<PAGE>
---------------------------------------------------------
TAX EXEMPT
SECURITIES National Trust 209 Maryland Trust 96
TRUST New York Trust 145 North Carolina Trust 10
Pennsylvania Trust 115
- ---------------------- ---------------------------------------------------
20,000 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 consists of separate underlying unit
investment trusts designated as National Trust 209, Maryland Trust 96, New
York Trust 145, North Carolina Trust 10 and Pennsylvania Trust 115 (the
"National Trust," the "Maryland Trust," the "New York Trust", the "North
Carolina Trust," and the "Pennsylvania 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 to obtain for its Unit holders tax-exempt interest
income and conservation of capital through investment in a professionally
selected, 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") or Duff & Phelps Credit
Rating Co. ("Duff & Phelps"). (See "Portfolio of Securities".) Each State
Trust comprises 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 July 19, 1995,
the Public Offering Price per Unit (including the sales charge) would have
been $1,025.35, $1,026.12, $1,022.73, $1,019.99 and $1,022.81 for the National
Trust, Maryland Trust, New York Trust, North Carolina Trust and Pennsylvania
Trust, respectively. In addition, there will be added an amount equal to
accrued interest commencing on the day after the Date of Deposit through the
date of settlement (normally three business days after purchase).
THE SPONSOR, although not obligated to do so, intends 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 will be
able to dispose of his Units through redemption, at prices that are also based
upon the aggregate bid price of the underlying bonds. Units can be sold at any
time without fee or penalty.
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".
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
The date of this Prospectus is July 20, 1995
<PAGE>
TAX EXEMPT SECURITIES TRUST
SUMMARY OF ESSENTIAL INFORMATION AS OF JULY 19, 1995+
SPONSOR RECORD DATES
Smith Barney Inc. The first day of each month,
commencing August 1, 1995
TRUSTEE
DISTRIBUTION DATES
United States Trust Company of
New York
The fifteenth day of each
month,** commencing August 15,
1995
EVALUATOR
Kenny S & P Evaluation EVALUATION TIME
Services,
a division of J.J. Kenny Co., As of 1:00 P.M. on the Date of
Inc. Deposit. Thereafter, as of
4:00 P.M. New York Time.
DATE OF DEPOSIT AND OF TRUST
AGREEMENT
EVALUATOR'S FEE
July 19, 1995 The Evaluator will receive a
fee of $.29 per bond per
evaluation. (See Part B,
"Evaluator--Responsibility"
and "Public Offering--Offering
Price".)
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.
SPONSOR'S 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 $2.00, $1.90, $1.91, $1.87 and
$1.92 for the National Trust, Maryland Trust, New York Trust, North
Carolina Trust and Pennsylvania Trust, respectively, will be made on
August 15, 1995.
*** In addition to this amount, the Sponsor may be reimbursed for bookkeeping
and other administrative expenses not exceeding its actual costs.
A-2
<PAGE>
<TABLE>
<CAPTION>
NATIONAL MARYLAND NEW YORK NORTH CAROLINA PENNSYLVANIA
TRUST 209 TRUST 96 TRUST 145 TRUST 10 TRUST 115
---------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Principal Amount of
Bonds in Trust......... $8,000,000 $3,000,000 $3,000,000 $3,000,000 $3,000,000
Number of Units......... 8,000 3,000 3,000 3,000 3,000
Principal Amount of
Bonds in Trust per
Unit................... $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Fractional Undivided In-
terest in Trust per
Unit................... 1/8,000 1/3,000 1/3,000 1/3,000 1/3,000
Minimum Value of Trust:
Trust Agreement may be
Terminated if Princi-
pal Amount is less
than................. $4,000,000 $1,500,000 $1,500,000 $1,500,000 $1,500,000
Calculation of Public
Offering Price per
Unit*:
Aggregate Offering
Price of Bonds in
Trust................ $7,817,250 $2,933,662 $2,923,977 $2,916,156 $2,924,214
========== ========== ========== ========== ==========
Divided by Number of
Units................ $ 977.16 $ 977.89 $ 974.66 $ 972.05 $ 974.74
Plus: Sales Charge
(4.70% of the Public
Offering Price)...... $ 48.19 $ 48.23 $ 48.07 $ 47.94 $ 48.07
---------- ---------- ---------- ---------- ----------
Public Offering Price
per Unit............. $ 1,025.35 $ 1,026.12 $ 1,022.73 $ 1,019.99 $ 1,022.81
Plus: Accrued Inter-
est*................. $ .99 $ .95 $ .95 $ .93 $ .96
---------- ---------- ---------- ---------- ----------
Total............... $ 1,026.34 $ 1,027.07 $ 1,023.68 $ 1,020.92 $ 1,023.77
========== ========== ========== ========== ==========
Sponsor's Initial Repur-
chase Price per Unit
(per Unit Offering
Price of Bonds)*...... $ 977.16 $ 977.89 $ 974.66 $ 972.05 $ 974.74
Approximate Redemption
Price per Unit (per
Unit Bid Price of
Bonds)**............. $ 970.16 $ 969.89 $ 966.66 $ 964.05 $ 966.74
---------- ---------- ---------- ---------- ----------
Difference Between per
Unit Offering and Bid
Prices of Bonds........ $ 7.00 $ 8.00 $ 8.00 $ 8.00 $ 8.00
========== ========== ========== ========== ==========
Calculation of Estimated
Net Annual Income per
Unit:
Estimated Annual In-
come per Unit........ $ 62.58 $ 59.67 $ 60.09 $ 58.89 $ 60.21
Less: Estimated Trust-
ee's Annual Fee***... $ 1.39 $ 1.36 $ 1.37 $ 1.36 $ 1.37
Less: Organizational
Expenses****......... $ .40 $ .40 $ .40 $ .40 $ .40
Less: Other Estimated
Annual Expenses...... $ .79 $ .79 $ .84 $ .85 $ .84
---------- ---------- ---------- ---------- ----------
Estimated Net Annual
Income per Unit...... $ 60.00 $ 57.12 $ 57.48 $ 56.28 $ 57.60
========== ========== ========== ========== ==========
Calculation of Monthly
Income Distribution
per Unit:
Estimated Net Annual
Income per Unit...... $ 60.00 $ 57.12 $ 57.48 $ 56.28 $ 57.60
Divided by 12......... $ 5.00 $ 4.76 $ 4.79 $ 4.69 $ 4.80
Accrued interest from
the day after the
Date of Deposit to
the first record
date**............... $ 2.00 $ 1.90 $ 1.91 $ 1.87 $ 1.92
First distribution per
unit................... $ 2.00 $ 1.90 $ 1.91 $ 1.87 $ 1.92
Daily Rate (360-day ba-
sis) of Income Accrual
per Unit............... $ .1666 $ .1586 $ .1596 $ .1563 $ .1600
Estimated Current Return
based on Public Offer-
ing Price*****......... 5.85% 5.57% 5.62% 5.52% 5.63%
Estimated Long-Term Re-
turn*****.............. 5.81% 5.53% 5.61% 5.49% 5.64%
</TABLE>
- -------
* Accrued interest will be added commencing on the day after the Date of
Deposit through the date of settlement (normally three business days
after purchase).
** This figure will also include accrued interest commencing on the day
after the Date of Deposit through the date of settlement (normally three
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.")
**** Each Trust (and therefore the investors) will bear all or a portion of
its organizational costs--including costs of preparing the registration
statement, the trust indenture and other closing documents, registering
units with the SEC and the states and the initial audit of the Trust--as
is common for mutual funds. Historically, the Sponsors of unit
investment trusts have paid all the costs of establishing those trusts.
Advertising and selling expenses will be paid by the Underwriters at no
cost to a Trust.
***** 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
NATIONAL TRUST 209
The Portfolio of the National Trust contains 19 issues of Bonds of issuers
located in 11 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: 33.7%; housing facilities: 32.6%; power
facilities: 7.5%; transportation facilities: 3.5%; industrial development
facilities: 6.5%; pollution control facilities: 5.6%; lease rental payments:
7.6%; tax allocation: 3.0%. The Trust is considered to be concentrated in
hospital and health care facilities and housing facilities issues.+ (See Part
B, "Tax Exempt Securities Trust--Risk Factors" for a brief summary of
additional considerations relating to certain of these issues.) Eleven 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
26.5 years.
As of the Date of Deposit, 93.2% of the Bonds in this Trust are rated by
Standard & Poor's (3.4% rated AAA, 9.8% rated AA and 80.0% rated A); 6.8% are
rated A 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 National Trust were acquired from the Sponsor as
sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's and Underwriters' Profits.")
MARYLAND TRUST 96
The Portfolio of the Maryland Trust contains 10 issues of Bonds of issuers
located in the State of Maryland and the Commonwealth of Puerto Rico. Of the
Bonds in this Trust, two were issued by issuers in the Commonwealth of Puerto
Rico (representing 11.5%* of the Bonds in the Trust) and were issued to
finance transportation and power facilities. 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: 30.9%; housing facilities:
36.5%; pollution control facilities: 17.4%; water and sewer facilities: 3.7%.
The Trust is considered to be concentrated in hospital and health care
facilities and housing facilities issues.+ (See Part B, "Tax Exempt Securities
Trust--Risk Factors" for a brief summary of additional considerations relating
to certain of these issues.) 17.4% of the Bonds in this Trust are insured as
to timely payment of principal and interest by certain insurance companies
(AMBAC, 4.3% and MBIA, 13.1%) (see Part B, "Tax Exempt Securities Trust--Risk
Factors--Insurance"). Five 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 26.3 years.
As of the Date of Deposit, 66.5% of the Bonds in this Trust are rated by
Standard & Poor's (17.4% rated AAA, 3.7% rated AA and 45.4% rated A); 33.5%
are rated by Moody's (5.5% rated Aa and 28.0% 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.
None of the Bonds in the Maryland Trust were acquired from the Sponsor as
sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's 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>
NEW YORK TRUST 145
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 8.6%* 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: 13.9%; housing facilities: 40.4%; transportation facilities:
12.4%; educational facilities: 21.5%; sales tax: 3.2%. The Trust is considered
to be concentrated in housing facilities issues.+ (See Part B, "Tax Exempt
Securities Trust--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) Five 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 30.0 years.
As of the Date of Deposit, 49.3% of the Bonds in this Trust are rated by
Standard & Poor's (46.1% rated AA and 3.2% rated A); 8.3% are rated Aa by
Moody's, and 42.4% 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.
None of the Bonds in the New York Trust were acquired from the Sponsor as
sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's and Underwriters' Profits.")
NORTH CAROLINA TRUST 10
The Portfolio of the North Carolina Trust contains 9 issues of Bonds of
issuers located in the State of North Carolina and the Commonwealth of Puerto
Rico. Of the Bonds in this Trust, one was issued by an issuer in the
Commonwealth of Puerto Rico (representing 7.9%* of the Bonds in the Trust) and
was issued to finance power facilities. 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: 41.9%; housing facilities:
17.1%; power facilities: 33.1%. The Trust is considered to be concentrated in
hospital and health care facilities and power facilities issues.+ (See Part B,
"Tax Exempt Securities Trust--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) 26.1% of the Bonds in
this Trust are insured as to timely payment of principal and interest by
certain insurance companies (MBIA, 26.1%) (see Part B, "Tax Exempt Securities
Trust--Risk Factors--Insurance"). Eight 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 North Carolina Trust is 24.8 years.
As of the Date of Deposit, 100% of the Bonds in this Trust are rated by
Standard & Poor's (26.1% rated AAA, 32.9% rated AA and 41.0% 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.
