,
except where there are sufficient revenues on hand or anticipated, as certified
by the Governor, to meet the appropriation. Finally, the Governor may, during
the course of the year, prevent the expenditure of various
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appropriations when revenues are below those anticipated or when he determines
that such expenditure is not in the best interest of the State.
In 1992, employment in services and government turned around in the State,
growing over the year by 0.7% and 0.3%, respectively. These increases were
outweighed by declines in other sectors -- especially in manufacturing,
wholesale and retail trade, and construction-- resulting in a net decline in
non-farm employment of 1.7% in 1992. Non-farm employment continued to decline
in 1993 but the rate of decline has tapered off. Employment in the first nine
months of 1993 was 1.0% lower than in the same period in 1992. Gains were
recorded in services, government, finance/insurance/real estate and
transportation/communication/public utilities. Declines continued in trade,
construction and manufacturing.
One of the major reasons for cautious optimism is found in the construction
industry. Total construction contracts awarded in New Jersey have turned
around, rising by 7.0% in 1993 compared with 1992. By far, the largest boost
came from residential construction awards which increased by 26% in 1993
compared with 1992. In addition, non-residential building construction awards
have turned around, posting a 17% gain.
Nonbuilding construction awards have been at high levels since 1991 due to
substantial outlays for roads, bridges and other infrastructure projects.
Although nonbuilding construction awards declined in 1993 compared with 1992,
this was due to an unusually large amount of contracts in the Spring of 1992.
Finally, even in the labor market there are signs of recovery. Thanks to a
reduced layoff rate and the reappearance of job opportunities in some parts of
the economy, unemployment in the State has been receding since July 1992, when
it peaked at 9.6% according to U.S. Bureau of Labor Statistics estimates based
on the federal government's monthly household survey. The same survey showed
joblessness dropped to an average of 6.7% in the fourth quarter of 1993. The
unemployment rate registered an average of 7.8% in the first quarter of 1994,
but this rate cannot be compared with prior data due to the changes in the U.S.
Department of Labor procedures for determining the unemployment rate that went
into effect in January 1994.
State Aid to Local Governments was the largest portion of Fiscal Year 1994
appropriations. In fiscal year 1994, $5,812.4 million of the State's
appropriations consisted of funds which are distributed to municipalities,
counties and school districts. The largest State Aid appropriation, in the
amount of $4,044.3 million, is provided for local elementary and secondary
education programs. Of this amount $2,538.2 million is provided as foundation
aid to school districts by formula based upon the number of students and the
ability of a school district to raise taxes from its own base. In addition, the
State provided $582.5 million for special education programs for children with
disabilities. A $293.0 million program was also funded for pupils at risk of
educational failure, including basic skills improvement. The State appropriated
$776.9 million on behalf of school districts as the employer share of the
teachers' pension and benefits programs, $263.8 million to pay for the cost of
pupil transportation and $57.4 million for transition aid, which guaranteed
school districts a 6.5% increase over the aid received in Fiscal Year 1991 and
is being phased out over four years.
Appropriations to the Department of Community Affairs total $650.4 million in
State Aid monies for Fiscal Year 1994. The principal programs funded were the
Supplemental Municipal Property Tax Act ($365.7 million); the Municipal
Revitalization Program ($165.0 million); municipal aid to urban communities to
maintain and upgrade municipal services ($40.4 million); and the Safe and Clean
Neighborhoods Program ($58.9 million). Appropriations to the State Department
of the Treasury total $327.5 million in State Aid monies for Fiscal Year 1994.
The principal programs funded by these appropriations were payments under the
Business Personal Property Tax Replacement Programs ($158.7 million); the cost
of senior citizens, disabled and veterans property tax deductions and
exemptions ($41.7 million); aid to densely populated municipalities ($33.0
million); Municipal Purposes Tax Assistance ($30.0 million) and payments to
municipalities for services to state owned property ($34.9 million); and the
Safe and Clean Communities program (15.0 million).
Other appropriations of State Aid in Fiscal 1994 include welfare programs
($477.4 million); aid to county colleges ($114.6 million); and aid to county
mental hospitals ($88.0 million).
The second largest portion of appropriations in fiscal 1994 is applied to
Direct State Services: the operation of State government's 19 departments, the
Executive Office, several commissions, the State Legislature and the Judiciary.
In fiscal 1994, appropriations for Direct State Services aggregate $5,335.5
million. Some of the major appropriations for Direct State Services during
fiscal 1994 are detailed below.
$602.3 million is appropriated for programs administered by the Department of
Human Services. The Department of Labor is appropriated $51.4 million for the
administration of programs for workers' compensation, unemployment and
disability insurance, manpower development, and health safety inspection.
The Department of Health is appropriated $37.6 million for the prevention and
treatment of diseases, alcohol and drug abuse programs, regulation of health
care facilities, and the uncompensated care program.
$673.0 million is appropriated to the Department of Higher Education for the
support of nine State colleges, Rutgers University, the New Jersey Institute of
Technology, and the University of Medicine and Dentistry of New Jersey.
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$932.6 million is appropriated to the Department of Law and Public Safety and
the Department of Corrections.
$99.8 million is appropriated to the Department of Transportation for the
various programs it administers, such as the maintenance and improvement of the
State highway system and subsidies for railroads and bus companies.
$156.4 million is appropriated to the Department of Environmental Protection
for the protection of air, land, water, forest, wildlife, and shellfish
resources and for the provision of outdoor recreational facilities.
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. State tax revenues and certain other
fees are pledged to meet the principal and interest payments required to pay
the debt fully. No general obligation debt can be issued by the State without
prior voter approval, except that no voter approval is required for any law
authorizing the creation of a debt for the purpose of refinancing all or a
portion of outstanding debt of the State, so long as such law requires that the
refinancing provide a debt service savings.
All appropriations for capital projects and all proposals for State bond
authorizations are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning. This permanent commission was
established in November, 1975, and is charged with the preparation of the State
Capital Improvement Plan, which contains proposals for State spending for
capital projects.
The aggregate outstanding general obligation bonded indebtedness of the State
as of June 30, 1993 was $3,594.7 billion. The debt service obligation for
outstanding indebtedness is $119.9 million for Fiscal Year 1994.
On November 2, 1993, Christine Todd-Whitman was elected Governor of the
State. As a matter of record, Governor Whitman, during her campaign, publicized
her intention to reduce taxes in the State. Effective January 1, 1994, New
Jersey's personal income tax rates were reduced by 5% for all taxpayers. The
effect of this tax reduction cannot be evaluated at this time.
Aside from its general obligation bonds, the State's "moral obligation" backs
certain obligations issued by the New Jersey Housing and Mortgage Finance
Agency, South Jersey Port Corporation (the "Corporation") and the Higher
Education Assistance Authority. As of June 30, 1992, there was outstanding in
excess of $1 billion of moral obligation bonded indebtedness issued by such
entities, for which the maximum annual debt service was over $101 million as of
such date. The State provides the Corporation with funds to cover debt service
and property tax requirements when earned revenues are anticipated to be
insufficient to cover these obligations. For the calendar years 1986 through
1992, the State appropriated $12,237,565.00 to cover property tax shortfalls of
the Corporation.
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 Tort
Claims Act, N.J.S.A. 59:1-1 et. seq. In addition, at any given time there are
various contract claims against the State and State agencies seeking recovery
of monetary damages. The State is unable to estimate its exposure for these
claims and cases. An independent study estimated an aggregate potential
exposure of $50 million for claims pending, as of January 1, 1982. It is
estimated that were a similar study made of claims currently pending, the
amount of estimated exposure would be higher. Moreover, New Jersey is involved
in a number of lawsuits in which adverse decisions could materially affect
revenues or expenditures. Such cases include challenges to its system of
educational funding, the methods by which the State Department of Human
Services shares with county governments the maintenance recoveries and costs
for residents in State psychiatric hospitals and residential facilities for the
developmentally disabled.
Other lawsuits that could materially affect revenue or expenditures include a
suit by a number of taxpayers seeking refunds of taxes paid to the Spill
Compensation Fund pursuant to N.J.S.A. 58:10-23.11; a suit alleging that
unreasonably low Medicaid payment rates have been implemented for long-term
care facilities in New Jersey; a suit alleging unfair taxation on interstate
commerce; a suit by Essex County seeking to invalidate the State's method of
funding the judicial system; a suit seeking return of moneys paid by various
counties for maintenance of Medicaid or Medicare eligible residents of
institutions and facilities for the developmentally disabled and a suit
challenging the imposition of premium tax surcharges on insurers doing business
in New Jersey, and assessments upon property and casualty liability insurers
pursuant to the Fair Automobile Insurance Reform Act.
Legislation enacted June 30, 1992, called for revaluation of several public
employee pension funds, authorized an adjustment to the assumed rate of return
on investment and refunds $773 million in public employer contributions to the
State from various pension funds, reflected as a revenue source for Fiscal Year
1992 and $226 million in Fiscal Year 1993 and each fiscal year thereafter.
