<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 1994
REGISTRATION NO. 33-56049
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
A. EXACT NAME OF TRUST:
TAX EXEMPT SECURITIES TRUST, TARGET MATURITY TRUST
NATIONAL SERIES
CALIFORNIA SERIES
NEW YORK SERIES
B. NAMES OF DEPOSITORS:
SMITH BARNEY INC.
KIDDER, PEABODY & CO. INCORPORATED
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
SMITH BARNEY INC. KIDDER, PEABODY & CO. INCORPORATED
1345 Avenue of the Americas 60 Broad Street
New York, New York 10105 New York, New York 10004
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
STEPHEN J. TREADWAY GILBERT R. OTT, JR.
Smith Barney Inc. Kidder, Peabody & Co. Incorporated
1345 Avenue of the Americas 10 Hanover Square
New York, New York 10105 New York, New York 10005
COPY TO:
PIERRE DE SAINT PHALLE, ESQ.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
AN INDEFINITE NUMBER OF UNITS OF BENEFICIAL INTEREST PURSUANT TO RULE 24F-2
PROMULGATED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED.
F. PROPOSED MAXIMUM AGGREGATE OFFERING PRICE TO THE PUBLIC OF THE SECURITIES
BEING REGISTERED:
INDEFINITE
G. AMOUNT OF FILING FEE:
$500 (AS REQUIRED BY RULE 24F-2)
H. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
[X]CHECK BOX IF IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
IMMEDIATELY UPON FILING PURSUANT TO RULE 487.
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- -------------------------------------------------------------------------------
<PAGE>
---------------------------------------------------------
TAX EXEMPT TARGET MATURITY TRUST
SECURITIES National Series
TRUST California Series
New York Series
- ---------------------- ---------------------------------------------------
30,500 UNITS
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
IN THE OPINION OF COUNSEL UNDER EXISTING LAW, INTEREST INCOME TO THE TRUSTS AND
TO UNIT HOLDERS (EXCEPT IN CERTAIN INSTANCES DEPENDING UPON THE UNIT HOLDERS)
IS EXEMPT FROM REGULAR FEDERAL INCOME TAX AND FROM CERTAIN STATE AND LOCAL
PERSONAL INCOME TAXES, TO THE EXTENT INDICATED, IN THE STATE FOR WHICH A STATE
TRUST IS NAMED. CAPITAL GAINS, IF ANY, ARE SUBJECT TO TAX.
THIS SERIES OF TAX EXEMPT SECURITIES TRUST consists of separate underlying unit
investment trusts designated as Target Maturity Trust (National Series), Target
Maturity Trust (California Series) and Target Maturity Trust (New York Series)
(the "National Trust," the "California Trust" and the "New York Trust,"
respectively) (the "Trusts" or the "Trust" as the context requires and in the
case of a Trust designated by a state name, the "State Trust" or "State
Trusts", as the context requires). Each Trust was formed for the purpose of
obtaining for its Unit holders tax-exempt interest income and conservation of
capital through investment in a fixed portfolio consisting primarily of
municipal bonds with fixed final maturities ranging from 2004 through 2012 and
rated at the time of deposit in the category A or better by Standard & Poor's
Ratings Group, a division of McGraw-Hill, Inc. ("Standard & Poor's"), Moody's
Investors Service, Inc. ("Moody's"), Fitch Investors Service, Inc. ("Fitch") or
Duff & Phelps Credit Rating Co. ("Duff & Phelps"). (See "Portfolio of
Securities"). Each State Trust comprises a fixed portfolio of interest-bearing
obligations issued primarily by or on behalf of the state for which such State
Trust is named and counties, municipalities, authorities or political
subdivisions thereof. Interest on all bonds in each Trust is in the opinion of
counsel under existing law, with certain exceptions, exempt from regular
Federal income taxes (see Part B, "Taxes") and from certain state and local
personal income taxes in the state for which a State Trust is named, but may be
subject to other state and local taxes. (See discussions of State and local
taxes in Part C.)
THE PUBLIC OFFERING PRICE of the Units of each Trust during the initial public
offering period is equal to the aggregate offering price of the underlying
bonds in the Trust's portfolio divided by the number of Units outstanding in
such Trust, plus a sales charge. The Public Offering Price of the Units of each
Trust following the initial public offering period is equal to the aggregate
bid price of the underlying bonds in the Trust's portfolio divided by the
number of Units outstanding in such Trust, plus a sales charge. During the
initial public offering period the sales charge is equal to 3.70% of the Public
Offering Price (3.842% of the aggregate offering price of the bonds per Unit)
for each Trust, and following the initial public offering period this charge
will be equal to 4.00% of the Public Offering Price (4.167% of the aggregate
bid price of the bonds per Unit) for each Trust. See Part B, "Public Offering--
Distribution of Units" for a description of the initial public offering period.
If the Units had been available for sale on November 18, 1994, the Public
Offering Price per Unit (including the sales charge) would have been $986.44,
$984.62 and $983.56 for the National Trust, California Trust and New York
Trust, respectively. In addition, there will be added an amount equal to
accrued interest from the day after the Date of Deposit to the date of
settlement (seven business days after purchase).