18.9% of the Bonds in the North Carolina Trust were acquired from the
Sponsor as sole underwriter or from an underwriting syndicate in which the
Sponsor participated, or otherwise from the Sponsor's own organization. (See
Part B, "Public Offering--Sponsor's 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-5
<PAGE>
PENNSYLVANIA TRUST 115
The Portfolio of the Pennsylvania Trust contains 8 issues of Bonds of
issuers located in the State of Pennsylvania. 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: 65.6%; educational
facilities: 6.5%; water and sewer facilities: 16.1%; solid waste disposal
facilities: 11.8%. The Trust is considered to be concentrated in hospital and
health care facilities issues.+ (See Part B, "Tax Exempt Securities Trust--
Risk Factors" for a brief summary of additional considerations relating to
certain of these issues.) 16.1% of the Bonds in this Trust are insured as to
timely payment of principal and interest by certain insurance companies (CGIC,
16.1%) (see Part B, "Tax Exempt Securities Trust--Risk Factors--Insurance").
Eight 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
Pennsylvania Trust is 23.3 years.
As of the Date of Deposit, 85.2% of the Bonds in this Trust are rated by
Standard & Poor's (16.1% rated AAA and 69.1% rated A); 14.8% are rated A 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.
8.0% of the Bonds in the Pennsylvania Trust were acquired from the Sponsor
as sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's 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 MARYLAND NEW YORK NORTH CAROLINA PENNSYLVANIA
TRUST 209 TRUST 96 TRUST 145 TRUST 10 TRUST 115
--------- -------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Smith Barney Inc. ...... 6,650 2,700 2,500 2,800 2,700
1345 Avenue of the Amer-
icas
New York, New York 10105
Gruntal & Co. Incorpo-
rated.................. 500 100 100 -- 100
14 Wall Street
New York, New York 10005
Advest Inc. ............ 100 -- 100 -- 100
One Commercial Plaza
280 Trumbull Street
Hartford, Connecticut
06103
Janney Montgomery Scott
Inc. .................. -- -- -- -- 100
1801 Market Street
Philadelphia, Pennsylva-
nia 19103
J.C. Bradford & Co. .... -- -- -- 100 --
330 Commerce Street
Nashville, Tennessee
37201
Legg Mason Wood Walker,
Inc. .................. 100 100 -- -- --
111 South Calvert Street
Baltimore, Maryland
21202
Oppenheimer & Co.,
Inc. .................. 100 -- 100 -- --
Oppenheimer Tower
One World Financial Cen-
ter
New York, New York 10281
Samuel A. Ramirez....... -- -- 100 -- --
61 Broadway
New York, New York 10008
Rauscher Pierce Refsnes,
Inc. .................. 100 -- -- -- --
2500 RPR Tower
Plaza of the Americas
Dallas, Texas 75201
Raymond James & Associ-
ates................... 100 -- -- -- --
880 Carillon Parkway
P.O. Box 12749
St. Petersburg, Florida
33733
Roosevelt & Cross,
Inc. .................. 100 -- 100 -- --
20 Exchange Place
New York, New York 10005
Wheat First Securities,
Inc. .................. -- 100 -- 100 --
901 East Byrd Street
Richmond, Virginia 23219
William R. Hough........ 250 -- -- -- --
100 Second Avenue
Suite 800
St. Petersburg, Florida
33701
----- ----- ----- ----- -----
Total................... 8,000 3,000 3,000 3,000 3,000
===== ===== ===== ===== =====
</TABLE>
A-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Sponsor, Trustee and Unit Holders of Tax Exempt Securities Trust,
National Trust 209, Maryland Trust 96, New York Trust 145, North Carolina
Trust 10 and Pennsylvania Trust 115:
We have audited the accompanying statements of financial condition,
including the portfolios of securities, of each of the respective trusts
constituting Tax Exempt Securities Trust, National Trust 209, Maryland Trust
96, New York Trust 145, North Carolina Trust 10 and Pennsylvania Trust 115 as
of July 19, 1995. These financial statements are the responsibility of the
Trustee (see note 6 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 statements of financial
condition are free of material misstatement. An audit of a statement of
financial condition includes examining, on a test basis, evidence supporting
the amounts and disclosures in that statement of financial condition. Our
procedures included confirmation with the Trustee of an irrevocable letter of
credit deposited on July 19, 1995 for the purchase of securities, as shown in
the statements of financial condition and portfolios of securities. An audit
of a statement of financial condition also includes assessing the accounting
principles used and significant estimates made by the Trustee, as well as
evaluating the overall statement of financial condition presentation. We
believe that our audits of the statements of financial condition provide a
reasonable basis for our opinion.
In our opinion, the statements of financial condition referred to above
present fairly, in all material respects, the financial position of each of
the respective trusts constituting Tax Exempt Securities Trust, National Trust
209, Maryland Trust 96, New York Trust 145, North Carolina Trust 10 and
Pennsylvania Trust 115 as of July 19, 1995, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
July 19, 1995
A-8
<PAGE>
TAX EXEMPT SECURITIES TRUST
STATEMENTS OF FINANCIAL CONDITION
AS OF DATE OF DEPOSIT, JULY 19, 1995
<TABLE>
<CAPTION>
TRUST PROPERTY
------------------------------------------------------------
NATIONAL MARYLAND NEW YORK NORTH CAROLINA PENNSYLVANIA
TRUST 209 TRUST 96 TRUST 145 TRUST 10 TRUST 115
---------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Investment in Tax-Exempt
Securities:
Bonds represented by
purchase contracts
backed by
letter of credit (1). $7,817,250 $2,933,662 $2,923,977 $2,916,156 $2,924,214
Accrued interest
through the Date of
Deposit on underlying
bonds (1)(2)......... 97,370 25,705 35,096 26,309 31,158
Organizational costs
(3).................. 3,200 1,200 1,200 1,200 1,200
---------- ---------- ---------- ---------- ----------
Total............... $7,917,820 $2,960,567 $2,960,273 $2,943,665 $2,956,572
========== ========== ========== ========== ==========
<CAPTION>
LIABILITIES AND INTEREST OF UNIT HOLDERS
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Liabilities:
Accrued interest
through the Date of
Deposit on underlying
bonds (1)(2)......... $ 97,370 $ 25,705 $ 35,096 $ 26,309 $ 31,158
Accrued expenses (3).. 3,200 1,200 1,200 1,200 1,200
---------- ---------- ---------- ---------- ----------
Interest of Unit Hold-
ers:
Units of fractional
undivided interest
outstanding (National
Trust 209: 8,000;
Maryland Trust 96:
3,000; New York Trust
145: 3,000; North
Carolina Trust 10:
3,000; Pennsylvania
Trust 115: 3,000)
Cost to investors
(4)................. 8,202,797 3,078,350 3,068,188 3,059,981 3,068,436
Less--Gross under-
writing commission
(5)................. 385,547 144,688 144,211 143,825 144,222
---------- ---------- ---------- ---------- ----------
Net amount applicable
to investors........ 7,817,250 2,933,662 2,923,977 2,916,156 2,924,214
---------- ---------- ---------- ---------- ----------
Total................. $7,917,820 $2,960,567 $2,960,273 $2,943,665 $2,956,572
========== ========== ========== ========== ==========
</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 July 19, 1995, 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 $21,000,000 which
was deposited with the Trustee for the purchase of $20,000,000 principal
amount of Bonds pursuant to contracts to purchase such Bonds at the
Sponsor's aggregate cost of $19,515,259 plus $215,638 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 Sponsor as Unit holder of record on such date, as
set forth in Part B, "Rights of Unit Holders--Distribution of Interest and
Principal."
(3) Organizational costs to be paid by the Trusts have been deferred and will
be amortized over five years.
(4) Aggregate public offering price (exclusive of interest) computed on 8,000,
3,000, 3,000, 3,000 and 3,000 Units of National Trust, Maryland Trust, New
York Trust, North Carolina Trust and Pennsylvania Trust, respectively, on
the basis set forth in Part B, "Public Offering--Offering Price."
(5) Sales charge of 4.70% computed on 8,000, 3,000, 3,000, 3,000 and 3,000
Units of National Trust, Maryland Trust, New York Trust, North Carolina
Trust and Pennsylvania Trust, respectively, on the basis set forth in Part
B, "Public Offering--Offering Price."
(6) 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."
A-9
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 209--PORTFOLIO OF SECURITIES AS OF JULY 19, 1995
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 120,000 California Housing A+ 8/1/02 @ 102 $ 123,680 6.250% $ 8,040
Agency, Multi-Unit SF 2/1/06 @ 100
Rental Housing Revenue
Bonds, 6.70% Due
8/1/2015
2. 250,000 Garden Grove Agency for A 10/1/03 @ 102 234,478 6.350 14,687
Community Development, SF 10/1/14 @ 100
Garden Grove Community
Project, California, Tax
Allocation Refunding
Bonds, 5.875% Due
10/1/2023
3. 630,000 City of Livermore, A- 5/1/01 @ 102 598,815 6.4000 37,800
Alameda County, SF 5/1/16 @100
California, Livermore
Capital Projects
Financing Authority,
Certificates of
Participation, 6.00%
Due 5/1/2020
4. 500,000 Sequoia Hospital A- 8/15/03 @ 102 422,160 6.600 26,875
District, Redwood City, SF 8/15/14 @ 100
California, Revenue
Bonds, 5.375% Due
8/15/2023
5. 250,000 City of West Covina, A 8/15/04 @ 102 251,945 6.400 16,250
California, Certificates SF 8/15/15 @ 100
of Participation, Queen
of the Valley Hospital,
6.50% Due 8/15/2019
6. 500,000 Illinois Health A- 10/1/03 @ 102 442,150 6.450 27,500
Facilities Authority SF 10/1/08 @ 100
Revenue Refunding Bonds,
Illinois Masonic Medical
Center, 5.50% Due
10/1/2019
7. 600,000 Illinois Housing A+ 9/1/04 @ 102 618,870 6.350 40,500
Development Multi-Family SF 3/1/15 @ 100
Program Revenue Bonds,
6.75% Due 9/1/2023
8. 500,000 DeKalb County, Indiana, A 1/15/05 @ 102 508,080 6.300 32,500
Redevelopment Authority, SF 1/15/10 @ 100
Mini-Mill Local Public
Improvement Project,
6.50% Due 1/15/2014
9. 510,000 Massachusetts Health and A 4/1/01 @ 102 536,010 6.350 36,720
Educational Facilities SF 4/1/12 @ 100
Authority Revenue Bonds,
New England Deaconess
Hospital Issue, 7.20%
Due 4/1/2022
10. 250,000 North Carolina Municipal A 1/1/03 @ 102 247,080 6.350 15,625
Power Agency Number 1, SF 1/1/16 @ 100
Catawba Electric Revenue
Bonds, 6.25%
Due 1/1/2017
11. 390,000 North Carolina Eastern A- 1/1/03 @ 100 341,761 6.500 21,450
Municipal Power Agency, SF 1/1/19 @ 100
Power System Revenue
Refunding Bonds, 5.50%
Due 1/1/2021
12. 500,000 Cleveland-Rock Glen, A* 6/1/06 @ 103 531,995 6.300 35,000
Ohio, Housing Assistance SF 6/1/06 @ 100
Corporation, Multifamily
Housing Revenue and
Revenue Refunding Bonds,
Ambleside Apartments,
Section 8 Assisted
Projects, 7.00% Due
6/1/2018
13. 500,000 Delaware County, A- 1/1/02 @ 102 504,820 6.350 32,500
Pennsylvania, Authority, SF 1/1/03 @ 100
Hospital Revenue
Refunding Bonds, Riddle
Memorial Hospital, 6.50%
Due 1/1/2022
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-10
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 209--PORTFOLIO OF SECURITIES AS OF JULY 19, 1995
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ----------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
14. $ 500,000 Austin, Texas, Housing A 4/1/04 @ 102 $ 515,295 6.350% $ 33,750
Finance Corporation, SF 4/1/11 @ 100
Multifamily Housing
Revenue Refunding Bonds,
Stassney Woods
Apartments Project,
6.75% Due 4/1/2019
15. 500,000 Brazos County, Texas, A- 1/1/04 @ 102 475,860 6.400 30,000
Health Facilities SF 1/1/14 @ 100
Development Corporation,
Franciscan Services
Corporation Revenue
Refunding Bonds, St.