Several labor unions filed suit seeking a judgment directing the State
Treasurer to refund all monies transferred from the pension funds and paid into
the General Fund. On February 5, 1993, the Superior Court granted the State's
motion for summary judgment as to all claims. An appeal has been filed with the
Appellate Division of the Superior Court. An adverse determination in this
matter would have a significant impact on fiscal year 1993 and subsequent
fiscal year fund balances.
BOND RATINGS--Citing a developing pattern of reliance on non-recurring
measures to achieve budgetary balance, four years of financial operations
marked by revenue shortfalls and operating deficits, and the likelihood that
financial pressures will persist, on August 24, 1992 Moody's lowered from Aaa
to Aa1 the rating assigned to New Jersey general obligation bonds. On July 6,
1992, Standard & Poor's affirmed its AA+ ratings on New Jersey's general
obligation and various lease and appropriation backed debt, but its ratings
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outlook was revised to negative for the longer term horizon (beyond four
months) for resolution of two items: (i) the Federal Health Care Facilities
Administration ruling concerning retroactive Medicaid hospital reimbursements
and (ii) the State's uncompensated health care funding system, which is under
review by the United States Supreme Court.
It is the Sponsors' intention to qualify and/or offer the Units of the New
Jersey Trust for sale only in the States of New Jersey, Hawaii, and Wyoming and
in the District of Columbia.
NEW JERSEY TAXES
In the opinion of Messrs. Shanley & Fisher, P.C., special New Jersey counsel
on New Jersey tax matters, under existing law:
The proposed activities of the New Jersey Trust will not cause it to be
subject to the New Jersey Corporation Business Tax Act.
The income of the New Jersey Trust will be treated as the income of
individuals, estates and trusts who are the Holders of Units of the New
Jersey Trust for purposes of the New Jersey Gross Income Tax Act, and
interest which is exempt from tax under the New Jersey Gross Income Tax Act
when received by the New Jersey Trust will retain its status as tax-exempt
in the hands of such Unit Holders. Gains arising from the sale or
redemption by a Holder of his Units or from the sale, exchange, redemption,
or payment at maturity of a Bond by the New Jersey Trust are exempt from
taxation under the New Jersey Gross Income Tax Act (P.L. 1976 c. 47), as
enacted and construed on the date hereof, to the extent such gains are
attributable to Bonds, the interest on which is exempt from tax under the
New Jersey Gross Income Tax Act. Any loss realized on such disposition may
not be utilized to offset gains realized by such Unit Holder on the
disposition of assets the gain on which is subject to the New Jersey Gross
Income Tax Act.
Units of the New Jersey Trust may be subject, in the estates of New
Jersey residents, to taxation under the Transfer Inheritance Tax Law of the
State of New Jersey.
NEW YORK TRUSTS
RISK FACTORS--Prospective investors should consider the financial
difficulties and pressures which the State of New York and several of its
public authorities and municipal subdivisions have undergone. The following
briefly summarizes some of these difficulties and the current financial
situation, based principally on certain official statements currently
available; copies may be obtained without charge from the issuing entity.
New York State. In recent fiscal years, there have been extended delays in
adopting the State's budget, repeated revisions of budget projections,
significant revenue shortfalls (as well as increased expenses) and year-end
borrowing to finance deficits. These developments reflect faster long-term
growth in State spending than revenues and that the State was earlier and more
severely affected by the recent economic recession than most of the rest of the
country, as well as its substantial reliance on non-recurring revenue sources.
The State's general fund incurred cash basis deficits of $775 million, $1,081
million and $575 million, respectively, for the 1990-92 fiscal years. Measures
to deal with deteriorating financial conditions included transfers from reserve
funds, recalculating the State's pension fund obligations (subsequently ruled
illegal), hiring freezes and layoffs, reduced aid to localities, sales of State
property to State authorities, and additional borrowings (including issuance of
additional short-term tax and revenue anticipation notes payable out of
impounded revenues in the next fiscal year). The general fund realized a $671
million surplus for the fiscal year ended March 31, 1993, and a $1.54 billion
surplus is projected for the fiscal year ended March 31, 1994.
Approximately $5.3 billion of State general obligation debt was outstanding
at December 31, 1993. The State's net tax-supported debt (restated to reflect
LGAC's assumption of certain obligations previously funded through issuance of
short-term debt) was $23.4 billion at March 31, 1993, up from $11.7 billion in
1984. A taxpayer filed various lawsuits challenging the constitutionality of
appropriation-backed debt issues by State authorities without voter approval. A
temporary restraining order against issuance of debt by the Metropolitan
Transportation Authority and the New York State Thruway Authority was lifted in
July 1993; an appeal is pending. A proposed constitutional amendment passed by
the Legislature would prohibit lease-purchase and contractual obligation
financing for State facilities, but would authorize the State without voter
referendum to issue revenue bonds within a formula-based cap, secured solely by
a pledge of certain State tax receipts. It would also restrict State debt to
capital projects included in a multi-year capital financing plan. The proposal
is subject to approval by the next Legislature and then by voters. S&P reduced
its rating of the State's general obligation bonds on January 13, 1992 to A-
(its lowest rating for any state). Moody's reduced its rating of State general
obligation bonds from A1 to A on June 6, 1990 and to Baa1, its rating of $14.2
billion of appropriation-backed debt of the State and State agencies (over two-
thirds of the total debt) on January 6, 1992.
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In May 1991 (over 2 months after the beginning of the 1992 fiscal year), the
State Legislature adopted a budget to close a projected $6.5 billion gap
(including repayment of $905 million of fiscal 1991 deficit notes). Measures
included $1.2 billion in new taxes and fees, $0.9 billion in non-recurring
measures and about $4.5 billion of reduced spending by State agencies
(including layoffs), reduced aid to localities and school districts, and
Medicaid cost containment measures. After the Governor vetoed $0.9 billion in
spending, the State adopted $0.7 billion in additional spending, together with
various measures including a $100 million increase in personal income taxes and
$180 million of additional non-recurring measures. Due primarily to declining
revenues and escalating Medicaid and social service expenditures, $0.4 billion
of administrative actions, $531 million of year-end short-term borrowing and a
$44 million withdrawal from the Tax Stabilization Reserve Fund were required to
meet the State's cash flow needs.
On April 2, 1992, the State adopted a budget to close a projected $4.8
billion gap for the State's 1993 fiscal year (including repayment of the fiscal
1992 short-term borrowing) through a combination of $3.5 billion of spending
reductions (including measures to reduce Medicaid and social service spending,
as well as further employee layoffs, reduced aid to municipalities and schools
and reduced support for capital programs), deferral of scheduled tax
reductions, and some new and increased fees. The State Comptroller concluded
that the budget included $1.18 billion of nonrecurring measures (the Division
of the Budget reported a figure of $450 million). The City and its Board of
Education sued the Governor and various other State officials in March 1993,
claiming that the State's formula for allocating aid to education discriminated
against City schools by at least $274 million in the 1993 fiscal year.
To close a projected budget gap of nearly $3 billion for the fiscal year
ended March 31, 1994, the State budget contained various measures including
deferral of scheduled income tax reductions for a fourth year, some tax
increases, $1.6 billion in spending cuts, especially for Medicaid, and further
reduction of the State's work force. The budget increased aid to schools, and
included a formula to channel more aid to districts with lower-income students
and high property tax burdens. State legislation requires deposit of receipts
from the petroleum business tax and certain other transportation-related taxes
into funds dedicated to transportation purposes. Nevertheless, $516 million of
these monies were retained in the general fund during the fiscal year. The
Division of the Budget has estimated that non-recurring income items other than
the $671 million surplus from the 1993 fiscal year aggregated $318 million. $89
million savings from bond refinancings was deposited in a reserve to fund
litigation settlements, particularly to repay monies received under the State's
abandoned property law, which the State will be required to give up as
described below.
The Governor proposed a budget for the fiscal year that began April 1, 1994,
which would increase spending by 3.8% (greater than inflation for the first
time in six years). Tax revenue projections are based on assumed modest growth
in the State economy. An estimated $130 million would come from proposed
lottery games and $70 million, from requiring bottling companies to pay to the
State unredeemed deposits on bottles and cans. The proposal would reduce or
phase out certain business taxes over several years, provide a tax credit for
low income families and increase aid to education, especially in the poorer
districts. The litigation fund would be increased to over $300 million. The
State would reduce coverage and place additional restrictions on certain health
care services. Over $1 billion would be saved by further postponement of
scheduled reductions in personal income taxes and in taxes on hospital income;
another $1 billion represents rolling over the projected surplus from the last
fiscal year. Other non-recurring measures would be reduced to $78 million. The
State Legislature passed legislation to implement a budget agreement more than
two months after the beginning of the year. Taxes (principally business taxes)
would be reduced by $450 million in the current fiscal year and by $1.7 billion
annually after fully phased in. In November 1993 the State's Court of Appeals
ruled unconstitutional 1990 legislation which postponed employee pension
contributions by the State and localities (other than New York City). The
amounts to be made up, estimated to aggregate $4 billion (half from the State),
would be repaid in increasing amounts over 12-20 years under a plan proposed by
the State Comptroller, trustee of the State pension system, and previous
contribution levels will not be exceeded until 1999. State and other estimates
are subject to uncertainties including the effects of Federal tax legislation
and economic developments.
