File No. 33-84086 CIK No. 930360
Securities and Exchange Commission
Washington, D. C. 20549-1004
Post-Effective
Amendment No. 3
to
Form S-6
For Registration under the Securities Act of 1933 of
Securities of Unit Investment Trusts Registered on
Form N-8B-2
Delaware Investments Tax-Exempt Trust, Series 1
(Exact Name of Trust)
Delaware Capital Management, Inc.
(Exact Name of Depositor)
One Commerce Square
Philadelphia, Pennsylvania 19103
(Complete address of Depositor's principal executive offices)
Delaware Capital Management, Inc. Chapman and Cutler
Attention: George M. Chamberlain, Jr. Attention: Mark J. Kneedy
One Commerce Square 111 West Monroe Street
Philadelphia, Pennsylvania 19103 Chicago, Illinois 60603
(Name and complete address of agents for service)
(X) Check if it is proposed that this filing will become effective on October
7, 1998 pursuant to paragraph (b) of Rule 485.
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
COLORADO INSURED SERIES 1 - 300,885 UNITS
MINNESOTA INSURED SERIES 1 - 317,913 UNITS
OREGON INSURED SERIES 1 - 263,229 UNITS
PROSPECTUS - Part One
Dated October 7, 1998 as of June 30, 1998
NOTE: PART ONE OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PART TWO OF THIS PROSPECTUS.
In the opinion of counsel, interest income to the Trusts and to Unit holders,
with certain exceptions, is exempt under existing law from all Federal income
taxes. In addition, the interest income is, in the opinion of Special Counsel,
exempt to the extent indicated from state and local income taxes. Capital gains,
if any are subject to Federal and state tax.
THE TRUSTS
Delaware Investments Tax Exempt Trust, Series 1 (the "FUND") consists of the
underlying unit investment trusts set forth above (each a "Trust" and
collectively, the "Trusts"). Each Trust consists of a fixed portfolio of
interest-bearing obligations issued by or on behalf of municipalities and other
governmental authorities within the states, counties, municipalities,
authorities and political subdivisions thereof, the interest on which is, in the
opinion of recognized bond counsel to the issuing governmental authorities,
exempt from all Federal income taxes and to the extent indicated from state and
local income taxes under existing law. At February 28, 1998, each Unit
represented a 1/300,885, 1/317,913, and 1/263,229 undivided interest, for
Colorado Insured Series 1 ("Colorado Insured"), Minnesota Insured Series 1
("Minnesota Insured") and Oregon Insured Series 1 ("Oregon Insured"),
respectively, in the principal and net income of each Trust (see "The Trusts" in
Part Two of this Prospectus).
The Units being offered by this Prospectus are issued and outstanding Units
which have been purchased by the Distributor in the secondary market or from the
Trustee after having been tendered for redemption. The profit or loss resulting
from the sale of Units will accrue to the Distributor. No proceeds from the sale
of Units will be received by the Trust.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units is equal to the net assets of the Trust
divided by the number of Units outstanding, plus a sales charge of 5.50% of the
Public Offering Price (5.820% of the amount invested). At February 28, 1998 the
Public Offering Price per Unit was $11.18, $11.17 and $11.19 for Colorado
Insured, Minnesota Insured and Oregon Insured, respectively (see "Public
Offering" in Part Two of this Prospectus).
Please retain all parts of this Prospectus for future reference.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
DELAWARE CAPITAL MANAGEMENT, INC.
SPONSOR
DELAWARE DISTRIBUTORS, L.P.
DISTRIBUTOR
<PAGE>
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
Estimated Current Return to Unit holders as of Feburary 28, 1998 was 5.11%,
5.09% and 5.02% for Colorado Insured, Minnesota Insured, and Oregon Insured,
respectively. Estimated Long-Term Return to Unit holders as of February 28, 1998
was 2.95%, 3.57% and 3.06% for Colorado Insured, Minnesota Insured and Oregon
Insured, respectively. Estimated Current Return is calculated by dividing the
Estimated Net Annual Interest Income per Unit by the Public Offering Price.
Estimated Long-Term Return is calculated by using a formula which (1) takes into
consideration and determines and factors in the relative weightings of the
market values, yields (which take into account the amortization of premiums and
the accretion of discounts) and estimated retirements of all of the Bonds in the
Trust; (2) takes into account a compounding factor and the expense and sales
charge associated with each Unit of the Trust. Since the market values and the
estimated retirements of the Bonds and the expenses of the Trust will change,
there is no assurance that the present Estimated Current Return and Estimated
Long-Term Return indicated above will be realized in the future. 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. The above
figures are based on estimated per Unit cash flows. Estimated cash flows will
vary with changes in fees and expenses, with changes in current interest rates,
and with the principal prepayment, redemption, maturity, call, exchange or sale
of the underlying Bonds. See "Estimated Current Return and Estimated Long-Term
Return" in Part Two of this Prospectus.
2
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
SUMMARY OF ESSENTIAL INFORMATION AS OF FEBRUARY 28, 1998
SPONSOR: DELAWARE CAPITAL MANAGEMENT, INC.
DISTRIBUTOR: DELAWARE DISTRIBUTOR, L.P.
EVALUATOR: MULLER DATA CORPORATION
TRUSTEE: THE CHASE MANHATTAN BANK
<TABLE>
<CAPTION>
COLORADO MINNESOTA OREGON
INSURED INSURED INSURED
SERIES 1 SERIES 1 SERIES 1
---------- ---------- ----------
<S> <C> <C> <C>
Principal Amount (Par Value) of Bonds (1) $2,885,000 $3,105,000 $2,525,000
Number of Units 300,885 317,913 263,229
Fractional Undivided Interest in the Trust per Unit 1/300,885 1/317,913 1/263,229
Principal Amount (Par Value) of Bonds per Unit $ 9.588 $ 9.767 $ 9.592
Public Offering Price: Net Assets $3,180,007 $3,354,367 $2,784,322
Net Asset Value per Unit $ 10.57 $ 10.55 $ 10.58
Sales Charge 5.5% (5.820% of the Net Asset Value) per Unit (2) $ 0.61 $ 0.62 $ 0.61
Public Offering Price per Unit (2)(3) $ 11.18 $ 11.17 $ 11.19
Redemption Price per Unit (3)(4) $ 10.57 $ 10.55 $ 10.58
Excess of Public Offering Price per Unit Over Redemption Price
per Unit $ 0.61 $ 0.62 $ 0.61
Minimum Value of the Trust under which Trust Agreement
may be terminated $ 577,000 $ 621,000 $ 505,000
Minimum Principal Distribution $1.00 per 100 Units
First Settlement Date January 26, 1995
Mandatory Termination Date December 31, 2044
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit $ 0.606950 $ 0.601840 $ 0.598050
Less: Estimated Annual Expense per Unit $ 0.035806 $ 0.033522 $ 0.035761
---------- ---------- ----------
Estimated Net Annual Interest Income per Unit $ 0.571144 $ 0.568318 $ 0.562289
Estimated Normal Monthly Distribution per Unit (5) $ 0.047595 $ 0.047360 $ 0.046857
Estimated Daily Rate of Net Interest Accrual per Unit $ 0.001587 $ 0.001579 $ 0.001562
Estimated Current Return Based on Public Offering Price (2)(5)(6) 5.11% 5.09% 5.02%
Estimated Long-Term Return (2)(5)(6) 2.95% 3.57% 3.06%
Trustee's Initial Annual Fee per $1,000 principal amount of Bonds $ 2.38 $ 2.13 $ 2.30
Evaluator's Annual Fee per Unit $ 0.0040 $ 0.0040 $ 0.0040
Sponsor's Annual Fee per Unit $ 0.0040 $ 0.0040 $ 0.0040
Record Dates First day of each month
Distribution Dates Fifteenth day of each month
</TABLE>
3
<PAGE>
Evaluations for purpose of sale, purchase or redemption of Units are made as of
the close of trading of the New York Stock Exchange (normally 4:00 P.M. Eastern
Standard Time) next following receipt of an order for a sale or purchase of
Units or receipt by the Trustee of Units tendered for redemption.
(1) Because certain of the Securities in certain Trusts may from time to
time under certain circumstances be sold or redeemed or will be called
or matured in accordance with their terms, there is no guarantee that
the value of each Unit at the respective Trusts' termination will be
equal to the Principal Amount (Par Value) of Securities per Unit stated
above.
(2) The sales charge is decreased and the Estimated Current Return and
Estimated Long-Term Return are increased for transactions entitled to a
reduced sales charge. See "Public Offering-General."
(3) Anyone ordering Units for settlement after the First Settlement Date
will pay accrued interest from such date to the date of settlement
(normally three business days after order) less distributions from the
Interest Account subsequent to the First Settlement Date. After the
initial offering period, the Sponsor's Repurchase Price per Unit will
be determined as described under the caption "Public Offering-Public
Market."
(4) See "Rights of Unitholders-Redemption of Units."
(5) These figures are based on estimated per Unit cash flows. Estimated
cash flows will vary with changes in fees and expenses, with changes in
current interest rates and with the principal prepayment, redemption,
maturity, call, exchange or sale of the underlying Bonds. The estimated
cash flows for each Trust are available upon request at no charge from
the Sponsor.
(6) The Estimated Current Return is calculated by dividing the Estimated
Net Annual Interest Income per Unit by the Public Offering Price. The
Estimated Net Annual Interest Income per Unit will vary with changes in
fees and expenses of the Trustee, the Sponsor and the Evaluator and
with the principal prepayment, redemption, maturity, exchange or sale
of 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 determines and factors in the relative
weighting 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 a Trust and (2) takes into account a
compounding factor and the expenses and sales charge associated with
each Trust Unit. Since the market values and estimated retirements of
the Bonds and the expenses of a 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 calculation includes only net annual interest income and Public
Offering Price.
4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Unitholders of
Delaware Investments Tax-Exempt Trust, Series 1:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Delaware Investments Tax-Exempt Trust, Series 1
(the "Fund") (comprised of Colorado Insured Series 1, Minnesota Insured Series
1, and Oregon Insured Series 1 (the "Trusts")) as of February 28, 1998, and the
related statements of operations and changes in net assets for the year then
ended. These financial statements are the responsibility of the Fund's Sponsor.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements for the years ended February 28, 1997 and
1996 were audited by other auditors whose report dated April 11, 1997 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of February 28, 1998, by correspondence with
the Trustee. An audit also includes assessing the accounting principles used and
significant estimates made by the Sponsor, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of each of the respective
Trusts constituting the Delaware Investments Tax-Exempt Trust, Series 1 at
February 28, 1998, and the results of their operations and changes in their net
assets for the year then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
September 18, 1998
5
<PAGE>
COLORADO INSURED SERIES 1
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL SECURITY COUPON RATE REDEMPTION MARKET
RATINGS(1) AMOUNT DESCRIPTION AND MATURITY FEATURES(2) VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(PERCENTAGE OF EACH INVESTMENT CATEGORY RELATES TO INVESTMENTS)
COLORADO MUNICIPAL BONDS (100.0%):
PRE-REFUNDED/ESCROWED (61.3%)
--------------------------------------------------------------------------------------------------------
AAA/Aaa $ 280,000 Colorado State Board of Agriculture, Colorado 6.40% @ 2017 2002 @ 101 $ 306,412
State University Auxiliary Facilities Refunding 2012 @ 100 S.F.
and Improvement Revenue Bonds, Series 1992,
(MBIA Insured),#, Prefunded to 03/01/2002 @ 101
AAA/Aaa 240,000 Douglas County School District, Number RE: 1, 6.50% @ 2016 2004 @ 101 273,307
Douglas and Elbert Counties, Colorado, (General
Obligation Improvement Bonds), Series 1994A
(MBIA Insured), Prefunded to 12/15/2004 @101
AAA/Aaa 500,000 Pueblo County School District No. 70, (Pueblo 6.40% @ 2014 2004 @ 100 562,400
County, Colorado) General Obligation Bonds, Series
1995, (AMBAC Insured), Prefunded to 12/01/2004 @ 100
AAA/Aaa 220,000 Summit School District RE-1, Summit County, 6.70% @ 2014 2004 @ 100 251,288
Colorado, General Obligation Improvement Bonds, 2010 @ 100 S.F.
Series 1994, (FGIC Insured), Prefunded to 12/01/2004
@100
AAA/Aaa 500,000 University of Colorado Hospital Authority 6.40% @ 2022 2002 @ 102 557,475
(Hospital Revenue Bonds), Series 1992A, 2013 @ 100 S.F.
(AMBAC Insured)#, Prefunded to 11/15/2002 @ 102
-----------
1,950,882
-----------
GENERAL OBLIGATION (0.4%):
--------------------------------------------------------------------------------------------------------
AAA/Aaa 10,000 Douglas County School District, Number RE: 1, 6.50% @ 2016 2004 @ 101 11,092
Douglas and Elbert Counties, Colorado, (General 2012 @ 100 S.F. -----------
Obligation Improvement Bonds), Series 1994A
(MBIA Insured)
INDUSTRIAL REVENUE (13.9%)
--------------------------------------------------------------------------------------------------------
AAA/Aaa 415,000 Adams County, Colorado Pollution Control 5.875% @ 2014 2003 @ 101 441,593
Refunding Revenue Bonds, (Public Service Company -----------
of Colorado Project), 1993 Series A, (MBIA
Insured)#
EDUCATION REVENUE (7.5%)
--------------------------------------------------------------------------------------------------------
AAA/Aaa 220,000 Colorado State Board of Agriculture, Colorado 6.40% @ 2017 2002 @ 101 236,874
State University Auxiliary Facilities Refunding 2012 @ 100 S.F. -----------
and Improvement Revenue Bonds, Series 1992,
(MBIA Insured),#
SALES AND USE TAX REVENUE (8.4%)
--------------------------------------------------------------------------------------------------------
AAA/Aaa 250,000 City of Arvada, Colorado, Sales and Use Tax 6.25% @ 2017 2002 @ 100 267,900
Refunding and Improvement Revenue Bonds, Series 2013 @ 100 S.F. -----------
1992, (FGIC Insured)#
UTILITY REVENUE (8.5%)
--------------------------------------------------------------------------------------------------------
AAA/Aaa 250,000 City of Westminster, Colorado, Water and 6.25% @ 2014 2004 @ 100 271,666
Wastewater Utility Enterprise, (Water and 2010 @ 100 S.F. -----------
Wastewater Revenue Bonds), Series 1994,
(AMBAC Insured)
- ------------------------------------------------------------------------------------------------------------------------------
$2,885,000 Total Bonds (Cost: $2,861,416) $3,180,007
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Schedules of Investments and Financial Statements
6
<PAGE>
MINNESOTA INSURED SERIES 1
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL SECURITY COUPON RATE REDEMPTION MARKET
RATINGS(1) AMOUNT DESCRIPTION AND MATURITY FEATURES(2) VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(PERCENTAGE OF EACH INVESTMENT CATEGORY RELATES TO INVESTMENTS)
MINNESOTA MUNICIPAL BONDS (100.0%):
PRE-REFUNDED/ESCROWED (18.3%)
----------------------------------------------------------------------------------------------------------
AAA/Aaa $ 70,000 Health Care Facilities Revenue Bonds, (The 6.30% @ 2004 2004 @ 100 $ 78,241
Duluth Clinic, Ltd.), Duluth Economic Development
Authority, Minnesota, Series 1992, (AMBAC Insured),
Prefunded to 11/01/2004 @ 100
AAA/Aaa 500,000 Southern Minnesota Municipal Power Agency, 5.75% @ 2018 2016 @ 100 536,305
Power Supply System Revenue Bonds, Series 1992A, 2013 @ 100 S.F.
(MBIA Insured)#, Prefunded to 07/01/16 @ 100
-----------
614,546
-----------
GENERAL OBLIGATION (27.0%):
----------------------------------------------------------------------------------------------------------
AAA/Aaa 500,000 Independent School District 279, Osseo Area 5.60% @ 2011 2004 @ 100 527,330
Schools, Minnesota, General Obligation School
Building Bonds, Series 1994A, (FGIC Insured)#
AAA/Aaa 355,000 Independent School District No. 750, (Rocori Area 6.15% @ 2011 2002 @ 100 379,037
Schools), Cold Spring, Minnesota, General Obligation 2008 @ 100 S.F.
School Building Bonds, Series 1992A, (FGIC Insured)#
-----------
906,367
-----------
HEALTH CARE REVENUE (54.7%)
----------------------------------------------------------------------------------------------------------
AAA/Aaa 500,000 City of Brainerd, Minnesota, Refunding Revenue 6.65% @ 2017 2002 @ 102 547,400
Bonds, (The Evangelical Lutheran Good Samaritan 2005 @ 100 S.F.
Society Project), Series 1992A, (FSA Insured)
AAA/Aaa 500,000 City of Minneapolis, Minnesota, Hospital Revenue 6.50% @ 2011 2002 @ 102 550,140
Refunding Bonds, (Fairview Hospital and 2002 @ 100 S.F.
Healthcare Services), 1991 Series A, (MBIA Insured)#
AAA/Aaa 500,000 City of Rochester, Minnesota, Health Care 6.25% @ 2021 2002 @ 102 540,830
Facilities Revenue Bonds, (Mayo Foundation/Mayo 2015 @ 100 S.F.
Medical Center), Series 1992F, (AMBAC Insured)#
AAA/Aaa 180,000 Health Care Facilities Revenue Bonds, (The 6.30% @ 2022 2002 @ 102 195,084
Duluth Clinic, Ltd.), Duluth Economic Development 2013 @ 100 S.F.
Authority, Minnesota, Series 1992, (AMBAC Insured)#
-----------
1,833,454
-----------
- -------------------------------------------------------------------------------------------------------------------------------
$3,105,000 Total Bonds (Cost: $3,023,353) $3,354,367
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Schedules of Investments and Financial Statements
7
<PAGE>
OREGON INSURED SERIES 1
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL SECURITY COUPON RATE REDEMPTION MARKET
RATINGS(1) AMOUNT DESCRIPTION AND MATURITY FEATURES(2) VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(PERCENTAGE OF EACH INVESTMENT CATEGORY RELATES TO INVESTMENTS)
OREGON MUNICIPAL BONDS (100.0%):
PRE-REFUNDED/ESCROWED (50.7%)
---------------------------------------------------------------------------------------------------------
AAA/Aaa $ 300,000 City of Eugene, Oregon, Electric Utility System 5.80% @ 2022 2004 @ 101 $ 330,072
Revenue Bonds, Series 1994C, (MBIA Insured)#, 2020 @ 100 S.F.
Prefunded to 08/01/2004 @ 101
AAA/Aaa 300,000 City of Portland, Oregon, Sewer System Revenue 6.25% @ 2015 2004 @ 101 336,627
Refunding Bonds, 1993 Series A, (FGIC Insured)# 2013 @ 100 S.F.
Prefunded to 06/01/2004 @ 101
AAA/Aaa 350,000 Umatilla County School District No. 8R, Hermiston, 6.00% @ 2013 2004 @ 100 388,798
Oregon, General Obligation Bonds, Series 1994,
(AMBAC Insured)#, Prefunded to 12/01/2004
@100
AAA/Aaa 300,000 Washington County Education Service District, 7.10% @ 2025 2005 @ 100 354,840
Washington County, Oregon, Certificates of 2017 @ 100 S.F.
Participation, Series 1994, (MBIA Insured) ------------
Prefunded to 06/01/2005 @100 1,410,337
------------
GENERAL OBLIGATION (25.3%)
---------------------------------------------------------------------------------------------------------
AAA/Aaa 300,000 City of Hermiston, Umatilla County, Oregon, 6.20% @ 2024 2004 @ 100 323,087
(General Obligation Water Bonds), Series 1994,
(AMBAC Insured)#
AAA/Aaa 350,000 Washington County School District No. 88J, 6.10% @ 2012 2005 @ 100 381,206
Sherwood, Oregon, General Obligation Bonds, 2008 @ 100 S.F.
Series 1994, (FSA Insured)#
------------
704,293
------------
HEALTH CARE REVENUE (12.6%)
---------------------------------------------------------------------------------------------------------
325,000 The Hospital Facilities Authority of the City of 6.70% @ 2021 2001 @ 102 351,452
AAA/Aaa Portland, Oregon Hospital Revenue Bonds, 2012 @ 100 S.F. ------------
(Legacy Health System) Series 1991B (AMBAC
Insured)#
UTILITY REVENUE (11.4%)
---------------------------------------------------------------------------------------------------------
AAA/Aaa 300,000 Emerald People's Utility District, Lane County, 5.75% @ 2016 2002 @ 102 318,240
Oregon, Electric System Revenue Refunding Bonds, 2013 @ 100 S.F. ------------
Series 1992, (AMBAC Insured)#
- -------------------------------------------------------------------------------------------------------------------------------
$2,525,000 Total Bonds (Cost: $2,503,308) $1,373,985
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Schedules of Investments and Financial Statements
8
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
NOTES TO SCHEDULES OF INVESTMENTS
FEBRUARY 28, 1998
(1) All ratings (unaudited) are Standard & Poor's Corporation and/ or
Moody's Investors Service. As a result, of the insurance related to
each Bond, each Bond is rated "AAA" by Standard & Poor's and/or
"Aaa" by Moody's.
(2) Unless otherwise indicated, there is shown under this heading the
year in which each issue of bonds is initially redeemable and the
redemption price for that year; each such issue continues to be
redeemable at declining prices thereafter, but not below par. "S.F."
indicates a sinking fund has been or will be established with
respect to an issue of bonds. In addition, certain bonds in the
portfolio may be redeemed in whole or in part other than by
operation of the stated redemption or sinking fund provisions under
certain unusual or extraordinary circumstances specified in the
instruments setting forth the terms and provisions of such bonds. A
sinking fund is a reserve fund accumulated over a period of time for
retirement of debt. A callable bond is one which is subject to
redemption prior to maturity at the option of the issuer.
# Indicates Bond was issued at either an original issue discount or
purchased at market discount.
AMBAC - Insured by the AMBAC Indemnity Corporation
FGIC - Insured by the Financial Guaranty Insurance Company
FSA - Insured by the Financial Security Assurance
MBIA - Insured by the Municipal Bond Insurance Association
ETM - Escrowed to Maturity
9
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
COLORADO MINNESOTA OREGON
INSURED INSURED INSURED
SERIES 1 SERIES 1 SERIES 1
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market value (cost:
$2,861,416; $3,023,353; and $2,503,308,
respectively) $ 3,180,007 $ 3,354,367 $ 2,784,322
Interest receivable 58,509 45,437 36,608
----------- ----------- -----------
Total assets 3,238,516 3,399,804 2,820,930
----------- ----------- -----------
LIABILITIES
Accrued expenses payable 882 984 631
Accrued distributions payable 14,430 15,156 12,424
Other liabilities 43,197 29,297 23,553
----------- ----------- -----------
Total liabilities 58,509 45,437 36,608
----------- ----------- -----------
Net assets $ 3,180,007 $ 3,354,367 $ 2,784,322
=========== =========== ===========
Net assets (units of fractional undivided interest outstanding:
300,885, 317,913 and 263,229, respectively):
Original cost to investors of 300,885; 317,913; and 263,229 units, respectively $ 3,008,850 $ 3,179,130 $ 2,632,290
Less:
Gross underwriting commissions (NOTE 4) (147,434) (155,777) (128,982)
----------- ----------- -----------
Total 2,861,416 3,023,353 2,503,308
Net unrealized appreciation of investments (NOTE 2) 318,591 331,014 281,014
----------- ----------- -----------
Net assets $ 3,180,007 $ 3,354,367 $ 2,784,322
=========== =========== ===========
Net asset value per unit (300,885; 317,913; and 263,229 units, respectively) $ 10.57 $ 10.55 $ 10.58
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
10
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
COLORADO MINNESOTA OREGON
INSURED INSURED INSURED
SERIES 1 SERIES 1 SERIES 1
---------------------------- ---------------------------- ----------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996 28, 1998 28, 1997 29, 1996 28, 1998 28, 1997 29, 1996
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income, interest $182,622 $182,622 $182,622 $191,333 $191,333 $191,333 $157,425 $157,425 $157,424
---------------------------- ---------------------------- ----------------------------
Expenses:
Trustee fees and expenses 7,386 7,241 7,310 7,114 7,173 7,241 6,308 6,262 6,327
Sponsor and Evaluator fees 1,075 -- -- 1,351 -- -- 1,026 -- --
Accounting fees 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
---------------------------- ---------------------------- ----------------------------
Total expenses 9,461 8,241 8,310 9,465 8,173 8,241 8,334 7,262 7,327
---------------------------- ---------------------------- ----------------------------
Investment income, net 173,161 174,381 174,312 181,868 183,160 183,092 149,091 150,163 150,097
---------------------------- ---------------------------- ----------------------------
Unrealized gain (loss) on investments,
net:
Net change in unrealized
appreciation (depreciation) 108,933 8,310 90,026 96,232 (10,473) 133,908 107,348 (27,358) 122,051
---------------------------- ---------------------------- ----------------------------
Net gain (loss) on investments 108,933 8,310 90,026 96,232 (10,473) 133,908 107,348 (27,358) 122,051
---------------------------- ---------------------------- ----------------------------
Net increase in net assets
resulting from operations $282,094 $182,691 $264,338 $278,100 $172,687 $317,000 $256,439 $122,805 $272,148
---------------------------- ---------------------------- ----------------------------
</TABLE>
- ---------------------------------------
See accompanying Notes to Financial Statements.
11
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
COLORADO MINNESOTA
INSURED INSURED
SERIES 1 SERIES 1
---------------------------------- ----------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996 28, 1998 28, 1997 29, 1996
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Investment income, net $ 173,161 $ 174,381 $ 174,312 $ 181,868 $ 183,160 $ 183,092
Net change in unrealized appreciation
(depreciation) 108,933 8,310 90,026 96,232 (10,473) 133,908
---------------------------------- ----------------------------------
Net increase in net assets resulting from
operations 282,094 182,691 264,338 278,100 172,687 317,000
---------------------------------- ----------------------------------
Distributions to unit holders from:
Investment income, net (173,161) (174,381) (174,312) (181,868) (183,160) (183,092)
---------------------------------- ----------------------------------
Total distributions (173,161) (174,381) (174,312) (181,868) (183,160) (183,092)
---------------------------------- ----------------------------------
Total increase (decrease) in net assets 108,933 8,310 90,026 96,232 (10,473) 133,908
Net assets:
Beginning of period 3,071,074 3,062,764 2,972,738 3,258,135 3,268,608 3,134,700
---------------------------------- ----------------------------------
End of period $3,180,007 $3,071,074 $3,062,764 $3,354,367 $3,258,135 $3,268,608
================================== ==================================
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
OREGON
INSURED
SERIES 1
----------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996
----------------------------------
<S> <C> <C> <C>
Operations:
Investment income, net $ 149,091 $ 150,163 $ 150,097
Net change in unrealized appreciation
(depreciation) 107,348 (27,358) 122,051
----------------------------------
Net increase in net assets resulting from
operations 256,439 122,805 272,148
----------------------------------
Distributions to unit holders from:
Investment income, net (149,091) (150,163) (150,097)
----------------------------------
Total distributions (149,091) (150,163) (150,097)
----------------------------------
Total increase (decrease) in net assets 107,348 (27,358) 122,051
Net assets:
Beginning of period 2,676,974 2,704,332 2,582,281
----------------------------------
End of period $2,784,322 $2,676,974 $2,704,332
==================================
</TABLE>
- -----------------------------------------------
See accompanying Notes to Financial Statements.