Joseph Hospital and
Health Center of Bryan,
Texas, 6.00% Due
1/1/2019
16. 450,000 Matagorda County, Texas, A- 7/1/03 @ 102 437,404 6.200 27,000
Navigation, District
Number One, Pollution
Control Revenue
Refunding Bonds, Central
Power and Light Company
Project, 6.00%
Due 7/1/2028
17. 250,000 Housing Authority of AAA 11/1/04 @ 104 265,078 6.350 17,500
Skagit County, SF 12/20/03 @ 100
Washington, Low-Income
Housing Assistance
Revenue Bonds, GNMA
Collateralized Mortgage
Loan, Sea Mar Project,
7.00% Due 6/20/2035
18. 300,000 State of Wisconsin, AA- 7/1/02 @ 100 272,649 6.200 16,500
Transportation Revenue SF 7/1/13 @ 100
Bonds, 5.50% Due
7/1/2022
19. 500,000 Wyoming Community AA 6/1/03 @ 102 489,120 6.250 30,500
Development Authority, SF 6/1/24 @ 100
Single Family Mortgage
Bonds, 6.10% Due
6/1/2033
---------- ---------- --------
$8,000,000 $7,817,250 $500,697
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-11
<PAGE>
TAX EXEMPT SECURITIES TRUST
MARYLAND TRUST 96--PORTFOLIO OF SECURITIES AS OF JULY 19, 1995
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 125,000 Maryland Health and AAA 7/1/03 @ 102 $ 125,000 5.750% $ 7,188
Higher Education SF 7/1/09 @ 100
Facilities Authority,
Project and Refunding
Revenue Bonds, Mercy
Medical Center Issue,
AMBAC Insured, 5.75%
Due 7/1/2015
2. 500,000 Maryland Health and A 7/1/03 @ 102 484,200 6.000 28,750
Higher Educational SF 7/1/14 @ 100
Facilities Authority
Revenue Bonds, Good
Samaritan Hospital
Issue, 5.75%
Due 7/1/2019
3. 155,000 Community Development Aa* 5/15/03 @ 102 159,774 6.200 10,268
Administration, SF 5/15/14 @ 100
Department of Housing
and Community
Development, State of
Maryland, Multi-Family
Housing Revenue Bonds,
6.625% Due 5/15/2023
4. 500,000 Anne Arundel County, A 4/1/04 @ 102 509,835 5.750 30,000
Maryland, Pollution
Control Revenue
Refunding Bonds,
Baltimore Gas and
Electric Company
Project, 6.00% Due
4/1/2024
5. 400,000 Baltimore City, AAA 1/1/04 @ 102 385,920 5.900 22,600
Maryland, Mortgage SF 1/1/18 @ 100
Revenue Refunding Bonds,
Seton Apartments
Project, FHA Insured
Mortgage Loan, MBIA
Insured, 5.65% Due
1/1/2026
6. 350,000 Prince George's County, A* 7/1/04 @ 102 297,514 6.450 18,550
Maryland, Project and SF 7/1/15 @ 100
Refunding Revenue Bonds,
Dimensions Health
Corporation Issue, 5.30%
Due 7/1/2024
7. 500,000 Housing Authority of A* 10/15/04 @ 102 523,710 6.399 35,000
Prince George's County, SF 4/15/10 @ 100
Maryland, Multifamily
Housing Revenue Bonds,
Emerson House Project,
7.00% Due 4/15/2019
8. 100,000 Washington Suburban AA 6/1/04 @ 100 107,802 5.500 6,625
Sanitary District,
Maryland, General
Construction Bonds,
6.625% Due 6/1/2019
9. 250,000 Puerto Rico Electric A- 7/1/04 @ 100 232,400 6.050 13,750
Power Authority, Power SF 7/1/17 @ 100
Revenue Bonds, 5.50%
Due 7/1/2020
10. 120,000 Puerto Rico Highway and A 7/1/03 @ 101.50 107,507 6.050 6,300
Transportation SF 7/1/20 @ 100
Authority, Highway
Revenue Refunding Bonds,
5.25% Due 7/1/2021
---------- ---------- --------
$3,000,000 $2,933,662 $179,031
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-12
<PAGE>
TAX EXEMPT SECURITIES TRUST
NEW YORK TRUST 145--PORTFOLIO OF SECURITIES AS OF JULY 19, 1995
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
REDEMPTION SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 250,000 The City of New York, A-** 2/15/05 @ 101 $ 252,497 6.500% $ 16,562
General Obligation SF 2/15/20 @ 100
Bonds, 6.625% Due
2/15/2025
2. 100,000 New York Local A 4/1/02 @ 100 92,750 6.050 5,500
Government Assistance SF 4/1/19 @ 100
Corporation Bonds, 5.50%
Due 4/1/2022
3. 500,000 New York City Housing AA 5/1/03 @ 102 479,570 6.150 29,250
Development Corporation, SF 5/1/14 @ 100
Multi-Family Housing
Revenue Bonds, 5.85% Due
5/1/2025
4. 160,000 Dormitory Authority of A** 5/15/04 @ 102 160,000 6.249 10,000
the State of New York, SF 5/15/15 @ 100
State University
Educational Facilities
Revenue Bonds, 6.25% Due
5/15/2020
5. 500,000 Dormitory Authority of A** 7/1/04 @ 102 467,925 6.200 28,500
the State of New York SF 7/1/15 @ 100
Revenue Bonds, Upstate
Community Colleges,
5.70% Due 7/1/2021
6. 500,000 Housing New York AA 11/1/03 @ 102 461,530 6.100 27,500
Corporation, Senior SF 11/1/19 @ 100
Revenue Refunding Bonds,
5.50% Due 11/1/2020
7. 390,000 New York State Medical AA 2/15/05 @ 102 406,076 6.000 25,350
Care Facilities Finance
Agency, FHA-Insured
Mortgage Project Revenue
Bonds, 6.50% Due
2/15/2035
8. 250,000 UFA Development Aa* 7/1/04 @ 102 242,583 6.150 14,875
Corporation, Utica, New SF 1/1/10 @ 100
York, FHA-Insured
Mortgage Revenue Bonds,
Loretto-Utica Project,
5.95% Due 7/1/2035
9. 350,000 Metropolitan A-** 7/1/04 @ 101.50 361,046 6.100 22,750
Transportation SF 7/1/19 @ 100
Authority, Commuter
Facilities Revenue
Bonds, 6.50% Due
7/1/2024
---------- ---------- --------
$3,000,000 $2,923,977 $180,287
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-13
<PAGE>
TAX EXEMPT SECURITIES TRUST
NORTH CAROLINA TRUST 10--PORTFOLIO OF SECURITIES AS OF JULY 19, 1995
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
REDEMPTION SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 190,000 North Carolina Eastern A- 1/1/03 @ 100 $ 166,499 6.500% $ 10,450
Municipal Power Agency, SF 1/1/19 @ 100
Power System Revenue
Refunding Bonds, 5.50%
Due 1/1/2021
2. 310,000 North Carolina Eastern A- -- 315,509 6.350 20,150
Municipal Power Agency, SF 7/1/17 @ 100
Power System Revenue
Refunding Bonds, 6.50%
Due 1/1/2018
3. 250,000 North Carolina Municipal A 1/1/03 @ 102 247,080 6.350 15,625
Power Agency Number 1, SF 1/1/16 @ 100
Catawba Electric Revenue
Bonds, 6.25% Due
1/1/2017
4. 470,000 North Carolina Housing AA 7/1/02 @ 102 498,943 6.000 32,430
Finance Agency, SF 7/1/14 @ 100
Multifamily Revenue
Refunding Bonds,
Refunding Bond
Resolution, 6.90% Due
7/1/2024
5. 480,000 North Carolina Medical AA 10/1/03 @ 102 461,001 5.800 26,400
Care Commission Hospital SF 10/1/15 @ 100
Refunding Revenue Bonds,
Presbyterian Hospital,
5.50% Due 10/1/2020
6. 250,000 North Carolina Municipal A 1/1/03 @ 100 234,695 6.300 14,375
Power Agency Number 1, SF 1/1/13 @ 100
Catawba Electric Revenue
Bonds, 5.75% Due
1/1/2015
7. 500,000 Craven Regional Medical AAA 10/1/03 @ 102 489,105 5.800 28,125
Authority, North SF 10/1/11 @ 100
Carolina, Insured Health
Care Facilities Revenue
Bonds, MBIA Insured,
5.625% Due 10/1/2017
8. 300,000 County of Wake, North AAA 10/1/03 @ 102 270,924 5.800 15,375
Carolina, Hospital SF 10/1/17 @ 100
System Revenue Bonds,
MBIA Insured, 5.125% Due
10/1/2026
9. 250,000 Puerto Rico Electric A- 7/1/04 @ 100 232,400 6.050 13,750
Power Authority, Power SF 7/1/17 @ 100
Revenue Bonds, 5.50% Due
7/1/2020
---------- ---------- --------
$3,000,000 $2,916,156 $176,680
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-14
<PAGE>
TAX EXEMPT SECURITIES TRUST
PENNSYLVANIA TRUST 115--PORTFOLIO OF SECURITIES AS OF JULY 19, 1995
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
REDEMPTION SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ----------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 450,000 Allegheny County, A* 5/1/02 @ 100 $ 433,125 6.300% $ 27,000
Pennsylvania, Hospital
Development Authority,
Health Facilities
Revenue Refunding Bonds,
South Hills Health
System, 6.00% Due
5/1/2020
2. 200,000 Duquesne City School A 10/1/03 @ 100 191,350 6.100 11,500
District, Allegheny SF 10/1/14 @ 100
County, Pennsylvania,
General Obligation
Bonds, 5.75% Due
10/1/2018
3. 500,000 Butler County, A- 6/1/03 @ 102 475,020 6.250 28,750
Pennsylvania, Industrial SF 6/1/05 @ 100
Development Authority,
Health Center Revenue
Refunding Bonds,
Pittsburgh Lifetime Care
Community, Sherwood Oaks
Project, 5.75% Due
6/1/2011
4. 500,000 Delaware County, A- 1/1/02 @ 102 504,820 6.350 32,500
Pennsylvania, Authority, SF 1/1/03 @ 100
Hospital Revenue
Refunding Bonds, Riddle
Memorial Hospital, 6.50%
Due 1/1/2022
5. 355,000 The Harrisburg A 9/1/03 @ 102 343,853 6.117 20,857
Authority, Pennsylvania, SF 9/1/14 @ 100
Guaranteed Resource
Recovery Facility
Revenue Bonds, 5.875%
Due 9/1/2021
6. 250,000 The Hospital and Higher A- 11/15/02 @ 102 251,705 6.400 16,250
Education Facilities SF 11/15/12 @ 100
Authority of
Philadelphia,
Pennsylvania, Hospital
Revenue Bonds, Chestnut
Hill Hospital, 6.50% Due
11/15/2022
7. 250,000 The Hospital and Higher A- 11/15/03 @ 102 254,170 6.400 16,562
Education Facilities SF 11/15/09 @ 100
Authority of
Philadelphia,
Pennsylvania, Hospital
Revenue Bonds, Temple
University Hospital,
6.625% Due 11/15/2023
8. 495,000 City of Philadelphia, AAA 6/15/03 @ 102 470,171 5.932 27,225
Pennsylvania, Water and SF 6/15/15 @ 100
Wastewater Revenue
Bonds, Capital Guaranty
Insured, 5.50% Due
6/15/2015
---------- ---------- --------
$3,000,000 $2,924,214 $180,644
========== ========== ========
</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(*) and Fitch Investor Services, 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 February
14, 1995, through July 19, 1995, with the final settlement date on July 24,
1995. The Profit to the Sponsor on Deposit totals $56,115, $13,359, $18,427,
$17,983 and $11,911 for the National Trust, Maryland Trust, New York Trust,
North Carolina Trust and Pennsylvania 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,
Maryland Trust, New York Trust, North Carolina Trust and Pennsylvania Trust
on July 19, 1995, was $7,761,250, $2,909,661, $2,899,977, $2,892,156 and
$2,900,214, 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
For over 20 years, Tax Exempt Securities Trust has specialized in quality
municipal bond investments designed to meet a variety of investment objectives
and Tax situations. Tax Exempt Securities Trust is a convenient and cost
effective alternative to individual bond purchases. 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"), of Smith Barney Inc., as Sponsor, United States Trust Company of
New York, as Trustee, and J.J. Kenny Co., 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 Sponsor 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 Sponsor 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
Sponsor 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 Sponsor 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
A tax-exempt unit investment trust provides many of the same benefits as
individual bond purchases, while the Unit holder avoids the complexity of
analyzing, selecting and monitoring a multi-bond portfolio. 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 Sponsor's investment professionals select Bonds for the Trust portfolios
from among the 200,000 municipal bond issues that vary according to bond
purpose, credit quality and years to maturity. 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 (including
alternative minimum 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 are rated A or better by a major bond rating agency, (4) the
Bonds were chosen in part on the basis of their respective maturity dates and
offer a degree of call protection, (5) 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 (6) in the opinion of
the Sponsor, 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
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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.