The State normally adjusts its cash basis balance by deferring until the
first quarter of the succeeding fiscal year substantial amounts of tax refunds
and other disbursements. For many years, it also paid in that quarter more than
40% of its annual assistance to local governments. Payment of these annual
deferred obligations and the State's accumulated deficit was substantially
financed by issuance of short-term tax and revenue anticipation notes shortly
after the beginning of each fiscal year. The New York Local Government
Assistance Corporation ("LGAC") was established in 1990 to issue long-term
bonds over several years, payable from a portion of the State sales tax, to
fund certain payments to local governments traditionally funded through the
State's annual seasonal borrowing. The legislation will normally limit the
State's short-term borrowing, together with net proceeds of LGAC bonds ($4.0
billion to date), to a total of $4.7 billion. The State's latest seasonal
borrowing, in May 1993, was $850 million. The Governor's budget for the current
fiscal year would finally eliminate this seasonal borrowing program.
Generally accepted accounting principles ("GAAP") for municipal entities
apply modified accrual accounting and give no effect to payment deferrals. On
an audited GAAP basis, the State's government funds group recorded operating
deficits of $1.2 billion and $1.4 billion for the 1990 and 1991 fiscal years.
For the same periods the general fund recorded deficits (net of transfers from
other funds) of $0.7 billion and $1.0 billion. Reflecting $1.6 billion and $881
million of payments by LGAC to local governments out of proceeds from
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bond sales, the general fund realized surpluses of $1.7 billion and $2.1
billion for the 1992 and 1993 fiscal years, respectively, leaving an
accumulated deficit of $2.551 billion.
For decades, the State's economy has grown more slowly than that of the rest
of the nation as a whole. Part of the reason for this decline has been
attributed to the combined State and local tax burden, which is the second
highest in the nation (about 40% above the national average). The State's
dependence on Federal funds and sensitivity to changes in economic cycles, as
well as the high level of taxes, may continue to make it difficult to balance
State and local budgets in the future. The total employment growth rate in the
State has been below the national average since 1984. The State lost 524,000
jobs in 1990-1993. It regained 60,000 jobs during the seven months ended May
1994.
New York City (the "City"). The City is the State's major political
subdivision. In 1975, the City encountered severe financial difficulties,
including inability to refinance $6 billion of short-term debt incurred to meet
prior annual operating deficits. The City lost access to the public credit
markets for several years and depended on a variety of fiscal rescue measures
including commitments by certain institutions to postpone demands for payment,
a moratorium on note payment (later declared unconstitutional), seasonal loans
from the Federal government under emergency congressional legislation, Federal
guarantees of certain City bonds, and sales and exchanges of bonds by The
Municipal Assistance Corporation for the City of New York ("MAC") to fund the
City's debt.
MAC has no taxing power and pays its obligations out of sales taxes imposed
within the City and per capita State aid to the City. The State has no legal
obligation to back the MAC bonds, although it has a "moral obligation" to do
so. MAC is now authorized to issue bonds only for refunding outstanding issues
and up to $1.5 billion should the City fail to fund specified transit and
school capital programs. The State also established the Financial Control Board
("FCB") to review the City's budget, four-year financial plans, borrowings and
major contracts. These were subject to FCB approval until 1986 when the City
satisfied statutory conditions for termination of such review. The FCB is
required to reimpose the review and approval process in the future if the City
were to experience certain adverse financial circumstances. The City's fiscal
condition is also monitored by a Deputy State Comptroller.
The City projects that it is beginning to emerge from four years of economic
recession. Since 1989 the gross city product has declined by 10.1% and
employment, by almost 11%, while the public assistance caseload has grown by
over 25%. Unemployment averaged 10.8% in 1992 and 10.1% in 1993, peaking at
13.4% in January 1993, the highest level in 25 years. It dropped to 8.4% in May
1994. The number of persons on welfare exceeds 1.1 million, the highest level
since 1972, and one in seven residents is currently receiving some form of
public assistance.
While the City, as required by State law, has balanced its budgets in
accordance with GAAP since 1981, this has required exceptional measures in
recent years. The FCB has commented that City expenditures have grown faster
than revenues each year since 1986, masked in part by a large number of non-
recurring gap closing actions. To eliminate potential budget gaps of $1-$3
billion each year since 1988 the City has taken a wide variety of measures. In
addition to increased taxes and productivity increases, these have included
hiring freezes and layoffs, reductions in services, reduced pension
contributions, and a number of nonrecurring measures such as bond refundings,
transfers of surplus funds from MAC, sales of City property and reduction of
reserves. The FCB concluded that the City has neither the economy nor the
revenues to do everything its citizens have been accustomed to expect.
The City closed a budget gap for the 1993 fiscal year (estimated at $1.2
billion) through actions including service reductions, productivity
initiatives, transfer of $0.5 billion surplus from the 1992 fiscal year and
$100 million from MAC. A November 1992 revision proposed to meet an additional
$561 million in projected expenditures through measures including a refunding
to reduce current debt service costs, reduction in the reserve and an
additional $81 million of gap closing measures. Over half of the City's actions
to eliminate the gap were non-recurring.
The Financial Plan for the City's current fiscal year (ending June 30, 1994)
relies on increases in State and Federal aid, as well as the 1993 $280 million
surplus and a partial hiring freeze, to close a gap resulting primarily from
labor settlements and decline in property tax revenues. However, overall
spending would increase by about the rate of inflation. The Plan contains over
$1.3 billion of one-time revenue measures including bond refundings, sale of
various City assets and borrowing against future property tax receipts. On July
2, 1993, the previous Mayor ordered spending reductions of about $130 million
for the current fiscal year and $400 million for the 1995 fiscal year. A new
Mayor and City Comptroller assumed office in January 1994. Various fiscal
monitors have criticized increased reliance on non-recurring revenues, with
attendant increases in the gaps for future years. Their reports note continued
cost overruns by the Board of Education and overtime in uniformed services (in
part because of repeated snow storms), as well as a budget gap in the Health
and Hospitals Corporation ("HHC") and shortfalls in certain budget balancing
measures such as increased Federal assistance. The new Mayor has initiated a
program to reduce non-personnel costs by up to $150 million. The FCB reported
that although a $98 million surplus is projected for the current fiscal year, a
$312 million shortfall in budgeted revenues and $904 million of unanticipated
expenses (including an unbudgeted increase of over 3,300 employees and a record
level of overtime), net of certain increased revenues and other savings,
resulting in depleting prior years' surpluses by $309 million. The report also
discussed the problem of weakened relations with the Board of Education, which
may make its dependence on the City greater and less predictable. The new City
Comptroller has urged more
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aggressive measures to collect amounts owed by the State and Federal
governments to reduce the short-term borrowing costs, and has criticized
continued reliance on delinquent property tax receivables.
The City's Financial Plan for the fiscal year beginning July 1, 1994,
proposes both to eliminate a projected $2.3 billion budget gap and to stabilize
overall spending while beginning to reduce some business and other taxes. It
calls for a reduction of 15,000 in the City workforce by June 1995 unless
equivalent productivity savings are negotiated with unions; with the aid of
$200 million from MAC, the City induced 6,800 workers to accept voluntary
severance, and unions leaders accepted transfer of remaining employees between
agencies. The Plan projects about $560 million of increased State and Federal
aid, some of which has not yet been approved; also, more State aid is earmarked
for education than the Plan provides and it is uncertain whether some of the
excess can be shifted to meet other needs. Additional revenue is projected from
a new video lottery game. Other initiatives include initial steps toward
merging the City's three separate police forces. In addition to rolling over a
projected $98 million surplus from the current fiscal year, the Plan includes
non-recurring measures such as $225 million from refinancing outstanding bonds
(which will increase future debt service), extension of the repayment schedule
of a debt to City pension funds and revision of actuarial assumptions to reduce
contribution levels, and sale of a City-owned hotel. A $200 million proposal
for City employees to bear part of their health care costs must be negotiated
with the unions, which have announced their opposition. The fiscal monitors,
while applauding the new Mayor's efforts toward structural balance, have given
varying estimates of the extent to which this and other provisions of the Plan
are subject to significant risk. It has also been questioned whether the
savings can be effected without significant deterioration of the level of City
services, especially social services and education.