THE SPONSORS, although not obligated to do so, intend to maintain a market for
the Units of the Trusts at prices based upon the aggregate bid price of the
underlying bonds, as more fully described under "Public Offering--Market for
Units" in Part B. If such a market is not maintained, a Unit holder may be able
to dispose of his Units only through redemption, at prices that are also based
upon the aggregate bid price of the underlying bonds.
MONTHLY DISTRIBUTIONS of principal and interest received by each Trust will be
made on or shortly after the fifteenth day of each month to holders of record
on the first day of that month. For further information regarding the
distributions by each Trust, see "Summary of Essential Information".
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The date of this Prospectus is November 21, 1994.
<PAGE>
TAX EXEMPT SECURITIES TRUST, TARGET MATURITY TRUST
SUMMARY OF ESSENTIAL INFORMATION AS OF NOVEMBER 18, 1994+
SPONSORS RECORD DATES
Smith Barney Inc.
Kidder, Peabody & Co. The first day of each month,
Incorporated commencing December 1, 1994
TRUSTEE DISTRIBUTION DATES
United States Trust Company of
New York The fifteenth day of each
month,** commencing December
15, 1994
EVALUATOR
EVALUATION TIME
Kenny S & P Evaluation As of 1:00 P.M. on the Date of
Services, a division of Deposit. Thereafter, as of
Kenny Information Systems, Inc. 4:00 P.M. New York Time.
DATE OF DEPOSIT AND OF TRUST EVALUATOR'S FEE
AGREEMENT
The Evaluator will receive a
fee of $.30 per bond per
November 18, 1994 evaluation. (See Part B,
"Evaluator--Responsibility"
and "Public Offering--Offering
Price".)
MANDATORY TERMINATION DATE*
Each Trust will terminate on the
date of maturity, redemption,
sale or other disposition of the
last Bond held in the Trust.
SPONSORS' ANNUAL PORTFOLIO
SUPERVISION FEE***
Maximum of $.25 per $1,000
face amount of the underlying
Bonds.
- -------
+ The Date of Deposit. The Date of Deposit is the date on which the Trust
Agreement was signed and the deposit with the Trustee was made.
* The actual date of termination of each trust may be considerably earlier
(see Part B, "Amendment and Termination of the Trust Agreement--
Termination").
** The first monthly income distribution of $2.32, $2.28 and $2.25 for the
National Trust, California Trust and New York Trust, respectively, will be
made on December 15, 1994.
***In addition to this amount, the Sponsors may be reimbursed for bookkeeping
and other administrative expenses not exceeding their actual costs.
A-2
<PAGE>
<TABLE>
<CAPTION>
TAX EXEMPT SECURITIES TRUST,
TARGET MATURITY TRUST
-----------------------------------
NATIONAL CALIFORNIA NEW YORK
TRUST TRUST TRUST
----------- ---------- ----------
<S> <C> <C> <C>
Principal Amount of Bonds in Trust........ $20,000,000 $3,000,000 $7,500,000
Number of Units........................... 20,000 3,000 7,500
Principal Amount of Bonds in Trust per
Unit..................................... $ 1,000 $ 1,000 $ 1,000
Fractional Undivided Interest in Trust per
Unit..................................... 1/20,000 1/3,000 1/7,500
Minimum Value of Trust:
Trust Agreement may be Terminated if
Principal Amount is less than.......... $10,000,000 $1,500,000 $3,750,000
Calculation of Public Offering Price per
Unit*:
Aggregate Offering Price of Bonds in
Trust.................................. $18,998,863 $2,844,564 $7,103,796
=========== ========== ==========
Divided by Number of Units.............. $ 949.94 $ 948.19 $ 947.17
Plus: Sales Charge (3.70% of the Public
Offering Price)........................ $ 36.50 $ 36.43 $ 36.39
----------- ---------- ----------
Public Offering Price per Unit.......... $ 986.44 $ 984.62 $ 983.56
Plus: Accrued Interest*................. $ 2.32 $ 2.28 $ 2.25
----------- ---------- ----------
Total................................. $ 988.76 $ 986.90 $ 985.81
=========== ========== ==========
Sponsors' Initial Repurchase Price per
Unit (per Unit Offering Price of
Bonds)*................................ $ 949.94 $ 948.19 $ 947.17
Approximate Redemption Price per Unit (per
Unit Bid Price of Bonds)**............. $ 945.94 $ 944.19 $ 943.17
----------- ---------- ----------
Difference Between per Unit Offering and
Bid Prices of Bonds...................... $ 4.00 $ 4.00 $ 4.00
=========== ========== ==========
Calculation of Estimated Net Annual Income
per Unit:
Estimated Annual Income per Unit........ $ 66.04 $ 64.78 $ 64.05
Less: Estimated Trustee's Annual Fee***. $ .55 $ .55 $ .55
Less: Other Estimated Annual Expenses... $ 1.05 $ .99 $ .98
----------- ---------- ----------
Estimated Net Annual Income per Unit.... $ 64.44 $ 63.24 $ 62.52
=========== ========== ==========
Calculation of Monthly Income Distribution
per Unit:
Estimated Net Annual Income per Unit... $ 64.44 $ 63.24 $ 62.52
Divided by 12........................... $ 5.37 $ 5.27 $ 5.21
Accrued interest from the day after the
Date of Deposit to the first record
date**................................. $ 2.32 $ 2.28 $ 2.25
First distribution per unit............... $ 2.32 $ 2.28 $ 2.25
Daily Rate (360-day basis) of Income Ac-
crual per Unit........................... $ .1790 $ .1756 $ .1736
Estimated Current Return based on Public
Offering Price****....................... 6.53% 6.42% 6.36%
Estimated Long-Term Return****............ 6.71% 6.62% 6.54%
</TABLE>
- -------
* Accrued interest will be added from the day after the Date of Deposit to
the date of settlement (normally five business days after purchase).