In the event that any contract for the purchase of any Bond fails, the
Sponsor is 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 Sponsor 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 Sponsor 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 Sponsor 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 SPONSOR 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
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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 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.
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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 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.
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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 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 of 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 to 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.
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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 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 Sponsor 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, decommissioning 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.
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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 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 waste 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
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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 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 costs,
deregulation, traffic constraints, the recent 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 Midway Airlines Inc., Eastern Airlines, Inc. and Pan American
Corporation have been liquidated. However, Continental Airlines and Trans
World Airlines have emerged from bankruptcy. The Sponsor cannot predict what
effect these industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines and their
usage of the particular airport facility. Furthermore, proposed Legislation
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.
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 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"), Financial Guaranty Insurance Company "Financial Guaranty"), Financial
Security Assurance Inc. ("FSA"), or MBIA Insurance Corporation ("MBIA")
(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 Sponsor. 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 $2,145,000,000 and
policyholders' surplus of approximately $782,000,000 as of December 31, 1994.
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.
Asset Guaranty is a New York State insurance company licensed to write
financial guarantee, credit, residual value and surety insurance. Asset
Guaranty commenced operations in mid-1988 by providing reinsurance to several
major monoline insurers. Asset Guaranty also issued limited amounts of primary
financial guaranty insurance, but not in direct competition with the primary
mono-line companies for which it acts as a reinsurer. The parent holding
company of Asset Guaranty, Asset Guarantee Inc. (AGI), merged with
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Enhance Financial Services (EFS) in June, 1990 to form Enhance Financial
Services Group Inc. (EFSG). The two main, 100%-owned subsidiaries of EFSG,
Asset Guaranty and Enhance Reinsurance Company (ERC), share common management
and physical resources. After an initial public offering completed in February
1992 and the sale by Merrill Lynch & Co. of its stake, EFSG is 49.8%-owned by
the public, 29.9% by US West Financial Services, 14.1% by Manufacturers Life
Insurance Co. and 6.2% by senior management. Both ERC and Asset Guaranty are
rated "AAA" for claims paying ability by Duff & Phelps. ERC is rated triple-A
for claims-paying ability by both S&P and Moody's. Asset Guaranty received a
"AA" claims-paying-ability rating from S&P during August 1993, but remains
unrated by Moody's. As of December 31, 1994 Asset Guaranty had admitted assets
of approximately $159,000,000 and policyholders' surplus of approximately
$72,000,000.
CAPMAC commenced operations in December 1987, as the second monoline
financial guaranty insurance company (after FSA) organized solely to insure
non-municipal obligations. CAPMAC, a New York corporation, is a wholly-owned
subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in 1992 by Citibank
(New York State) to a group of 12 investors led by the following: Dillon
Read's Saratoga Partners II; L.P. (Saratoga), an acquisition fund; Caprock
Management, Inc., representing Rockefeller family interests; Citigrowth Fund,
a Citicorp venture capital group; and CAPMAC senior management and staff.
These groups control approximately 70% of the stock of CHI. CAPMAC had
traditionally specialized in guaranteeing consumer loan and trade receivable
asset-backed securities. Under the new ownership group CAPMAC intends to
become involved in the municipal bond insurance business, as well as their
traditional non-municipal business. As of December 31, 1994 CAPMAC's admitted
assets were approximately $199,000,000 and its policyholders' surplus was
approximately $140,000,000.
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, 1994, CGIC had total admitted assets of
approximately $304,000,000 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 principal
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, 1994, its total
admitted assets were approximately $194,000,000 and policyholders' surplus was
approximately $106,000,000.
Financial Guaranty, a New York stock insurance company, is a wholly-owned
subsidiary of FGIC Corporation which is wholly-owned by General Electric
Capital Corporation. The investors in the FGIC Corporation are not obligated
to pay the debts of or the claims against Financial Guaranty. Financial
Guaranty commenced its business of providing insurance and financial
guarantees for a variety of investment instruments in January 1984 and is
currently authorized to provide insurance in 49 states and the District of
Columbia. It files reports with state regulatory agencies and is subject to
audit and review by those authorities. As of December 31, 1994, its total
admitted assets were approximately $2,131,000,000 and its policyholders'
surplus was approximately $894,000,000.
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, 1994, FSA had policyholders' surplus of approximately
$344,000,000 and total admitted assets of approximately $804,000,000.
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, 1994, MBIA had admitted assets of approximately $3,401,000,000 and
policyholders' surplus of approximately $1,110,000,000.
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
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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 effects 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 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 Sponsor, 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 Sponsor is 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 is 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
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(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 Sponsor, or until the termination of the
Trust Agreement. (See "Amendment and Termination of the Trust Agreement--
Termination.")
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 Sponsor,
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
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<PAGE>
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 amortization 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. 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 foregoing 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
Sponsor believes 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 Sponsor 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 to 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
B-13
<PAGE>
others would be exempt 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
All or some portion of the expenses incurred in establishing each Trust,
including the cost of the initial preparation of documents relating to a
Trust, Federal and State registration fees, the initial fees and expenses of
the Trustee, legal expenses and any other out-of-pocket expenses will be paid
by the Trust, and amortized over five years. Any balance of the expenses
incurred in establishing a Trust, as well as advertising and selling expenses
and other out-of-pocket expenses will be paid at no cost to the Trusts.
TRUSTEE'S, SPONSOR'S 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.
There are no management fees and the Sponsor earns only a nominal Portfolio
Supervision fee (the "Supervision Fee"), which is earned for Portfolio
supervisory services. This fee 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 Sponsor receives 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 Sponsor 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 Sponsor.
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
Sponsor maintains 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 Sponsor,
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.
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<PAGE>
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). 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 the Trusts will be reduced as follows:
<TABLE>
<CAPTION>
STATE TRUSTS
------------
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
<CAPTION>
NATIONAL TRUST
--------------
DEALER
CONCESSION
PERCENT OF PERCENT OF AS PERCENT OF
PUBLIC NET AMOUNT PUBLIC
UNITS PURCHASED+ OFFERING PRICE INVESTED OFFERING PRICE
- ---------------- -------------- ---------- --------------
<S> <C> <C> <C>
1- 99................................ 4.70% 4.932% 3.29%
100-249................................ 4.25% 4.439% 2.97
250-499................................ 4.00% 4.167% 2.80
500-999................................ 3.50% 3.627% 2.45
1,000 or more.......................... 3.00% 3.093% 2.10
</TABLE>
The Sponsor 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.
Pursuant to employee benefit plans, Units of a Trust are available to
employees of the Sponsor, 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 Sponsor 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 Sponsor repurchases and sells 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
- -------
* Current offering or bid prices of the Deposited Units, if any, are based on
prevailing weekly evaluations of the obligations underlying such Deposited
Units.
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<PAGE>
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 Sponsor 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 Sponsor 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 Sponsor's intention to qualify Units of a Trust for sale through
the Underwriters and dealers who are members of the National Association of
Securities Dealers, Inc. Units of a State Trust will be offered for sale only
in the State for which the Trust is named, except that Units of a New York
Trust will also be offered for sale to residents of the State of Connecticut,
the State of Florida and the Commonwealth of Puerto Rico. 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 Sponsor reserves 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 Sponsor
reserves 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 Sponsor, although not
obligated to do so, presently intends 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 Bonds, see "Public Offering--Method of Evaluation."
The Sponsor 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 Sponsor 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 Sponsor reserves
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.
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<PAGE>
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 the Sponsor 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 the Sponsor has arranged for different
reinvestment alternatives, Unit holders should contact the Sponsor 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.
SPONSOR'S 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 Sponsor receives 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 Sponsor 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 Sponsor (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 Sponsor). (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 Sponsor. The
Sponsor may also realize profits or sustain losses with respect to 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 Sponsor prior to the
anticipated first settlement date for the purchase of Units may be used in the
Sponsor's businesses to the extent permitted by applicable regulations and may
be of use to the Sponsor.
In maintaining a market for the Units of a Trust (see "Public Offering--
Market for Units"), the Sponsor 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 Sponsor. 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
B-17
<PAGE>
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 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
B-18
<PAGE>
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 Sponsor as the holder of record of all Units on the
first settlement date for the Units. Consequently, when the Sponsor sells
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 commencing on the day after the Date of Deposit through the date of
settlement of the investor's purchase (normally three 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 Sponsor, 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.
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 Sponsor 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
B-19
<PAGE>
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 Sponsor of Units tendered to the Trustee for redemption at
prices in excess of the Redemption Price, see "Redemption of Units--Purchase
by the Sponsor 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 SPONSOR OF UNITS TENDERED FOR REDEMPTION--The Trust
Agreement requires that the Trustee notify the Sponsor of any tender of Units
for redemption. So long as the Sponsor maintains a bid in the secondary
market, the Sponsor, 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 Sponsor 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 Sponsor which likewise will bear any loss
resulting from a lower offering or redemption price subsequent to their
acquisition of such Units. (See "Public Offering--Sponsor's and Underwriters'
Profits.")
SPONSOR
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.
Smith Barney or an affiliate is investment adviser, principal underwriter or
distributor of 60 open-end investment companies and investment manager of 12
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 sponsor of most
Series of Defined Assets Funds. The Sponsor has acted previously as managing
underwriter 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 Sponsor also executes orders for the purchase and
sale of securities of investment companies and sells securities to such
companies in its capacity as broker or dealer in securities.
B-20
<PAGE>
LIMITATIONS ON LIABILITY
The Sponsor is liable for the performance of its obligations arising from
its 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 its
obligations and duties. (See "Sponsor--Responsibility" below.)
RESPONSIBILITY
Although the Trusts are not actively managed as mutual funds are, the
portfolios are reviewed periodically on a regular cycle. The Sponsor is
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 Sponsor, may be detrimental to the interests of the Unit
holders.
The Sponsor intends 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 Sponsor 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 Sponsor may instruct the Trustee to accept such an offer
or to take any other action with respect thereto as the Sponsor may deem
proper if the issuer is in default with respect to such Bonds or in the
judgment of the Sponsor 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.
RESIGNATION
If the Sponsor resigns or otherwise fails or becomes unable to perform its
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 Unit Trust Division, 770 Broadway, 6th Floor, New York,
New York 10003. 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", "Sponsor--Resignation" and "Other Charges."
B-21
<PAGE>
RESIGNATION
By executing an instrument in writing and filing the same with the Sponsor,
the Trustee and any successor may resign. In such an event the Sponsor is
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 Sponsor 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 J.J. Kenny
Co., Inc., with main offices located at 65 Broadway, New York, New York 10006.
LIMITATIONS ON LIABILITY
The Trustee, Sponsor 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
Sponsor, 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.
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 Sponsor. 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
Sponsor and the Trustee, and in such event, the Sponsor 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.