The Mayor is exploring the possibility of privatizing some of the City's
services. The City Council passed legislation which would authorize the Council
to hold hearings on any significant privitization and would require submission
of a cost-benefit analysis. The Mayor has also been exploring how to obtain
greater mayoral control over spending by independent authorities and agencies
such as the Board of Education, the HHC and the TA. The Schools Chancellor has
agreed to meet the Mayor's job-reduction goal for the Board of Education over
the current and 1995 fiscal years. In April, the Mayor appointed a fiscal
monitor of the Board of Education. To avert the Chancellor's announced
resignation in response, the Mayor agreed that the monitor will act as a Deputy
Commissioner in the Department of Investigation. The Mayor's capital budget
proposed in May does not include $4.2 billion requested by the Chancellor for
constructing new school buildings. A tentative labor agreement for school
custodians reached a few days later, while praised by the Chancellor for
achieving job rule concessions, has been rejected by the Mayor. In March 1994
the Mayor reduced cash incentives to landlords renting apartments to the
homeless, and it has been reported that he is considering proposals including
eliminating City financing of a program that creates housing for single
homeless people, requiring able-bodied welfare recipients to render community
service, charging shelter occupants who refuse offers of treatment or training
a modest rent for use of the shelter and replacing some of the subsidies to day
care centers with a voucher system. The Mayor is considering a plan to
fingerprint welfare recipients in the City, despite failure of a State plan to
include the City; this could be subject to legal challenge. Budget gaps of $3.2
billion and $3.3 billion are projected for the 1996 and 1997 fiscal years.
A major uncertainty is the City's labor costs, which represent about 50% of
its total expenditures. The City's workforce grew by 34% during the 1980s. A
January 1993 agreement covering approximately 44% of City workers followed
negotiations lasting nearly two years. Workers will receive wage and benefit
raises totalling 8.25% over 39 months ending March 1995. Although this is less
than the inflation rate, the settlement achieved neither any of the
productivity savings that the previous Mayor had counted on to help balance the
City's budget nor are the increases beyond those previously budgeted offset by
labor concessions. An agreement announced in August 1993 provides wage
increases for City teachers averaging 9% over the 48 1/2 months ending October
1995. The City is seeking to negotiate workforce productivity initiatives,
savings from which would be shared with the workers involved. The current
Financial Plan assumes no further wage increases after the 1995 fiscal year.
Also, costs of some previous wage increases were offset by reduced
contributions to pension funds; if fund performance is less than the 9% annual
earnings projected, the City could incur increased expenses in future years.
Budget balance may also be adversely affected by the effect of the economy on
economically sensitive taxes. Reflecting the downturn in real estate prices and
increasing defaults, estimates of property tax revenues have been reduced.
Other uncertainties include additional expenditures to combat deterioration in
the City's infrastructure (such as bridges, schools and water supply), costs of
developing alternatives to ocean dumping of sewage sludge (which the City
expects to defray through increased water and sewer charges), cost of the AIDS
epidemic problems of drug addiction and homelessness and the impact of any
future State assistance payment reductions. An independent report in 1991
concluded that 50% of City roads need resurfacing or reconstruction. In
September 1993 the City reported that 56.4% of its bridges are structurally
deficient and need repairs; some repairs have been halted due to environmental
concerns. In response to evidence of widespread errors and falsification in
1986-89 inspections of City schools for presence of asbestos, the City in
August 1993 conducted an emergency reinspection program. The costs of
additional asbestos removal, $83 million, may require curtailment or deferral
of other school repairs and maintenance. In December 1993 the U.S.
Environmental Protection Agency ("EPA") agreed for now not to require the City
to build a water filtration plant, at an estimated cost of $2-$8 billion, if it
substantially implements more than 150 steps to prevent pollution of the
upstate watershed area that supplies most of the City's drinking water.
However, the
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City will be required to complete a preliminary design of the plant. The E.P.A.
will evaluate the City's progress by December 1996 and could still require it
to build the plant if the steps are not successful. A $9 billion suit by
developers in the area challenges that the City's actions devalue their
property without fair compensation. Plans for an incinerator at the Brooklyn
Navy Yard may be delayed further by emergence of a 1988 report that the site is
somewhat contaminated by toxic wastes. Plans to built additional incinerators
may also need to be reconsidered following a May 1994 U.S. Supreme Court
decision that the resulting sludge must be disposed of as toxic waste. It has
been reported that the Mayor will seek approval from the EPA to modify a City
commitment to build additional sludge treatment plants, to allow it to
transport the sludge for disposal out of state. Exporting sludge rather than
building further treatment plants is one measure recommended by the Citizens
Budget Commission to avert an increase in water rates of an estimated 68% by
2003. Recent court decisions found that the City has failed to provide adequate
shelter for many homeless persons, fined and held several City officials in
contempt for failure to comply with a State rule requiring provision of
immediate shelter for homeless persons and ordered the City to pay $3.5 billion
in fines. In February 1994, the State's Court of Appeals ruled that the City's
recycling program does not comply with City law; a State Supreme Court
subsequently gave the City until July 1996 to comply with the law's
requirements, rejecting a City proposal to delay further recycling for up to
four years; compliance could cost an additional $100 million in the 1995 fiscal
year alone. Elimination of any additional budget gaps will require various
actions, including by the State, a number of which are beyond the City's
control. Staten Island voters in 1993 approved a proposed charter under which
Staten Island would secede from the City. Secession will require enabling
legislation by the State Legislature; it would also be subject to legal
challenge by the City. The effects of secession on the City cannot be
determined at this time, but questions include responsibility for outstanding
debt, a diminished tax base, and continued use of the Fresh Kills landfill, the
City's only remaining garbage dump. A similar measure with respect to Queens
was approved by the New York State Senate.
In December 1993, a report commissioned by the City was released, describing
the nature of the City's structural deficit. It projects that the City will
need to identify and implement $5 billion in annual gap closing measures by
1998. The report suggests a variety of possible measures for City
consideration. While the new Mayor rejected out of hand many of the proposals
such as tax increases, the State Comptroller urged him to reconsider the
report.
The City sold $2.3 billion, $1.4 billion and $1.8 billion of short-term
notes, respectively, during 1992, 1993 and current fiscal years. The FCB
recently recommended development of a cash budgeting system to reduce short-
term borrowing resulting from timing imbalances. At December 31 1993, there
were outstanding $21.4 billion of City bonds (not including City debt held by
MAC), $4.5 billion of MAC bonds and $0.8 billion of City-related public benefit
corporation indebtedness, each net of assets held for debt service. Standard &
Poor's and Moody's during the 1975-80 period either withdrew or reduced their
ratings of the City's bonds. S&P currently rates the City's debt A- with a
negative outlook while Moody's rates City bonds Baa1. City-related debt almost
doubled since 1987, although total debt declined as a percentage of estimated
full value of real property. The City's financing program projects long-term
financing during fiscal years 1994-1997 to aggregate $19.9 billion. The City's
latest Ten Year Capital Strategy plans capital expenditures of $51.6 billion
during 1994-2003 (93% of be City funded). The State Comptroller has criticized
some City bond refinancings for producing short-term savings at the expense of
greater overall costs, especially in future years. Annual debt service is
projected to increase to about $3.2 billion by fiscal 1997 (from $1.2 billion
in fiscal 1990).
OTHER NEW YORK LOCALITIES. In 1992, other localities had an aggregate of
approximately $15.7 billion of indebtedness outstanding. In recent years,
several experienced financial difficulties. A March 1993 report by Moody's
Investors Service concluded that the decline in ratings of most of the State's
largest cities in recent years resulted from the decline in the State's
manufacturing economy. Seventeen localities had outstanding indebtedness for
deficit financing at the close of their respective 1992 fiscal years. In
response to requests from an unprecedented 10 local government units (including
Nassau and Suffolk counties) in 1992 for legislative authority to issue bonds
to fund deficits, the State Comptroller recommended legislation to establish
earlier State oversight of municipal deficits. In September, 1992, the previous
Comptroller proposed regulations which would prohibit use of certificates of
participation by municipalities for deficit financing or refundings. Some local
leaders complained that the deficits resulted from reduced State aid
accompanied by increases in State-mandated expenditures. Any reductions in
State aid to localities may cause additional localities to experience
difficulty in achieving balanced budgets. If special local assistance were
needed from the State in the future, this could adversely affect the State's as
well as the localities financial condition. Most localities depend on
substantial annual State appropriations. Legal actions by utilities to reduce
the valuation of their municipal franchises, if successful, could result in
localities becoming liable for substantial tax refunds.
STATE PUBLIC AUTHORITIES. In 1975, after the Urban Development Corporation
("UDC"), with $1 billion of outstanding debt, defaulted on certain short-term
notes, it and several other State authorities became unable to market their
securities. Since 1975 the State has provided substantial direct and indirect
financial assistance to UDC, the Housing Finance Agency ("HFA"), the
Environmental Facilities Corporation and other authorities. Practical and legal
limitations on these agencies' ability to pass on rising costs through rents
and fees could require further State appropriations. 18 State authorities had
an aggregate of $63.5. billion of debt outstanding at September 30, 1993. At
September 30, 1993, approximately $0.5 billion or State public authority
obligations was State-guaranteed, $7.7 billion was moral obligation debt
(including $4.8 billion of MAC debt) and $19.5 billion was financed under
lease-purchase or contractual obligation
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financing arrangements with the State. Various authorities continue to depend
on State appropriations or special legislation to meet their budgets.