12
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1998
Delaware Investments Tax-Exempt Trust, Series 1 (the "Fund") consists of three
separate unit investment trusts: Colorado Insured Series 1 ("Colorado Insured"),
Minnesota Insured Series 1 ("Minnesota Insured") and Oregon Insured Series 1
("Oregon Insured") (collectively referred to as the "Trusts"). The Fund was
organized on January 19, 1995 and is registered under the Investment Company act
of 1940.
1. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
The market value of securities is determined by the Evaluator (a) on the
basis of current bid prices for the bonds; (b) if bid prices are not
available, on the basis of current bid prices for comparable bonds; (c) by
causing the value of the bonds to be determined by others engaged in the
practice of evaluating, quoting, or appraising comparable bonds; or (d) by
any combination of the above.
FEDERAL INCOME TAXES
No provisions for income taxes has been made because the Trusts are not
associations taxable as corporations for federal income tax purposes. Each
unit holder will be treated as the owner of a pro rata portion of the Trust
and will be taxed on his or her pro rata share of net investment income and
securities gains or losses, if any.
OTHER
The financial statements of the Fund are prepared on the accrual basis of
accounting. Security transactions are accounted for on the date the
securities are purchased or sold. For financial reporting purposes, cost of
the bonds reflects no amortization or accretion of bond premium or
discount.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
2. INVESTMENTS
At February 28, 1998, the unrealized market appreciation (depreciation) was as
follows:
Colorado Minnesota Oregon
Insured Insured Insured
-----------------------------------------
Gross unrealized appreciation $318,591 $331,014 $281,014
Gross unrealized depreciation -- -- --
-----------------------------------------
Net unrealized appreciation $318,591 $331,014 $281,014
=========================================
13
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRUST EXPENSES
Each Trust pays trustee fees, evaluator fees, sponsor fees and various
out-of-pocket expenses.
Chase Manhattan Bank serves as Trustee and receives a monthly fee based on
$2.38, $2.13 and $2.30 per $1,000 principal amount of bonds outstanding as of
the first day of such month plus out-of-pocket expenses for Colorado Insured,
Minnesota Insured and Oregon Insured, respectively. Prior to August 12, 1997,
Investors Fiduciary Trust Company served as Trustee.
Muller Data Corporation serves as Evaluator and receives a monthly fee (based on
the number of units outstanding as of the first day of such month) not to exceed
$.004 per Unit on an annual basis for each Trust. Prior to May 1, 1997, Voyageur
Fund Managers, Inc. served as Evaluator.
Delaware Capital Management, Inc., an affiliate of the Fund's Distributor,
serves as Sponsor and receives a monthly fee (based on the number of units
outstanding as of the first day of such month) not to exceed $.004 per Unit on
an annual basis for each Trust. Prior to May 1, 1997, Voyageur Fund Managers,
Inc. served as Sponsor.
4. OTHER INFORMATION
The gross underwriting commission represents the aggregate sales charge paid in
connection with the initial public offering. Distributions of net investment
income to unit holders are paid on a monthly basis.
14
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SELECTED DATA
Selected data for a unit of each Trust outstanding throughout each period
follows:
<TABLE>
<CAPTION>
COLORADO MINNESOTA OREGON
INSURED INSURED INSURED
SERIES 1 SERIES 1 SERIES 1
---------------------------- ---------------------------- ----------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY FEBRUARY
28, 1998 28, 1997 29, 1996 28, 1998 28, 1997 29, 1996 28, 1998 28, 1997 29, 1996
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 0.61 $ 0.61 $ 0.61 $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Expenses (0.03) (0.03) (0.03) (0.03) (0.03) (0.03) (0.03) (0.03) (0.03)
---------------------------- ---------------------------- ----------------------------
Net investment income 0.58 0.58 0.58 0.57 0.57 0.57 0.57 0.57 0.57
Income distributions (0.58) (0.58) (0.58) (0.57) (0.57) (0.57) (0.57) (0.57) (0.57)
---------------------------- ---------------------------- ----------------------------
-- -- -- -- -- -- -- -- --
Net change in unrealized appreciation
(depreciation) 0.36 0.03 0.30 0.30 (0.03) 0.42 0.41 (0.10) 0.46
---------------------------- ---------------------------- ----------------------------
Increase/decrease in net asset value 0.36 0.03 0.30 0.30 (0.03) 0.42 0.41 (0.10) 0.46
Net asset value, beginning of period 10.21 10.18 9.88 10.25 10.28 9.86 10.17 10.27 9.81
---------------------------- ---------------------------- ----------------------------
Net asset value, end of period $ 10.57 $ 10.21 $ 10.18 $ 10.55 $ 10.25 $ 10.28 $ 10.58 $ 10.17 $ 10.27
============================ ============================ ============================
</TABLE>
15
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST, SERIES 1
Part One
Must Be Accompanied By Part Two of this Prospectus
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
Sponsor: Delaware Capital Management, Inc.
One Commerce Square
Philadelphia, Pennsylvania 19103
Distributor: Delaware Distributors, L.P.
1818 Market Street
Philadelphia, Pennsylvania 19103
Trustee: The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004-2413
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, securities in any jurisdiction to any person to whom it is not
lawful to make such offer in such jurisdiction.
The Prospectus does not contain all the information set forth in the
registration statement and exhibits relating thereto, which the Fund 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.
<PAGE>
DELAWARE INVESTMENTS TAX-EXEMPT TRUST SERIES
PROSPECTUS PART TWO OF THIS PROSPECTUS
PART TWO MAY NOT BE DISTRIBUTED
OCTOBER 5, 1998, AS OF JUNE 30, 1998 WITHOUT PART ONE
- --------------------------------------------------------------------------------
THE FUND. Delaware Investment Tax-Exempt Trust Series (the "FUND")
consists of the underlying separate unit investment trusts set forth in Part One
of this Prospectus. The various trusts are collectively referred to herein as
the "TRUSTS." Territorial Insured Series and National Insured Series are
referred to herein as the "INSURED NATIONAL TRUSTS," while Arizona Insured
Series, Colorado Insured Series, Minnesota Insured Series, Oregon Insured Series
and Pennsylvania Insured Series are collectively referred to herein as the
"INSURED STATE TRUSTS." Collectively, the Insured National Trusts and Insured
State Trusts may be referred to herein as the "INSURED TRUSTS." Because not all
of the Bonds in certain Territorial Series and the New Mexico Series are
insured, certain Territorial Series are not Insured National Trusts and the New
Mexico Series are not Insured State Trusts. Uninsured Territorial Series and
Insured National Trusts, collectively, may be referenced to herein as the
"NATIONAL TRUSTS." New Mexico Series and the Insured State Trusts, collectively,
may be referred to herein as the "STATE TRUSTS." Each Trust consists of
interest-bearing obligations issued by or on behalf of states and territories of
the United States and political subdivisions and authorities thereof, the
interest on which is, with certain exceptions, in the opinion of recognized bond
counsel to the issuing governmental authorities, exempt from all Federal income
taxes under existing law (the "BONDS"). In addition, the interest income of each
State Trust is, in the opinion of counsel, exempt to the extent indicated from
state and local taxes when held by residents of the state where the issuers of
Bonds in such State Trust are located. Investors should consult their tax
advisers to determine the extent to which such interest income is exempt from
taxation in their state of residence. Capital gains, if any, are subject to
Federal and state tax. All Bonds in the Insured Trusts have insurance
guaranteeing the payments of principal and interest, when due, or are escrowed
to maturity. All such insurance remains effective so long as the Bonds are
outstanding. IT SHOULD BE NOTED THAT THE INSURANCE RELATES ONLY TO THE BONDS IN
AN INSURED TRUST AND NOT TO THE UNITS OFFERED HEREBY OR TO THE MARKET VALUE
THEREOF. As a result of such insurance or escrow, the Bonds of each Insured
Trust are rated "AAA" by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("STANDARD & POOR'S") and/or "Aaa" by Moody's
Investors Service, Inc. ("MOODY'S"). Both Standard & Poor's and Moody's have
indicated that their respective rating is not a recommendation to buy, hold or
sell Units nor does it take into account the extent to which expenses of an
Insured Trust or sales by an Insured Trust of Bonds for less than the purchase
price paid by such Trust will reduce payment to Unitholders of the interest and
principal required to be paid on such Bonds. See "Insurance on the Bonds in the
Insured Trusts." No representation is made as to any insurer's ability to meet
its commitments. NO INSURANCE POLICY HAS BEEN OBTAINED FOR ANY OF THE BONDS IN
CERTAIN TERRITORIAL SERIES AND THE NEW MEXICO SERIES; HOWEVER, CERTAIN OF THE
BONDS CONTAINED THEREIN MAY BE INSURED. Certain of the Bonds in certain of the
Trusts may have been acquired at prices which resulted in such Bonds being
purchased at a discount from the aggregate par value of such Bonds. Gains based
upon the difference, if any, between the value of such Bonds at maturity,
redemption or sale and their purchase price at a discount
<PAGE>
(plus earned original issue discount) may constitute taxable ordinary income
with respect to a Unitholder who is not a dealer with respect to his Units.
UNITS OF THE TRUSTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED OR OTHERWISE PROTECTED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY AND INVOLVE INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The investor is advised to read and retain both Part One and Part Two of this
Prospectus for future reference.
<PAGE>
INVESTMENT OBJECTIVES OF THE FUND. The objectives of the Fund are
income exempt from Federal income tax and, in the case of the State Trusts,
Federal and state income tax (if any) and conservation of capital through an
investment in diversified portfolios of Federal and state tax-exempt
obligations. The Trusts may be an appropriate investment vehicle for investors
who desire to participate in a portfolio of tax-exempt fixed income securities
with greater diversification than they might be able to acquire individually. In
addition, securities of the type deposited in the Trusts are often not available
in small amounts. There is, of course, no guarantee that the Trusts will achieve
their objectives. The payment of interest and the preservation of principal are
dependent upon the continuing ability of the issuers and/or obligors of the
Bonds and of the insurers thereof to meet their respective obligations.
PUBLIC OFFERING PRICE. The Public Offering Price of the Units of each
Trust is equal to the aggregate bid price of the Bonds in such Trust's portfolio
and cash, if any, in the Principal Account held or owned by such Trust divided
by the number of Units outstanding, plus the applicable sales charge and accrued
interest, if any. If the Bonds in each Trust were available for direct purchase
by investors, the purchase price of the Bonds would not include the sales charge
included in the Public Offering Price of the Units. See "Public Offering."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN. The Estimated
Current Return and Estimated Long-Term Return to Unitholders are as set forth
under "Summary of Essential Financial Information" in Part One of this
Prospectus. The methods of calculating Estimated Current Return and Estimated
Long-Term Return are set forth in the footnotes to the "Summary of Essential
Financial Information" in Part One of this Prospectus and under "Estimated
Current Return and Estimated Long-Term Return."
DISTRIBUTIONS. Unitholders will receive distributions on a monthly
basis. See "Rights of Unitholders--Distributions of Interest and Principal."
Record dates will be the first day of each month. Distributions will be made on
the fifteenth day of the month subsequent to the respective record dates.
MARKET FOR UNITS. Although not obligated to do so, an affiliate of the
Sponsor, Delaware Distributors, L.P. (the "Distributor"), intends to maintain a
secondary market for the Units at prices based upon the aggregate bid price of
the Bonds in the portfolio of a Trust. If such a market is not maintained and no
other over-the-counter market is available, a Unitholder will be able to dispose
of his Units through redemption at prices based upon the bid prices of the
underlying Bonds (see "Rights of Unitholders--Redemption of Units").
REINVESTMENT OPTION. Unitholders have the opportunity to have their
distributions reinvested into an open-end management investment company as
described herein. See "Rights of Unitholder--Reinvestment Option."
RISK FACTORS. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other factors,
the inability of the issuer or an insurer to pay the principal of or interest on
a Bond when due, volatile interest rates,
<PAGE>
early call provisions, and changes to the tax status of the Bonds. See "The
Trusts--Risk Factors" for the applicable Trust and "Risk Factors."
THE FUND
GENERAL. The Fund was created under the laws of the State of New York
pursuant to a Trust Agreement (the "TRUST AGREEMENT"), dated each Trust's
Initial Date of Deposit, as defined in "Summary of Essential Financial
Information" in Part One of this Prospectus, with Delaware Capital Management,
Inc. as Sponsor, Muller Data Corporation, as Evaluator, and The Chase Manhattan
Bank, as Trustee.
The Fund consists of separate unit investment trusts, each having a
portfolio of interest-bearing obligations issued by or on behalf of states and
territories of the United States, and political subdivisions and authorities
thereof, the interest on which is, in the opinion of recognized bond counsel to
the issuing governmental authorities, exempt from all Federal income taxes under
existing law. All issuers of Bonds in a State Trust are located in the State for
which such Trust is named or in United States territories or possessions and
their public authorities; consequently, in the opinion of counsel, the related
interest earned on such Bonds is exempt to the extent indicated from state and
local taxes of such state or territory. In addition, in the case of a National
Trust, interest income may also be exempt from certain state and local taxes for
residents of various states. Illinois, Indiana, Virginia and Washington
residents may only purchase Units of a National Trust by this Prospectus.
Each Unit represents the fractional undivided interest in each Trust as
indicated under "Summary of Essential Financial Information" in Part One of this
Prospectus. To the extent that any Units are redeemed by the Trustee, the
fractional undivided interest in a Trust represented by each unredeemed Unit
will increase, although the actual interest in such Trust represented by such
fraction will remain unchanged. Units will remain outstanding until redeemed
upon tender to the Trustee by Unitholders, which may include the Sponsor, or
until the termination of the Trust Agreement.
Because certain of the Bonds in a Trust may from time to time under
certain circumstances be sold or redeemed or will mature in accordance with
their terms and because the proceeds from such events will be distributed to
Unitholders 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.
In the event a Bond is sold or redeemed from a Trust or matures in
accordance with its terms, the estimated net annual interest income per Unit for
the Trust would be reduced and the Estimated Current Return and the Estimated
Long-Term Return thereon might be lowered. In addition, Unitholders should be
aware that they may not be able at the time of receipt of such principal to
reinvest such proceeds in other securities at a yield equal to or in excess of
the yield which such proceeds were earning to Unitholders in the affected Trust.
<PAGE>
INVESTMENT OBJECTIVES AND PORTFOLIO SELECTION
The objectives of the Trusts are to provide interest income exempt from
Federal income tax and, in the case of a State Trust, Federal and state income
tax and to conserve capital through an investment in diversified portfolios of
Federal and state tax-exempt obligations. There is, of course, no guarantee that
the Trusts will achieve their objectives. The Trusts may be an appropriate
investment vehicle for investors who desire to participate in a portfolio of
tax-exempt fixed income securities with greater diversification than they might
be able to acquire individually. In addition, securities of the type deposited
in the Trusts are often not available in small amounts.
Insurance guaranteeing the timely payment, when due, of all principal
and interest on the Bonds in each Insured Trust has been obtained by the issuer
of such Bonds, by a prior owner of such Bonds or by the Sponsor prior to the
deposit of such Bonds in such Insured Trust from one of several insurance
companies (the "INSURERS"). Certain Bonds may be escrowed to maturity. No
representation is made as to any Insurer's ability to meet its commitments. All
Bonds insured by an Insurer receive an "AAA" rating by Standard & Poor's and an
"Aaa" rating by Moody's. All Bonds selected for an uninsured Trust were rated in
no case less than "BBB" by Standard & Poor's or "Baa" by Moody's. See
"Description of Bond Ratings." NO PORTFOLIO INSURANCE HAS BEEN OBTAINED BY THE
SPONSOR FOR BONDS CONTAINED IN CERTAIN UNINSURED TERRITORIAL SERIES AND THE NEW
MEXICO SERIES.
In selecting Bonds for the Trusts the following factors, among others,
were considered by the Sponsor: (i) either the Standard & Poor's rating of the
securities was in no case less than AAA in the case of the Insured Trusts and
BBB in the case of the uninsured Trusts, or the Moody's rating of the Securities
was in no case less than Aaa in the case of the Insured Trusts and Baa in the
case of the uninsured Trusts, including provisional or conditional ratings,
respectively, or, if not rated, the Securities had, in the opinion of the
Sponsor, credit characteristics sufficiently similar to the credit
characteristics of interest-bearing tax-exempt obligations that were so rated as
to be acceptable for acquisition by the Trusts, (ii) whether the Bonds are
insured by an Insurer in the case of an Insured Trust, (iii) the prices of the
Bonds relative to other bonds of comparable quality and maturity and (iv) the
diversification of Bonds as to purpose of issue and location of issuer, (v) with
respect to the Insured Trusts, the availability and cost of insurance for the
prompt payment of principal and interest, when due, on the Bonds. Subsequent to
a Trust's Initial Date of Deposit, a Bond may cease to be rated or its rating
may be reduced below either the applicable Standard & Poor's or Moody's ratings
set forth above or both. Neither event requires elimination of such Bonds from
the portfolio of a Trust but may be considered in the Sponsor's determination as
to whether or not to direct the Trustee to dispose of the Bonds. See "Trust
Administration--Portfolio Administration."
THE TRUSTS
RISK FACTORS SPECIFIC TO ARIZONA. The following brief summary regarding
the economy of Arizona is based upon information drawn from publicly available
sources and is included for the purpose of providing the information about
general economic conditions
<PAGE>
that may or may not affect issuers of the Arizona Bonds. The Sponsor has not
independently verified any of the information contained in such publicly
available documents.
Progressing from its traditional reliance on a cyclical construction
industry, Arizona's economic base is maturing and diversifying. One of the
nation's leaders in employment growth, Arizona has been among the top five
employment growth states for more than four years, and it should remain there
through 1998. After climbing by 6.2% in 1994, during which the state's economy
produced the second-highest number of jobs of any year in Arizona history, job
creation in Arizona is leveling off with employment growth of 5.6% in 1996-97,
although this compares favorably with the national figure of 2.0%. Arizona's
wage and salary employment grew 5.6% in 1996, 4.5% in 1997 and is forecast to
increase by 3.5% to 4.5% in 1998, and 3.5% in 1999. The unemployment rate,
around 4.5% for 1997, should remain low before increasing in late 1998 and 1999.
Arizona ranked third in the nation in personal income growth during
1991-96. Personal income, after growing 7.2% in 1997, is estimated at 6.7% in
1998 and 6.5% in 1999.
Overall, Arizona's forecast is for continued but moderate rates of
growth in employment and personal income. Employment growth will continue to be
stronger in the Phoenix area than in the balance of the state. Housing has
probably peaked and is likely to decline after seven extremely strong years.
Retail sales should also continue to slow.
Population, because of continued employment growth, will record
above-average growth rates. After population growth of 3.2% in 1996 and 3% in
1997, the forecast calls for 2.8% in 1998 and 2.5% in 1999. That translates into
almost 130,000 more people in the state in 1998 and 117,000 in 1999.
BUDGETARY PROCESS. The Budget Reform Act of 1997 made significant
changes to the State's planning and budgeting systems. Beginning with the Fiscal
biennium 2000-01, all State agencies, including capital improvement budgeting,
will be moved to a biennial budgeting system. From Fiscal Year 2000 to 2006, all
State agencies will move to a budget format that reflects the program structure
in the "Master List of State Government Programs."
The Budget Reform Act of 1993 established the current budgeting system
of one- and two-year budget reviews. Agencies selected for annual review and
appropriation are designated as Major Budget Units (MBUs). The 18 MBUs account
for over 90% of the total General Fund expenditures. Agencies selected for
biennial review and appropriation are designated as Other Budget Units (OBUs).
In 1997, combined MBU and OBU in the General Fund totaled $4.68 billion, and is
estimated at $5.1 billion in 1998.
REVENUES AND EXPENDITURES. The General Fund closed fiscal year 1997
with a $515.9 million ending balance, setting a new record for the state, and
the Executive plan for fiscal year 1998 anticipates a $497.1 million balance.
Overall, fiscal year 1997 revenues totaled $5,028.2 million. Corporate income
tax revenue jumped by 34%, from $448 million in
<PAGE>
fiscal year 1996 to $600 million in fiscal year 1997. Individual income tax
revenues grew by 12% from fiscal year 1996 to fiscal year 1997. Expenditures for
fiscal year 1997 totaled $4,826.5 million. Revertments totaled $80.17 million in
fiscal year 1997.
The current Executive forecast for fiscal year 1998 revenue is $5.289
billion. The major revenue source, transaction privilege taxes, is forecast to
produce $2.3 billion for fiscal year 1998. All three major revenue categories --
individual income taxes, corporate income taxes and transaction privilege taxes
- -- showed gains on a year-over-year basis. The most significant impact on fiscal
year 1998 revenues will be the various tax cutting measures enacted over the
past several years, which has decreased revenues by some 3.2%. Overall, the
Executive estimates a 3.7% or $196.9 million increase in base revenues of the
current Fiscal year 1998 estimate. This compares to the 4.5%, or $227.5 million
increase in base revenues between fiscal year 1997 and fiscal year 1998.
The Executive fiscal plan for Fiscal Year 1998 is based on revenue
estimates, yet still provides for Executive-initiated program changes and school
finance of $127.7 million; a $210 million tax reduction and a $96.0 million
capital program. The Executive projects a fiscal year 1998 ending balance of
$497.1 million.
For Fiscal year 1999, the Executive is recommending a base operating
budget of $5.4 billion, an increase of approximately $260.6 million. The
majority of recommended expenditures for fiscal year 1999 are in education. A
projected ending balance of $19.9 million is expected for Fiscal Year 1999. This
amount would ordinarily be considered "thin" at only 0.4% of expenditures.
However, given the prudent revenue forecast and the available reserves of $393
million in the Budget Stabilization Fund, $95 million in the Medical Services
Stabilization Fund, and $42.4 million in the Temporary Assistance Stabilization
Fund, the $19.9 million amount seems appropriate.
LITIGATION. In response to the court's ruling in ROOSEVELT V. BISHOP in
1994, the Executive recommended $30 million for the first-year implementation of
a capital assistance program for Arizona's schools. The program is designed to
help school districts that lack bonding capacity due to low value or rapid
growth. Income is provided for in a Capital Equity Fund which contains monies
appropriated by the Legislature and $30 million annually from the Common School
Land Fund (Permanent State School Fund). The Permanent State School Fund
consists of revenues from the proceeds of the sale of natural resources or
property from lands that have been granted by the United States to the State of
Arizona for the support of common schools. In future years, the Capital Equity
Fund may contain monies remitted by school districts for the repayment of loans.
Funds are used to assist school districts with capital needs. For fiscal year
1999, the Governor recommends $40.5 million be appropriated from the Permanent
State School Fund, which includes the $30 million appropriated to the Capital
Equity Fund.
DEBT ADMINISTRATION AND LIMITATION. The State is not permitted to issue
general obligation debt. The particular source of payment and security for each
of the Arizona Obligations is detailed in the debt instruments themselves and in
related offering materials. There can be no assurances with respect to whether
the market value or marketability of any
<PAGE>
of the Arizona Obligations issued by an entity other than the State of Arizona
will be affected by financial or other conditions of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the State, are subject to limitations imposed by Arizona's
Constitution with respect to AD VALOREM taxation, bonded indebtedness and other
matters. For example, the State legislature cannot appropriate revenues in
excess of 7% of the total personal income of the State in any fiscal year. These
limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
Although most of the Bonds in an Arizona Trust are revenue obligations
of local governments or authorities in the State, there can be no assurance that
the fiscal and economic conditions referred to above will not affect the market
value or marketability of the Bonds or the ability of the respective obligors to
pay principal of and interest on the Bonds when due.
ARIZONA STATE TAXATION. For a discussion of the Federal tax status of
income earned on Arizona Trust Units, see "Tax Status."
The assets of the Arizona Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Arizona (the "STATE"), its
political subdivisions and authorities (the "BONDS"), provided the interest on
such Bonds received by the Trust is exempt from State income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludable from gross income for
Federal income tax purposes and (iii) interest on the Bonds, if received
directly by a Unitholder would be exempt from the Arizona income tax (the
"ARIZONA INCOME TAX"). We have assumed that, at the respective times of issuance
of the Bonds, opinions relating to the validity thereof and to the exemption of
interest thereon from Federal income tax were rendered by bond counsel to the
respective issuing authorities. In addition, we have assumed that with respect
to the Arizona Bonds, bond counsel to the issuing authorities rendered opinions
that the interest on the Bonds is exempt from the Arizona Income Tax. Neither
the Sponsor nor its counsel has made any review for the Trust of the proceedings
relating to the issuance of the Bonds or of the bases for the opinions rendered
in connection therewith.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Arizona law as of the date of this Prospectus and based upon the
assumptions set forth above:
1. For Arizona income tax purposes, each Unitholder will be
treated as the owner of a pro rata portion of the Arizona Trust, and
the income of the Arizona Trust therefore will be treated as the income
of the Unitholder under State law.
2. For Arizona income tax purposes, interest on the Bonds
which is excludable from Federal gross income and which is exempt from
Arizona income
<PAGE>
taxes when received by the Arizona Trust, and which would be excludable
from Federal gross income and exempt from Arizona income taxes if
received directly by a Unitholder, will retain its status as tax-exempt
interest when received by the Arizona Trust and distributed to the
Unitholders.
3. To the extent that interest derived from the Arizona
Trust by a Unitholder with respect to the Bonds is excludable from
Federal gross income, such interest will not be subject to Arizona
income taxes.
4. Each Unitholder will receive taxable gain or loss for
Arizona income tax purposes when Bonds held in the Arizona Trust are
sold, exchanged, redeemed or paid at maturity, or when the Unitholder
redeems or sells Units, at a price that differs from original cost as
adjusted for amortization of Bond discount or premium and other basis
adjustments, including any basis reduction that may be required to
reflect a Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Unitholder's settlement date and the
date such Bonds are delivered to the Arizona trust, if later.