B-22
<PAGE>
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
AMENDMENT
The Sponsor 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 Sponsor, 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
Sponsor.
AUDITORS
The statements of financial condition and the portfolios of securities
included in this Prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their report with respect thereto, and
is 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.
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
- -------
+As described by the rating agencies.
B-23
<PAGE>
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 effects of changes
in circumstances and economic conditions than bonds in higher-rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to 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.
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.
B-24
<PAGE>
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 projected Federal income tax rates and the tax brackets for
the 1995 taxable year. 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.
1995 TAX YEAR
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE INCOME BRACKET* TAX EXEMPT YIELD
FEDERAL
JOINT RETURN SINGLE RETURN TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
TAXABLE EQUIVALENT YIELD
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$39,000 $ 0-$23,350 15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41%
$ 39,001- 94,250 $ 23,350- 56,550 28.00% 5.56 6.25 6.94 7.64 8.33 9.03 9.72 10.42 11.11
$ 94,251-114,700 $ 56,551-114,700 31.00% 5.80 6.52 7.25 7.97 8.70 9.42 10.14 10.87 11.59
$114,701-143,600 $114,701-117,950 31.00% 5.80 6.61 7.35 8.08 8.81 9.55 10.28 11.02 11.75
$143,601-256,500 $117,951-256,500 36.00% 6.36 7.15 7.95 8.74 9.54 10.33 11.13 11.92 12.71
Over $256,500 Over $256,500 39.60% 6.76 7.60 8.44 9.29 10.13 10.98 11.82 12.67 13.51
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note: This table reflects the following:
1 Taxable income equals adjusted gross income less personal exemptions of
$2,500 less the standard deduction of $6,550 on a joint or total
itemized deductions, whichever is greater. However under the provisions
of the Omnibus Budget Reconciliation Act of 1990, itemized deductions
are reduced by 3% of the amount of a taxpayer's AGI over $114,700. This
is reflected in the brackets above by higher effective federal tax
rates. Furthermore, personal exemptions are phased out for the amount of
a taxpayer's AGI over $114,700 for single taxpayers and $172,050 for
married taxpayers filing jointly. This letter provision is not
incorporated into the above brackets.
2 The combined effective rate is computed under the assumption that
taxpayers itemize their deductions on their federal tax returns.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the
table.
4 The taxable equivalent yield table does not incorporate the affect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest rates applicable to the income levels indicated
within each bracket.
PERFORMANCE INFORMATION
Sales material may compare tax-equivalent yields of long-term municipal
bonds to long-term U.S. Treasury bonds and to the Bond Buyer Revenue Bond
Index. Such information is based on past performance and is not indicative of
future results. Yields on taxable investment are generally higher than those
of tax-exempt securities of comparable maturity. While income from municipal
bonds is exempt from federal income taxes, income from Treasuries is exempt
from state and local taxes. Since Treasuries are considered to have the
highest possible credit quality, the difference in yields is somewhat narrower
than if compared to corporate bonds with similar ratings and maturities.
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PROSPECTUS--PART C:
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NOTE: PART C OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PARTS A AND B.
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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 Sponsor
believes 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 Sponsor has not independently verified this information,
it has 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.
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.
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.
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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.
Currently, the Stadium Authority operates Oriole Park at Camden Yards which
opened in 1992, 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.
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
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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.
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. 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
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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.
MARYLAND TAXES
In the opinion of Messrs. Weinberg & Green LLC, 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.
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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. Subject to a
three-year phase-in period, interest on Bonds is not subject to the
Maryland Franchise Tax imposed on "financial institutions."
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. Subject to a three-year phase-in
period, profits realized on the sale or exchange of Bonds are subject to
the Maryland Franchise Tax imposed on "financial institutions."
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 YORK TRUST
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 fiscal year
ended March 31, 1993, and a $1.54 billion surplus for the fiscal year ended
March 31, 1994. A deficit of approximately $300 million has been projected for
the fiscal year ended March 31, 1995.
Approximately $5.4 billion of State general obligation debt was outstanding
at March 31, 1994. 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 $27.5 billion at March 31, 1994, up from $11.7 billion in
1984. A proposed constitutional amendment would limit additional 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 voters in
November. S&P reduced its ratings of the State's general obligation bonds on
January 13, 1992 to A-(its lowest rating for any state). Moody's reduced its
ratings 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.
The State 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)
contained 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. Nonrecurring measures aggregated $1.18 billion.
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
further deferral of scheduled income tax reductions, 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 this 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.
The budget for the fiscal year ended March 31, 1995, increased spending by
3.8% (greater than inflation for the first time in six years). It provided a
tax credit for low income families and increases aid to education, especially
in the poorer districts. The State reduced coverage and placed additional
restrictions on certain health care services. Over $1 billion results from
postponement of scheduled reductions in personal income taxes for a fifth year
and in taxes on hospital income; another $1.5 billion comes from non-recurring
measures. The State Legislature passed legislation to implement a budget
agreement more than two months after the beginning of the year. Taxes
(principally business taxes) were reduced by $475 million. A shortfall of
approximately $300 million has been projected.
More than two months after the fiscal year that began April 1, 1995, the
State adopted a budget to close a projected gap of approximately $5 billion,
including a reduction in income and business taxes. Approximately $1 billion
of the gap-closing measures are non-recurring and some of the revenue and
cost-cutting estimates are considered optimistic. The State Comptroller sued
to prevent reallocation of $110 million of reserves from a special pension
fund and has projected gaps of $2.7 billion for fiscal 1997 and $3.9 billion
for fiscal 1998 (substantially above the Governor's projections). 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, to a total of $4.7 billion. The State's latest seasonal borrowing, in
May 1993, was $850 million.
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, $881
million and $875 million of payments by LGAC to local governments out of
proceeds from bond sales, the general fund realized surpluses of $1.7 billion,
$2.1 billion and $0.9 billion for the 1992, 1993 and 1994 fiscal years,
respectively, leaving an accumulated deficit of $1.6 billion. A $0.9 billion
deficit has been projected for the fiscal year ended March 31, 1995.
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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 among the
highest in the nation (over 60% 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 1990-1992. It regained approximately 134,000 jobs between November
1992 and July 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.
From 1989 to 1993, the gross city product declined by 10.1% and employment,
by almost 11%, while the public assistance caseload grew by over 25%.
Unemployment averaged 10.8% in 1992, 10.1% in 1993 and 8.7% in 1994. While the
City's unemployment rate has declined substantially since then, it is still
above the State and the nation as a whole and increased slightly during the
nine months ended March 1995. 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 tax
receivables. 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 offset 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 1994 fiscal year relied 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. The Plan contained over $1.3 billion of one-
time revenue measures including bond refundings, sale of various City assets
and borrowing against future property tax receipts. Interim expenditure
reductions of approximately $300 million were implemented. The FCB reported
that although a $98 million surplus was projected for the year (the surplus
was actually $81 million), a $312 million shortfall in budgeted revenues and
$904 million of unanticipated expenses (including an unbudgeted increase of
over 3,300 in the number of employees and a record level of overtime), net of
certain increased revenues and other savings, resulted in depleting prior
years' surpluses by $326 million.
The City's original Financial Plan for the fiscal year ended July 30, 1995
proposed to eliminate a projected $2.3 billion budget gap through measures
including reduction of the City's workforce (achieved in substantial part
through voluntary severance packages funded with funding from MAC), increased
State and Federal aid, a bond refinancing, reduced contributions to City
pension funds and sale of certain City assets. The Mayor's proposals include
efforts toward privatization of certain City services and agencies (the labor
union underbid private bidders on one recent contract), greater control of
independent authorities and agencies (the Schools Chancellor resigned
following numerous conflicts with the Mayor), and reducing social service
expenditures (including stricter eligibility requirements
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and fingerprinting of recipients). He also sought concessions from labor
unions representing City employees. As several of these measures failed to be
implemented, the City experienced lower than anticipated tax collections and
higher than budgeted costs (particularly overtime and liability claims) during
the year, various alternative measures were implemented, for an aggregate of
more than $3 billion of gap closing measures. $1.9 billion of these were non-
recurring and, in the case of a second bond refinancing, will increase City
expenses for future years. The City Comptroller estimated that debt service
will consume 19.5% of the City's tax revenue by fiscal 1998. Reduced
maintenance of City infrastructure could also lead to increased future
expenses. In December 1994, the City Council rejected the Mayor's
recommendations, adopted its own budget revisions and sued to enforce them;
the suit was dismissed and the Mayor impounded funds to achieve his proposed
expense reductions.
The City projected a budget gap of $3.1 billion for the fiscal year that
began July 1, 1995, attributed to the large use of non-recurring measures in
the 1995 fiscal year, a $500 million decline in tax revenues and a $265
million shortfall in anticipated State and Federal aid, as well as higher
Medicaid and agency spending, failure to negotiate increased lease payments
for City airports, additional funding for pensions and State failure to adopt
a tort reform measure. The Financial Plan approved in June will reduce a wide
range of City services, in part because the City received $650 million less
State aid than requested. The largest reduction ($900 million) is for funds to
the Board of Education. Fiscal monitors have criticized heavy reliance on non-
recurring measures and at least $450 million of questionable budgetary
assumptions. A subsequent tentative agreement with labor leaders for proposed
union concessions lacks specificity as to how much of the savings will be
achieved and did not include changes in productivity or work rules. The Mayor
separately proposed selling the City's water system to the New York Water
Board, which would issue $2.3 billion of bonds for the purpose. This would
provide the City with about $800 million in cash over the next four years. The
City Comptroller has threatened to block the sale unless the City commits to
use these funds only for capital projects. Most of the proposed gap-closing
measures depend on cooperation of Federal or State governments or municipal
unions, of which there can be no assurance. The City Comptroller predicted
that certain reductions in Medicaid and welfare expenditures may lead to job
reductions and higher costs for other programs. The City projects budget gaps
of $2.8 billion for the 1997 fiscal year and $2.9 billion for the 1988 fiscal
year. The fiscal monitors have suggested that sizeable additional gaps remain
for future fiscal years, and the City needs to take significant additional
actions to work toward structural balance. The State Comptroller cited
principally growing Medicaid, employee health insurance and debt service
costs.
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 the City workers followed
negotiations lasting nearly two years. Workers received wage and benefit
raises totalling 8.25% over 39 months ending March 1995. 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. Under a contract reached in September 1994,
while sanitation workers would receive an overall increase of 8.25% in wages
and benefits over 39 months, routes would be lengthened by an average of 20%.
The 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; because fund performance has been less than
the earnings projected, the City will need to increase contributions by $300
million, beginning in the 1996 fiscal year.
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.
If this trend continues, the City's ability to issue additional general
obligation bonds could be limited by the 1998 fiscal year. The City also faces
uncertainty in its dependence on State aid as the State grapples with its own
projected budget gap. 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 and problems of drug addiction and
homelessness. For example, the City may be ordered to spend up to $8 billion
to construct water filtration facilities if it is not successful in
implementing measures to prevent pollution of its watershed upstate. In
December 1994 the City submitted for State approval proposed new pervasive
regulations of activities in the area which can cause pollution. The City has
been sued by local landowners; also State regulations proposed in March 1995
requiring prior notification and approval of City land purchases would
undermine a major component of the City's plan. 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.
The City sold $1.4 billion, $1.8 billion and $2.2 billion of short-term
notes, respectively, during the 1993, 1994 and 1995 fiscal years. At September
30, 1994, there were outstanding $21.7 billion of City bonds (not including
City debt held by MAC), $4.1 billion of
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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 reduced its rating of the City's debt to BBB+ on July
10, 1995, citing the City's economy, substantial retention of non-recurring
revenues and optimistic revenue projections in the latest budget. 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
1995-1998 to aggregate $14.0 billion. An additional $2.4 billion is to be
derived from other sources, principally use of restricted cash balances and
advances from the general fund in anticipation of bond issuances. The City's
latest Ten Year Capital Strategy plans capital expenditures of $45.6 billion
during 1994-2003 (93% of be City funded).