The Metropolitan Transportation Authority ("MTA"), which oversees operation
of the City's subway and bus system by the City Transit Authority (the "TA")
and operates certain commuter rail lines, has required substantial State and
City subsidies, as well as assistance from several special State taxes.
Projections of TA revenues were reduced due to declining ridership, increasing
fare evasion, reductions in State and City aid and declining revenues from City
real estate taxes. It was reported in December 1993 that a 20-year trend in
declining bus ridership is expected to continue. While the MTA used bond
refinancings and other measures to avert a commuter rail line fare increase in
1992, measures including a fare increase eliminated the TA's 1992 budget gap.
Measures to balance the TA's 1993 budget included increased funding by the
City, increased bridge and tunnel tolls and allocation of part of the revenues
from the Petroleum Business Tax. Cash basis gaps of $500-800 million are
projected for each of the 1995, 1996 and 1997 years. Measures proposed to close
these gaps include various additional State aid and possible fare increases.
However, it was projected in May 1994 that the effect of the improving economy
on transportation-dedicated taxes and on ridership, as well as implementation
of cost savings, would permit deferral of fare increases until at least July
1995. Following a proposed labor settlement with Long Island Railroad workers
which granted 8.7% wage increases over the next three years (expected to cost
the MTA $14 million), without concessions in work rules, it has been reported
that TA workers are seeking a similar contract.
The MTA's Chairman proposed a 5-year financial strategy, including a variety
of fare changes; however, even if these are approved, an estimated $700 million
in additional funds will be needed from State and City financial assistance.
Substantial claims have been made against the TA and the City for damages from
a 1990 subway fire and a 1991 derailment. The MTA infrastructure, especially in
the City, needs substantial rehabilitation. A one-year $1.6 billion 1992 MTA
Capital Plan was approved. In December 1993, a $9.5 billion MTA Capital Plan
was finally approved for 1992-1996, although $500 million is contingent on
increased contributions from the City; the City has until late 1994 to decide
if it will make these contributions. The MTA's Chairman has threatened to raise
subway fares and borrow more if the City fails to make up this amount. In
response to a constitutional challenge to implementing a $6 billion State
transportation borrowing plan without voter approval, a temporary restraining
order was issued in May 1993, but was lifted in July. It is anticipated that
the MTA and the TA will continue to require significant State and City support.
Moody's reduced its rating of certain MTA obligations to Baa on April 14, 1992.
Because of reduced rates under the State's revised medical reimbursement
programs, as well as proposals to reduce reimbursement of hospital capital
costs and to change Medicaid funding, New York hospitals have experienced
increasing financial pressure. To mitigate unprecedented rate increases by
Empire State Blue Cross, the State in January 1993 made available $100 million
from the medical malpractice fund. A Federal District Court ruled in February
1993 that State surcharges of up to 24% on hospital bills paid by commercial
insurance companies and health maintenance organizations, much of which is used
to subsidize care of uninsured patients, violate Federal law; however, the
Court permitted continuance of the system pending appeal of the ruling.
LITIGATION. The State and the City are defendants in numerous legal
proceedings, including challenges to the constitutionality and effectiveness of
various welfare programs, alleged torts and breaches of contract, condemnation
proceedings and other alleged violations of laws. Adverse judgments in these
matters could require substantial financing not currently budgeted. For
example, in addition to real estate certiorari proceedings, claims in excess of
$343 billion were outstanding against the City at June 30, 1993, for which it
estimated its potential future liability at $2.2 billion. Another action seeks
a judgment that, as a result of an overestimate by the State Board of
Equalization and Assessment, the City's 1992 real estate tax levy exceeded
constitutional limits. In March 1993, the U.S. Supreme Court ruled that if the
last known address of a beneficial owner of accounts held by banks and
brokerage firms cannot be ascertained, unclaimed funds therein belong to the
state of the broker's incorporation rather than where its principal office is
located. New York has obtained about $350 million of abandoned funds that could
have to be paid to other States. (It has agreed to pay Delaware $200 million
over a 5-year period.) The case has been remanded to a special master to
determine disposition of these monies.
Final adverse decisions in any of these cases could require extraordinary
appropriations at either the State or City level or both.
NEW YORK TAXES
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing New York law:
Under the income tax laws of the State and City of New York, a Trust is
not an association taxable as a corporation and income received by a Trust
will be treated as the income of the Holders in the same manner as for
Federal income tax purposes. Accordingly, each Holder will be considered to
have received the interest on his pro rata portion of each Bond when
interest on the Bond is received by a Trust. In the opinion of bond counsel
delivered on the date of issuance of the Bond, such interest will be exempt
from New York State and City personal income taxes except where such
interest is subject to Federal income taxes (see
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Taxes). A noncorporate Holder of Units of a Trust who is a New York State
(and City) resident will be subject to New York State (and City) personal
income taxes on any gain recognized when he disposes of all or part of his
pro rata portion of a Bond. A noncorporate Holder who is not a New York
State resident will not be subject to New York State or City personal
income taxes on any such gain unless such Units are attributable to a
business, trade, profession or occupation carried on in New York. A New
York State (and City) resident should determine his tax basis for his pro
rata portion of each Bond for New York State (and City) income tax purposes
in the same manner as for Federal income tax purposes. Interest income on a
Holder's pro rata portion of the Bonds is generally not excludable from
income in computing New York State and City corporate franchise taxes.
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TAX FREE VS. TAXABLE INCOME
The following tables show the approximate yields which taxable securities
must earn in various income brackets to equal tax exempt yields under combined
Federal and state individual income tax rates. This table reflects Federal
income tax rates and tax brackets for the 1994 taxable year under the Code as
in effect on the date of this Prospectus and state income tax rates that were
available on the date of the Prospectus. Because the Federal rate brackets are
subject to adjustment based on changes in the Consumer Price Index, the
taxable equivalent yields for subsequent years may be lower than indicated. A
table is computed on the theory that the taxpayer's highest bracket tax rate
is applicable to the entire amount of any increase or decrease in taxable
income (after allowance for any resulting change in state income tax)
resulting from a switch from taxable to tax-free securities or vice versa.
Variations between state and Federal allowable deductions and exemptions are
generally ignored. The state tax is thus computed by applying to the Federal
taxable income bracket amounts shown in the table the appropriate state rate
for those same dollar amounts. For example, a married couple living in the
State of California and filing a Joint Return with $53,000 in taxable income
for the 1994 tax year would need a taxable investment yielding 9.058% in order
to equal a tax-free return of 6.00%. Use the appropriate table to find your
tax bracket. Read across to determine the approximate taxable yield you would
need to equal a return free of Federal income tax and state income tax.
STATE OF CALIFORNIA
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,118 to 34,906 18.400% 4.289 4.901 5.514 6.127 6.740 7.353 7.966 8.578
$ 34,906 to 36,900 20.100% 4.380 5.006 5.632 6.257 6.883 7.509 8.135 8.761
$ 36,900 to 48,456 32.320% 5.171 5.910 6.648 7.387 8.126 8.865 9.604 10.343
$ 48,456 to 61,240 33.760% 5.283 6.038 6.793 7.548 8.303 9.058 9.813 10.568
$ 61,240 to 89,150 34.696% 5.359 6.125 6.890 7.656 8.422 9.188 9.953 10.719
$ 89,150 to 140,000 37.417% 5.592 6.391 7.190 7.989 8.788 9.587 10.386 11.185
$140,000 to 212,380 41.952% 6.029 6.890 7.752 8.613 9.474 10.336 11.197 12.058
$212,380 to 250,000 42.400% 6.076 6.944 7.812 8.680 9.548 10.416 11.284 12.152
$250,000 to 424,760 45.640% 6.438 7.358 8.278 9.197 10.117 11.037 11.957 12.877
Over $424,760 46.244% 6.510 7.441 8.371 9.301 10.231 11.161 12.091 13.021
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 24,228 to 30,620 33.760% 5.283 6.038 6.793 7.548 8.303 9.058 9.813 10.568
$ 30,620 to 53,500 34.696% 5.359 6.125 6.890 7.656 8.422 9.188 9.953 10.719
$ 53,500 to 106,190 37.417% 5.592 6.391 7.190 7.989 8.788 9.587 10.386 11.185
$106,190 to 115,000 37.900% 5.636 6.441 7.246 8.051 8.856 9.661 10.467 11.272
$115,000 to 212,380 42.400% 6.076 6.944 7.812 8.680 9.548 10.416 11.284 12.152
$212,380 to 250,000 43.040% 6.144 7.022 7.900 8.778 9.655 10.533 11.411 12.289
Over $250,000 46.244% 6.510 7.441 8.371 9.301 10.231 11.161 12.091 13.021
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state income tax). If the standard deduction had been taken
for Federal income tax purposes in order to reach the amount shown in the
table, the taxable equivalent yield required to equal a specified tax-exempt
yield would be at least as great as that shown in the table. It is assumed
that the investor is not subject to the alternative minimum tax. Where
applicable, investors should take into account the provisions of the Code
under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, an individual taxpayer with adjusted gross income in excess
of a $111,800 threshold amount is subject to an overall limitation on
certain itemized deductions, requiring a reduction equal to the lesser of
(i) 3% of adjusted gross income in excess of the $111,800 threshold amount
or (ii) 80% of the amount of such itemized deductions otherwise allowable.