5. Amounts paid by the insurer under an insurance policy or
policies issued to the Arizona Trust, if any, with respect to the Bonds
in the Arizona Trust which represent maturing interest on defaulted
Bonds held by the Trustee will be exempt from State income taxes if,
and to the same extent as, such interest would have been so exempt if
paid by the issuer of the defaulted Bonds PROVIDED that, at the time
such policies are purchased, the amounts paid for such policies are
reasonable, customary and consistent with the reasonable expectation
that the issuer of the obligations, rather than the insurer, will pay
debt service on the Bonds.
6. Arizona law does not permit a deduction for interest paid
or incurred on indebtedness incurred or continued to purchase or carry
Units in the Arizona Trust, the interest on which is exempt from
Arizona income taxes.
7. Neither the Bonds nor the Units will be subject to
Arizona property taxes, sales tax or use tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Arizona law. Ownership of the Units may result in
collateral Arizona tax consequences to certain taxpayers. Prospective investors
should consult their tax advisors as to the applicability of any such collateral
consequences.
RISK FACTORS SPECIFIC TO COLORADO. The Colorado Constitution allocates
to the General Assembly legislative responsibility for appropriating State
moneys to pay the expenses of State government. The fiscal year of the State is
the 12-month period commencing July 1 and ending June 30. During the fiscal year
for which appropriations have been made, the General Assembly may increase or
decrease appropriations through supplementary appropriations.
<PAGE>
State general fund tax collections for fiscal year 1996-97 increased
9.6% over fiscal year 1995-96 to reach $4,679.4 million. The current estimate
for fiscal year 1997-98 is $5,178.6 million, or an increase of 10.7%. State cash
funds, which consist of a variety of program revenues, totaled $2,007.7 million
for fiscal year 1996-97, and are projected to increase 4.3% for fiscal year
1997-98 to $2,093.1 million.
The State Constitution requires that expenditures for any fiscal year
not exceed revenues for such fiscal year. In addition, Article X, Section 20, of
the State Constitution (see "State Constitutional Amendment" below) limits
increases in expenditures of state general funds and cash revenues from year to
year to the sum of State inflation plus the percentage change in population
(adjusted for revenue changes approved by voters). Expenditures in fiscal year
1997-98 are limited to an increase of no more than 5.5% over 1996-97
expenditures. The 5.5% increase factor is equal to the sum of 1996 inflation of
3.5% and population growth of 2.0%. Based upon total general fund tax
collections and state cash revenues for fiscal year 1996-97 of $6,647.6 million,
expenditures for 1997-98 will be limited to $6,866.6 million. December 20, 1997
estimates show total revenues for the 1997-98 fiscal year to be $7,226.7
million, or $360.1 million over the limit. The 1997 fiscal year General Fund and
program revenues (cash funds) were $139.0 million more than expenditures allowed
under the spending limitation. This is the first time the state breached the
limit since its implementation in 1992. This excess revenue of $139.0 million
will be refunded to Colorado taxpayers during the 1998 tax filing season.
STATE CONSTITUTIONAL AMENDMENT. Section 20, Article X of the Colorado
Constitution ("AMENDMENT ONE") contains limitations on the ability of
"Districts," which are defined as Colorado State and local governments, to
increase taxes and issue debt obligations, as well as limitations on spending
and revenue generation. The amendment does not apply to "Enterprises," which are
defined as government-owned businesses that are authorized to issue their own
revenue bonds and that receive under 10% of annual revenues in grants from all
Colorado state and local governments combined.
Amendment One limits the ability of Districts to increase taxes by
providing that advance voter approval is required for "any new tax, tax rate
increase, mill levy above that for the prior year, valuation for assessment
ratio increase for a property class, or extension of an expiring tax, or a tax
policy change directly causing a net tax revenue gain to any district." An
additional limitation is placed on the maximum annual percentage increase in
property tax revenue.
Amendment One also imposes limitations on government borrowing. The
amendment provides that Districts must have advance voter approval for the
"creation of any multiple-fiscal year direct or indirect district debt or other
financial obligation whatsoever without adequate present cash reserves pledged
irrevocably and held for payments in all future fiscal years," except for
refinancing District bonded debt at a lower interest rate or adding new
employees to existing District pension plans. Prior to the adoption of Amendment
One, voter approval was generally required only for the creation of general
obligation debt.
<PAGE>
Spending limitations applicable to the State and separately to local
governments are also included in Amendment One. The amendment provides that the
maximum annual percentage change in each local District's Fiscal Year Spending
shall equal inflation in the prior calendar year plus annual local growth,
adjusted for revenue changes approved by voters after 1991 and certain other
allowed adjustments. "Fiscal Year Spending" is defined as all District
expenditures and reserve increases except refunds made in the current or next
fiscal year, gifts, federal funds, collections for another government, pension
contributions by employees and pension fund earnings, reserve transfers or
expenditures, damage awards and property sales. If revenue from sources not
excluded from Fiscal Year Spending exceeds the spending limit for a fiscal year,
Amendment One provides that the excess must be refunded to taxpayers in the next
fiscal year unless voters approve a revenue change as an offset.
Elections required under Amendment One are limited to the State general
election (the first Tuesday after the first Monday in November in even numbered
years), an election held on the first Tuesday in November in odd numbered years,
or the regular biennial election of the local government.
While it is too early to determine what impacts Amendment One will
ultimately have on the financial operations of Colorado state and local
governments, these constraints on budgetary and debt management flexibility may
create credit concerns. Furthermore, the language of Amendment One is not clear
as to certain matters, including (a) whether property tax rates can be increased
without voter approval to support outstanding or refunding general obligation
bonds, (b) whether new lease rental bonds and certificates of participation
constitute multiple-year financial obligations within the context of the
amendment, and (c) the precise definition of exempt Enterprises. A number of
Colorado courts have rendered decisions regarding various provisions of
Amendment One since its passage. However, there are still many uncertainties as
to the appropriate construction of certain provisions of Amendment One. In view
of the fact that no appellate court has ruled on Amendment One comprehensively,
there can still be no assurance as to the appropriate construction of certain
provisions of Amendment One.
COLORADO ECONOMY. Colorado employment has slowed from 5.1% at its peak
in 1994 to 3.4% in 1996. Job creation back in 1994 hit 85,200. During 1996, only
62,500 jobs were created with services and trade being the number one and two,
respectively, largest growing industries in Colorado. Construction reported the
largest percentage gain from 1995 to 1996, at 8.8%, or an additional 9,000
employees. Mining continued to be the weakest industry sector with a loss of
8.1% or 1,200 employees in 1996.
Colorado's job growth is expected to remain at 3.4% for 1997 and an
estimated 64,500 jobs will be created. Growth is expected in every industry
except TCPU (Transportation, Communications and Public Utilities). High
technology industries such as computer services and manufacturing, telephone
communications, cable television and communications equipment manufacturing
continue to expand. The pace of growth in 1997 was brisk, even with such
high-profile losses as Southern Pacific's merger with Union Pacific and
subsequent relocation to Nebraska and the Public Service Company's merger and
downsizing. In 1998,
<PAGE>
overall growth is expected to continue to shrink as the building and real estate
sectors begin to top out and as manufacturing slows.
Unemployment will bottom out at 3.4% of the workforce in 1997, breaking
through the 4.2% threshold that has held for three years in a row. In
comparison, the national unemployment rate in 1996 was 5.4%. In 1973, Colorado's
unemployment was at 3.0%. In this business cycle, however, that 24-year low will
not be breached. Unemployment rates will rise slightly in 1998 and continue to
creep upward into 2001, as a result of slower labor force growth and slowing
participation rates. Furthermore, as newly-trained former welfare recipients
enter the labor market, the ranks of the unemployed will swell. Those looking
for first-time jobs and those who must go through several employment situations
before finding the right job will add to the unemployment rate.
Total personal income in Colorado during 1997 is projected to reach
$104.7 billion, an increase of 6.5%, yet lower than the 7.1% increase reached in
1996. During 1996, total United States personal income increased 5.6% and is
estimated to increase 5.8% in 1997. Preliminary estimates for Colorado personal
income predict an annual growth rate of 6.7% for 1998.
Total population in Colorado increased by 75,100 during 1996, resulting
in a growth rate of 2.0%. The preliminary estimate for total population increase
for 1997 is 73,300 or 1.9%.
COLORADO STATE TAXATION. For a discussion of the Federal tax status of
income earned on Colorado Trust Units, see "Tax Status."
The assets of the Colorado Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Colorado ("COLORADO") or
counties, municipalities, authorities or political subdivisions thereof (the
"COLORADO BONDS") the interest on which is expected to qualify as exempt from
Colorado income taxes.
Neither the Sponsor nor its counsel has independently examined the
Bonds to be deposited in and held in the Colorado Trust. However, although
Chapman and Cutler expresses no opinion with respect to the issuance of the
Bonds, in rendering its opinion expressed herein, it has assumed that: (i) the
Bonds were validly issued; (ii) the interest thereon is excludable from gross
income for Federal income tax purposes; and (iii) interest on the Bonds, if
received directly by a Unitholder, would be exempt from the income tax imposed
by the State of Colorado that is applicable to individuals and corporations (the
"STATE INCOME TAX"). This opinion does not address the taxation of persons other
than full time residents of Colorado.
We have assumed that, at the respective times of issuance of the Bonds,
opinions relating to the validity thereof and to the exemption of interest
thereon from Federal income tax were rendered by bond counsel to the respective
issuing authorities. In addition, we have assumed that, with respect to the
Colorado Bonds, bond counsel to the issuing authorities rendered opinions that
the interest on the Colorado Bonds is exempt from the Colorado
<PAGE>
Income Tax. Neither the Sponsor nor its counsel has made any review for the
Colorado Trust of the proceedings relating to the issuance of the Bonds or of
the bases for the opinions rendered in connection therewith.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Colorado law as of the date of this Prospectus and based upon the
assumptions set forth above:
1. Because Colorado income tax law is based upon the Federal
law, the Colorado Trust is not an association taxable as a corporation
for purposes of Colorado income taxation.
2. With respect to Colorado Unitholders, in view of the
relationship between Federal and Colorado tax computations described
above:
(i) Each Colorado Unitholder will be treated as
owning a pro rata share of each asset of the Colorado Trust
for Colorado income tax purposes in the proportion that the
number of Units of such Trust held by the Unitholder bears to
the total number of outstanding Units of the Colorado Trust,
and the income of the Colorado Trust will therefore be treated
as the income of each Colorado Unitholder under Colorado law
in the proportion described and an item of income of the
Colorado Trust will have the same character in the hands of a
Colorado Unitholder as it would have in the hands of the
Trustee;
(ii) Interest on Bonds that would not be includable
in income for Colorado income tax purposes when paid directly
to a Colorado Unitholder will be exempt from Colorado income
taxation when received by the Colorado Trust and attributed to
such Colorado Unitholder and when distributed to such Colorado
Unitholder;
(iii) Any proceeds paid under individual policies
obtained by issuers of Bonds in the Colorado Trust which
represent maturing interest on defaulted Bonds held by the
Trustee will be excludable from Colorado adjusted gross income
if, and to the same extent as, such interest is so excludable
for Federal income tax purposes if paid in the normal course
by the issuer notwithstanding that the source of payment is
from insurance proceeds PROVIDED that, at the time such
policies are purchased, the amounts paid for such policies are
reasonable, customary and consistent with the reasonable
expectation that the issuer of the Bonds, rather than the
insurer, will pay debt service on the Bonds;
(iv) Each Colorado Unitholder will realize taxable
gain or loss when the Colorado Trust disposes of a Bond
(whether by sale, exchange, redemption, or payment at
maturity) or when the Colorado Unitholder redeems or sells
Units at a price that differs from original cost as adjusted
for amortization of bond discount or premium and other basis
adjustments (including any basis reduction that may be
required to reflect a Colorado Unitholder's share of interest,
if any,
<PAGE>
accruing on Bonds during the interval between the Colorado
Unitholder's settlement date and the date such Bonds are
delivered to the Colorado Trust, if later);
(v) Tax basis reduction requirements relating to
amortization of bond premium may, under some circumstances,
result in Colorado Unitholders realizing taxable gain when
their Units are sold or redeemed for an amount equal to or
less than their original cost; and
(vi) If interest on indebtedness incurred or
continued by a Colorado Unitholder to purchase Units in the
Colorado Trust is not deductible for Federal income tax
purposes, it also will be non-deductible for Colorado income
tax purposes.
Unitholders should be aware that all tax-exempt interest, including
their share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Colorado law. Ownership of the Units may result in
collateral Colorado tax consequences to certain taxpayers. Prospective investors
should consult with their tax advisors as to the applicability of any such
collateral consequences.
RISK FACTORS SPECIFIC TO MINNESOTA. Minnesota's constitutionally
prescribed fiscal period is a biennium, and Minnesota operates on a biennial
budget basis. Legislative appropriations for each biennium are prepared and
adopted during the final legislative session of the immediately preceding
biennium. Prior to each fiscal year of a biennium, Minnesota's Department of
Finance allots a portion of the applicable biennial appropriation to each agency
or other entity for which an appropriation has been made. An agency or other
entity may not expend moneys in excess of its allotment. If revenues are
insufficient to balance total available resources and expenditures, Minnesota's
Commissioner of Finance, with the approval of the Governor, is required to
reduce allotments to the extent necessary to balance expenditures and forecasted
available resources for the then current biennium. The Governor may prefer
legislative action when a large reduction in expenditures appears necessary, and
if Minnesota's legislature is not in session, the Governor is empowered to
convene a special session.
Frequently in recent years, legislation has been required to eliminate
projected budget deficits by raising additional revenue, reducing expenditures,
including aids to political subdivisions and higher education, reducing the
State's budget reserve, imposing a sales tax on purchases by local governmental
units, and making other budgetary adjustments.
During fiscal year 1997, the total fund balance, on a GAAP basis, for
the General Fund increased by $66.9 million to $1.486 billion. At June 30, 1997,
the unreserved, undesignated portion of the fund balance reflected a positive
balance of $642.3 million, after providing for a $583.5 million budgetary
reserve. This compares with a $491.9 million
<PAGE>
unreserved, undesignated fund balance at the end of fiscal year 1996 with a $570
million budgetary reserve. On a budgetary basis, the June 30, 1997, unrestricted
(undesignated) fund balance for the General Fund was $812.7 million, compared
with a balance of $506 million at the end of 1996.
General Fund revenues and transfers-in totaled $10.412 billion for
fiscal year 1997, up 8% from those for fiscal year 1996. General Fund
expenditures and transfers-out for the year totaled $9.926 billion, an increase
of 3% from the previous year. Of this amount, $6.917 billion (70%) is in the
form of grants and subsidies to local governments, individuals and non-profit
organizations.
The Minnesota Department of Finance November 1997 Forecast projects
that, under current law, the State will complete its current biennium June 30,
1999 with a $453 million surplus, plus a $350 million cash flow account balance,
a $522 million budget reserve, and $93 million in other dedicated accounts.
Revenues for the 1998-99 biennium are forecast at $21.045 billion. Total General
Fund expenditures and transfers for the biennium are projected to be $20.7
billion. The forecast balance for the General Fund is $1.36 billion for the
1998-99 biennium.
The State is party to a variety of civil actions that could adversely
affect the State's General Fund. In addition, substantial portions of State and
local revenues are derived from federal expenditures, and reductions in federal
aid to the State and its political subdivisions and other federal spending cuts
may have substantial adverse effects on the economic and fiscal condition of the
State and its local governmental units. Risks are inherent in making revenue and
expenditure forecasts. Economic or fiscal conditions less favorable than those
reflected in State budget forecasts and planning estimates may create additional
budgetary pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota. Even with
respect to bonds that are revenue obligations of the issuer and not general
obligations of Minnesota, there can be no assurance that the fiscal problems
referred to above will not adversely affect the market value or marketability of
the bonds or the ability of the respective obligors to pay interest on and
principal of the bonds.
The state issued $170.0 million of new general obligation bonds, and
$172.1 million of general obligation bonds were redeemed during 1997, leaving an
outstanding balance of $2.2 billion. Moody's Investor Services and Fitch's rates
Minnesota general obligation bonds Aaa and AAA, respectively. In August 1997,
Standard & Poor's upgraded the state's general obligation bond rating to AAA
from AA+.
MINNESOTA ECONOMY. Minnesota relies heavily on a progressive individual
income tax and a retail sales tax for revenue, which results in a fiscal system
unusually sensitive to economic conditions. In fiscal year 1997, Minnesota's
economy outperformed the United States economy as a whole.
<PAGE>
In November 1997, the state's unemployment rate, on a seasonally
adjusted basis, was 2.8%, down 1.2 percentage points from the 4.0% observed one
year earlier. That unemployment rate was well below the national rate of 4.6%.
Payroll employment in Minnesota grew by 53,000 jobs during the 1997 fiscal year.
Employment in fiscal year 1997 grew by 2.2%, the same rate as the U.S. average.
At present, the state's most serious economic challenge is ensuring there will
be sufficient workers to fill the jobs currently being generated.
Personal income in Minnesota is now estimated to have grown at a 6.6%
annual rate during fiscal year 1997, well above the national average of 5.3%.
Wage growth was strong, but as in neighboring Midwestern states, all of whom
also had strong growth in personal income, the agricultural sector was a major
contributor. Prices were higher than average, yields were strong, and federal
farm program payments under the 1996 farm bill were much larger than they would
have been under the previous program.
Personal income in Minnesota is forecast to grow by 5.0% during the
1998 fiscal year, slightly below the average rate forecast for the nation.
Payroll employment is expected to grow at a 2.1% annual rate, consistent with
the national average. Wage and salary income growth, however, is projected to
lag the national average rate as states outside the Midwest also begin to feel
labor market pressures and part-time workers elsewhere increase their hours to,
or beyond, the levels they desire. Farm income in the 1998 fiscal year is also
forecast to be down from the high levels reported during fiscal year 1997 since
commodity prices have returned to more normal levels.
There can be no assurance that Minnesota's economy and fiscal condition
will not materially change in the future or that future difficulties will not
occur. Economic difficulties and the resultant impact on state and local
government finances may adversely affect the market value of obligations in the
portfolio of Minnesota Insured Intermediate Tax Free Fund or the ability of
respective obligors to make timely payment of the principal and interest on such
obligations.
MINNESOTA STATE TAXATION. For a discussion of the Federal tax status of
income earned on Minnesota Trust Units, see "Tax Status."
Counsel to the Minnesota Trust understands that the Minnesota Trust
would only have income consisting of (i) interest from bonds issued by the State
of Minnesota and its political and governmental subdivisions, municipalities and
governmental agencies and instrumentalities (the "MINNESOTA BONDS") and bonds
issued by possessions of the United States (the "POSSESSION BONDS" and, with the
Minnesota Bonds, the "BONDS") which would be exempt from Federal and Minnesota
income taxation when paid directly to an individual, trust or estate, (ii) gain
on the disposition of such Bonds and (iii) proceeds paid under certain insurance
policies issued to the issuers of the Bonds which represent maturing interest or
principal payments on defaulted Bonds held by the Trustee.
Neither the Sponsor nor its counsel has independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein
<PAGE>
regarding such matters, it is assumed that: (i) the Bonds were validly issued,
(ii) the interest thereon is excludable from gross income for Federal income tax
purposes and (iii) the interest thereon is exempt from the income tax imposed by
Minnesota that is applicable to individuals, trusts and estates (the "MINNESOTA
INCOME TAX"). It should be noted that interest on the Minnesota Bonds is subject
to tax in the case of corporations subject to the Minnesota Corporate Franchise
Tax or the Corporate Alternative Minimum Tax and is a factor in the computation
of the Minimum Fee applicable to financial institutions; no opinion is expressed
with respect to the treatment of interest on the Possession Bonds for purposes
of such taxes. The opinion set forth below does not address the taxation of
persons other than full time residents of Minnesota.
We have assumed that, at the respective times of issuance of the Bonds,
opinions relating to the validity thereof and to the exemption of interest
thereon from Federal income tax were rendered by bond counsel to the respective
issuing authorities. In addition, we have assumed that, with respect to the
Minnesota Bonds, bond counsel to the issuing authorities rendered opinions that
the interest on the Minnesota Bonds is exempt from the Minnesota Income Tax and,
with respect to the Possession Bonds, bond counsel to the issuing authorities
rendered opinions that the Possession Bonds and the interest thereon is exempt
from all state and local income taxation. Neither the Sponsor nor its counsel
has made any review for the Minnesota Trust of the proceedings relating to the
issuance of the Bonds or of the bases for the opinions rendered in connection
therewith.
Although Minnesota state law provides that interest on Minnesota Bonds
is exempt from Minnesota state income taxation, the Minnesota state legislature
has enacted a statement of intent that interest on Minnesota Bonds should be
subject to Minnesota state income taxation if it is judicially determined that
the exemption discriminates against interstate commerce, effective for the
calendar year in which such a decision becomes final. It cannot be predicted
whether a court would render such a decision or whether, as a result thereof,
interest on Minnesota Bonds and therefore distributions by the Minnesota Trust
would become subject to Minnesota state income taxation.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Minnesota law as of the date of this Prospectus and based upon the
assumptions set forth above:
1. The Minnesota Trust is not an association taxable as a
corporation and each Unitholder of the Minnesota Trust will be treated
as the owner of a pro rata portion of the Minnesota Trust, and the
income of such portion of the Minnesota Trust will therefore be treated
as the income of the Unitholder for Minnesota Income Tax purposes;
2. Income on the Bonds, excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax when received by the
Minnesota Trust, and which would be excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax if received directly by
a Unitholder, will be excludable from
<PAGE>
Minnesota taxable income for purposes of the Minnesota Income Tax when
received by the Minnesota Trust and distributed to such Unitholder;
3. To the extent that interest on certain Bonds (except with
respect to Possession Bonds, as to which no opinion is expressed), if
any, is includable in the computation of "alternative minimum taxable
income" for Federal income tax purposes, such interest will also be
includable in the computation of "alternative minimum taxable income"
for purposes of the Minnesota Alternative Minimum Tax imposed on
individuals, estates and trusts;
4. Each Unitholder of the Minnesota Trust will recognize
gain or loss for Minnesota Income Tax purposes if the Trustee disposes
of a Bond (whether by redemption, sale or otherwise) or if the
Unitholder redeems or sells Units of the Minnesota Trust to the extent
that such a transaction results in a recognized gain or loss to such
Unitholder for Federal income tax purposes;
5. Tax basis reduction requirements relating to amortization
of bond premium may, under some circumstances, result in Unitholders
realizing taxable gain for Minnesota Income Tax purposes when their
Units are sold or redeemed for an amount equal to or less than their
original cost;
6. Proceeds, if any, paid under individual insurance
policies obtained by issuers of Bonds which represent maturing interest
on defaulted obligations held by the Trustee will be excludable from
Minnesota net income if, and to the same extent as, such interest would
have been so excludable from Minnesota net income if paid in the normal
course by the issuer of the defaulted obligation PROVIDED that, at the
time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable
expectation that the issuer of the bonds, rather than the insurer, will
pay debt service on the bonds; and
7. To the extent that interest derived from the Minnesota
Trust by a Unitholder with respect to any Possession Bonds is
excludable from gross income for Federal income tax purposes and is
exempt from state and local taxation pursuant to federal law when
received by the Minnesota Trust, such interest will not be subject to
the Minnesota Income Tax when distributed by the Minnesota Trust and
received by the Unitholders. As noted above, we have expressed no
opinion as to the treatment of interest on the Possession Bonds for
purposes of the Minnesota Corporate Franchise Tax or the Alternative
Minimum Tax or whether it is a factor in the computation of the Minimum
Fee applicable to financial institutions. Although a federal statute
currently provides that bonds issued by the Government of Puerto Rico,
or by its authority, are exempt from all state and local taxation, the
Supreme Court of Minnesota has held that interest earned on bonds
issued by the Government of Puerto Rico may be included in taxable net
income for purposes of computing the Minnesota bank excise tax. The
State of Minnesota could apply the same reasoning in determining
whether interest on the Possession Bonds is subject to the taxes listed
above on which we express no opinion.
<PAGE>
Chapman and Cutler has not examined any of the Bonds to be deposited
and held in the Minnesota Trust or the proceedings for the issuance thereof or
the opinions of bond counsel with respect thereto, and therefore express no
opinions as to the exemption from State income taxes of interest on the Bonds if
received directly by a Unitholder. Chapman and Cutler has expressed no opinion
with respect to taxation under any other provision of Minnesota law. Ownership
of the Units may result in collateral Minnesota tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to the
applicability of any such collateral consequences. We have assumed that, at the
respective times of issuance of the Bonds, opinions relating to the validity
thereof and to the exemption of interest thereon from Federal income tax were
rendered by bond counsel to the respective issuing authorities. In addition, we
have assumed that, with respect to the Minnesota Bonds, bond counsel to the
issuing authorities rendered opinions that the interest on the Minnesota Bonds
is exempt from the Minnesota Income Tax and, with respect to the Possession
Bonds, bond counsel to the issuing authorities rendered opinions that the
Possession Bonds and the interest thereon is exempt from all state and local
income taxation. Neither the Sponsor nor its counsel has made any review for the
Minnesota Trust of the proceedings relating to the issuance of the Bonds or of
the bases for the opinions rendered in connection therewith.
RISK FACTORS SPECIFIC TO NEW MEXICO. The following brief summary
regarding the economy of New Mexico is based upon information drawn from
publicly available sources and is included for the purpose of providing the
information about general economic conditions that may or may not affect issuers
of the New Mexico Bonds. The Sponsor has not independently verified any of the
information contained in such publicly available documents.
GENERAL ECONOMIC CONDITIONS. The State of New Mexico, admitted as the
forty-seventh state on January 6, 1912, is the fifth largest state, containing
approximately 121,593 square miles. The State's climate is characterized by
sunshine and warm bright skies in both winter and summer. New Mexico has a
semiarid subtropical climate with light precipitation. At the time of the
official 1990 United States Census, the State's population was 1,515,069. As of
July 1, 1997, the population had increased to 1,729,751, or 13.8% since 1990.