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. Any
reductions in State aid to localities may cause additional localities to
experience difficulty in achieving balanced budgets. County executives have
warned that reductions in State aid to localities to fund future State tax
reductions are likely require increased local taxes. 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 March 31, 1994, approximately $0.4 billion of State public
authority obligations was State-guaranteed, $7.3 billion was moral obligation
debt (including $4.8 billion of MAC debt) and $16.6 billion was financed under
lease-purchase or contractual obligation 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.
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. While the TA projects a budget surplus for
1994 S&P has estimated that without the City's reimbursement of the 1994
surplus, the 1995 year-end cash balance could be a negative $150 million. Cash
basis gaps of $300-800 million are projected for each of the 1996 through 1998
years. Measures proposed to close these gaps include various additional State
aid and possible fare increases. However, both State and City budget proposals
would reduce their subsidies to the MTA. An agreement with TA workers reached
in July 1994, which provides 10.4% wage increases over 39 months, will cost
the MTA $337 million. The MTA Chairman stated that this cost would be partly
offset by savings from work rule changes and that money for the settlement is
available in the TA's budget. An earlier settlement with Long Island Railroad
workers is expected to cost the MTA $14 million over 26 months. In February
1995 the MTA approved reductions in service and other measures aggregating
$113 million to make up the City's elimination of a subsidy for reduced fares
to schoolchildren. It is uncertain whether additional State and Federal aid
reductions or other factors will require additional costcutting or a future
fare increase.
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. In December 1993, a
$9.5 billion MTA Capital Plan was finally approved for 1992-1996; however,
$500 million was contingent on increased contributions from the City which it
has declined to approve. The City is seeking State and MAC approval to defer
$245 million of capital contributions to the TA from the City's current fiscal
year until 1998. The Governor has requested the MTA to postpone the $690
million of borrowing for capital spending under the Plan for 1995. 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.
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 $286 billion were outstanding against the City at June 30,
1994, for which it estimated its potential future liability at $2.6 billion.
Another action seeks a judgment that, as a result of an overestimate by the
State
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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 agreed to pay $351 million by the 2003 fiscal year, of
which $90 million has been paid.
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 Sponsor,
under existing New York law:
Under the income tax laws of the State and City of New York, the Trust is
not an association taxable as a corporation and income received by the
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 the 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 Taxes). A noncorporate Holder
of Units of the 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, as well as any gain recognized on the disposition of, 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.
NORTH CAROLINA TRUST
RISK FACTORS--The Sponsor believes the information summarized below
describes some of the more significant developments relating to Securities of
(i) municipalities or other political subdivisions or instrumentalities of the
State of North Carolina (the "State") which rely, in whole or in part, on ad
valorem real property taxes and other general funds of such municipalities or
political subdivisions or (ii) the State of North Carolina, which are general
obligations of the State payable from appropriations from the State's General
Fund. The sources of such information include official reports from the
Department of the Treasurer, as well as other publicly available documents.
The Sponsor has not independently verified any of the information contained in
such official reports, but is not aware of any facts which could render such
information inaccurate.
STATE ECONOMIC PROFILE. North Carolina is basically a rural state, having
only five municipalities with populations in excess of 100,000. The economic
profile of North Carolina consists of a combination of industry, agriculture,
and tourism. Nonagricultural wage and salary employment accounted for
approximately 3,452,700 jobs as of June, 1995. The largest nonmanufacturing
segment of jobs was the approximately 784,900 persons employed in trade, with
textiles as the largest manufacturing segment employing approximately 201,000
people. The United States Department of Labor estimates that as of May, 1995,
North Carolina ranked tenth among the states in nonagricultural employment,
eighth in manufacturing employment, and eleventh in trade. During the period
1980 through 1992, per capita income in North Carolina grew from $7,999 to
$17,667, an increase of approximately 121%. The North Carolina Employment
Security Commission estimated the unadjusted unemployment rate in June, 1995
to be 4.7% of the labor force, as compared with an unemployment rate of 5.8%
nationwide. Gross agricultural income (excluding farm forest products) in 1993
was $5.457 billion. This places North Carolina ninth in the nation in gross
agricultural income. Tobacco production is the leading source of agricultural
crop income in the State, accounting for approximately 18.9% of gross
agricultural income in 1993.
STATE FINANCIAL CONDITION. The State's two principal operating accounts are
the General Fund and the Highway Fund. The principal sources of General Fund
tax revenues are the income tax and the sales and use tax. The State
Constitution limits the income tax to a rate of 10% of total net income; the
State actually imposed a maximum rate of 7.75% during the 1994 calendar year.
The State had (audited) General Fund balances at the June 30th year-end of
approximately $254 million, $124 million, ($112) million (deficit balance),
$235 million and $681 million for, respectively, the 1989, 1990, 1991, 1992
and 1993 fiscal years. For the year ended June 30, 1993, the State had total
budgeted appropriations from the General Fund of approximately $10.613
billion.
The State Highway Fund had an ending credit balance of approximately $308
million as of June 30, 1993, with total expenditures of approximately $1.410
billion.
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STATE DEBT. As of June 30, 1994, approximately $936 million aggregate
principal amount of the State's general obligation bonds and $55 million of
its highway fund general obligation bonds were outstanding. The highway fund
bonds are payable from the Highway Fund.
In addition, 16 constituent institutions of the University of North Carolina
and 8 agencies or public authorities of the State had approximately $9.705
billion principal amount of revenue bonds outstanding as of June 30, 1994.
There are no bonds of the State outstanding, and no State statutes which would
authorize the issuance of any bonds, which contemplate the appropriation by
the General Assembly of such amount as would be necessary to make up any
deficiency in a debt service reserve fund.
Local governmental units in the State had approximately $5.118 billion
principal amount of general obligation bonds and $2.337 billion of revenue
bonds (excluding industrial revenue bonds of county authorities) outstanding
as of June 30, 1994. The State has no financial responsibility with respect to
this debt.
NORTH CAROLINA TAXES
As of the date of this Prospectus, in the opinion of Messrs. Petree
Stockton, L.L.P., special North Carolina counsel on North Carolina tax
matters, with respect to the North Carolina Trust, under then existing law
applicable to persons who are North Carolina residents:
The State of North Carolina imposes a tax upon the taxable income of
individuals, corporations, estates, and trusts. Nonresident individuals are
generally taxed only on income from North Carolina sources. Corporations
doing business within and without North Carolina are entitled to allocate
and apportion their income if they have income from business activity which
is taxable in another state. The mere ownership of Units will not subject a
nonresident Unit holder to the tax jurisdiction of North Carolina.
Counsel has been advised that for federal income tax purposes the North
Carolina Trust will be a grantor trust and not an association taxable as a
corporation. Upon this assumption, counsel is of the opinion that the North
Carolina Trust will be treated as a grantor trust for North Carolina income
tax purposes and not as an association taxable as a corporation. Each
participant in the North Carolina Trust must report his share of the
taxable income of the North Carolina Trust.
The calculation of North Carolina taxable income of an individual,
corporation, estate or trust begins with federal taxable income. Certain
modifications are specified, but no such modification requires the addition
of interest on the obligations of the State of North Carolina, its
political subdivisions, or nonprofit educational institutions organized or
chartered under the laws of North Carolina.
As a general rule, gain (or loss) from the sale of obligations held by
the North Carolina Trust (whether as a result of the sale of such
obligations by the North Carolina Trust or as a result of the sale of a
Unit by a Unit holder) is includable (or deductible) in the calculation of
the Unit holder's North Carolina taxable income. Under the language of
certain enabling legislation such as the North Carolina Hospital
Authorities Act, the North Carolina Health Care Facilities Finance Act, the
North Carolina Housing Finance Agency Act, the act establishing the North
Carolina State Ports Authority, the North Carolina Joint Municipal Electric
Power and Energy Act, the act authorizing the organization of business
development corporations, the North Carolina Higher Education Facilities
Finance Act, the North Carolina Agricultural Finance Act, and the act
establishing the North Carolina Solid Waste Management Loan Program,
profits made on the sale of obligations issued by authorities created
thereunder are made expressly exempt from North Carolina income taxation.
The exemption of such profits from North Carolina income taxation does not
require a disallowance of any loss incurred on the sale of such obligations
in the calculation of North Carolina income taxes.
For federal income tax purposes, interest on North Carolina obligations
that would otherwise be exempt from taxation may in certain circumstances
be taxable to the recipient. North Carolina law provides that the interest
on North Carolina obligations shall maintain its exemption from North
Carolina income taxation notwithstanding that such interest may be subject
to federal income taxation.
North Carolina imposes a tax on transfers which occur by reason of death
or by gift. Transfers of obligations of North Carolina, its political
subdivisions, agencies of such governmental units, or nonprofit educational
institutions organized or chartered under the laws of North Carolina are
not exempt from the North Carolina inheritance and gift taxes.
48 U.S.C. (S) 745 provides that bonds issued by the Government of Puerto
Rico, or by its authority, shall be exempt from taxation by any State or by
any county, municipality, or other municipal subdivision of any State.
Accordingly, interest on any such obligations held by the North Carolina
Trust would be exempt from the North Carolina corporate and individual
income taxes. The North Carolina Department of Revenue takes the position
that gains from the sale or other disposition of such obligations are
subject to the North Carolina corporate and individual income taxes.
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PENNSYLVANIA TRUST
RISK FACTORS--Potential purchasers of Units of the Pennsylvania Trust should
consider the fact that the Trust's portfolio consists primarily of securities
issued by the Commonwealth of Pennsylvania (the "Commonwealth"), its
municipalities and authorities and should realize the substantial risks
associated with an investment in such securities. Although the General Fund of
the Commonwealth (the principal operating fund of the Commonwealth)
experienced deficits in fiscal 1990 and 1991, tax increases and spending
decreases helped return the General Fund balance to a surplus at June 30, 1992
of $87.5 million and at June 30, 1993 of $698.9 million. The deficit in the
Commonwealth's unreserved/undesignated funds of prior years also was reversed
to a surplus of $64.4 million as of June 30, 1993.
Pennsylvania's economy historically has been dependent upon heavy industry,
but has diversified recently into various services, particularly into medical
and health services, education and financial services. Agricultural industries
continue to be an important part of the economy, including not only the
production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of nonagricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the Bonds in the Pennsylvania Trust or the ability of the
respective obligors to make payments of interest and principal due on such
Bonds.
Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suits relating to the following matters: (i) the ACLU has filed suit
in federal court demanding additional funding for child welfare services; the
Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania
and is seeking the dismissal of the federal suit, inter alia, because of that
settlement. The district court has denied class certification to the ACLU, and
the parties have stipulated to a judgment against the plaintiffs to allow
plaintiffs to appeal the denial of a class certification to the Third Circuit.
(no available estimate of potential liability); (ii) in 1987, the Supreme
Court of Pennsylvania held the statutory scheme for county funding of the
judicial system to be in conflict with the constitution of the Commonwealth,
but stayed judgment pending enactment by the legislature of funding consistent
with the opinion, and the legislature has yet to consider legislation
implementing the judgment. In 1992, a new action in mandamus was filed seeking
to compel the Commonwealth to comply with the original decision; (iii) several
banks have filed suit against the Commonwealth contesting the
constitutionality of a law enacted in 1989 imposing a bank shares tax; in July
1994, the Commonwealth Court en banc upheld the constitutionality of the 1989
bank shares tax law, but struck down a companion law to provide credits
against the bank shares tax for new banks; cross-appeals from that decision to
the Pennsylvania Supreme Court have been filed; (iv) litigation has been filed
in both state and federal court by an association of rural and small schools
and several individual school districts and parents challenging the
constitutionality of the Commonwealth's system for funding local school
districts--the federal case has been stayed pending resolution of the state
case, and the state case is in the pre-trial stage (no available estimate of
potential liability); (v) the ACLU has brought a class action suit on behalf
of inmates challenging the conditions of confinement in thirteen of the
Commonwealth's correctional institutions; a proposed settlement agreement has
been submitted to the court and members of the class for their review (no
available estimate of potential cost of complying with the injunction sought,
but capital and personnel costs might cost millions of dollars); (vi) a
consortium of public interest law firms filed a class action suit alleging
that the Commonwealth has not complied with a federal mandate to provide
screening, diagnostic and treatment services for all Medicaid-eligible
children under 21; the district court denied class certification, and the
parties have submitted a tentative settlement agreement to the court for
approval; and (vii) litigation has been filed in federal court by the
Pennsylvania Medical Society seeking payment of the full co-pay and deductible
in excess of the maximum fees set under the Commonwealth's medical assistance
program for outpatient services provided to medical assistance patients who
also are eligible for Medicare; the Commonwealth received a favorable decision
in the federal district court, but the Pennsylvania Medical Society won a
reversal in the federal circuit court (potential liability estimated at $50
million per year).