The benefit of each personal exemption is phased out for married taxpayers
filing a joint return with adjusted gross income in excess of $167,700 and
for single taxpayers with adjusted gross income in excess of $111,800.
Personal exemptions are phased out at the rate of two percentage points for
each $2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. California has adopted provisions corresponding
to the Federal law provisions limiting the benefit of certain itemized
deductions and phasing out the benefit of personal exemptions. However, the
California threshold amounts and percentage reductions differ from those
applicable under Federal law. The Federal and [California] tax brackets, the
threshold amounts at which itemized deductions are subject to reduction, and
the range over which personal exemptions are phased out will be adjusted for
inflation. The 36% and the 39.6% Federal tax brackets will, however, be
adjusted for inflation only for years after 1994.
C-20
<PAGE>
STATE OF MARYLAND*
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
FEDERAL, STATE
TAXABLE AND LOCAL 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET** TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20,000 to 36,900 21.800% 4.475 5.115 5.754 6.393 7.033 7.672 8.312 8.951
$ 36,900 to 89,150 33.760% 5.283 6.038 6.793 7.548 8.303 9.057 9.812 10.567
$ 89,150 to 140,000 36.520% 5.513 6.301 7.088 7.876 8.664 9.451 10.239 11.027
$140,000 to 150,000 41.120% 5.944 6.793 7.642 8.491 9.341 10.190 11.039 11.888
$150,000 to 250,000 41.760% 6.009 6.868 7.726 8.585 9.443 10.302 11.160 12.019
Over $250,000 45.036% 6.367 7.277 8.187 9.096 10.006 10.916 11.825 12.735
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,000 to 22,100 21.800% 4.475 5.115 5.754 6.393 7.033 7.672 8.312 8.951
$ 22,100 to 53,500 33.760% 5.283 6.038 6.793 7.548 8.303 9.057 9.812 10.567
$ 53,500 to 100,000 36.520% 5.513 6.301 7.088 7.876 8.664 9.451 10.239 11.027
$100,000 to 115,000 37.210% 5.574 6.370 7.166 9.555 8.759 9.555 10.351 11.148
$115,000 to 250,000 41.760% 6.009 6.868 7.726 8.585 9.443 10.302 11.160 12.019
Over $250,000 45.036% 6.367 7.277 8.187 9.096 10.006 10.916 11.825 12.735
</TABLE>
- -------
* The combined tax rate in the table includes local income taxes imposed by
Maryland counties and the city of Baltimore at a rate of 60% of the state
income tax liability with respect to taxable income of $150,000 or below in
the case of a joint return and $100,000 or below in the case of a single
return and 50% of the state income tax liability with respect to taxable
income in excess of $150,000 in the case of a joint return and $100,000 in
the case of a single return. Investors who are residents of Maryland
counties that impose county income tax at a rate that is less than these
rates will have a taxable equivalent yield that is less than that indicated
in the table.
** The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deductions for state and local income taxes). If the standard deduction had
been taken for Federal income tax purposes, the taxable equivalent yield
required to equal a specified tax-exempt yield would be at least as great
as that shown in the table. It is assumed that the investor is not subject
to the alternative minimum tax. Where applicable, investors should take
into account the provisions of the Code under which the benefit of certain
itemized deductions and the benefit of personal exemptions are limited in
the case of higher income individuals. Under the Code, an individual
taxpayer with adjusted gross income in excess of a $111,800 threshold
amount is subject to an overall limitation on certain itemized deductions,
requiring a reduction equal to the lesser of (i) 3% of adjusted gross
income in excess of the $111,800 threshold amount or (ii) 80% of the amount
of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out for married taxpayers filing a joint
return with adjusted gross income in excess of $167,700 and for single
taxpayers with adjusted gross income in excess of $111,800. Personal
exemptions are phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. The 15%, 28% and 31% Federal tax brackets, the
threshold amounts at which itemized deductions are subject to reduction,
and the range over which personal exemptions are phased out will be
adjusted for inflation. The 36% and 39.6% Federal tax brackets will be
adjusted for inflation for each year after 1994. The 6% Maryland state
income tax rate with respect to taxable income in excess of $150,000 in the
case of a joint return and $100,000 in the case of a single return is
scheduled to revert to 5% after 1994.
STATE OF NEW JERSEY
1994 TAX YEAR
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
APPROX. COMBINED
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20,000 to 38,000 17.019% 4.2178 4.8204 5.4229 6.0255 6.6280 7.2305 7.8331 8.4356
$ 38,001 to 50,000 29.710% 4.9794 5.6907 6.4020 7.1134 7.8247 8.5361 9.2474 9.9587
$ 50,001 to 70,000 30.394% 5.0283 5.7466 6.4650 7.1833 7.9016 8.6199 9.3383 10.0566
$ 70,001 to 80,000 31.420% 5.1035 5.8326 6.5617 7.2908 8.0198 8.7489 9.4780 10.2071
$ 80,001 to 91,850 32.446% 5.1810 5.9212 6.6613 7.4015 8.1416 8.8818 9.6219 10.3621
$ 91,851 to 140,000 35.261% 5.4063 6.1786 6.9510 7.7233 8.4956 9.2679 10.0403 10.8126
$140,001 to 150,000 39.952% 5.8287 6.6613 7.4940 8.3267 9.1593 9.9920 10.8247 11.6573
$150,001 to 250,000 40.256% 5.8583 6.6952 7.5321 8.3690 9.2059 10.0428 10.8798 11.7167
Over $250,001 43.617% 6.2075 7.0943 7.9811 8.8679 9.7546 10.6414 11.5282 12.4150
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,000 to 20,000 16.615% 4.1974 4.7970 5.3967 5.9963 6.5959 7.1955 7.7952 8.3948
$ 20,001 to 22,750 17.019% 4.2178 4.8204 5.4229 6.0255 6.6280 7.2305 7.8331 8.4356
$ 22,751 to 35,000 29.710% 4.9794 5.6907 6.4020 7.1134 7.8247 8.5361 9.2474 9.9587
$ 35,001 to 40,000 31.420% 5.1035 5.8326 6.5617 7.2908 8.0198 8.7489 9.4780 10.2071
$ 40,001 to 55,100 32.446% 5.1810 5.9212 6.6613 7.4015 8.1416 8.8818 9.6219 10.3621
$ 55,501 to 75,000 35.261% 5.4063 6.1786 6.9510 7.7233 8.4956 9.2679 10.0403 10.8126
$ 75,001 to 115,000 35.589% 5.4338 6.2101 6.9863 7.7626 8.5388 9.3151 10.0914 10.8676
$115,001 to 250,000 40.256% 5.8583 6.6952 7.5321 8.3690 9.2059 10.0428 10.8798 11.7167
Over $250,001 43.617% 6.2075 7.0943 7.9811 8.8679 9.7546 10.6414 11.5282 12.4150
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions and itemized deductions (including the
deduction for state income tax). If the standard deduction had been taken
for Federal income tax purposes in order to reach the amount shown in the
table, the taxable equivalent yield required to equal a specified tax-exempt
yield would be at least as great as that shown in the table. It is assumed
that the investor is not subject to the alternative minimum tax. Where
applicable investors should take into account the provisions of the Code
under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, individual taxpayers with adjusted gross income in excess of
a $111,800 threshold amount are subject to an overall limitation on certain
itemized deductions, requiring a reduction equal to the lesser of (i) 3% of
adjusted gross income in excess of the $111,800 threshold amount or (ii) 80%
of the amount of such itemized deductions otherwise allowable. The benefit
of each personal exemption is phased out for married taxpayers filing a
joint return with adjusted gross income in excess of $167,770 and for single
taxpayers with adjusted gross income in excess of $111,800. Personal
exemptions are phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. The 15%, 28% and 31% Federal tax brackets, the
threshold amounts at which itemized deductions are subject to reduction, and
the range over which personal exemptions are phased out will be adjusted for
inflation for each year after 1993. The 36% and 39.6% Federal tax brackets
will be adjusted for inflation for each year after 1994, using 1993 as the
base year.