Major industries in the State are energy resources, tourism, services,
construction, trade, agriculture-agribusiness, government, manufacturing, and
mining. In 1995, the value of energy resources production (crude petroleum,
natural gas, uranium, and coal) was approximately $4.9 billion with an increase
showing for 1996. From 1995-96, the value of construction contracts increased
4.9% to $2.2 billion. Natural gas prices are expected to decline to $1.48 per
mcf in fiscal year 1999 as significant new sources of supply are bought on line
in Canada and the deep water Gulf of Mexico. Gas sale prices were $1.68 per mcf
in fiscal year 1997 and are estimated to have remained unchanged as of December
1997. Crude oil prices will decline in fiscal year 1998 to $17.60 per barrel
compared to $21.04 in fiscal year 1997. Oil prices are expected to continue
downward. Major federally funded scientific research facilities at Los Alamos,
Albuquerque and White Sands are also a notable part of the State's economy.
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The State has a thriving tourist industry which has slowed since 1995.
In 1996, there were approximately 2.18 million visits to national parks and
about 5.0 million visits to State parks, in the State. According to the New
Mexico Department of Labor, the State's tourist industry generated about $2.1
billion in revenue and more than 66,000 jobs. Total gross receipts for hotels
and other lodging places increased 3.4% in 1996, compared with a 1.4% decrease
in 1995. Yet, visits to New Mexico's national parks and monuments, affected
partly by federal government shutdowns in the fall and winter, dropped 3.1% in
1996. One of the State's most famous attractions is Carlsbad Cavern, which was
made a national monument in 1923 and designated a national park in 1930.
Agriculture is a major part of the State's economy, producing $1.468
billion in 1996. This was a 3.8% increase from 1995. As a high, relatively dry
region with extensive grasslands, the State is ideal for raising cattle, sheep,
and other livestock. Because of irrigation and a variety of climatic conditions,
the State's farmers are able to produce a diverse assortment of quality
products. The State's farmers are major producers of alfalfa hay, wheat, chile
peppers, cotton, fruits and pecans. Agricultural businesses include chile
canneries, wineries, alfalfa pellets, chemical and fertilizer plants, farm
machinery, feed lots, and commercial slaughter plants.
BUDGETARY PROCESS. The State's government consists of the three
branches characteristic of the American political system: executive, legislative
and judicial. The executive branch is headed by the Governor who is elected for
a four-year term and may succeed him(her)self in office once. Following a
reorganization plan implemented in 1978 to reduce and consolidate some 390
agencies, boards and commissions, the primary functions of the executive branch
are now carried out by sixteen cabinet departments, each headed by a cabinet
secretary appointed by the Governor.
The Board, in addition to other powers and duties provided by law, has
general supervisory authority over the fiscal affairs of the State and over the
safekeeping and depositing of all money and securities belonging to, or in the
custody of, the State. The Board has seven members consisting of the Governor,
the Lieutenant Governor, the Treasurer and four members appointed by the
Governor with the advice and consent of the Senate; no more than two such
appointed members may be from the same political party.
The Department of Finance and Administration, created in 1957 as part
of governmental reorganization measures of that year, is the principal financial
organization of State government and performs through its divisions the duties
and functions relating to State and local government financing and general
administration. On July 1, 1983, the Department of Finance and Administration
was reorganized into the DFA, which retained the prior name and handles the
State's financial functions, and the General Services Department, which now
handles the administrative functions. The executive and administrative head of
the DFA is the Secretary, who is appointed by the Governor with the advice and
consent of the Senate, and who also serves as Executive Officer of the Board. In
1983, a Board of Finance Division was created in the DFA, to staff and
coordinate the functions of the Board.
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The Legislature convenes in regular session annually on the third
Tuesday in January. Regular sessions are constitutionally limited in length to
sixty calendar days in odd-numbered years and thirty calendar days in
even-numbered years. In addition, special sessions of the Legislature may be
convened by the Governor under certain limited circumstances.
All State agencies are required to submit their budget requests to the
Budget Division of the DFA by September 1 of each year. Budget hearings are
scheduled for the purpose of examining the merits of budget requests through the
fall and are usually completed by the middle of December. Statutes require the
Budget Division to present comprehensive budget recommendations to the Governor
annually by January 2.
By statute, the Governor is required to submit a budget for the
upcoming fiscal year to the Legislature by the 25th legislative day. The State
budget is contained in a General Appropriation Bill which is first referred to
the House Appropriations and Finance Committee for consideration. The General
Appropriation Act may also contain proposals for supplemental and deficiency
appropriations for the current fiscal year. The Senate and the Senate Finance
Committee consider the General Appropriation Act after its approval by the House
of Representatives. Upon Senate passage, the Governor may sign the General
Appropriation Act, veto it, veto line items or veto parts of it. After the
Governor has signed the General Appropriation Act, the Budget Division of the
DFA approves the agency budgets and monitors the expenditure of the funds
beginning on July 1, the fist day of the fiscal year.
REVENUES AND EXPENDITURES. The State derives the bulk of its recurring
General Fund revenues from five major sources: general and selective sales
taxes, income taxes, the emergency school tax on oil and gas production, rents
and royalties from State and federal land, and interest earnings from its two
Permanent Funds. Effective July 1, 1981, the Legislature abolished all property
taxes for State operating purposes.
FISCAL YEAR 1996-1997. For the Fiscal Year ending June 30, 1997,
recurring revenue totaled $2.964 billion, an increase of 5.5% over the previous
fiscal year. Total General Fund Revenue was $3.033 billion, up 10% from fiscal
year 1996. In general, weakness in broad-based taxes was offset by strength in
revenue related to the production of natural gas and crude oil.
Preliminary results for fiscal year 1998 show recurring appropriations
at $2.999 billion, up 4.7% from the previous fiscal year. Nonrecurring
appropriations for fiscal year 1997 were $85.2 million, and are estimated at
$4.4 million for fiscal year 1998. The net transfer necessary from the operating
reserve was $15.2 million and is within the $30 million transfer authority
authorized by the 1996 legislature.
The 1996 legislature also established the risk reserve fund within the
general fund. General fund balances including the risk reserve fund are
projected to total $231.6 million. Without the risk reserve, balances would be
$95.4 million. The fiscal year 1997 balance in the operating reserve was $80.8
million, or only 2.7% of fiscal year 1997 total revenue.
<PAGE>
Disaster allotments from the appropriation contingency fund totaled
$5.1 million, and the ending balance in the appropriation contingency fund is
$9.4 million.
FISCAL YEAR 1997-1998. General Fund recurring revenue is projected to
reach $3.08 billion in fiscal year 1998, a 4.0% increase over fiscal year 1997.
When nonrecurring revenue is included, total General Fund receipts will reach
$3.13 billion of recurring revenue and $3.14 billion total revenue, increases of
1.5% and 0.3%, respectively. Current and projected growth in recurring revenue
is slow when compared to the 1993 and 1995 period. Slow growth is largely
attributable to declines in severance-related taxes and declines in revenue from
rents and royalties. Lower natural gas and oil prices are responsible for
stagnation in severance-related taxes which are expected to grow only 0.9% in
fiscal year 1998 and decline by 13.7% in fiscal year 1999. Gross receipts taxes
will grow in fiscal year 1998 by 5.0% and income taxes will increase by 7.4%.
The growth in income taxes is augmented by increased capital gains realizations
due to new federal legislation. Nonrecurring revenue will decline 37.5% in
fiscal year 1998 and an additional 79.1% in fiscal year 1999. Fiscal year 1997
nonrecurring revenue was attributable to new estimated payments required for
personal income tax purposes. Fiscal year 1998 nonrecurring revenue includes
higher than usual reversions in the Medicaid program thanks to significant cost
savings.
DEBT ADMINISTRATION. The principal sources of funding for capital
projects by the State are surplus general fund balances, general obligation
bonds, and Severance Tax Bonds. The 1994 Legislature authorized the largest
capital program in the State's history, $383 million. The Executive Capital
outlay recommendation for the 1998 session totals $265.9 million. These
authorizations fund a broad range of State and local capital needs for various
public school and higher education acquisitions as well as correction
facilities, museum and cultural facilities, health facilities, State building
repairs, water rights, wastewater and water systems, State parks, local roads,
and senior citizens facilities projects.
GENERAL OBLIGATION BONDS. General obligation bonds of the State are
issued and the proceeds thereof appropriated to various purposes pursuant to an
act of the Legislature of the State. The State Constitution requires that any
law which authorizes general obligation debt of the State shall provide for an
annual tax levy sufficient to pay the interest and to provide a sinking fund to
pay the principal of the debts. General obligation bonds are general obligations
of the State for the payment of which the full faith and credit of the State are
pledged. The general obligation bonds are payable from "AD VALOREM" taxes levied
without limit as to rate or amount on all property in the State subject to
taxation for State purposes. For the fiscal year ended June 30, 1997, the total
amount outstanding on General Obligation Bonds was $247,313,874. Of this amount,
$42,018,874 is in interest.
The State of New Mexico General Obligation Capital Projects
Improvements Bonds Series 1997 in the principal amount of $64,825,000 are
authorized by the 1996 Capital Projects General Obligation Bond Act (the "ACT")
passed by the State Legislature in 1996, have been approved by the voters in a
statewide election in November 1996 and will be issued pursuant to a resolution
of the State Board of Finance. General obligation bond
<PAGE>
recommendations for fiscal year 1998-99 total $83.3 million. Of this amount,
$72.1 million is for public and higher education facilities, and $11.2 million
is for statewide projects.
SEVERANCE TAX BONDS. Severance Tax Bonds are not general obligations of
the State and the State is prohibited by law from using the proceeds of property
taxes as a source of payment of revenue bonds, including Severance Tax Bonds.
The State Treasurer keeps separate accounts for all money collected as Severance
Taxes, and is directed by State statute to pay Severance Tax Bonds from monies
on deposit in the Bonding Fund. For the fiscal year ended June 30, 1997, the
total amount outstanding on Severance Tax Bonds was $444,723,257. Of this
amount, $58,953,257 is in interest.
The Severance Tax Bonds, Series 1995A funds 55 projects for schools,
local governments, universities, and State agencies. Total amount of principal
and interest due on Series 1995-B and Series 1996-A as of June 30, 1997 is
$66,176,318 and $47,067,458, respectively. Total amount of principal and
interest outstanding as of June 30, 1997 for the Series 1997-A Refunding Bonds
is $68,515,621. The Severance Tax Bond recommendation for the 1998 session
totals $140 million. Of this amount, $68.6 million is for public and higher
education facilities, $12.7 million is for adult corrections projects and
facility purchase and $58.7 million is for other statewide projects.
Severance taxes have been collected by the State since the adoption of
the Severance Tax Act in 1937. Since 1959, certain severance tax receipts and
certain other monies determined by the Legislature have been deposited into the
Bonding Fund and used, in part, to retire bond issues which have funded a
variety of capital improvements in the State. The main minerals extracted from
the State which contribute the largest portion of Severance Tax revenues are
natural gas, oil and coal. Severance tax collections totaled $181.6 million in
fiscal year 1997 and are projected at $183.3 million for 1998.
Moody's and S&P have assigned the bond ratings of "Aa1" and "AA+,"
respectively to General Obligation Bonds and "Aa" and "AA," respectively, to the
Severance Tax Bonds, Series 1995A.
The foregoing information constitutes only a brief summary of some of
the financial difficulties which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the New Mexico Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired by the
New Mexico Trust to pay interest on or principal of the Bonds.
NEW MEXICO STATE TAXATION. For a discussion of the Federal tax status
of income earned on New Mexico Trust Units, see "Tax Status."
<PAGE>
The assets of the New Mexico Trust will consist of interest-bearing
obligations issued by or on behalf of the State of New Mexico ("NEW MEXICO") or
counties, municipalities, authorities or political subdivisions thereof (the
"NEW MEXICO BONDS"), and by or on behalf of the government of Puerto Rico, the
government of the Guam, or the government of the Virgin Islands (collectively
the "POSSESSION BONDS") (collectively the New Mexico Bonds and the Possession
Bonds shall be referred to herein as the "BONDS") the interest on which is
expected to qualify as exempt from New Mexico income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the New Mexico Trust. However, although no
opinion is expressed herein regarding such matter, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for federal income tax purposes and (iii) interest on the Bonds, if
received directly by a Unit holder, would be exempt from the New Mexico income
taxes applicable to individuals and corporation (collectively, the "NEW MEXICO
STATE INCOME TAX"). At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the Bonds, bond counsel to the issuing
authorities rendered opinions as to the exemption of interest from the New
Mexico State Income Tax. Neither the Sponsor nor its counsel has made any review
for the New Mexico Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith. The
opinion set forth below does not address the taxation of persons other than full
time residents of New Mexico.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing New Mexico law as of the date of this Prospectus and based upon the
assumptions set forth above:
1. The New Mexico Trust will not be subject to tax under the
New Mexico State Income Tax.
2. Interest on the Bonds which is exempt from the New Mexico
State Income Tax when received by the New Mexico Trust, and which would
be exempt from the New Mexico State Income Tax if received directly by
a Unitholder, will retain its status as exempt from such tax when
received by the New Mexico Trust and distributed to such Unitholder
PROVIDED that the New Mexico Trust complies with the reporting
requirements contained in the New Mexico State Income Tax Regulations.
3. To the extent that interest income derived from the New
Mexico Trust by a Unitholder with respect to Possession Bonds is exempt
from state taxes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section
1423a or 48 U.S.C. Section 1403, such interest income will not be
subject to New Mexico State Income Tax.
4. Each Unitholder will recognize gain or loss for New
Mexico State Income Tax purposes if the Trustee disposes of a bond
(whether by redemption, sale or otherwise) or if the Unitholder redeems
or sells Units of the New Mexico Trust to the
<PAGE>
extent that such a transaction results in a recognized gain or loss to
such Unitholder for Federal income tax purposes.
5. The New Mexico State Income Tax does not permit a
deduction of interest paid on indebtedness or other expenses incurred
(or continued) in connection with the purchase or carrying of Units in
the New Mexico Trust to the extent that interest income related to the
ownership of Units is exempt from the New Mexico State Income Tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provisions of New Mexico law. Prospective investors should
consult their tax advisors regarding collateral tax consequences under New
Mexico law relating to the ownership of the Units, including, but not limited
to, the inclusion of income attributable to ownership of the Units in "modified
gross income" for the purposes of determining eligibility for and the amount of
the low income comprehensive tax rebate, the child day care credit, and the
elderly taxpayers' property tax rebate and the applicability of other New Mexico
taxes, such as the New Mexico estate tax. We have assumed that at the respective
times of issuance of the Bonds, opinions relating to the validity thereof and to
the exemption of interest thereon from Federal income tax were rendered by bond
counsel to the respective issuing authorities. In addition, we have assumed
that, with respect to the New Mexico Bonds, bond counsel to the issuing
authorities rendered opinions as to the exemption of interest from the New
Mexico Income Tax and, with respect to the Possession Bonds, bond counsel to the
issuing authorities rendered opinions as to the exemption from all state and
local income taxation of the Possession Bonds and the interest thereon. Neither
the Sponsor nor its counsel has made any review for the New Mexico Trust of the
proceedings relating to the issuance of the Bonds or of the bases for the
opinions rendered in connection therewith.
RISK FACTORS SPECIFIC TO OREGON. Oregon's December 1997 forecast issued
by the Department of Administrative Services predicts that downside risks have
increased with volatility in worldwide financial markets and the likelihood of
slower growth in important Asian markets. Yet, there is most likely to be a
continuation of the modest deceleration that has taken place during 1997. Growth
is expected to be led by further expansion of the state's high technology
manufacturing industries and their suppliers, along with additional gains in
transportation equipment manufacturing. Expansion of these manufacturing sectors
will translate into job creation in the service-producing sectors. The
construction sector is expected to level off after four years of extremely rapid
growth, thereby slowing the state's overall growth rate.
A pattern of slowing growth is expected for both personal income and
employment. Total nonfarm wage and salary employment is projected to increase
3.5% for 1997, down from 4.0% in 1996. Job growth is expected to slow further to
2.6% in 1998. Personal income will grow a projected 6.7% for 1997 and 5.6% for
1998, down from 7.0% growth in 1996. The state's population is forecast to
increase 1.6% in 1998, up slightly from an estimated 1.5% in 1997.
<PAGE>
Oregon's unemployment rate increased from 4.8% in 1995 to 5.2% in 1996.
This compares favorably with the national unemployment rates of 5.6% in 1995 and
5.4% in 1996. However, as of November 1997, Oregon's unemployment rate was 5.3%
while the U.S. unemployment rate was 4.6%.
The statewide timber harvest is expected to be 4.0 billion board feet
for both 1997 and 1998, a slight increase from 3.932 billion board feet in 1996.
The 1996 statewide timber harvest was a decrease of 8.9% from 1995. In the
agricultural industry, cash commodities include farm forest products, cattle and
calves, nursery crops, dairy, wheat, potatoes, alfalfa hay, and perennial rye
grass seed.
BUDGETARY PROCESS. The Oregon budget is approved on a biennial basis by
separate appropriation measures. A biennium begins July 1 and ends June 30 of
odd-numbered years. Measures are passed for the approaching biennium during each
regular Legislative session, held beginning in January of odd-numbered years.
Because the Oregon Legislative Assembly meets in regular session for
approximately six months of each biennium, provision is made for interim funding
through the Legislative Emergency Board. The Emergency Board is authorized to
make allocations of General Fund monies to State agencies from the State
Emergency Fund. The Emergency Board may also authorize increases in expenditure
limitations from Other or Federal Funds (dedicated or continuously appropriated
funds), and may take other actions to meet emergency needs when the Legislative
Assembly is not in session. The most significant feature of the budgeting
process in Oregon is the constitutional requirement that the budget be in
balance at the end of each biennium. Because of this provision, Oregon may not
budget a deficit and is required to alleviate any revenue shortfalls within each
biennium.
REVENUE AND EXPENDITURES. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The total
budget consists of three segments distinguished by source of revenues: programs
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and Federal Funds. General Fund revenue
totaled $7,731.58 million for the 1995-1997 biennium. Revenue exceeded the May
estimate by $187.7 million.
General Fund revenue is projected to be $8,477.4 million for the
1997-99 biennium. The beginning balance is estimated to be $794.2 million for a
total General Fund resource estimate of $9,271.6 million. The December 1997-99
General Fund revenue estimate is $42.9 million higher than the September 1997
forecast. It is $252.4 million higher than the Close of Session (COS) forecast.
The State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future expenditures
or may impair future revenue sources. Because of the prospective nature of these
legal proceedings, no provision for these potential liabilities has been
recorded in the publicly disclosed financial statements. Additionally, 1,229
notices of tort claims have been filed against the State. Of those claims, 544
also have been filed as court actions, and are pending against the State. These
cases are
<PAGE>
pending in State courts and are subject to the liability limitations stated in
the Tort Claims Act of $500,000 per occurrence, $200,000 per individual for
physical injuries, and $50,000 per occurrence for property damage. The
likelihood of an unfavorable outcome in these cases ranges from probable to
remote, but it is certain that these cases do not involve real exposure of $25
million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or may have,
a material financial impact on the State. "Measure 11" amends Oregon statutes to
require mandated minimum sentences for certain felonies, effective April 1,
1995. "Measure 11" creates a need for an estimated 6,085 new prison beds by the
year 2001 and calls for State correction facility construction costs of
approximately $462 million in the next five years. The State also estimates
increases in State expenditures for correctional operations, beginning with an
increase of $3.2 million in fiscal year 1996, with accelerating costs that
should peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by on the State General Fund, they will
reduce amounts that otherwise would be available in the future for the Oregon
Legislative Assembly to appropriate for other purposes.
In November of 1996, voters approved Ballot Measure 47, the property
tax cut and cap. It will reduce revenues to schools, cities and counties by as
much as $1 billion and put pressure on the General Fund to make up some or all
of the difference.
Ballot Measure 50, passed by Oregon voters in May of 1997, limits the
taxes a property owner must pay. It limits taxes on each property by rolling
back the 1997-98 assessed value of each property to 90% of its 1995-96 value.
The measure also limits future growth on taxable value to 3% a year, with
exceptions for items such as new construction, remodeling, subdivisions, and
rezoning. It establishes permanent tax rates for Oregon's local taxing
districts, yet allows voters to approve new, short-term option levies outside
the permanent rate limit if approved by a majority of a 50% voter turnout.
DEBT ADMINISTRATION AND LIMITATION. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of sale for
State agency bonds. The Governor, by statute, seeks the advice of the State
Treasurer when recommending the total biennial bonding level for State programs.
Agencies may not request that the Treasurer issue bonds or certificates of
requirements for state agencies on proposed and outstanding debt. Statutes
contain management and reporting requirements for state agencies on proposed and
outstanding debt.
A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects. General
obligation bond authority requires voter approval or a constitutional amendment,
while revenue bonds may be issued under statutory authority. However, under the
Oregon Constitution the state may issue up to $50,000 of general obligation debt
without specific voter approval. The State Legislative Assembly has the right to
place limits on general obligation bond programs which are more restrictive than
those approved by the voters. General obligation authorizations are
<PAGE>
normally expressed as a percentage of statewide True Cash Value (TCV) of taxable
property. Revenue bonds usually are limited by the Legislative Assembly to a
specific dollar amount.
The State's constitution authorizes the issuance of general obligation
bonds for financing community colleges, highway construction, and pollution
control facilities. Higher education institutions and activities and community
colleges are financed through an appropriation from the General Fund. Facilities
acquired under the pollution control program are required to conservatively
appear to be at least 70% self-supporting and self-liquidating from revenues,
gifts, federal government grants, user charges, assessments, and other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans, provide loans
for state residents to construct water development projects, provide credit for
multi-family housing for elderly and disabled persons, and for small scale local
energy projects. These bonds are self-supporting and are accounted for as
enterprise funds. Certain provisions of the Water Resources general obligation
bond indenture conflict with State statutes. Upon the advice of the Attorney
General, the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation pending
against the State concerning this treatment of the investment interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects, facilities,
institutions, and activities. As of September 1, 1997, the total balance of
general obligation bonds was $3.26 billion. The debt service requirements for
general obligation bonds, including interest of approximately $2.39 billion, as
of September 1, 1997, was $5.66 billion.
In addition to general obligation and direct revenue bonds, the State
of Oregon issues industrial development revenue bonds ("IDBS"), Oregon Mass
Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds. The IDBs
are issued to finance the expansion, enhancement or relocation of private
industry in the State. Before such bonds are issued, the project application
must be reviewed and approved by both the Oregon State Treasury and the Oregon
Economic Development Commission. Strict guidelines for eligibility have been
developed to ensure that the program meets a clearly defined development
objective. IDBs issued by the State are secured solely by payments from the
private company and there is no obligation, either actual or implied, to provide
state funds to secure the bonds. The Oregon Mass Transportation Financing
Authority ("OMTFA") reviews financing requests from local mass transit districts
and may authorize issuance of revenue bonds to finance eligible projects. The
State has no financial obligation for these bonds, which are secured solely by
payments from local transit districts.
The State is statutorily authorized to enter into financing agreements
through the issuance of certificates of participation. Certificates of
participation have been used for the acquisition of computer systems by the
Department of Transportation, Department of
<PAGE>
Administrative Services, and the Department of Higher Education. Also,
certificates of participation have been used for the acquisition or construction
of buildings by the Department of Administrative Services, Department of Fish
and Wildlife, Department of Corrections, State Police, and Department of Higher
Education. Further, certificates of participation were used in the acquisition
of telecommunication systems by the Department of Administrative Services and
the Adult & Family Services Division. As of September 1, 1997, the certificates
of participation debt totaled $634.9 million. The debt service requirements for
certificates of participation for 1995-1997 is estimated at $70.1 million.
HHECFA is a public corporation created in 1989, and modified in 1991,
to assist with the assembling and financing of lands for health care, housing,
educational and cultural uses and for the construction and financing of
facilities for such uses. The Authority reviews proposed projects and makes
recommendations to the State Treasurer as to the issuance of bonds to finance
proposed projects. The State has no financial obligation for these bonds, which
are secured solely by payments from the entities for which the projects were
financed.
The Treasurer on behalf of the State may also issue federally taxable
bonds in those situations where securing a federal tax exemption is unlikely or
undesirable; regulate "current" as well as "advance" refunding bonds; enter into
financing agreements, including lease purchase agreements, installment sales
agreements and loan agreements to finance real or personal property and approve
certificates of participation with respect to the financing agreements. Amounts
payable by the State under a financing agreement are limited to funds
appropriated or otherwise made available by the Legislative Assembly for such
payment. The principal amount of such financing agreements are treated as bonds
subject to maximum annual bonding levels established by the Legislative Assembly
under Oregon statute.
Each of Fitch IBCA, Inc. (formerly Fitch Investors Service, L.P.),
Moody's Investors Service and Standard & Poor's Ratings Group has assigned their
municipal bond ratings of "AA," "Aa," and "AA," respectively.
The foregoing information constitutes only a brief summary of some of
the financial difficulties which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Oregon Trust are subject. Additionally, many factors
including national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State and various
agencies and political subdivisions located in the State. The Sponsor is unable
to predict whether or to what extent such factors or other factors may affect
the issuers of Bonds, the market value or marketability of the Bonds or the
ability of the respective issuers of the Bonds acquired by the Oregon Trust to
pay interest on or principal of the Bonds.
OREGON STATE TAXATION. For a discussion of the Federal tax status of
income earned on Oregon Trust Units, see "Tax Status."
The assets of the Oregon Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Oregon (the "STATE") or
counties, municipalities, authorities or
<PAGE>
political subdivisions thereof (the "OREGON BONDS") or by the Commonwealth of
Puerto Rico, Guam and the United States Virgin Islands (the "POSSESSION BONDS")
(collectively, the "BONDS"). Neither the Sponsor nor its counsel have
independently examined the Bonds to be deposited in and held in the Oregon
Trust. Although no opinion is expressed herein regarding such matters, it is
assumed that: (i) the Bonds were validly issued; (ii) the interest thereon is
excludable from gross income for Federal income tax purposes; and (iii) interest
on the Bonds, if received directly by an Oregon Unitholder, would be exempt from
the Oregon income tax applicable to individuals (the "OREGON PERSONAL INCOME
TAX").