The Commonwealth's general obligation bonds have been rated AA- by Standard
& Poor's and A1 by Moody's for more than the last five years.
The City of Philadelphia (the "City") has been experiencing severe financial
difficulties which has impaired its access to public credit markets and a
long-term solution to the City's financial crisis is still being sought. The
City experienced a series of General Fund deficits for Fiscal Years 1988
through 1992. The City has no legal authority to issue deficit reduction bonds
on its own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority (the "Authority") to provide fiscal
oversight for Pennsylvania cities (primarily Philadelphia) suffering recurring
financial difficulties. The Authority is broadly empowered to assist cities in
avoiding defaults and eliminating deficits by encouraging the adoption of
sound budgetary practices and issuing bonds. In order for the Authority to
issue bonds on behalf of the City, the City and the Authority entered into an
intergovernmental cooperative agreement providing the Authority with certain
oversight powers with respect to the fiscal affairs of the City, and the
Authority originally approved a five-year financial plan prepared by the City
on April 6, 1992. The Authority approved the latest update of the five year
financial plan on
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May 2, 1994. The City has reported a surplus of approximately $15 million for
the fiscal year ending June 30, 1994. In June 1992, the Authority issued
$474,555,000 in bonds to liquidate the City's deficit balance in its general
fund. The Authority issued $643,430,000 of bonds in July 1993 and $178,675,000
of bonds in August 1993 to refund certain bonds of the City and to fund
additional capital projects.
PENNSYLVANIA TAXES
In the opinion of Messrs. Drinker Biddle & Reath, Philadelphia,
Pennsylvania, special counsel on Pennsylvania tax matters, under existing law:
Units evidencing fractional undivided interests in the Pennsylvania Trust
are not subject to the Pennsylvania personal property tax to the extent
that the Trust is comprised of bonds issued by the Commonwealth of
Pennsylvania, any public authority, commission, board or other agency
created by the Commonwealth of Pennsylvania or any public authority created
by any such political subdivision ("Pennsylvania Bonds"). The portion, if
any, of such Units representing bonds or other obligations issued by the
Government of Guam or by its authority, bonds issued by the Government of
Puerto Rico or by its authority, and bonds issued by the Government of the
Virgin Islands or by a municipality thereof (collectively, "Possession
Bonds") is not expressly exempt from personal property taxation under
Pennsylvania law. However, such bonds are expressly relieved from direct
state taxation by United States statutes. Therefore, Units in the
Pennsylvania Trust are not subject to Personal Property Tax to the extent
that the Trust is comprised of Possession Bonds.
Pennsylvania Trust Units may be subject to tax in the estate of a
resident decedent under the Pennsylvania inheritance and estate taxes.
Income received by a Unit holder attributable to interest realized by the
Pennsylvania Trust from Pennsylvania Bonds and Possession Bonds (including
such interest received from Prior Trust Units) is not taxable to
individuals, estates or trusts under the Personal Income Tax imposed by
Article III of the Tax Reform Code of 1971; to corporations under the
Corporate Net Income Tax imposed by Article IV of the Tax Reform Code of
1971; nor to individuals under the Philadelphia School District Net Income
Tax ("School District Tax") imposed on Philadelphia resident individuals
under the authority of the Act of August 9, 1963, P.L. 640.
Income received by a Unit holder attributable to gain on the sale or
other disposition by the Pennsylvania Trust of Pennsylvania Bonds,
Possession Bonds and Prior Trust Units is taxable under the Personal Income
Tax, the Corporate Net Income Tax, and, unless these assets were held by
the Pennsylvania Trust for more than six months, the School District Tax.
To the extent that gain on the disposition of a Unit represents gain
realized on Pennsylvania Bonds held by the Pennsylvania Trust or held by
Prior Trust Units, such gain may be subject to the Personal Income Tax and
Corporate Net Income Tax. Such gain may also be subject to the School
District Tax, except that gain realized with respect to a Unit held for
more than six months is not subject to the School District Tax.
No opinion is expressed regarding the extent, if any, to which Units, or
interest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks and other
financial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed herein (including the
Corporate Capital Stock/Foreign Franchise Tax).
C-13
<PAGE>
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 projected
Federal income tax rates and tax brackets for the 1995 taxable year 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 New York and filing a Joint Return with $53,000
in taxable income for the 1995 tax year would need a taxable investment
yielding 8.97% 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 NEW YORK
1995 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
INCOME BRACKET TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 14,000 19.36% 4.96% 5.58% 6.20% 6.82% 7.44% 8.06% 8.68% 9.30% 9.92%
$ 14,001 to 28,000 20.21 5.01 5.64 6.27 6.89 7.52 8.15 8.77 9.40 10.03
$ 28,001 to 39,000 21.06 5.07 5.70 6.33 6.97 7.60 8.23 8.87 9.50 10.13
$ 39,001 to 94,250 33.13 5.98 6.73 7.48 8.22 8.97 9.72 10.47 11.22 11.96
$ 94,251 to 114,700 35.92 6.24 7.02 7.80 8.58 9.36 10.14 10.92 11.70 12.48
$114,701 to 143,600 36.78 6.33 7.12 7.91 8.70 9.49 10.28 11.07 11.86 12.65
$143,601 to 256,500 41.56 6.84 7.70 8.56 9.41 10.27 11.12 11.98 12.83 13.69
Over
$256,500 45.01 7.27 8.18 9.09 10.00 10.91 11.82 12.73 13.64 14.55
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 7,000 19.36 4.96 5.58 6.20 6.82 7.44 8.06 8.68 9.30 9.92
$ 7,001 to 14,000 20.21 5.01 5.64 6.27 6.89 7.52 8.15 8.77 9.40 10.03
$ 14,001 to 23,350 21.06 5.07 5.70 6.33 6.97 7.60 8.23 8.87 9.50 10.13
$ 23,351 to 56,550 33.13 5.98 6.73 7.48 8.22 8.97 9.72 10.47 11.22 11.96
$ 56,551 to 114,700 35.92 6.24 7.02 7.80 8.58 9.36 10.14 10.92 11.70 12.48
$114,701 to 117,950 36.78 6.33 7.12 7.91 8.70 9.49 10.28 11.07 11.86 12.65
$117,951 to 256,500 41.56 6.84 7.70 8.56 9.41 10.27 11.12 11.98 12.83 13.69
Over
$256,500 45.01 7.27 8.18 9.09 10.00 10.91 11.82 12.73 13.64 14.55
</TABLE>
- -------
Note: This table reflects the following:
1 Taxable income equals adjusted gross income less personal exemptions of
$2,500 less the standard deduction of $6,550 on a joint return or total
itemized deductions, whichever is greater. However under the provisions of
the Omnibus Budget Reconciliation Act of 1990, itemized deductions are
reduced by 3% of the amount of a taxpayer's AGI over $114,700. This is
reflected in the brackets above by higher effective federal tax rates.
Furthermore, personal exemptions are phased out for the amount of a
taxpayer's AGI over $114,700 for single taxpayers and $172,050 for married
taxpayers filing jointly. This latter provision is not incorporated into
the above brackets.
2 The combined effective rate is computed under the assumption that
taxpayers itemize their deductions on their federal income tax returns.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the
table.
4 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest rates applicable to the income levels indicated
within each bracket.
C-14
<PAGE>
CITY OF NEW YORK
1995 TAX YEAR
<TABLE>
<CAPTION>
TOTAL APPROX. COMBINED
NEW FEDERAL, STATE & TAX EXEMPT YIELD
TAXABLE YORK NEW YORK CITY 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
INCOME BRACKET RATES TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 14,000 7.73% 21.57% 5.10% 5.74% 6.37% 7.01% 7.65% 8.29% 8.92% 9.56% 10.20%
$ 14,001 to 14,400 8.73 22.42 5.16 5.80 6.44 7.09 7.73 8.38 9.02 9.67 10.31
$ 14,401 to 27,000 9.13 22.76 5.18 5.83 6.47 7.12 7.77 8.41 9.06 9.71 10.36
$ 27,001 to 28,000 9.43 23.01 5.20 5.85 6.49 7.14 7.79 8.44 9.09 9.74 10.39
$ 28,001 to 39,000 10.43 23.85 5.25 5.91 6.57 7.22 7.88 8.54 9.19 9.85 10.51
$ 39,001 to 45,000 10.43 35.51 6.20 6.98 7.75 8.53 9.30 10.08 10.85 11.53 12.40
$ 45,001 to 94,250 10.48 35.54 6.21 6.98 7.76 8.53 9.31 10.08 10.86 11.64 12.41
$ 94,251 to 108,000 10.48 38.23 6.48 7.28 8.09 8.90 9.71 10.52 11.33 12.14 12.95
$108,001 to 114,700 10.53 38.26 6.48 7.29 8.10 8.91 9.72 10.53 11.34 12.15 12.96
$114,701 to 143,600 10.53 39.09 6.57 7.39 8.21 9.03 9.85 10.67 11.49 12.31 13.14
$143,601 to 256,500 10.53 43.70 7.11 7.99 8.88 9.77 10.66 11.55 12.43 13.32 14.21
Over $256,500 10.53 47.02 7.55 8.49 9.44 10.38 11.33 12.27 13.21 14.16 15.10
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 7,000 7.73 21.57 5.10% 5.74% 6.37% 7.01% 7.65% 8.29% 8.92% 9.56% 10.20%
$ 7,001 to 8,000 8.73 22.42 5.16 5.80 6.44 7.09 7.73 8.38 9.02 9.67 10.31
$ 8,001 to 14,000 9.13 22.76 5.18 5.83 6.47 7.12 7.77 8.41 9.06 9.71 10.36
$ 14,001 to 15,000 10.13 23.61 5.24 5.89 6.55 7.20 7.85 8.51 9.16 9.82 10.47
$ 15,001 to 23,350 10.43 23.86 5.25 5.91 6.57 7.22 7.88 8.54 9.19 9.85 10.51
$ 23,351 to 25,000 10.43 35.51 6.20 6.98 7.75 8.53 9.30 10.08 10.85 11.63 12.40
$ 25,001 to 56,550 10.48 35.54 6.21 6.98 7.76 8.53 9.31 10.08 10.86 11.64 12.41
$ 56,551 to 60,000 10.48 38.23 6.48 7.28 8.09 8.90 9.71 10.52 11.33 12.14 12.95
$ 60,001 to 114,700 10.53 38.26 6.48 7.29 8.10 8.91 9.72 10.53 11.34 12.15 12.96
$114,701 to 117,950 10.53 39.09 6.57 7.39 8.21 9.03 9.85 10.67 11.49 12.31 13.14
$117,951 to 256,500 10.53 43.70 7.11 7.99 8.88 9.77 10.66 11.55 12.43 13.32 14.21
Over $256,500 10.53 47.02 7.55 8.49 9.44 10.38 11.33 12.27 13.21 14.16 15.10
</TABLE>
- -------
Note: This table reflects the following:
1 Taxable income equals adjusted gross income less personal exemptions of
$2,500 less the standard deduction of $6,550 on a joint return or total
itemized deductions, whichever is greater. However under the provisions of
the Omnibus Budget Reconciliation Act of 1990, itemized deductions are
reduced by 3% of the amount of a taxpayer's AGI over $114,700. This is
reflected in the brackets above by higher effective federal tax rates.