** This figure will also include accrued interest from the day after the Date
of Deposit to the date of settlement (normally five business days after
purchase) and the net of cash on hand in the relevant Trust, accrued
expenses of such Trust and amounts distributable to holders of record of
Units of such Trust as of a date prior to the computation date, on a pro
rata share basis. (See Part B, "Redemption of Units--Computation of
Redemption Price per Unit.")
*** Per $1,000 principal amount of Bonds, plus expenses. (See Part B, "Rights
of Unit Holders--Distribution of Interest and Principal.")
**** The Estimated Current Return is calculated by dividing the Estimated Net
Annual Interest Income per Unit by the Public Offering Price per Unit. The
Estimated Net Annual Interest Income per Unit will vary with changes in fees
and expenses of the Trustee and the Evaluator and with the principal
prepayment, redemption, maturity, exchange or sale of Bonds while the Public
Offering Price will vary with changes in the offering price of the
underlying Bonds; therefore, there is no assurance that the present
Estimated Current Return indicated above will be realized in the future. The
Estimated Long-Term Return is calculated using a formula which (1) takes
into consideration, and factors in the relative weightings of, the market
values, yields (which takes into account the amortization of premiums and
the accretion of discounts) and estimated retirements of all of the Bonds in
the Trust and (2) takes into account the expenses and sales charge
associated with each Unit. Since the market values and estimated retirements
of the Bonds and the expenses of the Trust will change, there is no
assurance that the present Estimated Long-Term Return as indicated above
will be realized in the future. The Estimated Current Return and Estimated
Long-Term Return are expected to differ because the calculation of the
Estimated Long-Term Return reflects the estimated date and amount of
principal returned while the Estimated Current Return calculations include
only Net Annual Interest Income and Public Offering Price as of the Date of
Deposit. The effect of the delay in the payment to Unit holders for the
first few months of Trust operations, which results in a lower true return
to Unit holders, is not reflected in either calculation (a projected cash
flow statement as of the Date of Deposit is available upon request from the
Trustee).
A-3
<PAGE>
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT
RISK FACTORS
Smith Barney's Fixed-Income Research, as of October 1, 1994, is of the
opinion that municipal bonds with maturities in the 10-17 year range currently
offer the most attractive returns relative to market and reinvestment risk,
and that it may be an opportune time to invest in these bonds. Trust
advertising and sales material may include a description of the factors on
which this opinion is based, including assumptions concerning rates of
economic growth and inflation, the results of actions by the Federal Reserve
Board, availability of and demand for municipal bonds, interest rates
(especially those of municipal bonds) and a chart prepared by Bloomberg
Financial Markets illustrating the effect of maturities of A-rated general
purpose municipal bonds on average interest rates. Smith Barney anticipates
that when and if interest rates decline, municipal bonds with these maturities
should benefit more than bonds with shorter maturities.
Of course, investing in municipal bonds involves certain risk. The value of
the underlying bonds, and therefore Unit price, will vary with the financial
condition of the issuers of the bonds and changes in interest rates. If
interest rates rise, Trust income would not increase and Unit price would
decline. Falling interest rates could lead to a greater number of bond calls
or other portfolio changes, which would result in early returns of principal.
Generally, return on bonds increases with their time to maturity, but so does
price volatility. A portfolio consisting of municipal bonds with 10-17 year
maturities may not be appropriate for all investors.
TARGET MATURITY TRUST (NATIONAL SERIES)
The Portfolio of the National Trust contains 29 issues of Bonds of issuers
located in 14 States. Of the Bonds in this Trust, one issue (representing
approximately 6.9%* of the Bonds in the Trust) is a general obligation of a
governmental entity and is backed by the taxing power of that entity. The
remaining issues are payable from the income of specific projects or
authorities and are not supported by the issuer's power to levy taxes.
Although income to pay such Bonds may be derived from more than one source,
the primary sources of such income and the percentage of the Bonds in this
Trust deriving income from such sources are as follows: hospital and health
care facilities: 32.0%; housing facilities: 15.9%; power facilities: 13.2%;
transportation facilities: 5.0%; industrial development facilities: 4.7%;
educational facilities: 8.0%; water and sewer facilities: 2.4%; sports
facilities: 4.1%; other: 7.8%. The Trust is considered to be concentrated in
hospital and health care facilities issues.+ (See Part B, "Tax Exempt
Securities Trust--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) 9.8% of the Bonds in this
Trust are insured as to timely payment of principal and interest by certain
insurance companies (AMBAC, 3.8%; Connie Lee, 1.0%; and MBIA, 5.0%) (see Part
B, "Tax Exempt Securities Trust--Risk Factors--Insurance"). Sixteen Bonds in
this Trust have been issued with an "original issue discount." (See Part B,
"Taxes.") The average life to maturity of the Bonds in the National Trust is
15.7 years.