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Oregon law as of the date of this Prospectus and based on the
assumptions set forth above:
1. The Oregon Trust is not an association taxable as a
corporation and based upon an administrative rule of the Oregon State
Department of Revenue, each Oregon Unitholder of the Oregon Trust will
be essentially treated as the owner of a pro rata portion of the Oregon
Trust and the income of such portion of the Oregon Trust will be
treated as the income of the Oregon Unitholder for Oregon Personal
Income Tax purposes;
2. Interest on the Bonds which is exempt from the Oregon
Personal Income Tax when received by the Oregon Trust, and which would
be exempt from the Oregon Personal Income Tax if received directly by
an Oregon Unitholder, will retain its status as exempt from such tax
when received by the Oregon Trust and distributed to an Oregon
Unitholder;
3. To the extent that interest derived from the Oregon Trust
by an Oregon Unitholder with respect to the Possession Bonds is
excludable from gross income for Federal income tax purposes pursuant
to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a and 48 U.S.C. Section
1403, such interest will not be subject to the Oregon Personal Income
Tax;
4. Each Oregon Unitholder of the Oregon Trust will recognize
gain or loss for Oregon Personal Income Tax purposes if the Trustee
disposes of a bond (whether by redemption, sale or otherwise) or if the
Oregon Unitholder redeems or sells Units of the Oregon Trust to the
extent that such a transaction results in a recognized gain or loss to
such Oregon Unitholder for Federal income tax purposes; and
5. The Oregon Personal Income Tax does not permit a
deduction of interest paid or incurred on indebtedness incurred or
continued to purchase or carry Units in the Oregon Trust, the interest
on which is exempt from such Tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Oregon law. Ownership of the Units may result in
collateral Oregon tax consequences to certain taxpayers including, but not
limited to, the calculation of "net pension income" tax credits for retirees and
the applicability of other Oregon taxes.
<PAGE>
Prospective investors should consult their tax advisors as to the applicability
of any such collateral consequences.
Chapman and Cutler has not examined any of the Bonds to be deposited
and held in the Oregon Trust or the proceedings for the issuance thereof or the
opinions of bond counsel with respect thereto and therefore it expresses no
opinion as to the exemption from the Oregon Personal Income Tax of interest on
the Bonds if received directly by an Oregon Unitholder. In addition, prospective
purchasers subject to the Oregon corporate income tax should be advised that for
purposes of the Oregon Corporate Income (Excise) Tax, interest on the Bonds
received by the Oregon Trust and distributed to an Oregon Unitholder subject to
such tax will be added to the corporate Oregon Unitholder's Federal taxable
income and therefore will be taxable. No opinion is expressed regarding the
Oregon taxation of foreign or domestic insurance companies. We have assumed that
at the respective times of issuance of the Bonds, opinions relating to the
validity thereof and to the exemption of interest thereon from Federal income
tax were rendered by bond counsel to the respective issuing authorities. In
addition, we have assumed that, with respect to the Oregon Bonds, bond counsel
to the issuing authorities rendered opinions as to the exemption of interest
from the Oregon Income Tax and, with respect to the Possession Bonds, bond
counsel to the issuing authorities rendered opinions as to the exemption from
all state and local income taxation of the Possession Bonds and the interest
thereon. Neither the Sponsor nor its counsel has made any review for the Oregon
Trust of the proceedings relating to the issuance of the Bonds or of the bases
for the opinions rendered in connection therewith.
RISK FACTORS SPECIFIC TO PENNSYLVANIA. Investors should be aware of
certain factors that might affect the financial conditions of the Commonwealth
of Pennsylvania. Investors should be aware of certain factors that might affect
the financial conditions of the Commonwealth of Pennsylvania. Pennsylvania
historically has been identified as a heavy industry state although that
reputation has changed recently as the industrial composition of the
Commonwealth diversified when the coal, steel and railroad industries began to
decline. A more diversified economy was necessary as the traditionally strong
industries in the Commonwealth declined due to a long-term shift in jobs,
investment and workers away from the northeast part of the nation. The major
sources of growth in Pennsylvania are in the service sector, including trade,
medical and the health services, education and financial institutions.
Pennsylvania's agricultural industries are also an important component of the
Commonwealth's economic structure, particularly in crop and livestock products
as well as agribusiness and food related industries.
Strong growth experienced in Pennsylvania in 1997 was unanticipated and
is unlikely to continue. The peak growth was reached during the first quarter
and growth in subsequent quarters has been lower. Due to Pennsylvania's improved
competitive position, the Commonwealth should experience economic growth rates
close to the national average. The annual rate of job growth, ranked 45th in
1995, is currently ranked 17th nationwide.
Non-manufacturing employment has increased in recent years to 82.8% of
total Commonwealth employment as of March 1998. Consequently, manufacturing
employment constitutes a diminished share of total employment within the
Commonwealth.
<PAGE>
Manufacturing, contributing 17.2% of non-agricultural employment as of March
1998, has fallen behind both the services sector and the trade sector as the
largest single source of employment within the Commonwealth. In March 1998, the
services sector accounted for 31.8% of all non-agricultural employment while the
trade sector accounted for 22.4%.
Preliminary results from the Pennsylvania Department of Labor and
Industry show Pennsylvania's total non-farm jobs increased by 66,900 or almost
1.2% from March 1997 to March 1998, a stark difference from the 106,200 gain
between December 1996 and December 1997. The services industry was responsible
for over one-half of all new jobs created during this period. Retail trade
increased merely .31% or 3,000 jobs. Construction employment increased 3% or
6,300 jobs. Manufacturing growth was slow at .6% or 5,100 jobs from March 1997
to March 1998. As of March 1998, the seasonally adjusted unemployment rate for
the Commonwealth was 4.8% compared to 4.7% for the United States.
More jobs in 1997 brought faster growing personal income. For the four
quarters ending with the first quarter of 1997, personal income in Pennsylvania
rose at a rate of over 6%. This healthy advance contributed to a 6.1% increase
in General Fund tax revenue for fiscal year 1996-97 due to similar increases in
collections for personal income tax and the sales and use tax.
Financial information for the principal operating funds of the
Commonwealth is maintained on a budgetary basis of accounting. A budgetary basis
of accounting is used for the purpose of ensuring compliance with the enacted
operating budget and is governed by applicable statutes of the Commonwealth and
by administrative procedures. The Commonwealth also prepares annual financial
statements in accordance with generally accepted accounting principles ("GAAP").
The budgetary basis financial information maintained by the Commonwealth to
monitor and enforce budgetary control is adjusted at fiscal year-end to reflect
appropriate accruals for financial reporting in conformity with GAAP.
FISCAL 1997 FINANCIAL RESULTS. At June 30, 1997, the Commonwealth
reported an unreserved/undesignated fund balance (budgetary basis) of $402.7
million in the General Fund. This compares to a budgetary basis fund balance of
$158.5 million at June 30, 1996. The budgetary basis fund balance for the fiscal
year ended June 30, 1997 was the result of revenue collections totaling
$26,149.6 million less appropriation authorizations totaling $25,835.7 million,
less other net financing uses totaling $69.7 million. Included in the $25,835.7
million appropriation authorizations are $164.3 million of state supplemental
appropriations and $207.0 million in federal supplemental appropriations
authorized during the fiscal year.
On a GAAP basis, at June 30, 1997, the Commonwealth's General Fund
reported a fund balance of $1,364.9 million, an increase of $729.7 million from
the $635.2 million fund balance at June 30, 1996. Total assets increased by
$563.4 million to $4,268.5 million. Liabilities decreased $166.3 million to
$2,903.6 million.
<PAGE>
For fiscal year 1996-97, revenues of the Commonwealth's General,
Special Revenue, Debt Service and Capital Projects Funds (collectively, the
governmental funds) totaled $32,073 million, an increase of $1,147 million or
3.7% from fiscal year 1995-96. Taxes accounted for 56.6% of the total general
governmental revenues. Their combined fund balances at June 30, 1997 increased
by $914.6 million to $2,900.9 million. The unreserved/undesignated fund balance
was $699.2 million compared to $378.2 million from the previous year.
FISCAL 1998 BUDGET. Total receipts for fiscal year 1997-98 are
projected at $17,077 million. Appropriations are estimated at $17,269 million.
The closing balance in the General Fund (after adding the beginning balance of
$403 billion and deducting lapses of $120 million) is $331 million. After a
transfer to the Rainy Day Fund of $50 million, the ending balance in the General
Fund for fiscal year 1997-98 is estimated at $281 million.
Estimated revenues for 1997-98 have been raised $231.1 million due to
substantial upward revisions to personal income and inheritance revenues and
downward revisions to sales and use and insurance premiums taxes. The personal
income tax has provided almost all of the revenue surplus. Through December
1997, fiscal year 1997-98 revenues have increased 2.8% over the same period in
the prior fiscal year. Revised estimates for 1997-98 project a 2.1% increase in
General Fund revenues. Total revenues, excluding proposed tax changes, are
projected to increase by 2.9%.
PROPOSED FISCAL 1999 BUDGET. The Governor's 1998-99 Budget continues a
four-year record of tax cuts and fiscal discipline. The proposed 1998-99 General
Fund Budget is $17.8 billion, an increase of $518 million or 3%. The total
recommended budget for 1998-99 is $35.8 billion. Approximately $10.16 billion is
from federal funds.
General Fund revenue is estimated to be generated in the following
percentages: 34.7% from sales tax, 34.2% from personal income tax, 12.5% from
business tax, 9.3% from corporate net income tax, 5.4% from other revenues, and
3.9% from the inheritance tax. Total expenditures for fiscal year 1998-99 are
estimated in the following percentages: 44.3% for education, 34.4% for health
and human services, 11.3% for protection, 3.8% for direction programs, 3.1% for
other programs, and 3.1% for economic development.
Budgets for the past four years have proposed an average spending
growth of 2.0%. The average growth in the enacted budgets during the previous
ten-year period was 5.4%. Over $128 million in tax reductions are proposed in
1998-99 to help working families and to stimulate job creation and retention.
After an estimated $2 million transfer to the Rainy Day Fund in
1998-99, the ending fund balance for the General Fund for fiscal year 1998-99 is
estimated at $9 million. With the projected transfer at the end of 1998-99, the
reserve balance in the Commonwealth's Rainy Day Fund will exceed $500 million,
more than seven times the balance in 1994-95.
DEBT ADMINISTRATION. The Constitution of the Commonwealth of
Pennsylvania permits the incurrence of debt, without approval of the electorate,
for capital projects specifically
<PAGE>
authorized in a capital budget. Capital project debt outstanding cannot exceed
one and three quarters (1.75) times the average of the annual tax revenues
deposited in all funds during the previous five fiscal years. The certified
constitutional debt limit at August 29, 1997 was $34.3 billion. Outstanding
capital project debt at August 29, 1997 amounted to $3.7 billion.
In addition to constitutionally authorized capital project debt, the
Commonwealth may incur debt for electorate approved programs, such as economic
revitalization, land and water development, and water facilities restoration;
and for special purposes approved by the General Assembly, such as disaster
relief. The total general obligation bond indebtedness outstanding at June 30,
1997 was $4,842 million. Total debt service transfers paid from General Fund and
Motor License Fund appropriations during the fiscal year ended June 30, 1997
amounted to $781.5 million.
All outstanding general obligation bonds of the Commonwealth are rated
AA- by S&P and Aa3 by Moody's. Any explanation concerning the significance of
such ratings must be obtained from the rating agencies. There is no assurance
that any ratings will continue for any period of time or that they will not be
revised or withdrawn.
In addition to general obligation bonds, the Commonwealth issues tax
anticipation notes ("TANS") to meet operating cash needs during certain months
of the fiscal year. The Commonwealth anticipates issuance of $225 million in
General Fund TANS during the 1997-98 fiscal year. During fiscal year 1996-97,
$550 million TANS were issued.
The City of Philadelphia ("PHILADELPHIA") is the largest city in the
Commonwealth, with an estimated population of 1,478,002 in 1996, according to
the U.S. Bureau of the Census. Philadelphia functions both as a city of the
first class and a county for the purpose of administering various governmental
programs.
Legislation providing for the establishment of the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") to assist first class cities in
remedying fiscal emergencies was enacted by the General Assembly and approved by
the Governor in June 1991. PICA is designed to provide assistance through the
issuance of funding debt to liquidate budget deficits and to make factual
findings and recommendations to the assisted city concerning its budgetary and
fiscal affairs. An intergovernmental cooperation agreement between Philadelphia
and PICA was approved by City Council on January 3, 1992, and approved by the
PICA Board and signed by the Mayor on January 8, 1992. At this time,
Philadelphia is operating under a five-year fiscal plan approved by PICA on
April 30, 1996.
As of February 28, 1997, PICA has issued approximately $1,761.7 million
of its Special Tax Revenue Bonds to provide financial assistance to
Philadelphia, to liquidate the cumulative General Fund balance deficit, to
refund certain general obligation bonds of the City and to fund additional
capital projects. No further PICA bonds are to be issued by PICA for the purpose
of financing a capital project or deficit as the authority for such bond sales
expired on December 31, 1994. PICA's authority to issue debt for the purpose of
financing a cash flow deficit expired on December 31, 1996. Its ability to
refund existing
<PAGE>
outstanding debt is unrestricted. PICA had $1,102.4 million in Special Tax
Revenue Bonds outstanding as of June 30, 1997.
The audited General fund balance of the City as of June 30, 1995, 1996,
and 1997 showed a surplus of approximately $80.5 million, $118.5 million, and
$128.8 million, respectively.
S&P's rating on Philadelphia's general obligation bonds is "BBB" and
Moody's rating is "Baa." Any explanation concerning the significance of such
ratings must be obtained from the rating agencies. There is no assurance that
any ratings will continue for any period of time or that they will not be
revised or withdrawn.
It should be noted that the creditworthiness of obligations issued by
local Pennsylvania issuers may be unrelated to the creditworthiness of
obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth to make payment on such local
obligations in the event of default.
PENNSYLVANIA STATE TAXATION. For a discussion of the Federal tax status
of income earned on Pennsylvania Trust Units, see "Tax Status."
We have examined certain laws of the State of Pennsylvania (the
"STATE") to determine their applicability to the Pennsylvania Trust (the
"PENNSYLVANIA TRUST") and to the holders of Units in the Pennsylvania Trust who
are residents of the State of Pennsylvania (the "UNITHOLDERS"). The assets of
the Pennsylvania Trust will consist of interest-bearing obligations issued by or
on behalf of the State, any public authority, commission, board or other agency
created by the State or a political subdivision of the State, or political
subdivisions thereof (the "BONDS"). Distributions of income with respect to the
Bonds received by the Pennsylvania Trust will be made monthly.
Although we express no opinion with respect thereto, in rendering the
opinion expressed herein, we have assumed that: (i) the Bonds were validly
issued by the State or its municipalities, as the case may be, (ii) the interest
therein is excludable from gross income for federal income tax purposes, (iii)
the interest thereon is exempt from Pennsylvania State and local taxes and (iv)
the Bonds are exempt from county personal property taxes. This opinion does not
address the taxation of persons other than full-time residents of Pennsylvania.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Pennsylvania law as of the date of this Prospectus and based upon the
assumptions set forth above:
1. The Pennsylvania Trust will have no tax liability for
purposes of the personal income tax (the "PERSONAL INCOME TAX"), the
corporate income tax (the "CORPORATE INCOME TAX") and the capital
stock-franchise tax (the "FRANCHISE TAX"), all of which are imposed
under the Pennsylvania Tax Reform Code of 1971, or the
<PAGE>
Philadelphia School District Investment Net Income Tax (the
"PHILADELPHIA SCHOOL TAX") imposed under Section 19-1804 of the
Philadelphia Code of Ordinances.
2. Interest on the Bonds, net of Pennsylvania Trust
expenses, which is exempt from the Personal Income Tax when received by
the Pennsylvania Trust and which would be exempt from such tax if
received directly by a Unitholder, will retain its status as exempt
from such tax when received by the Pennsylvania Trust and distributed
to such Unitholder. Interest on the Bonds which is exempt from the
Corporate Income Tax and the Philadelphia School Tax when received by
the Pennsylvania Trust and which would be exempt from such taxes if
received directly by a Unitholder, will retain its status as exempt
from such taxes when received by the Pennsylvania Trust and distributed
to such Unitholder.
3. Distributions from the Pennsylvania Trust attributable to
capital gains recognized by the Pennsylvania Trust upon its disposition
of a Bond issued on or after February 1, 1994, will be taxable for
purposes of the Personal Income Tax and the Corporate Income Tax. No
opinion is expressed with respect to the taxation of distributions from
the Pennsylvania Trust attributable to capital gains recognized by the
Pennsylvania Trust upon its disposition of a Bond issued before
February 1, 1994.
4. Distributions from the Pennsylvania Trust attributable to
capital gains recognized by the Pennsylvania Trust upon its disposition
of a Bond will be exempt from the Philadelphia School Tax if the Bond
was held by the Pennsylvania Trust for a period of more than six months
and the Unitholder held his Unit for more than six months before the
disposition of the Bond. If, however, the Bond was held by the
Pennsylvania Trust or the Unit was held by the Unitholder for a period
of less than six months, then distributions from the Pennsylvania Trust
attributable to capital gains recognized by the Pennsylvania Trust upon
its disposition of a Bond issued on or after February 1, 1994 will be
taxable for purposes of the Philadelphia School Tax; no opinion is
expressed with respect to the taxation of any such gains attributable
to Bonds issued before February 1, 1994.
5. Insurance proceeds paid under policies which represent
maturing interest on defaulted obligations will be exempt from the
Corporate Income Tax to the same extent as such amounts are excluded
from gross income for federal income tax purposes. No opinion is
expressed with respect to whether such insurance proceeds are exempt
from the Personal Income Tax or the Philadelphia School Tax.
6. Each Unitholder will recognize gain for purposes of the
Corporate Income Tax if the Unitholder redeems or sells Units of the
Pennsylvania Trust to the extent that such a transaction results in a
recognized gain to such Unitholder for federal income tax purposes and
such gain is attributable to Bonds issued on or after February 1, 1994.
No opinion is expressed with respect to the taxation of gains realized
by a Unitholder on the sale or redemption of a Unit to the extent such
gain is attributable to Bonds issued prior to February 1, 1994.
<PAGE>
7. A Unitholder's gain on the sale or redemption of a Unit
will be subject to the Personal Income Tax, except that no opinion is
expressed with respect to the taxation of any such gain to the extent
it is attributable to Bonds issued prior to February 1, 1994.
8. A Unitholder's gain upon a redemption or sale of Units
will be exempt from the Philadelphia School Tax if the Unitholder held
his Unit for more than six months and the gain is attributable to Bonds
held by the Pennsylvania Trust for a period of more than six months.
If, however, the Unit was held by the Unitholder for less than six
months or the gain is attributable to Bonds held by the Pennsylvania
Trust for a period of less than six months, then the gains will be
subject to the Philadelphia School Tax; except that no opinion is
expressed with respect to the taxation of any such gains attributable
to Bonds issued before February 1, 1994.
9. The Bonds will not be subject to taxation under the
County Personal Property Tax Act of June 17, 1913 (the "PERSONAL
PROPERTY TAX"). Personal property taxes in Pennsylvania are imposed and
administered locally, and thus no assurance can be given as to whether
Units will be subject to the Personal Property Tax in a particular
jurisdiction. However, in our opinion, Units should not be subject to
the Personal Property Tax.
Unitholders should be aware that, generally, interest on indebtedness
incurred or continued to purchase or carry Units is not deductible for purposes
of the Personal Income Tax, the Corporate Income Tax or the Philadelphia School
Tax.
We have not examined any of the Bonds to be deposited and held in the
Pennsylvania Trust or the proceedings for the issuance thereof or the opinions
of bond counsel with respect thereto, and therefore express no opinion as to the
exemption from federal or state income taxation of interest on the Bonds if
interest thereon had been received directly by a Unitholder.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Pennsylvania law. Ownership of the Units may result
in collateral Pennsylvania tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
RISK FACTORS SPECIFIC TO PUERTO RICO. The economy of Puerto Rico is
closely integrated with that of the mainland United States. During fiscal 1996
approximately 88% of Puerto Rico's exports were to the U.S. mainland, which was
also the source of approximately 62% of Puerto Rico's imports. The economy of
Puerto Rico is dominated by the manufacturing and service sectors. The
manufacturing sector has experienced a basic change over the years as a result
of increased emphasis on higher wage, high technology industries such as
pharmaceuticals, electronics, computers, microprocessors, professional and
scientific instruments, and certain high technology machinery and equipment. The
service sector, including finance, insurance and real estate, also plays a major
role in the economy. It ranks second only to manufacturing in contribution to
the gross domestic
<PAGE>
product and leads all sectors in providing employment. In recent years, the
service sector has experienced significant growth in response to the expansion
of the manufacturing sector.
Puerto Rico's more than decade-long economic expansion continued
throughout the five-year period from fiscal 1992 through fiscal 1996. Almost
every sector of the economy participated and record levels of employment were
achieved. Factors behind this expansion included government-sponsored economic
development programs, periodic declines in the exchange value of the U.S.
dollar, increases in the level of federal transfers and the relatively low cost
of borrowing. Unemployment, although at relatively low historical levels,
remains above the average for the United States. Average employment increased
from 977,000 in fiscal 1992 to 1,092,300 in fiscal 1996. Average unemployment
decreased from 16.5% in fiscal 1992, to 13.8% in fiscal 1996.
Gross product in fiscal 1992 was $23.7 billion and gross product in
fiscal 1996 was $30.2 billion ($26.7 billion in 1992 prices). This represents an
increase in gross product of 27.7% from fiscal 1992 to 1996 (12.9% in 1992
prices). Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1996, aggregate personal
income was $29.4 billion ($27.8 billion in 1992 prices) and personal income per
capita was $7,882 ($7,459 in 1992 prices).
The gross product forecast for fiscal 1997, made in February 1997,
projects an increase of 2.8% over fiscal 1996. Further growth in the Puerto Rico
economy in fiscal 1997 depends on several factors, including the strength of the
U.S. economy, the relative stability in the price of oil imports, increases in
the number of visitors to the island, the level of exports, the exchange value
of the U.S. dollar, the level of federal transfers and the cost of borrowing.
During the first seven months of fiscal 1997, total employment (seasonally
adjusted) averaged 1,129,100, compared to 1,089,000 in the same period in fiscal
1996, an increase of 3.7%.
The Puerto Rican economy is affected by a number of Commonwealth and
federal investment incentive programs. 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 further reduction in transfer payment programs such as food
stamps, curtailment of military spending and policies which could lead to a
stronger dollar. One of the factors assisting the development of the Puerto
Rican economy has been the tax incentives offered by the federal and Puerto Rico
governments. Recently enacted federal legislation amending Internal Revenue Code
Section 936, however, phases out the federal tax incentives during a ten-year
period.
On February 26, 1997, legislation was introduced in the U.S. House of
Representatives proposing a mechanism to settle permanently the political
relationship between Puerto Rico and the United States, either through full self
government (E.G., statehood or independence, including, as an alternative, free
association via a bilateral treaty) or continued commonwealth. Under the
legislation, failure to settle on full self government after completion of the
referendum process provided therein would result in retention of
<PAGE>
commonwealth status. Any change in the current status of Puerto Rico could have
a material adverse impact 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. However, no assessment can be made at this time of the
economic and other effects of a change in federal laws affecting Puerto Rico.
FEDERAL TAXATION. For a discussion of the Federal tax status of income
earned on Territorial Trust Units, see "Tax Status."
<PAGE>
EQUIVALENT TAXABLE ESTIMATED CURRENT RETURNS
As of the date of this Prospectus, the following table shows the
approximate taxable estimated current returns for individuals that are
equivalent to tax-exempt estimated current returns under combined Federal and
State (if applicable) taxes using the published Federal and State (if
applicable) tax rates scheduled to be in effect in 1998. This table illustrates
approximately what you would have to earn on taxable investments to equal the
tax-exempt estimated current return in your income tax bracket. For cases in
which more than one State bracket falls within a Federal bracket, the highest
State bracket is combined with the Federal bracket. The combined State and
Federal tax rates shown reflect the fact that State tax payments are currently
deductible for Federal tax purposes. The table does not show the approximate
taxable estimated current returns for individuals who are subject to the
alternative minimum tax. The taxable equivalent estimated current returns may be
somewhat higher than the equivalent returns indicated in the following table for
those individuals who have adjusted gross incomes in excess of $124,500. The
table does not reflect the effect of limitations on itemized deductions and the
deduction for personal exemptions which were designed to phase out certain
benefits of these deductions for higher income taxpayers. These limitations are
subject to certain maximums, which depend on the number of exemptions claimed
and the total amount of the taxpayer's itemized deductions. For example, the
limitation on itemized deductions will not cause a taxpayer to lose more than 80
percent of his allowable itemized deductions, with certain exceptions. See "Tax
Status" for a more detailed discussion of recent Federal tax legislation,
including a discussion of provisions affecting corporations.
ARIZONA TAX EQUIVALENT TABLE
<TABLE>
<CAPTION>
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-25.35 18.2% 5.50% 6.11% 6.72% 7.33% 7.95% 8.56% 9.17%
$ 0-42.35 17.8% 5.47 6.08 6.69 7.30 7.91 8.52 9.12
25.35-61.40 42.35-102.30 31.4% 6.56 7.29 8.02 8.75 9.48 10.20 10.93
61.40-128.10 102.30-155.95 34.3% 6.85 7.61 8.37 9.13 9.89 10.65 11.42
155.95-278.45 39.0% 7.38 8.20 9.02 9.84 10.66 11.48 12.30
128.10-278.45 39.3% 7.41 8.24 9.06 9.88 10.71 11.53 12.36
Over 278.45 Over 278.45 42.7% 7.85 8.73 9.60 10.47 11.34 12.22 13.09
<PAGE>
COLORADO TAX EQUIVALENT TABLE
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
$ 0-25.35 $ 0-42.35 19.3% 5.58% 6.20% 6.82% 7.43% 8.05% 8.67% 9.29%
25.35-61.40 42.35-102.30 31.6 6.58 7.31 8.04 8.77 9.50 10.23 10.96
61.40-128.10 102.30-155.95 34.5 6.87 7.63 8.40 9.16 9.92 10.69 11.45
128.10-278.45 155.95-278.45 39.2 7.40 8.22 9.05 9.87 10.69 11.51 12.34
Over 278.45 Over 278.45 42.6 7.84 8.71 9.58 10.45 11.32 12.20 13.07
MINNESOTA TAX EQUIVALENT TABLE
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
$ 0-25.35 $ 0-42.35 21.8% 5.75% 6.39% 7.03% 7.67% 8.31% 8.95% 9.59%
25.35-61.40 42.35-102.30 34.1 6.83 7.59 8.35 9.10 9.86 10.62 11.38
61.40-128.10 102.30-155.95 36.9 7.13 7.92 8.72 9.51 10.30 11.09 11.89
128.10-278.45 155.95-278.45 41.4 7.68 8.53 9.39 10.24 11.09 11.95 12.80
Over 278.45 Over 278.45 44.7 8.14 9.04 9.95 10.85 11.75 12.66 13.56
NATIONAL TAX EQUIVALENT TABLE
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
$ 0-25.35 $ 0-42.35 15.0% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82%
25.35-61.40 42.35-102.30 28.0 6.25 6.94 7.64 8.33 9.03 9.72 10.42
61.40-128.10 102.30-155.95 31.0 6.52 7.25 7.97 8.70 9.42 10.14 10.87
128.10-278.45 155.95-278.45 36.0 7.03 7.81 8.59 9.38 10.16 10.94 11.72
Over 278.451 Over 278.45 39.6 7.45 8.28 9.11 9.93 10.76 11.59 12.42
NEW MEXICO TAX EQUIVALENT TABLE
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
$ 0-25.35 20.1% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76% 9.39%
$ 0-42.35 21.0 5.70 6.33 6.96 7.59 8.23 8.86 9.49
25.35-61.40 33.7 6.79 7.54 8.30 9.05 9.80 10.56 11.31
42.35-102.30 33.9 6.81 7.56 8.32 9.08 9.83 10.59 11.35
61.40-128.10 102.30-155.95 36.7 7.11 7.90 8.69 9.48 10.27 11.06 11.85
128.10-278.45 155.95-278.45 41.2 7.65 8.50 9.35 10.20 11.05 11.90 12.76
Over 278.45 Over 278.45 44.6 8.12 9.03 9.93 10.83 11.73 12.64 13.54
<PAGE>
OREGON TAX EQUIVALENT TABLE
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
$ 0-25.35 $ 0-42.35 22.7% 5.82% 6.47% 7.12% 7.76% 8.41% 9.06% 9.70%
25.35-61.40 42.35-102.30 34.5 6.87 7.63 8.40 9.16 9.92 10.69 11.45
61.40-128.10 102.30-155.95 37.2 7.17 7.96 8.76 9.55 10.35 11.15 11.94
128.10-278.45 155.95-278.45 41.8 7.73 8.59 9.45 10.31 11.17 12.03 12.89
Over 278.45 Over 278.45 45.0 8.18 9.09 10.00 10.91 11.82 12.73 13.64
- -----------
* The State tax brackets are those for 1997. The 1998 brackets may be
indexed by cost-of-living adjustment.