C-21
<PAGE>
STATE OF NEW YORK**
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,000 to 26,000 20.950% 4.427 5.060 5.692 6.325 6.957 7.590 8.222 8.855
$ 26,000 to 36,900 21.693% 4.469 5.108 5.746 6.385 7.023 7.662 8.300 8.939
$ 36,900 to 89,150 33.670% 5.276 6.030 6.784 7.538 8.291 9.045 9.799 10.553
$ 89,150 to 140,000 36.433% 5.506 6.292 7.079 7.865 8.652 9.438 10.225 11.012
$140,000 to 250,000 41.040% 5.936 6.784 7.632 8.480 9.328 10.176 11.024 11.872
Over $250,000 44.356% 6.289 7.188 8.087 8.985 9.884 10.782 11.681 12.579
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,000 to 22,100 21.693% 4.469 5.108 5.746 6.385 7.023 7.662 8.300 8.939
$ 22,100 to 53,500 33.670% 5.276 6.030 6.784 7.538 8.291 9.045 9.799 10.553
$ 53,500 to 115,000 36.433% 5.506 6.292 7.079 7.865 8.652 9.438 10.225 11.012
$115,000 to 250,000 41.040% 5.936 6.784 7.632 8.480 9.328 10.176 11.024 11.872
Over $250,000 44.356% 6.289 7.188 8.087 8.985 9.884 10.782 11.681 12.579
</TABLE>
CITY OF NEW YORK***
<TABLE>
<CAPTION>
APPROX. COMBINED
FEDERAL, STATE & TAX EXEMPT YIELD
TAXABLE NEW YORK CITY 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,000 to 26,000 24.061% 4.608 5.267 5.925 6.584 7.242 7.901 8.559 9.217
$ 26,000 to 27,000 24.804% 4.654 5.319 5.984 6.649 7.314 7.979 8.644 9.309
$ 27,000 to 36,900 25.331% 4.687 5.356 6.026 6.696 7.365 8.035 8.705 9.374
$ 36,900 to 45,000 36.751% 5.533 6.324 7.114 7.905 8.695 9.486 10.276 11.067
$ 45,000 to 89,150 36.838% 5.541 6.332 7.124 7.916 8.707 9.499 10.290 11.082
$ 89,150 to 108,000 39.469% 5.782 6.608 7.434 8.260 9.086 9.912 10.738 11.564
$108,000 to 140,000 39.511% 5.786 6.612 7.439 8.265 9.092 9.919 10.745 11.572
$140,000 to 250,000 43.894% 6.238 7.129 8.020 8.911 9.802 10.694 11.585 12.476
Over $250,000 47.050% 6.610 7.554 8.498 9.442 10.387 11.331 12.275 13.220
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,000 to 22,100 25.331% 4.687 5.356 6.026 6.696 7.365 8.035 8.705 9.374
$ 22,100 to 25,000 36.751% 5.533 6.324 7.114 7.905 8.695 9.486 10.276 11.067
$ 25,000 to 53,500 36.838% 5.541 6.332 7.124 7.916 8.707 9.499 10.290 11.082
$ 53,500 to 60,000 39.469% 5.782 6.608 7.434 8.260 9.086 9.912 10.738 11.564
$ 60,000 to 115,000 39.511% 5.786 6.612 7.439 8.265 9.092 9.919 10.745 11.572
$115,000 to 250,000 43.894% 6.238 7.129 8.020 8.911 9.802 10.694 11.585 12.476
Over $250,000 47.050% 6.610 7.554 8.498 9.442 10.387 11.331 12.275 13.220
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deductions for state and local income taxes). If the standard deduction
had been taken for Federal income tax purposes, the taxable equivalent
yield required to equal a specified tax-exempt yield would be at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax.
** The New York State personal income tax rates are currently scheduled to
change in 1994 and later years. For example, the highest New York State
tax for 1993 is 7.875% and is scheduled to decrease to 7.59375% for 1994,
7.125% for 1995 and 7% for later years. The scheduled reductions in the
New York State top bracket rates will, if implemented, result in taxable
equivalent yields for 1993 and later years that are somewhat lower than
those indicated in the above tables.
*** The City of New York table reflects the surcharges of between .51% and
.55% applicable to City of New York residents in certain instances and the
additional tax equal to 14% of the sum of the income tax and surcharge.
Note:
Where applicable, investors should take into account the provisions of the
Code under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, an individual taxpayer with adjusted gross income in excess of
a $111,800 threshold amount is subject to an overall limitation on certain
itemized deductions, requiring a reduction equal to the lesser of (i) 3% of
adjusted gross income in excess of the $111,800 threshold amount or (ii) 80%
of the amount of such itemized deductions otherwise allowable. The benefit of
each personal exemption is phased out for married taxpayers filing a joint
return with adjusted gross income in excess of $167,700 and for single
taxpayers with adjusted gross income in excess of $111,800. Personal
exemptions are phased out at the rate of two percentage points for each $2,500
(or fraction thereof) of adjusted gross income in excess of the applicable
threshold amount. The 15%, 28% and 31% Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be adjusted for inflation
for each year. The 36% and the 39.6% Federal tax brackets will be adjusted for
inflation for each year after 1994. For New York State tax purposes, the
benefit of tax rates below 7.875% on taxable income amounts up to $26,000 in
the case of a joint return and $13,000 in the case of a single return is
phased out for a taxpayer with adjusted gross income in excess of a $100,000
threshold amount. The benefit is phased out pro rata over the first $50,000 of
adjusted gross income in excess of $100,000 and the phase out is complete when
New York adjusted gross income equals $150,000. The tables assume that New
York adjusted gross income does not exceed $100,000 in every case in which a
phase out of the benefit of the rate on taxable income below $26,000 would
affect the computation.
C-22
<PAGE>
PROSPECTUS
THIS PROSPECTUS CONTAINS INFORMATION CONCERNING THE TRUST AND THE SPONSORS,
BUT DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE REGISTRATION
STATEMENTS AND EXHIBITS RELATING THERETO, WHICH THE TRUST HAS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C., UNDER THE SECURITIES ACT
OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS
HEREBY MADE.
INDEX:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF ESSENTIAL INFORMATION........................................... A-2
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT.................................... A-4
UNDERWRITING............................................................... A-7
INDEPENDENT AUDITORS' REPORT............................................... A-8
STATEMENT OF FINANCIAL CONDITION OF THE TAX EXEMPT SECURITIES TRUST........ A-9
PORTFOLIO OF SECURITIES.................................................... A-10
TAX EXEMPT SECURITIES TRUST................................................ B-1
THE TRUSTS................................................................ B-1
OBJECTIVES................................................................ B-1
PORTFOLIO................................................................. B-1
THE UNITS................................................................. B-11
TAXES..................................................................... B-12
EXPENSES AND CHARGES...................................................... B-13
PUBLIC OFFERING............................................................ B-14
OFFERING PRICE............................................................ B-14
METHOD OF EVALUATION...................................................... B-15
DISTRIBUTION OF UNITS..................................................... B-15
MARKET FOR UNITS.......................................................... B-15
EXCHANGE OPTION........................................................... B-16
REINVESTMENT PROGRAMS..................................................... B-16
SPONSORS' AND UNDERWRITERS' PROFITS....................................... B-16
RIGHTS OF UNIT HOLDERS..................................................... B-17
CERTIFICATES.............................................................. B-17
DISTRIBUTION OF INTEREST AND PRINCIPAL.................................... B-17
REPORTS AND RECORDS....................................................... B-18
REDEMPTION OF UNITS....................................................... B-19
SPONSORS................................................................... B-20
LIMITATIONS ON LIABILITY.................................................. B-20
RESPONSIBILITY............................................................ B-20
RESIGNATION............................................................... B-21
TRUSTEE.................................................................... B-21
LIMITATIONS ON LIABILITY.................................................. B-21
RESIGNATION............................................................... B-21
EVALUATOR.................................................................. B-21
LIMITATIONS ON LIABILITY.................................................. B-21
RESPONSIBILITY............................................................ B-22
RESIGNATION............................................................... B-22
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT........................... B-22
AMENDMENT................................................................. B-22
TERMINATION............................................................... B-22
LEGAL OPINION.............................................................. B-22
AUDITORS................................................................... B-22
BOND RATINGS............................................................... B-22
FEDERAL TAX FREE VS. TAXABLE INCOME........................................ B-24
THE STATE TRUSTS........................................................... C-1
TAX FREE VS. TAXABLE INCOME................................................ C-20
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL
TO MAKE SUCH OFFER IN SUCH STATE.
TAX EXEMPT
SECURITIES
TRUST
------------
18,000 UNITS
------------
Prospectus
Dated July 1, 1994
------------
SPONSORS
SMITH BARNEY INC.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 298-UNIT
------------
KIDDER, PEABODY & CO.
INCORPORATED
60 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 656-1609
<PAGE>
PART II. ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
A. The following information relating to the Depositors is incorporated by
reference to the SEC filings indicated and made a part of this Registration
Statement.
<TABLE>
<CAPTION>
SEC FILE OR
IDENTIFICATION NO.