As of the Date of Deposit, 81.6% of the Bonds in this Trust are rated by
Standard & Poor's (10.9% rated AAA, 2.4% rated AA and 68.3% rated A); 18.4%
are rated A by Moody's. For a description of the meaning of the applicable
rating symbols as published by the rating agencies, see Part B, "Bond
Ratings." It should be emphasized, however, that the ratings of the rating
agencies represent their opinions as to the quality of the Bonds which they
undertake to rate, and that these ratings are general and are not absolute
standards of quality and may change from time to time.
18.0% of the Bonds in the National Trust were acquired from a Sponsor as
sole underwriter or from an underwriting syndicate in which a Sponsor
participated, or otherwise from a Sponsor's own organization. (See Part B,
"Public Offering--Sponsors' and Underwriters' Profits.")
TARGET MATURITY TRUST (CALIFORNIA SERIES)
The Portfolio of the California Trust contains 11 issues of Bonds of issuers
located in the State of California. All of the issues are payable from the
income of specific projects or authorities and are not supported by the
issuer's power to levy taxes. Although income to pay such Bonds may be derived
from more than one source, the primary sources of such income and the
percentage of the Bonds in this Trust deriving income from such sources are as
follows: hospital and health care facilities: 32.6%*; power facilities: 9.2%;
educational facilities: 29.6%; capital improvement facilities: 16.8%; tax
allocation: 11.8%. The Trust is considered to be concentrated in hospital and
health care facilities and educational facilities issues.+ (See Part B, "Tax
Exempt Securities Trust--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) 23.6% of the Bonds in
this Trust are insured as to timely payment of principal and interest by
certain insurance companies (Connie Lee, 11.8%; CGIC, 11.8%) (see Part B, "Tax
Exempt Securities Trust--Risk Factors--Insurance"). Seven Bonds in this Trust
have been issued with an "original issue discount." (See Part B, "Taxes.") The
average life to maturity of the Bonds in the California Trust is 14.8 years.
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-4
<PAGE>
As of the Date of Deposit, 90.8% of the Bonds in this Trust are rated by
Standard & Poor's (23.6% rated AAA and 67.2% rated A); 9.2% are rated A by
Moody's. For a description of the meaning of the applicable rating symbols as
published by the rating agencies, see Part B, "Bond Ratings." It should be
emphasized, however, that the ratings of the rating agencies represent their
opinions as to the quality of the Bonds which they undertake to rate, and that
these ratings are general and are not absolute standards of quality and may
change from time to time.
None of the Bonds in the California Trust were acquired from a Sponsor as
sole underwriter or from an underwriting syndicate in which a Sponsor
participated, or otherwise from a Sponsor's own organization. (See Part B,
"Public Offering--Sponsors' and Underwriters' Profits.")
TARGET MATURITY TRUST (NEW YORK SERIES)
The Portfolio of the New York Trust contains 15 issues of Bonds of issuers
located in the State of New York. Three of the issues (representing
approximately 14.2%* of the Bonds in the Trust) are general obligations of
governmental entities and are backed by the taxing power of those entities. The
remaining issues are payable from the income of specific projects or
authorities and are not supported by the issuer's power to levy taxes. Although
income to pay such Bonds may be derived from more than one source, the primary
sources of such income and the percentage of the Bonds in this Trust deriving
income from such sources are as follows: power facilities: 4.2%; transportation
facilities: 34.1%; educational facilities: 11.2%; water and sewer facilities:
7.9%; sales tax: 11.6%; lease rental payments: 3.2%; other: 13.6%. The Trust is
considered to be concentrated in transportation issues.+ (See Part B, "Tax
Exempt Securities Trust--Risk Factors" for a brief summary of additional
considerations relating to certain of these issues.) 14.5% of the Bonds in this
Trust are insured as to timely payment of principal and interest by certain
insurance companies (AMBAC, 14.5%) (see Part B, "Tax Exempt Securities Trust--
Risk Factors--Insurance"). Eleven Bonds in this Trust have been issued with an
"original issue discount." (See Part B, "Taxes.") The average life to maturity
of the Bonds in the New York Trust is 15.5 years.
As of the Date of Deposit, 75.3% of the Bonds in this Trust are rated by
Standard & Poor's (14.5% rated AAA, 8.6% rated AA and 52.2% rated A); 13.5% are
rated by Moody's (10.3% rated Aa and 3.2% rated A); 11.2% are rated A by Fitch.
For a description of the meaning of the applicable rating symbols as published
by the rating agencies, see Part B, "Bond Ratings." It should be emphasized,
however, that the ratings of the rating agencies represent their opinions as to
the quality of the Bonds which they undertake to rate, and that these ratings
are general and are not absolute standards of quality and may change from time
to time.
18.0% of the Bonds in the New York Trust were acquired from a Sponsor as sole
underwriter or from an underwriting syndicate in which a Sponsor participated,
or otherwise from a Sponsor's own organization. (See Part B, "Public Offering--
Sponsors' and Underwriters' Profits.")