PENNSYLVANIA TAX EQUIVALENT TABLE
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
$ 0-25.35 $ 0-42.35 17.4% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08%
25.35-61.40 42.35-102.30 30.0 6.43 7.14 7.86 8.57 9.29 10.00 10.71
61.40-128.10 102.30-155.95 32.9 6.71 7.45 8.20 8.94 9.69 10.43 11.18
128.10-278.45 155.95-278.45 37.8 7.23 8.04 8.84 9.65 10.45 11.25 12.06
Over 278.45 Over 278.45 41.3 7.67 8.52 9.37 10.22 11.07 11.93 12.78
TERRITORIAL TAX EQUIVALENT TABLE
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
$ 0-25.35 $ 0-42.35 15.0% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82%
25.35-61.40 42.35-102.30 28.0 6.25 6.94 7.64 8.33 9.03 9.72 10.42
61.40-128.10 102.30-155.95 31.0 6.52 7.25 7.97 8.70 9.42 10.14 10.87
128.10-278.45 155.95-278.45 36.0 7.03 7.81 8.59 9.38 10.16 10.94 11.72
Over 278.45 Over 278.45 39.6 7.45 8.28 9.11 9.93 10.76 11.59 12.42
</TABLE>
- -----------
* The table reflects the Federal tax rate and does not reflect any effect that
Puerto Rico taxes may have in determining the taxable equivalent yield for
residents of Puerto Rico.
RISK FACTORS
GENERAL. Certain of the Bonds in the Trusts may have been acquired at a
market discount from par value. The coupon interest rates on the discount bonds
at the time they were purchased and deposited in the Trusts were lower than the
current market interest rates for newly issued bonds of comparable rating and
type. If such interest rates for newly issued comparable bonds increase, the
market discount of previously issued bonds will
<PAGE>
become greater, and if such interest rates for newly issued comparable bonds
decline, the market discount of previously issued bonds will be reduced, other
things being equal. Investors should also note that the value of bonds purchased
at a market discount will increase in value faster than Bonds purchased at a
market premium if interest rates decrease. Conversely, if interest rates
increase, the value of bonds purchased at a market discount will decrease faster
than Bonds purchased at a market premium. In addition, if interest rates rise,
the prepayment risk of higher yielding, premium bonds and the prepayment benefit
for lower yielding, discount bonds will be reduced. A discount bond held to
maturity will have a larger portion of its total return in the form of taxable
income and capital gain and less in the form of tax-exempt interest income than
a comparable bond newly issued at current market rates. See "Tax Status." Market
discount attributable to interest changes does not indicate a lack of market
confidence in the issue. Neither the Sponsor, the Distributor nor the Trustee
shall be liable in any way for any default, failure or defect in any of the
Bonds.
Certain of the Bonds in the Trusts may be original issue discount
bonds. Under current law, the original issue discount, which is the difference
between the stated redemption price at maturity and the issue price of the
Bonds, is deemed to accrue on a daily basis and the accrued portion is treated
as tax-exempt interest income for Federal income tax purposes. On sale or
redemption, any gain realized that is in excess of the earned portion of
original issue discount will be taxable as capital gain unless the gain is
attributable to market discount in which case the accretion of market discount
is taxable as ordinary income. See "Tax Status." The current value of an
original issue discount bond reflects the present value of its stated redemption
price at maturity. The market value tends to increase in greater increments as
the Bonds approach maturity.
Certain of the original issue discount bonds may be zero coupon bonds
(including bonds known as multiplier bonds, money multiplier bonds, capital
appreciation bonds, capital accumulator bonds, compound interest bonds and money
discount maturity payment bonds). Zero coupon bonds do not provide for the
payment of any current interest and generally provide for payment at maturity at
face value unless sooner sold or redeemed. Zero coupon bonds may be subject to
more price volatility than conventional bonds. While some types of zero coupon
bonds, such as multipliers and capital appreciation bonds, define par as the
initial offering price rather than the maturity value, they share the basic zero
coupon bond features of (i) not paying interest on a semi-annual basis and (ii)
providing for the reinvestment of the bond's semi-annual earnings at the bond's
stated yield to maturity. While zero coupon bonds are frequently marketed on the
basis that their fixed rate of return minimizes reinvestment risk, this benefit
can be negated in large part by weak call protection, I.E., a bond's provision
for redemption at only a modest premium over the accreted value of the bond. See
footnote (6) in "The Trusts--Notes to Schedules of Investments" in Part One of
this Prospectus.
Certain of the Bonds in the Trusts may have been acquired at a market
premium from par value at maturity. The coupon interest rates on the premium
bonds at the time they were purchased and deposited in the Trusts were higher
than the current market interest rates for newly issued bonds of comparable
rating and type. If such interest rates for newly issued and otherwise
comparable bonds decrease, the market premium of previously issued bonds
<PAGE>
will be increased, and if such interest rates for newly issued comparable bonds
increase, the market premium of previously issued bonds will be reduced, other
things being equal. The current returns of bonds trading at a market premium are
initially higher than the current returns of comparable bonds of a similar type
issued at currently prevailing interest rates because premium bonds tend to
decrease in market value as they approach maturity when the face amount becomes
payable. Because part of the purchase price is thus returned not at maturity but
through current income payments, early redemption of a premium bond at par or
early prepayments of principal will result in a reduction in yield. Redemption
pursuant to call provisions generally will, and redemption pursuant to sinking
fund provisions may, occur at times when the redeemed Bonds have an offering
side valuation which represents a premium over par or for original issue
discount Bonds a premium over the accreted value. To the extent that the Bonds
were deposited in the Fund at a price higher than the price at which they are
redeemed, this will represent a loss of capital when compared to the original
Public Offering Price of the Units. Because premium bonds generally pay a higher
rate of interest than Bonds priced at or below par, the effect of the redemption
of premium bonds would be to reduce estimated net annual unit income by a
greater percentage than the par amount of such bonds bears to the total par
amount of Bonds in the affected Trust. Although the actual impact of any such
redemptions that may occur will depend upon the specific Bonds that are
redeemed, it can be anticipated that the estimated net annual unit income will
be significantly reduced after the dates on which such Bonds are eligible for
redemption. A Trust may be required to sell zero coupon bonds prior to maturity
(at their current market price which is likely to be less than their par value)
in the event that all the Bonds in the portfolio other than the zero coupon
bonds are called or redeemed in order to pay expenses of a Trust or in case a
Trust is terminated. See "Trust Administration--Portfolio Administration" and
"Trust Administration--Amendment or Termination." See "The Trusts--Schedule of
Investments" in Part One of this Prospectus for each Trust for the earliest
scheduled call date and the initial redemption price for each Bond.
Certain of the Bonds in certain of the Trusts may be general
obligations of a governmental entity that are backed by the taxing power of such
entity. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such an
investment may entail. All other Bonds in the Trusts are revenue bonds payable
from the income of a specific project or authority and are not supported by the
issuer's power to levy taxes. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds, on the other hand, are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source. There are, of course, variations in the security of the different Bonds
in the Fund, both within a particular classification and between
classifications, depending on numerous factors.
Certain of the Bonds in certain of the Trusts may be obligations which
derive their payments from mortgage loans. Certain of such housing bonds may be
FHA insured or may be single family mortgage revenue bonds issued for the
purpose of acquiring from originating financial institutions notes secured by
mortgages on residences located within the issuer's boundaries and owned by
persons of low or moderate income. In view of this an
<PAGE>
investment in such a Trust should be made with an understanding of the
characteristics of such issuers and the risks which such an investment may
entail. Mortgage loans are generally partially or completely prepaid prior to
their final maturities as a result of events such as sale of the mortgaged
premises, default, condemnation or casualty loss. Because these bonds are
subject to extraordinary mandatory redemption in whole or in part from such
prepayments of mortgage loans, a substantial portion of such bonds will probably
be redeemed prior to their scheduled maturities or even prior to their ordinary
call dates. Extraordinary mandatory redemption without premium could also result
from the failure of the originating financial institutions to make mortgage
loans in sufficient amounts within a specified time period. Additionally,
unusually high rates of default on the underlying mortgage loans may reduce
revenues available for the payment of principal of or interest on such mortgage
revenue bonds. These bonds were issued under Section 103A of the Internal
Revenue Code, which Section contains certain requirements relating to the use of
the proceeds of such bonds in order for the interest on such bonds to retain its
tax-exempt status. In each case the issuer of the bonds has covenanted to comply
with applicable requirements and bond counsel to such issuer has issued an
opinion that the interest on the bonds is exempt from Federal income tax under
existing laws and regulations. Certain issuers of housing bonds have considered
various ways to redeem bonds they have issued prior to the stated first
redemption dates for such bonds. In connection with any housing bonds held by
the Fund, the Sponsor at the Initial Date of Deposit is not aware that any of
the respective issuers of such Bonds are actively considering the redemption of
such Bonds prior to their respective stated initial call dates.
Certain of the Bonds in certain of the Trusts may be health care
revenue bonds. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which such
an investment may entail. Ratings of bonds issued for health care facilities are
often based on feasibility studies that contain projections of occupancy levels,
revenues and expenses. A facility's gross receipts and net income available for
debt service may be affected by future events and conditions including, among
other things, demand for services and the ability of the facility to provide the
services required, physicians' confidence in the facility, management
capabilities, competition with other health care facilities, efforts by insurers
and governmental agencies to limit rates, legislation establishing state
rate-setting agencies, expenses, the cost and possible unavailability of
malpractice insurance, the funding of Medicare, Medicaid and other similar third
party payor programs, government regulation and the termination or restriction
of governmental financial assistance, including that associated with Medicare,
Medicaid and other similar third party payor programs. Medicare reimbursements
are currently calculated on a prospective basis utilizing a single nationwide
schedule of rates. Prior to such legislation, Medicare reimbursements were based
on the actual costs incurred by the health facility. The current legislation may
adversely affect reimbursements to hospitals and other facilities for services
provided under the Medicare program.
Certain of the Bonds in certain of the Trusts may be obligations of
public utility issuers, including those selling wholesale and retail electric
power and gas. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which such
an investment may entail. General problems of such
<PAGE>
issuers would include the difficulty in financing large construction programs in
an inflationary period, the limitations on operations and increased costs and
delays attributable to environmental considerations, the difficulty of the
capital market in absorbing utility debt, the difficulty in obtaining fuel at
reasonable prices and the effect of energy conservation. All of such issuers
have been experiencing certain of these problems in varying degrees. In
addition, Federal, state and municipal governmental authorities may from time to
time review existing, and impose additional, regulations governing the
licensing, construction and operation of nuclear power plants, which may
adversely affect the ability of the issuers of certain of the Bonds in the
portfolio to make payments of principal and/or interest on such Bonds.
Certain of the Bonds in certain of the Trusts may be obligations of
issuers whose revenues are derived from the sale of water and/or sewerage
services. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such an
investment may entail. Such Bonds are generally payable from user fees. The
problems of such issuers include the ability to obtain timely and adequate rate
increases, population decline resulting in decreased user fees, the difficulty
of financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations, the
increasing difficulty of obtaining or discovering new supplies of fresh water,
the effect of conservation programs and the impact of "no growth" zoning
ordinances. All of such issuers have been experiencing certain of these problems
in varying degrees.
Certain of the Bonds in certain of the Trusts may be industrial revenue
bonds ("IRBS"). In view of this an investment in such a Trust should be made
with an understanding of the characteristics of such issuers and the risks which
such an investment may entail. IRBs have generally been issued under bond
resolutions pursuant to which the revenues and receipts payable under the
arrangements with the operator of a particular project have been assigned and
pledged to purchasers. In some cases, a mortgage on the underlying project may
have been granted as security for the IRBs. Regardless of the structure, payment
of IRBs is solely dependent upon the creditworthiness of the corporate operator
of the project or corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or environmentally-caused illnesses, extensive competition and
financial deterioration resulting from a corporate restructuring pursuant to a
leveraged buy-out, takeover or otherwise. Such a restructuring may result in the
operator of a project becoming highly leveraged which may impact on such
operator's creditworthiness which in turn would have an adverse impact on the
rating and/or market value of such Bonds. Further, the possibility of such a
restructuring may have an adverse impact on the market for and consequently the
value of such Bonds, even though no actual takeover or other action is ever
contemplated or effected.
Certain of the Bonds in certain of the Trusts may be obligations that
are secured by lease payments of a governmental entity (hereinafter called
"LEASE OBLIGATIONS"). Lease obligations are often in the form of certificates of
participation. In view of this an
<PAGE>
investment in such a Trust should be made with an understanding of the
characteristics of such issuers and the risks which such an investment may
entail. Although the lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to appropriate
for and make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. A governmental entity
that enters into such a lease agreement cannot obligate future governments to
appropriate for and make lease payments but covenants to take such action as is
necessary to include any lease payments due in its budgets and to make the
appropriations therefor. A governmental entity's failure to appropriate for and
to make payments under its lease obligation could result in insufficient funds
available for payment of the obligations secured thereby. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
Certain of the Bonds in certain of the Trusts may be obligations of
issuers which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from AD VALOREM taxes or, for
higher education systems, from tuition, dormitory revenues, grants and
endowments. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such an
investment may entail. General problems relating to school bonds include
litigation contesting the state constitutionality of financing public education
in part from AD VALOREM taxes, thereby creating a disparity in educational funds
available to schools in wealthy areas and schools in poor areas. Litigation or
legislation on this issue may affect the sources of funds available for the
payment of school bonds in the Trusts. General problems relating to college and
university obligations include the prospect of a declining percentage of the
population consisting of "college" age individuals, possible inability to raise
tuitions and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of Federal grants and state funding, and
government legislation or regulations which may adversely affect the revenues or
costs of such issuers. All of such issuers have been experiencing certain of
these problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations which
are payable from and secured by revenues derived from the ownership and
operation of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such issuers and
the risks which such an investment may entail. The major portion of an airport's
gross operating income is generally derived from fees received from signatory
airlines pursuant to use agreements which consist of annual payments for leases,
occupancy of certain terminal space and service fees. Airport operating income
may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines are experiencing severe financial difficulties.
The Sponsor cannot predict what effect these industry conditions may have on
airport revenues which are
<PAGE>
dependent for payment on the financial condition of the airlines and their usage
of the particular airport facility. Similarly, payment on Bonds related to other
facilities is dependent on revenues from the projects, such as user fees from
ports, tolls on turnpikes and bridges and rents from buildings. Therefore,
payment may be adversely affected by reduction in revenues due to such factors
as increased cost of maintenance, decreased use of facility, lower cost of
alternative modes of transportation, scarcity of fuel and reduction or loss of
rents.
Certain of the Bonds in certain of the Trusts may be obligations which
are payable from and secured by revenues derived from the operation of resource
recovery facilities. In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and the risks
which such an investment may entail. Resource recovery facilities are designed
to process solid waste, generate steam and convert steam to electricity.
Resource recovery bonds may be subject to extraordinary optional redemption at
par upon the occurrence of certain circumstances, including but not limited to:
destruction or condemnation of a project; contracts relating to a project
becoming void, unenforceable or impossible to perform; changes in the economic
availability of raw materials, operating supplies or facilities necessary for
the operation of a project or technological or other unavoidable changes
adversely affecting the operation of a project; administrative or judicial
actions which render contracts relating to the projects void, unenforceable or
impossible to perform; or impose unreasonable burdens or excessive liabilities.
The Sponsor cannot predict the causes or likelihood of the redemption of
resource recovery bonds in a Trust prior to the stated maturity of the Bonds.
An investment in Units of the Trusts should be made with an
understanding of the interest rate risk associated with such an investment.
Generally, bond prices (and therefore Unit prices) will move inversely with
interest rates, and bonds (Trusts) with longer maturities are likely to exhibit
greater fluctuations in market value, all other things being equal, than bonds
(Trusts) with shorter maturities.
Like other investment companies, financial and business organizations
and individuals around the world, a Trust could be adversely affected if the
computer systems used by the Sponsor, Evaluator or Trustee or other service
providers to the Trusts do not properly process and calculate date-related
information and data involving dates of January 1, 2000 and thereafter. This is
commonly known as the "Year 2000 Problem." The Sponsor, Evaluator and Trustee
are taking steps that they believe are reasonably designed to address the Year
2000 Problem with respect to computer systems that they use and to obtain
reasonable assurances that comparable steps are being taken by each Trust's
other service providers. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact to the Trusts. The
Sponsor is unable to predict what impact, if any, the Year 2000 Problem will
have on issuers of the Bonds contained in the Trusts.
To the best knowledge of the Sponsor, there is no litigation pending as
of the date of this Prospectus in respect of any Bonds which might reasonably be
expected to have a material adverse effect upon the Fund or any of the Trusts.
At any time after the date of this Prospectus, litigation may be initiated on a
variety of grounds with respect to Bonds in the
<PAGE>
Fund. Such litigation, as, for example, suits challenging the issuance of
pollution control revenue bonds under environmental protection statutes, may
affect the validity of such Bonds or the tax-free nature of the interest
thereon. While the outcome of litigation of such nature can never be entirely
predicted, the Fund has received or will receive opinions of bond counsel to the
issuing authorities of each Bond on the date of issuance to the effect that such
Bonds have been validly issued and that the interest thereon is exempt from
Federal and applicable state income taxation. In addition, other factors may
arise from time to time which potentially may impair the ability of issuers to
meet obligations undertaken with respect to the Bonds.
REDEMPTIONS OF BONDS. Certain of the Bonds in certain of the Trusts are
subject to redemption prior to their stated maturity date pursuant to sinking
fund provisions, call provisions or extraordinary optional or mandatory
redemption provisions or otherwise. A sinking fund is a reserve fund accumulated
over a period of time for retirement of debt. A callable debt obligation is one
which is subject to redemption or refunding prior to maturity at the option of
the issuer. A refunding is a method by which a debt obligation is redeemed, at
or before maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of the
called Bonds are used to pay for Unit redemptions) result in the distribution of
principal and may result in a reduction in the amount of subsequent interest
distributions and it may also affect the current return on Units of the Trust
involved. Each Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the Bonds. Extraordinary optional
redemptions and mandatory redemptions result from the happening of certain
events. Generally, events that may permit the extraordinary optional redemption
of Bonds or may require the mandatory redemption of Bonds include, among others:
the substantial damage or destruction by fire or other casualty of the project
for which the proceeds of the Bonds were used; an exercise by a local, state or
Federal governmental unit of its power of eminent domain to take all or
substantially all of the project for which the proceeds of the Bonds were used;
changes in the economic availability of raw materials, operating supplies or
facilities or technological or other changes which render the operation of the
project for which the proceeds of the Bonds were used uneconomic; changes in law
or an administrative or judicial decree which renders the performance of the
agreement under which the proceeds of the Bonds were made available to finance
the project impossible or which creates unreasonable burdens or which imposes
excessive liabilities, such as taxes, not imposed on the date the Bonds are
issued on the issuer of the Bonds or the user of the proceeds of the Bonds; an
administrative or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of the Bonds,
an overestimate of the costs of the project to be financed with the proceeds of
the Bonds resulting in excess proceeds of the Bonds which may be applied to
redeem Bonds; or an underestimate of a source of funds securing the Bonds
resulting in excess funds which may be applied to redeem Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Bonds. See "Schedule of Investments" in Part One of this
Prospectus for each Trust and the "Notes to Schedules of Investments" in Part
One of this Prospectus.
<PAGE>
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
As of the date indicated in "Summary of Essential Financial
Information" in Part One of this Prospectus, the Estimated Current Returns and
the Estimated Long-Term Returns were those indicated therein. The Estimated
Current Returns are calculated by dividing the estimated net annual interest
income per Unit by the Public Offering Price. The estimated net annual interest
income per Unit will vary with changes in fees and expenses of the Trustee,
Sponsor and Evaluator and with the principal prepayment, redemption, maturity,
exchange or sale of Bonds while the Public Offering Price will vary with changes
in the offering price of the underlying Bonds; therefore, there is no assurance
that the present Estimated Current Returns will be realized in the future.
Estimated Long-Term Returns are calculated using a formula which (i) takes into
consideration, and determines and factors in the relative weightings of, the
market values, yields (which takes into account the amortization of premiums and
the accretion of discounts) and estimated retirements of all the Bonds in a
Trust and (ii) takes into account a compounding factor and the expenses and
sales charge associated with each Trust Unit. Since the market values and
estimated retirements of the Bonds and the expenses of a Trust will change,
there is no assurance that the present Estimated Long-Term Returns will be
realized in the future. Estimated Current Returns and Estimated Long-Term
Returns are expected to differ because the calculation of Estimated Long-Term
Returns reflects the estimated date and amount of principal returned while
Estimated Current Returns calculations include only net annual interest income
and Public Offering Price.
TRUST OPERATING EXPENSES
COMPENSATION OF SPONSOR. Delaware Capital Management, Inc., which acts
as Sponsor, will receive a fee for providing supervisory services as set forth
under "Summary of Essential Financial Information" in Part One of this
Prospectus. Any such charges would be payable in monthly installments and would
be based on the number of Units outstanding on the first day of each month of
each year. The Sponsor may also be reimbursed for bookkeeping and administrative
services in amounts which will not exceed the amounts set forth under "Summary
of Essential Financial Information" in Part One of this Prospectus. With respect
to fees payable to the Sponsor for providing portfolio supervision, and
bookkeeping and administrative services to the Trusts, such individual fees may
exceed the actual costs of providing such services for a Trust, but at no time
will the total amount paid to the Sponsor for providing such services rendered
to all unit investment trusts sponsored by the Sponsor or its affiliates in any
calendar year exceed the aggregate cost to the Sponsor and its affiliates of
supplying such services in such year. The foregoing fees may be increased
without approval of the Unitholders by amounts not exceeding proportionate
increases under the category "All Services Less Rent of Shelter" in the Consumer
Price Index published by the United States Department of Labor or, if such
category is no longer published, in a comparable category. The Distributor, an
affiliate of the Sponsor, will receive sales commissions and may realize other
profits (or losses) in connection with the sale of Units.
<PAGE>
EVALUATOR'S FEE. For its services, the Evaluator will receive an annual
fee as set forth under "Summary of Essential Financial Information" in Part One
of this Prospectus. The Evaluator's fees are payable in monthly installments.
The Evaluator's fees may be increased without approval of the Unitholders by
amounts not exceeding proportionate increases under the category "All Services
Less Rent of Shelter" in the Consumer Price Index published by the United States
Department of Labor or, if such category is no longer published, in a comparable
category.
TRUSTEE'S FEE. For its services, the Trustee will receive an annual fee
as set forth under "Summary of Essential Financial Information" in Part One of
this Prospectus. The Trustee's fees are payable in monthly installments (based
on the outstanding principal amount of Bonds in a Trust as of the first day of
each month of each year) on or before the fifteenth day of each month from the
Interest Account to the extent funds are available and then from the Principal
Account. The Trustee's fee may be periodically adjusted in response to
fluctuations in short-term interest rates (reflecting the cost to the Trustee of
advancing funds to a Trust to meet scheduled distributions) and may be further
increased without approval of the Unitholders by amounts not exceeding
proportionate increases under the category "All Services Less Rent of Shelter"
in the Consumer Price Index published by the United States Department of Labor
or, if such category is no longer published, in a comparable category. Since the
Trustee has the use of the funds being held in the Principal and Interest
Accounts for future distributions, payment of expenses and redemptions and since
such Accounts are non-interest bearing to Unitholders, the Trustee benefits
thereby. Part of the Trustee's compensation for its services to the Fund is
expected to result from the use of these funds. For a discussion of the services
rendered by the Trustee pursuant to its obligations under the Trust Agreement,
see "Rights of Unitholders--Reports Provided" and "Trust Administration."
MISCELLANEOUS EXPENSES. The following additional charges are or may be
incurred by the Trusts: (i) fees of the Trustee for extraordinary services, (ii)
expenses of the Trustee (including legal and auditing expenses) and of counsel
designated by the Sponsor, (iii) various governmental charges, (iv) expenses and
costs of any action taken by the Trustee to protect a Trust and the rights and
interests of Unitholders, (v) indemnification of the Trustee for any loss,
liability or expenses incurred by it in the administration of a Trust without
gross negligence, bad faith or willful misconduct on its part, (vi) any special
custodial fees payable in connection with the sale of any of the Bonds in a
Trust and (vii) expenditures incurred in contacting Unitholders upon termination
of a Trust.
The fees and expenses set forth herein are payable out of the Trusts.
When such fees and expenses are paid by or owing to the Trustee, they are
secured by a lien on the portfolio or portfolios of the applicable Trust or
Trusts. If the balances in the Interest and Principal Accounts are insufficient
to provide for amounts payable by the Fund, the Trustee has the power to sell
Bonds to pay such amounts.