------------------
<S> <C>
I. Bonding Arrangements and Date of Organization of the Depositors
filed pursuant to Items A and B of Part II of the Registration
Statement on Form S-6 under the Securities Act of 1993:
Smith Barney Inc. 2-55436
Kidder, Peabody & Co. Incorporated
II. Information as to Officers and Directors of the Depositors filed
pursuant to Schedules A and D of Form BD under Rules 15b1-1 and
15b3-1 of the Securities Exchange Act of 1934:
Smith Barney Inc. 8-8177
Kidder, Peabody & Co. Incorporated 8-4831
III. Charter documents of the Depositors filed as Exhibits to the Reg-
istration Statement on Form S-6 under the Securities Act of 1933
(Charter, By-Laws):
Smith Barney Inc. 33-65332, 33-36037
Kidder, Peabody & Co. Incorporated 33-17979, 33-20499
B. The Internal Revenue Service Employer Identification Numbers of the
Sponsors and Trustee are as follows:
Smith Barney Inc. 13-1912900
Kidder, Peabody & Co. Incorporated 13-5650440
United States Trust Company of New York, Trustee 13-5459866
</TABLE>
UNDERTAKING
The Sponsors undertake that (i) they will not instruct the Trustee to accept
from any insurance company affiliated with any of the Sponsors, in settlement
of any claim, less than an amount sufficient to pay any principal or interest
(and, in the case of a taxability redemption, premium) then due on any Security
in accordance with the municipal bond guaranty insurance policy attached to
that Security or (ii) any affiliate of the Sponsors who has any obligation with
respect to any Security, less than the full amount due pursuant to the
obligation, unless those instructions have been approved by the Securities and
Exchange Commission pursuant to Rule 17d-1 under the Investment Company Act of
1940.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
THE REGISTRATION STATEMENT ON FORM S-6 COMPRISES THE FOLLOWING PAPERS AND
DOCUMENTS:
The facing sheet of Form S-6.
The Cross-Reference Sheet (incorporated by reference to the Cross-Reference
Sheet to the Registration Statement of Tax Exempt Securities Trust, Series
384, 1933 Act File No. 33-50915).
The Prospectus.
Additional Information not included in the Prospectus (Part II).
Consent of Independent Auditors.
The following exhibits:
<TABLE>
<C> <S>
1.1 --Form of Trust Indenture and Agreement (incorporated by reference to
Exhibit 4.a to the Registration Statement of Tax Exempt Securities
Trust, Series 265, 1933 Act File No. 33-15123).
1.1.1 --Form of Reference Agreement Trust (incorporated by reference to
Exhibit 4.b to the Registration Statement of Tax Exempt Securities
Trust, Series 384, 1993 Act File No. 33-50915).
1.2 --Form of Agreement Among Underwriters (incorporated by reference to
Exhibit 99 to the Registration Statement of Tax Exempt Securities
Trust, Series 384, 1933 Act File No. 33-50915).
2.1 --Form of Certificate of Beneficial Interest (included in Exhibit 1.1).
3.1 --Opinion of counsel as to the legality of the securities being issued
including their consent to the use of their name under the headings
"Taxes", "Legal Opinion" and "New York Trust--New York Taxes" in the
Prospectus.
4.1 --Consent of the Evaluator.
</TABLE>
II-2
<PAGE>
SIGNATURES
The registrant, Tax Exempt Securities Trust, Series 392, hereby identifies
Series 1 and Series 357 of the Trust for purposes of the representations
required by Rule 487 and represents the following:
(1) That the portfolio securities deposited in the series as to the
securities of which this Registration Statement is being filed do not
differ materially in type or qualify from those deposited in such previous
series;
(2) That, except to the extent necessary to identify the specific
portfolio securities deposited in, and to provide essential financial
information for, the series with respect to the securities of which this
Registration Statement is being filed, this Registration Statement is being
filed, this Registration Statement does not contain disclosures that differ
in any material respect from those contained in the registration statements
for such previous series as to which the effective date was determined by
the Commission or the staff; and
(3) That is has complied with Rule 460 under the Securities Act of 1933.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, AND STATE OF NEW YORK, ON THE 1ST DAY OF JULY, 1994.
Signatures appear on pages II-4 and II-5.
A majority of the members of the Board of Directors of Smith Barney Inc. has
signed this Registration Statement or Amendment to the Registration Statement
pursuant to Powers of Attorney authorizing the person signing this Registration
Statement or Amendment to the Registration Statement to do so on behalf of such
members.
A majority of the members of the Board of Directors of Kidder, Peabody & Co.
Incorporated has signed this Registration Statement or Amendment to the
Registration Statement pursuant to Powers of Attorney authorizing the person
signing this Registration Statement or Amendment to the Registration Statement
to do so on behalf of such members.
II-3
<PAGE>
Smith Barney Inc., Depositor
/s/ George S. Michinard, Jr.
By .................................
(GEORGE S. MICHINARD, JR.)
By the following persons*, who
constitute a majority of the
directors of Smith Barney Inc.:
Steven D. Black
James S. Boshart III
Robert A. Case
Robert K. Difazio
James Dimon
Robert Druskin
Herbert Dunn
Toni A. Elliot
Lewis L. Glucksman
Robert F. Greenhill
John B. Hoffmann
A. Richard Janiak, Jr.
Robert Q. Jones
Robert B. Kane
Robert H. Lessen
Jeffrey B. Lane
Thomas A. Maguire, Jr.
Howard D. Marsh
John F. McCann
William J. Mills, II
John C. Morris
Charles O'Connor
Hugh J. O'Hare
Joseph J. Plumeri II
Jack L. Rivkin
A. George Saks
Bruce D. Sargent
Don M. Shagrin
David M. Standridge
Jacques S. Theriot
Melvin B. Taub
Stephen Treadway
Paul Underwood
Philip M. Waterman, Jr.
/s/ George S. Michinard, Jr.
By ..................................
(GEORGE S. MICHINARD, JR.,
ATTORNEY-IN-FACT)
- --------
* Pursuant to Powers of Attorney filed under the 1933 Act file Numbers 33-
56722 and 33-51999.
II-4
<PAGE>
Kidder, Peabody & Co. Incorporated,
Depositor
/s/ Gilbert R. Ott, Jr.
By ..................................
(GILBERT R. OTT, JR.)
By the following persons,* who
constitute a majority of the Board
of Directors of Kidder, Peabody &
Co. Incorporated:
Edward A. Cerullo
Theodore J. Johnson
John M. Liftin
C. Edward Midgley
James A. Mullin
Richard W. O'Donnell
Thomas F. Ryan, Jr.
Douglas T. Tansill
/s/ Gilbert R. Ott, Jr.
By ..................................
(GILBERT R. OTT, JR., ATTORNEY-IN-
FACT)
- --------
* Pursuant to Powers of Attorney filed under the 1933 Act File Number 33-
52529.
II-5
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
To the Sponsors and Unit Holders of
Tax Exempt Securities Trust, Series 392:
We consent to the use of our report dated June 30, 1994 included herein
and to the reference to our firm under the heading "Auditors" in the
Prospectus.
KPMG PEAT MARWICK
New York, New York
June 30, 1994
II-6
<PAGE>
EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
June 30, 1994
Tax Exempt Securities Trust,
Series 392
Smith Barney Inc.
Kidder, Peabody & Co. Incorporated
c/oSmith Barney Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
We have acted as special counsel for you, as sponsors (the "Sponsors") of
Series 392 of Tax Exempt Securities Trust (the "Trusts"), in connection with
the issuance of units of fractional undivided interest in the Trusts (the
"Units") in accordance with the Trust Indenture and Agreement and related
Reference Trust Agreement relating to the Trusts (the "Indenture").
We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents and instruments as
we have deemed necessary or advisable for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsors and (ii) the Units, when duly issued and delivered
by the Sponsors and the Trustee in accordance with the Indenture, will be
legally issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 3.1 to the
Registration Statement relating to the Units filed under the Securities Act of
1933 and to the use of our name in such Registration Statement and in the
related prospectus under the headings "Taxes", "New York Trust--New York Taxes"
and "Legal Opinion".
Very truly yours,
Davis Polk & Wardwell
<PAGE>
EXHIBIT 4.1
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York 10006-2511
Telephone: 212/770-4900
John R. Fitzgerald
Vice President
June 30, 1994
Smith Barney Inc.
1345 Avenue of the Americas
New York, N.Y. 10105
United States Trust Company
114 W. 47th Street
New York, N.Y. 10036
Re: Tax-Exempt Securities Trust, Series 392
Gentlemen:
We have examined Registration Statement File No. 33-52729 for the above-
captioned trust. We hereby acknowledge that Kenny S&P Evaluation Services, a
division of Kenny Information Systems, Inc. is currently acting as the
evaluator for the trust. We hereby consent to the use in the Registration
Statement of the reference to Kenny S&P Evaluation Services, a division of
Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings indicated in the Registration
Statement for the respective bonds comprising the trust portfolio are the
ratings indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter with the Securities
and Exchange Commission.
Sincerely,
John R. Fitzgerald
Vice President