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-5
<PAGE>
UNDERWRITING
The names and addresses of the Underwriters and the number of Units to be
sold by them are as follows:
<TABLE>
<CAPTION>
UNITS
----------------------------
TAX EXEMPT SECURITIES TRUST,
TARGET MATURITY TRUST
NATIONAL CALIFORNIA NEW YORK
TRUST TRUST TRUST
-------- ---------- --------
<S> <C> <C> <C>
Smith Barney Inc. ................................. 18,700 2,400 6,800
1345 Avenue of the Americas
New York, New York 10105
Kidder, Peabody & Co. Incorporated................. 1,000 500 500
60 Broad Street
New York, New York 10004
Gruntal & Co. Incorporated......................... 100 -- 100
14 Wall Street
New York, New York 10005
Rauscher Pierce Refsnes, Inc. ..................... 100 -- --
2500 RPR Tower
Plaza of the Americas
Dallas, Texas 75201
Roosevelt & Cross, Inc. ........................... 100 -- 100
20 Exchange Place
New York, New York 10005
Sutro & Co. Inc. .................................. -- 100 --
201 California Street
San Francisco, California 94111
------ ----- -----
Total.............................................. 20,000 3,000 7,500
====== ===== =====
</TABLE>
A-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Sponsors and Unit Holders of Tax Exempt Securities Trust, Target
Maturity Trust (National Series, California Series and New York Series):
We have audited the accompanying statements of financial condition, including
the portfolios of securities, of each of the respective trusts constituting Tax
Exempt Securities Trust, Target Maturity Trust (National Series, California
Series and New York Series) as of November 18, 1994. These financial statements
are the responsibility of the Trustee (see note 5 to the statements of
financial condition). Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the statements of financial condition
are free of material misstatement. An audit of a statement of financial
condition includes examining, on a test basis, evidence supporting the amounts
and disclosures in that statement of financial condition. Our procedures
included confirmation with the Trustee of an irrevocable letter of credit
deposited on November 18, 1994 for the purchase of securities, as shown in the
statements of financial condition. An audit of a statement of financial
condition also includes assessing the accounting principles used and
significant estimates made by the Trustee, as well as evaluating the overall
statement of financial condition presentation. We believe that our audits of
the statements of financial condition provide a reasonable basis for our
opinion.
In our opinion, the statements of financial condition referred to above
present fairly, in all material respects, the financial position of each of the
respective trusts constituting Tax Exempt Securities Trust, Target Maturity
Trust (National Series, California Series and New York Series) as of November
18, 1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
November 18, 1994
A-7
<PAGE>
TAX EXEMPT SECURITIES TRUST, TARGET MATURITY TRUST
STATEMENTS OF FINANCIAL CONDITION
AS OF DATE OF DEPOSIT, NOVEMBER 18, 1994
<TABLE>
<CAPTION>
TRUST PROPERTY
---------------------------------
NATIONAL CALIFORNIA NEW YORK
TRUST TRUST TRUST
----------- ---------- ----------
<S> <C> <C> <C>
Investment in Tax-Exempt Securities:
Bonds represented by purchase contracts
backed by letter of credit (1)............ $18,998,863 $2,844,564 $7,103,796
Accrued interest through the Date of Deposit
on underlying bonds (1)(2).................. 295,483 21,041 125,815
----------- ---------- ----------
Total.................................... $19,294,346 $2,865,605 $7,229,611
=========== ========== ==========
<CAPTION>
LIABILITY AND INTEREST OF UNIT
HOLDERS
---------------------------------
<S> <C> <C> <C>
Liability:
Accrued interest through the Date of De-
posit underlying bonds (1)(2)............. $ 295,483 $ 21,041 $ 125,815
----------- ---------- ----------
Interest of Unit Holders:
Units of fractional undivided interest out-
standing
Cost to investors (3)..................... 19,728,800 2,953,852 7,376,724
Less--Gross underwriting commission (4)... 729,937 109,288 272,928
----------- ---------- ----------
Net amount applicable to investors........ 18,998,863 2,844,564 7,103,796
----------- ---------- ----------
Total.................................... $19,294,346 $2,865,605 $7,229,611
=========== ========== ==========
</TABLE>
(1) Aggregate cost to each Trust of the Bonds listed under the Portfolios of
Securities on the immediately following pages is based on offering prices
as of 1:00 P.M. on November 18, 1994, the Date of Deposit, determined by
the Evaluator on the basis set forth in Part B, "Public Offering--Offering
Price." Morgan Guaranty Trust Company of New York issued an irrevocable
letter of credit in the aggregate principal amount of $33,000,000 which was
deposited with the Trustee for the purchase of $30,500,000 principal amount
of Bonds pursuant to contracts to purchase such Bonds at the Sponsor's
aggregate cost of $28,947,223 plus $442,339 representing accrued interest
thereon through the Date of Deposit.
(2) The Indenture provides that the Trustee will advance amounts equal to the
accrued interest on the underlying securities of each Trust (net of accrued
expenses) through the Date of Deposit and that such amounts will be
distributed to the Sponsors as Unit holders of record on such date, as set
forth in Part B, "Rights of Unit Holders--Distribution of Interest and
Principal."
(3) Aggregate public offering price (exclusive of interest) computed on 20,000,
3,000 and 7,500 Units of National Trust, California Trust and New York
Trust, respectively, on the basis set forth in Part B, "Public Offering--
Offering Price."
(4) Sales charge of 3.70% computed on 20,000, 3,000 and 7,500 Units of National
Trust, California Trust and New York Trust, respectively, on the basis set
forth in Part B, "Public Offering--Offering Price."