<PAGE>
INSURANCE ON THE BONDS IN THE INSURED TRUSTS
Insurance guaranteeing prompt payment of interest and principal, when
due, on all the Bonds in the Insured Trusts in the Fund has been obtained by the
Sponsor or by the issuers or underwriters of such Bonds. Although no insurance
has been obtained on the Bonds in the uninsured Trusts, certain of the Bonds in
the uninsured Trusts may be insured.
An Insurer has issued a policy or policies of insurance covering each
of the Bonds in the Insured Trusts, each policy to remain in force until the
payment in full of such Bonds and whether or not the Bonds continue to be held
by an Insured Trust. By the terms of each policy, the Insurer will
unconditionally guarantee to the holders or owners of the Insured Bonds the
payment, when due, required of the issuer of the Bonds of an amount equal to the
principal of and interest on the Bonds as such payments shall become due, but
not be paid (except that in the event of any acceleration of the due date of
principal by reason of mandatory or optional redemption, default or otherwise,
the payments guaranteed will be made in such amounts and at such times as would
have been due had there not been an acceleration). The Insurer will be
responsible for such payments, less any amounts received by the holders or
owners of the Bonds from any trustee for the bond issuers or from any other
sources other than the Insurer. The Insurers' policies relating to small
industrial development bonds and pollution control revenue bonds also guarantee
the full and complete payments required to be made by or on behalf of an issuer
of Bonds pursuant to the terms of the Bonds if there occurs an event which
results in the loss of the tax-exempt status of the interest on such Bonds,
including principal, interest or premium payments, if any, as and when thereby
required. Each Insurer has indicated that its insurance policies do not insure
the payment of principal or interest on bonds which are not required to be paid
by the issuer thereof because the bonds were not validly issued. However, as
indicated under "Tax Status," the respective issuing authorities have received
opinions of bond counsel relating to the valid issuance of each of the Bonds in
the Trusts. Each Insurer's policy also does not insure against non-payment of
principal of or interest on the Bonds resulting from the insolvency, negligence
or any other act or omission of the trustee or other paying agent for the Bonds.
Such policies are not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law. The policies are
non-cancelable and the insurance premiums have been fully paid on or prior to
the date of deposit, either by the Sponsor or, if a policy has been obtained by
a Bond issuer, by such issuer.
Standard & Poor's rates all new issues insured by an Insurer "AAA Prime
Grade." Moody's rates all bond issues insured by an Insurer "Aaa." These ratings
independently reflect each company's current assessment of the creditworthiness
of each Insurer and its ability to pay claims on its policies of insurance. See
"Investment Objectives and Portfolio Selection." Any further explanation as to
the significance of either rating may be obtained only from the company which
issued the respective rating. Neither rating is a recommendation to buy, sell or
hold the Bonds, and such rating may be subject to revision or withdrawal at any
time by the respective issuer. Any downward revision or withdrawal of the rating
may have an adverse effect on the market price of the Bonds.
<PAGE>
Because the insurance on the Bonds will be effective so long as the
Bonds are outstanding, such insurance will be taken into account in determining
the market value of the Bonds and therefore some value attributable to such
insurance will be included in the value of the Units of the Insured Trusts. The
insurance does not, however, guarantee the market value of the Bonds or of the
Units.
TAX STATUS
At the respective times of issuance of the Bonds, opinions relating to
the validity thereof and to the exclusion of interest thereon from Federal gross
income were rendered by bond counsel to the respective issuing authorities. In
addition, with respect to State Trusts, where applicable, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest on such
Bonds when held by residents of the State in which issuers of such Bonds are
located, from State income taxes and certain State or local intangibles and
local income taxes. Neither the Sponsor nor Chapman and Cutler has made any
review of the Fund proceedings relating to the issuance of the Bonds or of the
bases for the opinions rendered in connection therewith. If the interest on a
Bond should be determined to be taxable, the Bond would generally have to be
sold at a substantial discount. In addition, investors could be required to pay
income tax on interest received prior to the date on which interest is
determined to be taxable. Gain realized on the sale or redemption of the Bonds
by the Trustee or of a Unit by a Unitholder is includable in gross income for
Federal income tax purposes and may be includable in gross income for state tax
purposes. (Such gain does not include any amounts received in respect of accrued
interest or accrued original issue discount, if any.) For purposes of the
following opinions, it is assumed that each asset of the Trust is debt, the
interest on which is excluded for Federal income tax purposes.
In the opinion of Chapman and Cutler, counsel for the Sponsor, under
existing law as of the date of this prospectus:
1. Each Trust is not an association taxable as a corporation
for Federal income tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income under the
Internal Revenue Code of 1986 (the "CODE") will retain its status for
Federal income tax purposes when received by a Trust and when
distributed to Unitholders; however such interest may be taken into
account in computing the alternative minimum tax, an additional tax on
branches of foreign corporations and the environmental tax (the
"SUPERFUND TAX"), as noted below;
2. Each Unitholder is considered to be the owner of a pro
rata portion of each asset of the respective Trust under subpart E,
subchapter J of chapter 1 of the Code and will have a taxable event
when such Trust disposes of a Bond, or when the Unitholder redeems or
sells his Unit. If the Unitholder disposes of a Unit, he is deemed
thereby to have disposed of his entire pro rata interest in all assets
of the Trust involved including his pro rata portion of all the Bonds
represented by the Unit. The Taxpayer Relief Act of 1997 includes
provisions that treat certain transactions designed to reduce or
eliminate risk of loss and opportunities for gain (e.g., short
<PAGE>
sales, offsetting notional principal contracts, futures or forward
contracts, or similar transactions) as constructive sales for purposes
of recognition of gain (but not loss) and for purposes of determining
the holding period. Unitholders should consult their own tax advisors
with regard to any such constructive sale rules. Unitholders must
reduce the tax basis of their Units for their share of accrued interest
received by the respective Trust, if any, on Bonds delivered after the
date the Unitholders pay for their Units to the extent that such
interest accrued on such Bonds before the date the Trust acquired
ownership of the Bonds (and the amount of this reduction may exceed the
amount of accrued interest paid to the seller), and, consequently, such
Unitholders may have an increase in taxable gain or reduction in
capital loss upon the disposition of such Units. Gain or loss upon the
sale or redemption of Units is measured by comparing the proceeds of
such sale or redemption with the adjusted basis of the Units. If the
Trustee disposes of Bonds (whether by sale, payment at maturity,
redemption or otherwise), gain or loss is recognized to the Unitholder
(subject to various nonrecognition provisions of the Code). The amount
of any such gain or loss is measured by comparing the Unitholder's pro
rata share of the total proceeds from such disposition with the
Unitholder's basis for his or her fractional interest in the asset
disposed of. In the case of a Unitholder who purchases Units, such
basis (before adjustment for accrued original issue discount and
amortized bond premium, if any) is determined by apportioning the cost
of the Units among each of the Trust assets ratably according to value
as of the valuation date nearest the date of acquisition of the Units.
The tax basis reduction requirements of the Code relating to
amortization of bond premium may, under some circumstances, result in
the Unitholder realizing a taxable gain when his Units are sold or
redeemed for an amount less than or equal to his original cost.
Unitholders should consult their own tax advisors with regard to the
calculation of basis.; and
3. Any proceeds paid under individual policies obtained by
issuers of Bonds which represent maturing interest on defaulted Bonds
held by the Trustee will be excludable from Federal gross income if,
and to the same extent as, such interest would have been excludable if
paid in the normal course by the issuer of the defaulted Bonds PROVIDED
that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the
reasonable expectation that the issuer of the Bonds, rather than the
Insurer, will pay debt service on the Bonds.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules provide that
original issue discount accrues either on the basis of a constant compound
interest rate or ratably over the term of the Bond, depending on the date the
Bond was issued. In addition, special rules apply if the purchase price of a
Bond exceeds the original issue price plus the amount of original issue discount
which would have previously accrued based upon its issue price (its "ADJUSTED
ISSUE PRICE") to prior owners. If a Bond is acquired with accrued interest, that
portion of the price paid for the accrued interest is added to the tax basis of
the Bond. When this accrued interest is received, it is treated as a return of
capital and reduces the tax basis of the
<PAGE>
Bond. If a Bond is purchased for a premium, the amount of the premium is added
to the tax basis of the Bond. Bond premium is amortized over the remaining term
of the Bond, and the tax basis of the Bond is reduced each tax year by the
amount of the premium amortized in that tax year. The application of these rules
will also vary depending on the value of the Bonds on the date a Unitholder
acquires his Units and the price the Unitholder pays for his Units. Unitholders
should consult with their tax advisers regarding these rules and their
application.
"The Revenue Reconciliation Act of 1993" (the "1993 TAX ACT") subjects
tax-exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the amount (if
any) by which the stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if any, is
attributable to original issue discount not yet accrued) subject to a statutory
DE MINIMIS rule. Market discount can arise based on the price a Trust pays for
Bonds or the price a Unitholder pays for his or her Units. Under the 1993 Tax
Act, accretion of market discount is taxable as ordinary income; under prior law
the accretion had been treated as capital gain. Market discount that accretes
while a Trust holds a Bond would be recognized as ordinary income by the
Unitholders when principal payments are received on the Bond, upon sale or at
redemption (including early redemption), or upon the sale or redemption of his
or her Units, unless a Unitholder elects to include market discount in taxable
income as it accrues. The market discount rules are complex and Unitholders
should consult their tax advisers regarding these rules and their application.
In the case of certain corporations, the alternative minimum tax and
the Superfund Tax for taxable years beginning after December 31, 1986 depend
upon the corporation's alternative minimum taxable income ("AMTI"), which is the
corporation's taxable income with certain adjustments. One of the adjustment
items used in computing the AMTI of a corporation (other than an S Corporation,
Regulated Investment Company, Real Estate Investment Trust, REMIC or FASIT) is
an amount equal to 75% of the excess of such corporation's "adjusted current
earnings" over an amount equal to its AMTI (before such adjustment item and the
alternative tax net operating loss deduction). "Adjusted current earnings"
includes all tax exempt interest, including interest on all of the Bonds in the
Trust. Under current Code provisions, the Superfund Tax does not apply to tax
years beginning on or after January 1, 1996. Legislative proposals have been
introduced that would reinstate the Superfund Tax for taxable years beginning
after December 31, 1997 and before January 1, 2009. Under the provisions of
Section 884 of the Code, a branch profits tax is levied on the "effectively
connected earnings and profits" of certain foreign corporations which include
tax-exempt interest such as interest on the Bonds in the Trusts. Unitholders
should consult their tax advisers with respect to the particular tax
consequences to them including the corporate alternative minimum tax, the
Superfund Tax and the branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the
Code, interest on indebtedness incurred or continued to purchase or carry Units
of a Trust is not deductible for Federal income tax purposes. The Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however, these rules
generally do not apply to interest paid on indebtedness incurred to purchase or
improve a personal residence). Also, under Section 265 of the Code, certain
<PAGE>
financial institutions that acquire Units would generally not be able to deduct
any of the interest expense attributable to ownership of such Units. Legislative
proposals have been made that would extend the financial institution rules to
certain other corporations, including securities dealers and other financial
intermediaries. Investors with questions regarding these issues should consult
with their tax advisers.
In the case of certain of the Bonds in the Trust, 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 these Bonds, or persons
related thereto, for periods while such Bonds are held by such a user or related
person, will not be excludable from Federal gross income, although interest on
such Bonds received by others would be excludable from Federal gross income.
"Substantial user" and "related person" are defined under the Code and U.S.
Treasury Regulations. Any person who believes that he or she may be a
"substantial user" or a "related person" as so defined should contact his or her
tax adviser.
ALL STATEMENTS OF LAW IN THE PROSPECTUS CONCERNING EXCLUSION FROM GROSS
INCOME FOR FEDERAL, STATE OR OTHER TAX PURPOSES ARE THE OPINIONS OF COUNSEL AND
ARE TO BE SO CONSTRUED.
At the respective times of issuance of the Bonds, opinions relating to
the validity thereof and to the exclusion of interest thereon from Federal gross
income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for the
Fund of the proceedings relating to the issuance of the Bonds or of the basis
for such opinions.
The Internal Revenue Service Restructuring and Return Act of 1998 (the
"1998 Tax Act") provides that for taxpayers other than corporations, net capital
gain ( which is defined as net long-term capital gain over net short-term
capital loss for the taxable year) realized from property (with certain
exclusions) is subject to a maximum marginal stated tax rate of 20% (10% in the
case of certain taxpayers in the lowest tax bracket). Capital gain or loss is
long-term if the holding period for the asset is more than one year, and is
short-term if the holding period for the asset is one year or less. The date on
which a Unit is acquired (i.e., the "trade date") is excluded for purposes of
determining the holding period of the Unit. The legislation is generally
effective retroactively for amounts properly taken into account on or after
January 1, 1998. Capital gains realized from assets held for one year or less
are taxed at the same rates as ordinary income.
In addition, please note that capital gains may be recharacterized as
ordinary income in the case of certain financial transactions that are
considered "conversion transactions" effective for transactions entered into
after April 30, 1993. Unit holders should consult their tax advisors regarding
the potential effect of this provision on their investment in Units.
For purposes of computing the alternative minimum tax for individuals
and corporations and the Superfund Tax for corporations, interest on certain
private activity bonds (which includes most industrial and housing revenue
bonds) issued on or after August 8, 1996 is included as an item of tax
preference.
<PAGE>
In general, Section 86 of the Code, provides that 50% of Social
Security benefits are includable in gross income to the extent that the sum of
"modified adjusted gross income" plus 50% of the Social Security benefits
received exceeds a "base amount." The base amount is $25,000 for unmarried
taxpayers, $32,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the taxable year and
who file separate returns. Modified adjusted gross income is adjusted gross
income determined without regard to certain otherwise allowable deductions and
exclusions from gross income and by including tax-exempt interest. To the extent
that Social Security benefits are includable in gross income, they will be
treated as any other item of gross income.
In addition, under the 1993 Tax Act, for taxable years beginning after
December 31, 1993, up to 85% of Social Security benefits are includable in gross
income to the extent that the sum of "modified adjusted gross income" plus 50%
of Social Security benefits received exceeds an "adjusted base amount." The
adjusted base amount is $34,000 for unmarried taxpayers, $44,000 for married
taxpayers filing a joint return, and zero for married taxpayers who do not live
apart at all times during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified adjusted gross
income solely for the purpose of determining what portion, if any, of Social
Security benefits will be included in gross income, no tax-exempt interest,
including that received from a Trust, will be subject to tax. A taxpayer whose
adjusted gross income already exceeds the base amount or the adjusted base
amount must include 50% or 85%, respectively, of his Social Security benefits in
gross income whether or not he receives any tax-exempt interest. A taxpayer
whose modified adjusted gross income (after inclusion of tax-exempt interest)
does not exceed the base amount need not include any Social Security benefits in
gross income.
FOR A DISCUSSION OF THE STATE TAX STATUS OF INCOME EARNED ON UNITS OF A
TRUST, SEE "THE TRUSTS--STATE TAXATION" FOR THE APPLICABLE TRUST. EXCEPT AS
NOTED THEREIN, THE EXEMPTION OF INTEREST ON STATE AND LOCAL OBLIGATIONS FOR
FEDERAL INCOME TAX PURPOSES DISCUSSED ABOVE DOES NOT NECESSARILY RESULT IN
EXEMPTION UNDER THE INCOME OR OTHER TAX LAWS OF ANY STATE OR CITY. THE LAWS OF
THE SEVERAL STATES VARY WITH RESPECT TO THE TAXATION OF SUCH OBLIGATIONS.
Ownership of the Units may result in collateral federal income tax
consequences to certain taxpayers, including, without limitation, corporations
subject to either the environmental tax or the branch profits tax, financial
institutions, certain insurance companies, certain S corporations, individual
recipients of Social Security or Railroad Retirement benefits and taxpayers who
may be deemed to have incurred (or continued) indebtedness to purchase or carry
tax-exempt obligations. Prospective investors should consult their tax advisors
as to the applicability of any collateral consequences.
PUBLIC OFFERING
GENERAL. Units are offered at the Public Offering Price. The Public
Offering Price is based on the bid prices of the Bonds in each Trust and
includes a sales charge of 5.5% of the
<PAGE>
Public Offering Price (5.820% of the aggregate bid price of the Bonds) plus any
accrued interest. Employees, officers and directors (including their immediate
family members, defined as spouses, children, grandchildren, parents,
grandparents, mothers-in-law, fathers-in-law, sons-in-law and daughters-in-law,
and trustees, custodians or fiduciaries for the benefit of such persons) of the
Sponsor and its subsidiaries, related companies to the Sponsor and a registered
representative purchasing for such representative's personal account may
purchase Units of the Trusts without a sales charge in the secondary offering
period.
Investors who purchase Units through registered broker/dealers who
charge periodic fees for financial planning, investment advisory or asset
management services, or provide such services in connection with the
establishment of an investment account for which a comprehensive "wrap fee"
charge is imposed may purchase Units in the secondary offering period at the
Public Offering Price less the concession the Distributor typically would allow
such broker/dealer. See "Public Offering--Unit Distribution."
ACCRUED INTEREST. Accrued interest is the accumulation of unpaid
interest on a bond from the last day on which interest thereon was paid.
Interest on Bonds generally is paid semi-annually, although a Trust accrues such
interest daily. Because of this, each Trust always has an amount of interest
earned but not yet collected by the Trustee. For this reason, the Public
Offering Price of Units will have added to it the proportionate share of accrued
interest to the date of settlement. Unitholders will receive on the next
distribution date of the respective Trust the amount, if any, of accrued
interest paid on their Units.
Because of the varying interest payment dates of the Bonds, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. Therefore, there
will always remain an item of accrued interest that is added to the value of the
Units. If a Unitholder sells or redeems all or a portion of his Units, he will
be entitled to receive his proportionate share of the accrued interest from the
purchaser of his Units. Since the Trustee has the use of the funds held in the
Interest Account for distributions to Unitholders and since such Account is
noninterest-bearing to Unitholders, the Trustee benefits thereby.
OFFERING PRICE. The Public Offering Price of the Units will vary from
the amounts stated under "Summary of Essential Financial Information" in Part
One of this Prospectus in accordance with fluctuations in the prices of the
underlying Bonds in each Trust.
As indicated above, the price of the Units as of the opening of
business on the date of Part One of this Prospectus was determined by adding to
the determination of the aggregate bid price of the Bonds an amount equal to
5.820% of such value and dividing the sum so obtained by the number of Units
outstanding. This computation produced a gross underwriting profit equal to 5.5%
of the Public Offering Price. The Evaluator will appraise or cause to be
appraised the value of the underlying Bonds as of the close of trading of the
New York Stock Exchange (generally 4:00 p.m. Eastern Time) on days on which the
New York Stock Exchange is open (or as of any earlier closing time on a day on
which the New York Stock Exchange is scheduled in advance to close at such
earlier time) for each day on which any Unit of a Trust is tendered for
redemption, and it shall determine the aggregate
<PAGE>
value of such Trust as of 4:00 p.m. Eastern time (or as of any earlier closing
time on a day on which the New York Stock Exchange is scheduled in advance to
close at such earlier time) on such other days as may be necessary. Such Public
Offering Price will be effective for all orders received at or prior to 4:00
p.m. Eastern time (or as of any earlier closing time on a day on which the New
York Stock Exchange is scheduled in advance to close at such earlier time) on
each such day. Orders received by the Trustee, Sponsor, Distributor or any
dealer for purchases, sales or redemptions after that time, or on a day when the
New York Stock Exchange is closed, will be held until the next determination of
price.
The aggregate price of the Bonds in each Trust has been and will be
determined on the basis of bid prices (i) on the basis of current market prices
for the Bonds obtained from dealers or brokers who customarily deal in bonds
comparable to those held by the Trust; (ii) if such prices are not available for
any particular Bonds, on the basis of current market prices for comparable
bonds; (iii) by causing the value of the Bonds to be determined by others
engaged in the practice of evaluation, quoting or appraising comparable bonds;
or (iv) by any combination of the above.
The Public Offering Price per Unit is based on the bid price per Unit
of the Bonds in each Trust plus the applicable sales charge plus accrued
interest. The offering price of Bonds in each Trust may be expected to range
from .35%-1% more than the bid price of such Bonds.
Although payment is normally made three business days following the
order for purchase, payment may be made prior thereto. However, delivery of
certificates, if any are requested in writing, representing Units so ordered
will be made as soon as possible following such order or shortly thereafter. A
person will become the owner of Units on the date of settlement provided payment
has been received. Cash, if any, made available to the Distributor prior to the
date of settlement for the purchase of Units may be used in the Distributor's
business and may be deemed to be a benefit to the Distributor, subject to the
limitations of the Securities Exchange Act of 1934.
UNIT DISTRIBUTION. Units repurchased in the secondary market, if any,
may be offered by this prospectus at the secondary Public Offering Price in the
manner described. Broker-dealers or others will be allowed a concession or
agency commission in connection with the distribution of Units in the secondary
market equal to 4.0% of the Public Offering Price per Unit.
As stated under "Public Market" below, the Distributor intends to
maintain a secondary market for the Units of the Fund. In so maintaining a
market, the Distributor will also realize profits or sustain losses in the
amount of any difference between the price at which Units are purchased and the
price at which Units are resold (which price is based on the bid prices of the
Bonds in a Trust and includes a sales charge). In addition, the Distributor will
also realize profits or sustain losses resulting from a redemption of such
repurchased Units at a price above or below the purchase price for such Units,
respectively.
<PAGE>
At various times, the Distributor may implement programs under which
the sales forces of brokers, dealers, banks and/or others may be eligible to win
nominal awards for certain sales efforts, or under which the Distributor will
reallow to any such brokers, dealers, banks and/or others that sponsor sales
contests or recognition programs conforming to criteria established by the
Distributor, or participate in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by such person at the public offering price during such programs. Also, the
Distributor in its discretion may from time to time pursuant to objective
criteria established by the Distributor pay fees to qualifying brokers, dealers,
banks or others for certain services or activities which are primarily intended
to result in sales of Units of the Trusts. Such payments are made by the
Distributor out of its own assets, and not out of the assets of the Trusts.
These programs will not change the price Unitholders pay for their Units or the
amount that the Trusts will receive from the Units sold.
PUBLIC MARKET. Although not obligated to do so, the Distributor intends
to maintain a market for the Units offered hereby and to offer continuously to
purchase such Units at the bid price of the Bonds in the portfolio plus interest
accrued to the date of settlement plus any principal cash on hand, less any
amounts representing taxes or other governmental charges payable out of the
Trust and less any accrued Trust expenses. If the supply of Units exceeds demand
or if some other business reason warrants it, the Distributor may either
discontinue all purchases of Units or discontinue purchases of Units at such
prices. In the event that a market is not maintained for the Units and the
Unitholder cannot find another purchaser, a Unitholder desiring to dispose of
his Units may dispose of such Units by tendering them to the Trustee for
redemption at the Redemption Price, which is based upon the aggregate bid price
of the Bonds in the portfolio and any accrued interest. The aggregate bid prices
of the underlying Bonds in a Trust are expected to be less than the related
aggregate offering prices. See "Rights of Unitholders--Redemption of Units." A
UNITHOLDER WHO WISHES TO DISPOSE OF HIS UNITS SHOULD INQUIRE OF HIS BROKER AS TO
CURRENT MARKET PRICES IN ORDER TO DETERMINE WHETHER THERE IS IN EXISTENCE ANY
PRICE IN EXCESS OF THE REDEMPTION PRICE AND, IF SO, THE AMOUNT THEREOF.
RIGHTS OF UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any Trust will not be
evidenced by certificates unless a Unitholder, the Unitholder's registered
broker/dealer or the clearing agent for such broker/dealer makes a written
request to the Trustee. Certificates, if issued, will be so noted on the
confirmation statement sent to the Unitholder's broker. Non-receipt of such
certificate(s) must be reported to the Trustee within one year; otherwise, a 2%
surety bond fee will be required for replacement.
Units are transferable by making a written request to the Trustee and,
in the case of Units evidenced by a certificate, by presenting and surrendering
such certificate to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer which should be sent registered or
certified mail for the protection of the Unitholder. Unitholders must sign such
written request, and such certificate or transfer instrument, exactly as their
names appear on the records of the Trustee and on any
<PAGE>
certificate representing the Units to be transferred. Such signatures must be
guaranteed by a participant in the Securities Transfer Agents Medallion Program
("STAMP") or such other signature guarantee program in addition to, or in
substitution for, STAMP, as may be accepted by the Trustee.
Although no such charge is now made or contemplated, the Trustee may
require a Unitholder to pay a reasonable fee for each certificate reissued or
transferred and to pay any governmental charge that may be imposed in connection
with each such transfer or interchange. Destroyed, stolen, mutilated or lost
certificates will be replaced upon delivery to the Trustee of satisfactory
indemnity, evidence of ownership and payment of expenses incurred. Mutilated
certificates must be surrendered to the Trustee for replacement.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL. Interest received by the
Trusts, including that part of the proceeds of any disposition of Bonds which
represents accrued interest and including any insurance proceeds representing
interest due on defaulted Bonds, is credited by the Trustee to the Interest
Account of the appropriate Trust. Other receipts are credited to the Principal
Account of the appropriate Trust. Interest received by a Trust will be
distributed on or shortly after the fifteenth day of each month on a pro rata
basis to Unitholders of record as of the preceding record date (which will be
the first day of the month). All distributions will be net of applicable
expenses. The pro rata share of cash in the Principal Account will be computed
as of the applicable record date, and distributions to the Unitholders as of
such record date will be made on or shortly after the fifteenth day of such
month. Proceeds received from the disposition of any of the Bonds after such
record date and prior to the following distribution date will be held in the
Principal Account and not distributed until the next distribution date. The
Trustee is not required to pay interest on funds held in the Principal or
Interest Accounts (but may itself earn interest thereon and therefore benefits
from the use of such funds) nor to make a distribution from the Principal
Account unless the amount available for distribution shall equal at least $0.01
per Unit.
The distribution to the Unitholders 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 portion of the Unitholders' pro rata
share of the estimated net annual unit income in the Interest Account after
deducting estimated expenses. Because interest payments are not received by the
Trusts at a constant rate throughout the year, such interest distribution may be
more or less than the amount credited to the Interest Account as of the record
date. For the purpose of minimizing fluctuation in the distributions from the
Interest Account, the Trustee is authorized to advance such amounts as may be
necessary to provide interest distributions of approximately equal amounts. The
Trustee shall be reimbursed for any such advances from funds in the Interest
Account on the ensuing record date. Persons who purchase Units will commence
receiving distributions only after such person becomes a record owner.