Furthermore, personal exemptions are phased out for the amount of a
taxpayer's AGI over $114,700 for single taxpayers and $172,050 for married
taxpayers filing jointly. This latter provision is not incorporated into
the above brackets.
2 The combined effective rate is computed under the assumption that
taxpayers itemize their deductions on their federal income tax returns.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the
table.
4 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest rates applicable to the income levels indicated
within each bracket.
C-15
<PAGE>
STATE OF MARYLAND
1995 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED
FEDERAL, STATE TAX FREE YIELD
TAXABLE AND LOCAL 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
INCOME BRACKET TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 1,000 16.70% 4.80% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40% 9.00% 9.60%
$ 1,001- 2,000 17.55 4.85 5.46 6.06 6.67 7.28 7.88 8.49 9.10 9.70
$ 2,001- 3,000 18.40 4.90 5.51 6.13 6.74 7.35 7.97 8.58 9.19 9.80
$ 3,001- 39,000 19.25 4.95 5.57 6.19 6.81 7.43 8.05 8.67 9.29 9.91
$ 39,001- 94,250 31.60 5.85 6.58 7.31 8.04 8.77 9.50 10.23 10.96 11.70
$ 94,251-114,700 34.45 6.10 6.86 7.63 8.39 9.15 9.92 10.68 11.44 12.20
$114,701-143,600 35.33 6.19 6.96 7.73 8.51 9.28 10.05 10.82 11.60 12.37
$143,601-150,000 40.23 6.69 7.53 8.36 9.20 10.04 10.87 11.71 12.55 13.38
$150,001-256,300 40.86 6.76 7.61 8.45 9.30 10.14 10.99 11.84 12.68 13.53
Over $256,500 44.34 7.19 8.09 8.98 9.88 10.78 11.68 12.58 13.48 14.37
SINGLE RETURN
$ 0- 1,000 16.70% 4.80% 5.40% 6.00% 6.60% 7.20% 7.80% 8.40% 9.00% 9.60%
$ 1,001- 2,000 17.55 4.85 5.46 6.06 6.67 7.28 7.88 8.49 9.10 9.70
$ 2,001- 3,000 18.40 4.90 5.51 6.13 6.74 7.35 7.97 8.58 9.19 9.80
$ 3,001- 23,350 19.25 4.95 5.57 6.19 6.81 7.43 8.05 8.67 9.29 9.91
$ 23,351- 56,550 31.60 5.85 6.58 7.31 8.04 8.77 9.50 10.23 10.96 11.70
$ 56,551-100,000 34.45 6.10 6.86 7.63 8.39 9.15 9.92 10.68 11.44 12.20
$100,001-114,700 35.14 6.17 6.94 7.71 8.48 9.25 10.02 10.79 11.56 12.33
$114,701-117,950 36.01 6.25 7.03 7.81 8.60 9.38 10.16 10.94 11.72 12.50
$117,951-256,500 40.86 6.76 7.61 8.45 9.30 10.14 10.99 11.84 12.68 13.53
Over $256,500 44.34 7.19 8.09 8.98 9.88 10.78 11.68 12.58 13.48 14.37
</TABLE>
- -------
This table reflects the following:
1 Taxable income equals adjusted gross income less personal exemptions of
$2,500 less the standard deduction of $6,550 on a joint return or total
itemized deductions, whichever is greater. However under the provisions of
the Omnibus Budget Reconciliation Act of 1990, itemized deductions are
reduced by 3% of the amount of a taxpayer's AGI over $114,700. This is
reflected in the brackets above by higher effective federal tax rates.
Furthermore, personal exemptions are phased out for the amount of a
taxpayer's AGI over $114,700 for single taxpayers and $172,050 for married
taxpayers filing jointly. This latter provision is not incorporated into
the above brackets.
2 The combined effective rate is computed under the assumption that
taxpayers itemize their deductions on their federal income tax returns.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the
table.
4. The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest rates applicable to the income levels indicated
within each bracket.
STATE OF NORTH CAROLINA
1995 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 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>
$ 0 to 21,250 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76%
$ 21,251 to 39,000 20.95 5.06 5.69 6.33 6.95 7.59 8.22 8.86
$ 39,001 to 94,250 33.04 5.97 6.72 7.47 8.21 8.96 9.71 10.45
$ 94,251 to 100,000 35.83 6.23 7.01 7.79 8.57 9.35 10.13 10.91
$100,001 to 114,700 36.35 6.28 7.07 7.86 8.64 9.43 10.21 11.00
$114,701 to 143,600 37.21 6.37 7.17 7.96 8.76 9.55 10.35 11.15
$143,601 to 256,500 41.96 6.89 7.75 8.61 9.48 10.34 11.20 12.06
Over $256,500 45.38 7.32 8.24 9.15 10.07 10.88 11.90 12.82
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 12,750 20.10 5.01 5.63 6.26 6.88 7.51 8.14 8.76
$ 12,751 to 23,350 20.95 5.06 5.69 6.33 6.95 7.59 8.22 8.86
$ 23,351 to 56,550 33.04 5.97 6.72 7.47 8.21 8.96 9.71 10.45
$ 56,551 to 60,000 35.83 6.23 7.01 7.79 8.57 9.35 10.13 10.91
$ 60,001 to 114,700 36.35 6.28 7.07 7.86 8.64 9.43 10.21 11.00
$114,701 to 117,950 37.21 6.37 7.17 7.96 8.76 9.55 10.35 11.15
$117,951 to 256,500 41.95 6.89 7.75 8.61 9.48 10.34 11.20 12.06
Over $256,500 45.38 7.32 8.24 9.15 10.07 10.88 11.90 12.82
</TABLE>
- -------
This table reflects the following:
1 Taxable income equals adjusted gross income less personal exemptions of
$2,500 less the standard deduction of $6,550 on a joint return or total
itemized deductions, whichever is greater. However under the provisions of
the Omnibus Budget Reconciliation Act of 1990, itemized deductions are
reduced by 3% of the amount of a taxpayer's AGI over $114,700. This is
reflected in the brackets above by higher effective federal tax rates.
Furthermore, personal exemptions are phased out for the amount of a
taxpayer's AGI over $114,700 for single taxpayers and $172,050 for married
taxpayers filing jointly. This latter provision is not incorporated into
the above brackets.
2 The combined effective rate is computed under the assumption that
taxpayers itemize their deductions on their federal income tax returns.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the
table.
4 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest rates applicable to the income levels indicated
within each bracket.
C-16
<PAGE>
COMMONWEALTH OF PENNSYLVANIA
1995 TAX YEAR
<TABLE>
<CAPTION>
TAX-FREE YIELD
1995 TAX YEAR COMBINED FEDERAL 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
FEDERAL TAXABLE INCOME & STATE TAX RATE TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 39,000 17.38% 4.84% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08% 9.68%
$ 39,001 to 94,250 30.02% 5.72% 6.43% 7.14% 7.86% 8.57% 9.29% 10.00% 10.72% 11.43%
$ 94,251 to 114,700 32.93% 5.96% 6.71% 7.46% 8.20% 8.95% 9.69% 10.44% 11.18% 11.93%
$114,701 to 143,600 33.84% 6.05% 6.80% 7.56% 8.31% 9.07% 9.82% 10.58% 11.34% 12.09%
$143,601 to 256,500 38.84% 6.54% 7.36% 8.18% 8.99% 9.81% 10.63% 11.45% 12.26% 13.08%
Over $256,500 42.45% 6.95% 7.82% 8.69% 9.66% 10.43% 11.29% 12.16% 13.03% 13.90%
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 23,350 17.38% 4.84% 3.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08% 9.68%
$ 23,351 to 56,550 30.02% 5.72% 6.43% 7.14% 7.86% 8.57% 9.29% 10.00% 10.72% 11.43%
$ 56,551 to 114,700 32.93% 3.96% 6.71% 7.46% 8.20% 8.95% 9.69% 10.44% 11.18% 11.93%
$114,701 to 117,950 33.84% 6.05% 6.80% 7.56% 8.31% 9.07% 9.82% 10.35% 11.34% 12.09%
$117,951 to 256,500 38.84% 6.54% 7.36% 8.18% 8.99% 9.81% 10.63% 11.45% 12.26% 13.08%
Over $256,500 42.45% 6.95% 7.82% 8.69% 9.56% 10.43% 11.29% 12.16% 13.03% 13.90%
</TABLE>
- -------
This table reflects the following:
1 Taxable income equals adjusted gross income less personal exemptions of
$2,500 less the standard deduction of $6,550 on a joint return or total
itemized deductions, whichever is greater. However itemized deductions
are reduced by 3% of the amount of a taxpayer's AGI over $114,700. This
is reflected in the brackets above by higher effective federal tax rates.
Furthermore, personal exemptions are phased out for the amount of a
taxpayer's AGI over $114,700 for single taxpayers and $172,050 for
married taxpayers filing jointly. This latter provision is not
incorporated into the above brackets.
2 The combined effective rate is computed under the assumption that
taxpayers itemize their deductions on their federal income tax returns.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the
table.
4 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest rates applicable to the income levels indicated
within each bracket.
C-17
<PAGE>
PROSPECTUS
THIS PROSPECTUS CONTAINS INFORMATION CONCERNING THE TRUST AND THE SPONSOR, 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
STATEMENTS OF FINANCIAL CONDITION OF THE TAX EXEMPT SECURITIES TRUST....... A-9
PORTFOLIOS OF SECURITIES................................................... A-10
TAX EXEMPT SECURITIES TRUST................................................ B-1
THE TRUSTS................................................................ B-1
OBJECTIVES................................................................ B-1
PORTFOLIO................................................................. B-1
RISK FACTORS.............................................................. B-2
THE UNITS................................................................. B-12
TAXES..................................................................... B-12
EXPENSES AND CHARGES...................................................... B-14
PUBLIC OFFERING............................................................ B-15
OFFERING PRICE............................................................ B-15
METHOD OF EVALUATION...................................................... B-15
DISTRIBUTION OF UNITS..................................................... B-16
MARKET FOR UNITS.......................................................... B-16
EXCHANGE OPTION........................................................... B-16
REINVESTMENT PROGRAMS..................................................... B-17
SPONSOR'S AND UNDERWRITERS' PROFITS....................................... B-17
RIGHTS OF UNIT HOLDERS..................................................... B-17
CERTIFICATES.............................................................. B-17
DISTRIBUTION OF INTEREST AND PRINCIPAL.................................... B-18
REPORTS AND RECORDS....................................................... B-19
REDEMPTION OF UNITS....................................................... B-19
SPONSOR.................................................................... B-20
LIMITATIONS ON LIABILITY.................................................. B-21
RESPONSIBILITY............................................................ B-21
RESIGNATION............................................................... B-21
TRUSTEE.................................................................... B-21
LIMITATIONS ON LIABILITY.................................................. B-21
RESIGNATION............................................................... B-22
EVALUATOR.................................................................. B-22
LIMITATIONS ON LIABILITY.................................................. B-22
RESPONSIBILITY............................................................ B-22
RESIGNATION............................................................... B-22
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT........................... B-23
AMENDMENT................................................................. B-23
TERMINATION............................................................... B-23
LEGAL OPINION.............................................................. B-23
AUDITORS................................................................... B-23
BOND RATINGS............................................................... B-23
FEDERAL TAX FREE VS. TAXABLE INCOME........................................ B-25
THE STATE TRUSTS........................................................... C-1
TAX FREE VS. TAXABLE INCOME................................................ C-14
</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
------------
20,000 UNITS
------------
Prospectus
Dated July 20, 1995
------------
SPONSOR
SMITH BARNEY INC.
388 GREENWICH STREET
23RD FLOOR
NEW YORK, NEW YORK 10013
(800) 223-2532