(5) The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of each
Trust and is responsible for establishing and maintaining a system of
internal controls directly related to, and designed to provide reasonable
assurance as to the integrity and reliability of, financial reporting of
each Trust. The Trustee is also responsible for all estimates and accruals
reflected in each Trust's financial statements. The Evaluator determines
the price for each underlying Bond included in each Trust's Portfolio of
Securities on the basis set forth in Part B, "Public Offering--Offering
Price." Under the Securities Act of 1933, as amended (the "Act"), the
Sponsors are deemed to be issuers of each Trust's Units. As such, the
Sponsors have the responsibility of issuers under the Act with respect to
financial statements of each Trust included in the Registration Statement
under the Act and amendment thereto.
A-8
<PAGE>
TAX EXEMPT SECURITIES TRUST
TARGET MATURITY TRUST (NATIONAL SERIES)--PORTFOLIO OF SECURITIES AS OF NOVEMBER
18, 1994
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ----------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 750,000 California Statewide A 12/1/04 @ 102 $ 742,853 7.100% $52,500
Communities Development
Authority, Insured
Revenue Bonds,
Certificates of
Participation, 7.00% Due
12/1/2010
2. 250,000 State of California, A- 8/1/04 @ 102 239,502 5.900 16,000
Trade and Commerce
Agency, Rural Economic
Development
Infrastructure Panel
Revenue Bonds, 6.40% Due
8/1/2007
3. 250,000 State of California, A- 8/1/04 @ 102 238,602 7.000 16,250
Trade and Commerce
Agency, Rural Economic
Development
Infrastructure Panel
Revenue Bonds, 6.50% Due
8/1/2009
4. 250,000 State Public Works Board A- 3/1/04 @ 102 251,890 7.000 17,750
of the State of
California, Lease
Revenue Bonds,
California Community
Colleges, Various
Community College
Projects, 7.10% Due
3/1/2009
5. 310,000 Palm Beach County, A- 10/1/03 @ 102 274,449 7.400 19,220
California, Health SF 10/1/07 @ 100
Facilities Authority,
Hospital Revenue Bonds,
Good Samaritan Health
Systems, Inc. Project,
6.20% Due 10/1/2011
6. 150,000 Palomar Community AAA 10/1/04 @ 102 143,025 6.900 9,562
College District, County
of San Diego,
California, Certificates
of Participation,
Building Acquisition
Project, 6.375% Due
10/1/2008 (Connie Lee
Ins.)
7. 1,250,000 West Covina, California, A 8/15/04 @ 102 1,181,950 7.100 81,250
Certificates of SF 8/15/05 @ 100
Participation, Queen of
the Valley Hospital
Revenue Bonds, 6.50% Due
8/15/2009
8. 750,000 Summit County, Colorado, A- -- 769,268 7.100 55,312
Sports Facilities
Revenue Refunding Bonds,
Keystone Resorts
Management, Inc.
Project, 7.375% Due
9/1/2010
9. 1,200,000 Georgia Municipal A+ -- 1,134,840 7.050 78,000
Electric Authority, SF 1/1/08 @ 100
Power Revenue Bonds,
6.50% Due 1/1/2012
10. 1,250,000 The Housing Authority of A- 5/1/04 @ 100 1,194,763 7.100 82,814
the County of Dekalb, SF 11/1/05 @ 100
Georgia, First Lien
Revenue Refunding Bonds,
Macon Garden Apartments,
Section 8 Assisted
Project, 6.625% Due
5/1/2010
11. 1,000,000 Illinois Development A- 11/15/04 @ 102 1,000,000 7.250 72,500
Finance Authority, Debt SF 11/15/06 @ 100
Restructuring Revenue
Bonds, City of East St.
Louis, 7.25% Due
11/15/2009
12. 1,000,000 City of Chicago, AAA 1/1/05 @ 102 947,630 6.900 63,750
Illinois, Chicago-O'Hare SF 1/1/10 @ 100
International Airport,
General Airport Second
Lien Revenue Refunding
Bonds, 6.375% Due
1/1/2012 (MBIA Ins.)