Notification to the Trustee of the transfer of Units is the responsibility of
the purchaser, but in the normal course of business such notice is provided by
the selling broker-dealer.
As of the first day of each month, the Trustee will deduct from the
Interest Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts
<PAGE>
necessary to pay the expenses of Trusts (as determined on the basis set forth
under "Trust Operating Expenses"). The Trustee also may withdraw from said
accounts such amounts, if any, as it deems necessary to establish a reserve for
any governmental charges or extraordinary charges payable out of the Trusts.
Amounts so withdrawn shall not be considered a part of a Trust's assets until
such time as the Trustee shall return all for any part of such amounts to the
appropriate accounts. In addition, the Trustee may withdraw from the Interest
and Principal Accounts such amounts as may be necessary to cover redemption of
Units by the Trustee.
REINVESTMENT OPTION. Unitholders of the Trusts may elect to have each
distribution of interest income, capital gains and/or principal on their Units
automatically reinvested in shares of any mutual fund in the Delaware
Investments Family of Mutual Funds which are registered in the Unitholder's
state of residence. Such mutual funds are hereinafter collectively referred to
as the "REINVESTMENT FUNDS."
Each Reinvestment Fund has investment objectives which differ from
those of the Trusts. The prospectus relating to each Reinvestment Fund describes
the investment policies of such fund and sets forth the procedures to follow to
commence reinvestment. A Unitholder should obtain a prospectus for the
respective Reinvestment Fund by writing to Delaware Distributors, L.P. at 1818
Market Street, Philadelphia, Pennsylvania 19103, or by phone at 800-362-7500.
After becoming a participant in a reinvestment plan, each distribution
of interest income, capital gains and/or principal on the participant's Units
will, on the applicable distribution date, automatically be applied, as directed
by such person, as of such distribution date by the Trustee to purchase shares
(or fractions thereof) of the applicable Reinvestment Fund at a net asset value
as computed as of the next end of a "business day," as defined in the
Reinvestment Fund's prospectus.
Confirmations of all reinvestments by a Unitholder into a Reinvestment
Fund will be mailed to the Unitholder by such Reinvestment Fund.
A participant may at any time prior to five days preceding the next
succeeding distribution date, by so notifying the Trustee in writing, elect to
terminate his or her reinvestment plan and receive future distributions on his
or her Units in cash. There will be no charge or other penalty for such
termination. Each Reinvestment Fund, its sponsor and its investment adviser
shall have the right to terminate at any time the reinvestment plan relating to
such fund.
REPORTS PROVIDED. The Trustee shall furnish Unitholders of a Trust in
connection with each distribution a statement of the amount of interest and, if
any, the amount of other receipts being distributed expressed in each case as a
dollar amount representing the pro rata share of each Unit of a Trust
outstanding. For as long as the Sponsor deems it to be in the best interests of
the Unitholders, the accounts of each Trust shall be audited, not less
frequently than annually, by independent certified public accountants and the
report of such accountants shall be furnished by the Trustee to Unitholders of
such Trusts upon request.
<PAGE>
Within a reasonable period of time after the end of each calendar year, the
Trustee shall furnish to each person who at any time during the calendar year
was a registered Unitholder of a Trust a statement (i) as to the Interest
Account: interest received (including amounts representing interest received
upon any disposition of the Bonds) and the percentage of such amount by states
and territories in which the issuers of such Bonds are located, deductions for
applicable taxes and for fees and expenses of such Trust, for purchases of
Replacement Bonds and for redemptions of Units, if any, reservations made by the
Trustee, if any, and the balance remaining after such distributions and
deductions, expressed in each case 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; (ii) as to the Principal Account: the dates
of disposition of any Bonds and the net proceeds received therefrom (excluding
any portion representing accrued interest), the amount paid for purchases of
Replacement Bonds and for redemptions of Units, if any, reservations made by the
Trustee, if any, deductions for payment of applicable taxes, fees and expenses
of such Trust 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; (iii) a list of the Bonds held and the number of Units
outstanding on the last business day of such calendar year; (iv) the Redemption
Price per Unit based upon the last computation thereof made during such calendar
year; and (v) amounts actually distributed during such calendar year from the
Interest and Principal Accounts, separately stated, expressed both as total
dollar amounts and as dollar amounts representing the pro rata share of each
Unit outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations of the
Bonds in a Trust furnished to it by the Evaluator.
REDEMPTION OF UNITS. A Unitholder who does not dispose of Units in the
secondary market described above may cause Units to be redeemed by the Trustee
by making a written request to the Trustee, at its unit investment trust office,
The Chase Manhattan Bank, Bowling Green Station, P.O. Box 5185, New York, New
York 10274-5185 and, in the case of Units evidenced by a certificate, by
tendering such certificate to the Trustee, properly endorsed or accompanied by a
written instrument or instruments of transfer in form satisfactory to the
Trustee. Unitholders must sign the request, and such certificate or transfer
instrument, exactly as their names appear on the records of the Trustee and on
any certificate representing the Units to be redeemed. If the amount of the
redemption is $25,000 or less and the proceeds are payable to the Unitholder(s)
of record at the address of record, no signature guarantee is necessary for
redemptions by individual account owners (including joint owners). Additional
documentation may be requested, and a signature guarantee is always required,
from corporations, executors, administrators, trustees, guardians or
associations. The signatures must be guaranteed by a participant in the STAMP or
such other guarantee program in addition to, or in substitution for, STAMP, as
may be accepted by the Trustee. A certificate should only be sent by registered
or certified mail for the protection of the Unitholder. Since tender of the
certificate is required for redemption when one has been issued, Units
represented by a certificate cannot be redeemed until the certificate
representing such Units has been received by the purchasers. The Trustee's
toll-
<PAGE>
free number for customer assistance is 800-428-8890, available 9:00 a.m. to 5:00
p.m. EST any business day.
Redemption shall be made by the Trustee on the third business day
following the day on which a tender for redemption is received (the "REDEMPTION
DATE"). Such redemption shall be made by payment of cash, equivalent to the
Redemption Price for such Trust, determined as set forth below as of the
evaluation time stated under "Summary of Essential Financial Information" in
Part One of this Prospectus, next following such tender, multiplied by the
number of Units being redeemed. Any Units redeemed shall be cancelled and any
undivided fractional interest in the Fund extinguished. The price received upon
redemption might be more or less than the amount paid by the Unitholder
depending on the value of the Bonds in the Trust involved at the time of
redemption.
Under regulations issued by the Internal Revenue Service, the Trustee
will be required to withhold a specified percentage of the principal amount of a
Unit redemption if the Trustee has not been furnished the redeeming Unitholder's
tax identification number in the manner required by such regulations. Any amount
so withheld is transmitted to the Internal Revenue Service and may be recovered
by the Unitholder only when filing a return. Under normal circumstances the
Trustee obtains the Unitholder's tax identification number from the selling
broker. However, at any time a Unitholder elects to tender Units for redemption,
such Unitholder should provide a tax identification number to the Trustee in
order to avoid this possible "back-up withholding" in the event the Trustee has
not been previously provided such number.
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 will be withdrawn from the Principal Account. The
Trustee is empowered to sell underlying Bonds in order to make funds available
for redemption. Units so redeemed shall be cancelled.
The Redemption Price per Unit (as well as the secondary market Public
Offering Price) will be determined on the basis of the bid price of the Bonds in
each Trust, as of the close of trading on the New York Stock Exchange (or as of
any earlier closing time on a day on which the New York Stock Exchange is
scheduled in advance to close at such earlier time) on days of trading on the
New York Stock Exchange on the date any such determination is made. While the
Trustee has the power to determine the Redemption Price per Unit when Units are
tendered for redemption, such authority has been delegated to the Evaluator
which determines the price per Unit on a daily basis. The Redemption Price per
Unit is the pro rata share of each Unit in a Trust determined on the basis of
(i) the cash on hand in such Trust or monies in the process of being collected,
(ii) the value of the Bonds in such Trust based on the bid prices of the Bonds
(including "when issued" contracts, if any) and (iii) interest accrued thereon,
less (a) amounts representing taxes or other governmental charges payable out of
such Trust and (b) the accrued expenses of such Trust.
The Evaluator may determine the value of the Bonds in a Trust by
employing any of the methods set forth in "Public Offering--Offering Price."
<PAGE>
The price at which Units may be redeemed could be less than the price
paid by the Unitholder and may be less than the par value of the Bonds
represented by the Units so redeemed. As stated above, the Trustee may sell
Bonds to cover redemptions. When Bonds are sold, the size of the affected Trust
will be, and the diversity may be, reduced. Such sales may be required at a time
when Bonds would not otherwise be sold and might result in lower prices than
might otherwise be realized.
The right of redemption may be suspended and payment postponed for any
period during which the New York Stock Exchange is closed, other than for
customary weekend and holiday closings, or during which the Securities and
Exchange Commission determines that trading on that Exchange is restricted or an
emergency exists, as a result of which disposal or evaluation of the Bonds in a
Trust is not reasonably practicable, or for such other periods as the Securities
and Exchange Commission may by order permit. The Trustee is not liable to any
person in any way for any loss or damage which may result from any such
suspension or postponement.
TRUST ADMINISTRATION
DISTRIBUTOR PURCHASES OF UNITS. The Trustee shall notify the
Distributor of any tender of Units for redemption. If the Distributor's bid in
the secondary market at that time equals or exceeds the Redemption Price per
Unit, it may purchase such Units by notifying the Trustee before the close of
business on the date of such notification and by making payment therefor to the
Unitholder not later than the day on which the Units would otherwise have been
redeemed by the Trustee. Units held by the Distributor may be tendered to the
Trustee for redemption as any other Units.
The offering price of any Units acquired by the Distributor will be in
accord with the Public Offering Price described in the then currently effective
prospectus describing such Units. Any profit resulting from the resale of such
Units will belong to the Distributor which likewise will bear any loss resulting
from a lower offering or redemption price subsequent to its acquisition of such
Units.
PORTFOLIO ADMINISTRATION. The Trustee is empowered to sell, for the
purpose of redeeming Units tendered by any Unitholder, and for the payment of
expenses for which funds may not be available, such of the Bonds designated by
the Sponsor as the Trustee in its sole discretion may deem necessary. The
Sponsor, in designating such Bonds, will consider a variety of factors,
including (i) interest rates, (ii) market value and (iii) marketability. The
Sponsor may direct the Trustee to dispose of Bonds in the event there is a
decline in price or the occurrence of other market or credit factors, including
advance refunding (I.E., the issuance of refunding securities and the deposit of
the proceeds thereof in trust or escrow to retire the refunded securities on
their respective redemption dates), so that in the opinion of the Sponsor the
retention of such Securities would be detrimental to the interest of the
Unitholders. The Trustee may, from time to time, retain and pay compensation to
the Sponsor (or an affiliate of the Sponsor) to act as agent for the Trusts with
respect to selling Bonds from the Trusts. In acting in such capacity, the
Sponsor or its affiliate will be held subject to the restrictions under the
Investment Company Act of 1940, as amended.
<PAGE>
The Sponsor is required to instruct the Trustee to reject any offer
made by an issuer of any of the Bonds to issue new obligations in exchange or
substitution for any Bond pursuant to a refunding or refinancing plan, except
that the Sponsor may instruct the Trustee to accept or reject such an offer or
to take any other action with respect thereto as the Sponsor may deem proper if
(i) the issuer is in default with respect to such Bond or (ii) in the written
opinion of the Sponsor the issuer will probably default with respect to such
Bond in the reasonably foreseeable future. Any obligation so received in
exchange or substitution will be held by the Trustee subject to the terms and
conditions of the Trust Agreement to the same extent as Bonds originally
deposited thereunder. Within five days after the deposit of obligations in
exchange or substitution for underlying Bonds, the Trustee is required to give
notice thereof to each Unitholder, identifying the Bonds eliminated and the
Bonds substituted therefor. Except as stated herein, the acquisition by the
Trust of any obligations other than the Bonds initially deposited is not
permitted.
If any default in the payment of principal or interest on any Bond
occurs and no provision for payment is made therefor within 30 days, the Trustee
is required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such Bond within 30 days after notification by the
Trustee to the Sponsor of such default, the Trustee may in its discretion sell
the defaulted Bond and not be liable for any depreciation or loss thereby
incurred.
AMENDMENT OR TERMINATION. The Sponsor and the Trustee have the power to
amend the Trust Agreement without the consent of any of the Unitholders when
such an amendment is (i) to cure an 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 (ii) to make such other provisions as shall
not adversely affect the interest of the Unitholders (as determined in good
faith by the Sponsor and the Trustee), PROVIDED that the Trust Agreement may not
be amended to increase the number of Units issuable thereunder or to permit the
deposit or acquisition of obligations either in addition to or in substitution
for any of the Bonds initially deposited in a Trust, except for the substitution
of certain refunding obligations for such Bonds, for Replacement Bonds and for
subsequent deposits (see "The Fund"). In the event of any amendment requiring
the consent of Unitholders, the Trustee is obligated to notify promptly all
Unitholders of the substance of such amendment.
A Trust may be terminated at any time by consent of Unitholders
representing 66-2/3% of the Units of such Trust then outstanding or by the
Trustee when the value of such Trust, as shown by any semi-annual evaluation, is
less than the minimum value indicated under "Summary of Essential Financial
Information" in Part One of this Prospectus. A Trust will be liquidated by the
Trustee in the event that a sufficient number of Units not yet sold are tendered
for redemption by the Underwriters, including the Distributor, so that the net
worth of such Trust would be reduced to less than 40% of the initial principal
amount of such Trust. If a Trust is liquidated because of the redemption of
unsold Units by the Underwriters, the Distributor will refund to each purchaser
of Units the entire sales charge paid by such purchaser.
<PAGE>
The Trust Agreement provides that a Trust shall terminate upon the
redemption, sale or other disposition of the last Bond held in such Trust, but
in no event shall it continue beyond the end of the year preceding the fiftieth
anniversary of the Trust Agreement. In the event of termination of a Trust,
written notice thereof will be sent by the Trustee to each Unitholder of such
Trust at his address appearing on the registration books of the Trust maintained
by the Trustee, such notice specifying the time or times at which the Unitholder
may surrender his certificate or certificates, if any were issued, for
cancellation. Within a reasonable time thereafter, the Trustee shall liquidate
any Bonds then held in such Trust and shall deduct from the rinds of such Trust
any accrued costs, expenses or indemnities provided by the Trust Agreement,
including estimated compensation of the Trustee and costs of liquidation and any
amounts required as a reserve to provide for payment of any applicable taxes or
other governmental charges. The sale of Bonds in a Trust upon termination may
result in a lower amount than might otherwise be realized if such sale were not
required at such time. For this reason, among others, the amount realized by a
Unitholder upon termination may be less than the principal amount or par amount
of Bonds represented by the Units held by such Unitholder. The Trustee shall
then distribute to each Unitholder his or her share of the balance of the
Interest and Principal Accounts. With such distribution, the Unitholders shall
be furnished a final distribution statement of the amount distributable. At such
time as the Trustee in its sole discretion shall determine that any amounts held
in reserve are no longer necessary, it shall make distribution thereof to
Unitholders in the same manner.
LIMITATION ON LIABILITIES. The Sponsor, the Evaluator, the Distributor
and the Trustee shall be under no liability to Unitholders for taking any action
or for refraining from taking any action in good faith pursuant to the Trust
Agreement, or for errors in judgment, but shall be liable only for their own
willful misfeasance, bad faith or gross negligence in the performance of their
duties or by reason of their reckless disregard of their obligations and duties
thereunder. The Trustee shall not be liable for depreciation or loss incurred by
reason of the sale by the Trustee of any of the Bonds. In the event of the
failure of the Sponsor to act under the Trust Agreement, the Trustee may act
thereunder and shall not be liable for any action taken by it in good faith
under the Trust Agreement.
The Trustee shall not be liable for any taxes or other governmental
charges imposed upon or in respect of the Bonds or upon the interest thereon or
upon it as Trustee under the Trust Agreement or upon or in Fund which the
Trustee may be required to pay under any present or future law of the United
States of America or of any other taxing authority having jurisdiction. In
addition, the Trust Agreement contains other customary provisions limiting the
liability of the Trustee.
The Trustee, Sponsor, Distributor and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for the
accuracy thereof. Determinations 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, Sponsor, Distributor or Unitholders for errors in judgment. This
provision shall not protect the Evaluator in any case of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations and duties.
<PAGE>
SPONSOR. Delaware Capital Management, Inc. is the Sponsor of the Fund
and Delaware Distributors, L.P. is the primary Distributor of Fund Units. Both
the Sponsor and Distributor are indirect, wholly owned subsidiaries of Lincoln
National Corporation ("LNC"). LNC, headquartered in Fort Wayne, Indiana, owns
and operates insurance and investment management businesses, including Delaware
Management Holdings, Inc. ("DMH"). Affiliates of DMH serve as adviser,
distributor and transfer agent for the Delaware Investments Family of Mutual
Funds.
As of April 30, 1998, affiliates of DMH, including the Sponsor, had
assets under management of over $40 billion in mutual fund and institutional
accounts, and served as investment adviser to over 100 mutual fund portfolios.
The principal business address for the Sponsor is One Commerce Square,
Philadelphia, Pennsylvania 19103; the principal business address for the
Distributor is 1818 Market Street, Philadelphia, Pennsylvania 19103. (The
paragraph relates only to the Sponsor and not to the Fund or to any Series
thereof. The information is included herein only for the purpose of informing
investors as to the financial responsibility of the Sponsor and its ability to
carry out its contractual obligations. More detailed information will be made
available by the Sponsor upon request.)
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its affairs are
taken over by public authorities, then the Trustee may (i) appoint a successor
Sponsor at rates of compensation deemed by the Trustee to be reasonable and not
exceeding amounts prescribed by the Securities and Exchange Commission, (ii)
terminate the Trust Agreement and liquidate the Fund as provided therein or
(iii) continue to act as Trustee without terminating the Trust Agreement.
EVALUATOR. Muller Data Corporation serves as Evaluator. The Evaluator
may resign or be removed by the Sponsor in which event the Sponsor is to use its
best efforts to appoint a satisfactory successor. Such resignation or removal
shall become effective upon acceptance of appointment by the successor
evaluator. If upon resignation of the Evaluator no successor has accepted
appointment within 30 days after notice of resignation, the Evaluator may apply
to a court of competent jurisdiction for the appointment of a successor. Notice
of such resignation or removal and appointment shall be mailed by the Trustee to
each Unitholder.
TRUSTEE. The Trustee is The Chase Manhattan Bank, with its principal
executive office located at 270 Park Avenue, New York, New York 10017 and its
unit investment trust office at 4 New York Plaza, 6th Floor, New York, New York
10004-2413. The Trustee is subject to supervision 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.
The duties of the Trustee are primarily ministerial in nature. It did
not participate in the selection of Bonds for the portfolio of any Trust.
In accordance with the Trust Agreement, the Trustee shall keep proper
books of record and account of all transactions at its office for the Fund. Such
records shall include the name and address of, and the certificates issued by
each Trust to, every Unitholder of
<PAGE>
each Trust. Such books and records shall be open to inspection by any Unitholder
at all reasonable times during usual business hours. The Trustee shall make such
annual or other reports as may from time to time be required under any
applicable state or Federal statute, rule or regulation (see "Rights of
Unitholders--Reports Provided"). The Trustee is required to keep a certified
copy or duplicate original of the Trust Agreement on file in its office
available for inspection at all reasonable times during the usual business hours
by any Unitholder, together with a current list of the Bonds held in the Trusts.
Under the Trust Agreement, the Trustee or any successor trustee may
resign and be discharged of the Trusts created by the Trust Agreement by
executing an instrument in writing and filing the same with the Sponsor. The
Trustee or successor trustee must mail a copy of the notice of resignation to
all Unitholders then of record, not less than 60 days before the date specified
in such notice when such resignation is to take effect. The Sponsor upon
receiving notice of such resignation is obligated to appoint a successor trustee
promptly. If, upon such resignation, no successor trustee has been appointed and
has accepted the appointment within 30 days after notification, the retiring
Trustee may apply to a court of competent jurisdiction for the appointment of a
successor. The Sponsor may remove the Trustee and appoint a successor trustee as
provided in the Trust Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a written acceptance
of such appointment by such successor trustee, all the rights, powers, duties
and obligations of the original trustee shall vest in the 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.
Any corporation into which a Trustee may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which a Trustee shall be a party, shall be the successor trustee. The Trustee
must be a corporation organized under the laws of the United States or any
State, be authorized to exercise trust powers and have at all times an aggregate
capital, surplus and undivided profits of not less than $5,000,000.
OTHER MATTERS
LEGAL OPINIONS. The legality of the Units offered hereby and certain
matters relating to Federal and state tax law have been passed upon by Chapman
and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for the
Sponsor. Carter, Ledyard & Milburn will act as counsel for the Trustee and as
special New York tax counsel for the Trusts.
INDEPENDENT AUDITORS. The financial statements of each Trust as of the
date presented in Part One of this Prospectus have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report therein appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
<PAGE>
DESCRIPTION OF BOND RATINGS*
STANDARD & POOR'S. A brief description of the applicable Standard &
Poor's ratings symbols and their meanings follows:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I Likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal
in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangements under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.**
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
- --------
* As published by the ratings companies.
** Bonds insured by Financial Guaranty Insurance Company, AMBAC Indemnity
Corporation, Municipal Bond Investors Assurance Corporation, Connie Lee
Insurance Company, Financial Security Assurance and Capital Guaranty
Insurance Company are automatically rated "AAA" by Standard & Poor's.
<PAGE>
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his/her own judgment with respect to such
likelihood and risk.
Credit Watch: Credit Watch highlights potential changes in ratings of
bonds and other fixed income securities. It focuses on events and trends which
place companies and government units under special surveillance by S&P's
180-member analytical staff. These may include merges, voter referendums,
actions by regulatory authorities, or developments gleaned from analytical
reviews. Unless otherwise noted, a rating decision will be made within 90 days.
Issues appear on Credit Watch where an event, situation, or deviation from
trends occurred and needs to be evaluated as to its impact. On credit ratings. A
listing, however, does not mean a rating change is inevitable. Since S&P
continuously monitors all of its ratings, Credit Watch is not intended to
include all issues under review. Thus, rating changes will occur without issues
appearing on Credit Watch.
Bonds insured by Financial Guaranty Insurance Company, AMBAC Indemnity
Corporation, Municipal Bond Investors Assurance Corporation, Connie Lee
Insurance Company, Financial Security Assurance and Capital Guaranty Insurance
Company are automatically rated "AAA" by Standard & Poor's
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings 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. Their
safety is so absolute that with the occasional exception of oversupply in a few
specific instances, characteristically, their market value is affected solely by
money market fluctuations.
<PAGE>
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or 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.
Their market value is virtually immune to all but money market influences, with
the occasional exception of oversupply in a few specific instances.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. The market value of A-rated bonds may be influenced to some degree by
economic performance during a sustained period of depressed business conditions,
but, during periods of normalcy, A-rated bonds frequently move in parallel with
Aaa and Aa obligations, with the occasional exception of oversupply in a few
specific instances.
A 1 and Baa 1 - Bonds which are rated A 1 and Baa 1 offer the maximum
in security within their quality group, can be bought for possible upgrading in
quality, and additionally, afford the investor an opportunity to gauge more
precisely the relative attractiveness of offerings in the market place.
Baa - Bonds which are rated Baa are considered as medium grade
obligation; I.E., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well. The market value of
Baa-rated bonds is more sensitive to changes in economic circumstances, and
aside form occasional speculative factors applying to some bonds of this class,
Baa market valuations will move in parallel with Aaa, Aa, and A obligations
during periods of economic normalcy, except in instances of oversupply.
Moody's bond rating symbols may contain numerical modifiers of a
generic rating classification. The modifier 1 indicates that the bond ranks at
the high end of its category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Con. (--) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
<PAGE>
No person is authorized to give any information or to make any representations
not contained in this Prospectus; and any information or representation not
contained herein must not be relied upon as having been authorized by the Fund,
the Sponsor or the Underwriters. 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.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
TITLE PAGE
THE FUND...................................................4
INVESTMENT OBJECTIVES AND PORTFOLIO SELECTION..............5
THE TRUSTS.................................................5
EQUIVALENT TAXABLE ESTIMATED CURRENT RETURNS..............40
RISK FACTORS..............................................42
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN...50
TRUST OPERATING EXPENSES..................................50
INSURANCE ON THE BONDS IN THE INSURED TRUSTS..............52
TAX STATUS................................................53
PUBLIC OFFERING...........................................58
RIGHTS OF UNITHOLDERS.....................................61
TRUST ADMINISTRATION......................................65
OTHER MATTERS.............................................70
DESCRIPTION OF BOND RATINGS...............................70
- --------------------------------------------------------------------------------
This Prospectus contains information concerning the Fund and the Sponsor, but
does not contain all of the information set forth in the registration statements
and exhibits relating thereto, which the Fund 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.
PROSPECTUS
- --------------------------------------------------------------------------------
October 5, 1998, as of
June 30, 1998
PROSPECTUS PART TWO
DELAWARE INVESTMENTS
TAX-EXEMPT TRUST SERIES
CONTENTS OF POST-EFFECTIVE AMENDMENT
TO REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
This Post-Effective Amendment to the Registration Statement comprises
the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Delaware Investments Tax-Exempt Trust, Series 1, certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal to be hereunto
affixed and attested, all in the City of Philadelphia and State of Pennsylvania
on the 7th day of October, 1998.
Delaware Investments Tax-Exempt Trust,
Series 1
(Registrant)
By Delaware Capital Management, Inc.
(Depositor)
By /s/ Wayne A. Stork
-----------------------------------
Chairman of the Board of Directors
and President
(Seal)
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities on October 7, 1998:
/s/ Wayne A. Stork
- ------------------------------
Wayne A. Stork Chairman of the Board of Directors and President
/s/ George M. Chamberlain, Jr.
- ------------------------------
George M. Chamberlain, Jr. Director, Senior Vice President and Secretary
/s/ David K. Downes
- ------------------------------
David K. Downes Senior Vice President, Chief Operating Officer,
and Chief Financial Officer
EXHIBIT 99.c1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Independent Auditors"
and to the use of our report dated September 18, 1998 in this Post-Effective
Amendment No. 3 to Registration Statement (Form S-6 No. 33-84086) and related
Prospectus of Delaware Investments Tax-Exempt Trust, Series 1 dated October 7,
1998.
Ernst & Young LLP
Philadelphia, Pennsylvania
September 30, 1998
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