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-9
<PAGE>
<TABLE>
<CAPTION>
COST OF ANNUAL
SECURITIES YIELD ON INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DATE OF INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) DEPOSIT (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- ----------- ----------
<C> <C> <S> <C> <C> <C> <C> <C>
13. $ 705,000 Whiteside County, A- 5/1/04 @ 102 $ 694,792 7.100% $ 48,997
Illinois, Housing SF 5/1/07 @ 100
Authority, First Lien
Revenue Refunding Bonds,
Section 8 Elderly, Civic
Plaza II Development,
6.95% Due 5/1/2011
14. 1,000,000 Indiana Health Facility A* 9/15/02 @ 102 959,260 7.200 67,500
Financing Authority, SF 9/15/03 @ 100
Hospital Revenue
Refunding Bonds, The
Methodist Hospitals,
Inc., 6.75% Due
9/15/2009
15. 445,000 Massachusetts Health and A 4/1/02 @ 102 412,733 7.371 29,481
Educational Facilities SF 4/1/07 @ 100
Authority Revenue Bonds,
New England Deaconess
Hospital Issue, 6.625%
Due 4/1/2012
16. 500,000 Massachusetts Water AA- 2/1/04 @ 102 463,930 7.000 31,250
Pollution Abatement
Trust, Water Pollution
Abatement Revenue Bonds,
SESD Loan Program, 6.25%
Due 2/1/2011
17. 250,000 Housing Finance AAA 8/15/04 @ 102 254,908 7.000 18,125
Corporation of the City SF 8/15/05 @ 100
of Newark, New Jersey,
Mortgage Revenue
Refunding Bonds, Section
8 Assisted FHA Insured
Broadway Manor
Apartments Project,
7.25% Due 2/15/2010
18. 1,000,000 North Carolina Eastern A- -- 913,850 7.100 61,250
Municipal Power Agency,
Power System Revenue
Refunding Bonds, 6.25%
Due 1/1/2009
19. 500,000 North Carolina Eastern A- 1/1/03 @ 102 449,105 7.300 31,250
Municipal Power Agency, SF 1/1/10 @ 100
Power System Revenue
Refunding Bonds, 6.25%
Due 1/1/2012
20. 750,000 Rhode Island Port AAA 6/1/04 @ 102 728,587 6.800 48,750
Authority and Economic
Development Corporation,
Shepard Building
Project, Revenue Bonds,
6.50% due 6/1/2010
(AMBAC Ins.)
21. 160,000 The Health, Educational A- -- 158,862 7.100 11,200
and Housing Facilities
Board of the County of
Sumner, Tennessee,
Revenue Refunding Bonds,
Sumner Regional Health
Systems, Inc. Project,
7.00% Due 11/1/2004
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-10
<PAGE>
<TABLE>
<CAPTION>
COST OF ANNUAL
SECURITIES YIELD ON INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DATE OF INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) DEPOSIT (4) TO TRUST
--------- ------------------------ ------- ---------------- ----------- ----------- ----------
<C> <C> <S> <C> <C> <C> <C> <C>
22. $ 330,000 The Health, Educational A- 11/1/04 @ 102 $ 328,126 7.200% $ 23,512
and Housing Facilities
Board of the County of
Sumner, Tennessee,
Revenue Refunding Bonds,
Sumner Regional Health
Systems, Inc. Project,
7.125% Due 11/1/2005
23. 355,000 The Health, Educational A- 11/1/04 @ 102 353,576 7.250 25,560
and Housing Facilities
Board of the County of
Sumner, Tennessee,
Revenue Refunding Bonds,
Sumner Regional Health
Systems, Inc. Project,
7.20% Due 11/1/2006
24. 750,000 Ector County, Texas, A* 4/15/02 @ 102 742,650 7.400 54,750
Hospital District, SF 4/15/03 @ 100
Hospital Revenue Bonds,
7.30% Due 4/15/2012
25. 920,000 Housing Authority of the A* 6/1/03 @ 103 868,508 7.200 60,950
City of Gainesville, SF 12/1/07 @ 100
Texas, Multifamily
Mortgage Revenue Bonds,
Section 8 Assisted
Project, 6.625% Due
12/1/2011
26. 410,000 King County, Washington, A+ 12/1/02 @ 101 402,968 6.800 27,060
School District Revenue
Bonds, 6.60% Due
12/1/2007
27. 1,000,000 Wisconsin Health and A* 8/15/02 @ 102 932,380 7.200 65,000
Educational Facilities SF 8/15/05 @ 100
Authority Revenue Bonds,
Mercy Hospital of
Janeville, Wisconsin,
Inc. Project, 6.50% Due
8/15/2011
28. 1,015,000 City of Neehah, A- -- 901,421 7.200 61,408
Wisconsin, Industrial
Development Revenue
Refunding Bonds, Beloit
Corporation Project,
6.05% Due 12/1/2011
29. 1,500,000 District of Columbia, A- 6/1/03 @ 102 1,314,435 7.300 90,000
Washington, D.C.,
General Obligation
Refunding Bonds, 6.00%
Due 6/1/2011
----------- ----------- ----------
$20,000,000 $18,998,863 $1,320,951
=========== =========== ==========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-11
<PAGE>
TAX EXEMPT SECURITIES TRUST
TARGET MATURITY TRUST (CALIFORNIA SERIES)--PORTFOLIO OF SECURITIES AS OF
NOVEMBER 18, 1994
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
REDEMPTION SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 250,000 California Statewide A 12/1/04 @ 102 $ 247,618 7.100% $ 17,500
Communities Development
Authority, Insured
Revenue Bonds,
Certificates of
Participation, 7.00% Due
12/1/2010
2. 250,000 State of California, A- 8/1/04 @ 102 239,502 6.900 16,000
Trade and Commerce
Agency, Rural Economic
Development
Infrastructure Panel
Revenue Bonds, 6.40% Due
8/1/2007
3. 250,000 State of California, A- 8/1/04 @ 102 238,602 7.000 16,250
Trade and Commerce
Agency, Rural Economic
Development
Infrastructure Panel
Revenue Bonds, 6.50% Due
8/1/2009
4. 320,000 The Regents of the Aa* 11/1/03 @ 102 262,746 7.250 17,280
University of
California, Refunding
Certificates of
Participation, UCLA
Central
Chiller/Cogeneration
Facility, 5.40% Due
11/1/2011
5. 250,000 State Public Works Board A- 3/1/04 @ 102 253,838 6.900 17,750
of the State of
California, Lease
Revenue Bonds,
California Community
Colleges, Various
Community College
Projects, 7.10% Due
3/1/2008
6. 250,000 State Public Works Board A- 3/1/04 @ 102 251,890 7.000 17,750
of the State of
California, Lease
Revenue Bonds,
California Community
Colleges, Various
Community College
Projects, 7.10% Due
3/1/2009
7. 330,000 Association of Bay Area AAA 12/15/04 @ 102 335,323 6.900 23,430
Governments Tax
Allocation Revenue
Bonds, California,
Redevelopment Agency
Pool, 7.10% Due
12/15/2011 (CGIC Ins.)
8. 240,000 Palomar Community AAA 10/1/04 @ 102 229,790 6.800 15,120
College District, County
of San Diego,
California, Certificates
of Participation,
Building Acquisition
Project, 6.30% Due
10/1/2007 (Connie Lee
Ins.)
9. 110,000 Palomar Community AAA 10/1/04 @ 102 104,885 6.900 7,012
College District, County
of San Diego,
California, Certificates
of Participation,
Building Acquisition
Project, 6.375% Due
10/1/2008 (Connie Lee
Ins.)
10. 500,000 San Bernardino County, A- -- 443,980 7.250 30,000
California, Certificates SF 8/1/2007
of Participation,
Medical Center Financing
Project, 6.00% Due
8/1/2009
11. 250,000 City of West Covina, A 8/15/04 @ 102 236,390 7.100 16,250
California, Certificates SF 8/15/05 @ 100
of Participation, Queen
of the Valley Hospital,
6.50% Due 8/15/2009
---------- ---------- --------
$3,000,000 $2,844,564 $194,342
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-12
<PAGE>
TAX EXEMPT SECURITIES TRUST
TARGET MATURITY TRUST (NEW YORK SERIES)--PORTFOLIO OF SECURITIES AS OF NOVEMBER
18, 1994
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
REDEMPTION SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 250,000 The City of New York, A- 2/1/02 @ 101.5 $ 246,793 7.150% $ 17,500
General Obligation
Bonds, 7.00% Due
2/1/2008
2. 450,000 The City of New York, A- 8/15/04 @ 101 450,000 7.298 32,850
General Obligation
Bonds, 7.30% Due
8/15/2011
3. 250,000 New York City Municipal A- -- 224,315 7.100 15,000
Water Finance Authority,
Water and Sewer System
Revenue Bonds, 6.00% Due
6/15/2010
4. 400,000 New York City, Municipal A- 6/15/02 @ 101.5 334,772 7.200 22,000
Water Finance Authority,
Water and Sewer System
Revenue Bonds, 5.5% Due
6/15/2011
5. 500,000 New York Local A -- 461,475 6.850 30,000
Government Assistance
Corporation Refunding
Bonds, 6.00% Due
4/1/2009
6. 400,000 New York Local A 4/1/02 @ 102 360,112 7.000 24,000
Government Assistance SF 4/1/09 @ 100
Corporation Bonds, 6.00%
Due 4/1/2012
7. 800,000 Dormitory Authority of A** 7/1/04 @ 102 793,280 7.000 55,200
the State of New York,
Dormitory Revenue Bonds,
State University Issue,
6.90% 7/1/2007
8. 1,000,000 State of New York A+ 9/15/01 @ 102 966,350 7.100 67,500
Municipal Bond Bank SF 3/15/07 @ 100
Agency, Special Program
Revenue Bonds, City of
Rochester, 6.75% Due
3/15/2011
9. 300,000 New York State Power AA- -- 297,363 6.600 19,500
Authority, General SF 1/1/06 @ 100
Purpose Bonds, 6.50% Due
1/1/2008
10. 750,000 New York State Thruway A 1/1/02 @ 102 657,240 7.000 43,125
Authority, General SF 1/1/09 @ 100
Revenue Bonds, 5.75% Due
1/1/2012
11. 1,000,000 Metropolitan AAA -- 1,032,300 6.650 70,000
Transportation SF 7/1/06 @ 100
Authority, New York,
Transit Facilities
Revenue Bonds, 7.00% Due
7/1/2009 (AMBAC Ins.)
12. 350,000 City of Syracuse, AA 6/15/02 @ 102 315,007 6.800 20,125
Onondaga County, New
York, Public Improvement
Bonds, 5.75% Due
6/15/2010
13. 500,000 Triborough Bridge and Aa* -- 496,160 6.700 33,125
Tunnel Authority, SF 1/1/11 @ 100
General Purpose Revenue
Bonds, 6.625% Due
1/1/2012
14. 300,000 Triborough Bridge and Aa* 1/1/03 @ 100 238,119 7.100 15,000
Tunnel Authority, SF 1/1/09 @ 100
General Purpose Revenue
Bonds, 5.00% Due
1/1/2012
15. 250,000 United Nations A* 7/1/03 @ 102 230,510 7.000 15,500
Development Corporation, SF 7/1/05 @ 100
New York, Refunding
Bonds, 6.20% Due
7/1/2011
---------- ---------- --------
$7,500,000 $7,103,796 $480,425
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-13
<PAGE>
NOTES TO PORTFOLIOS OF SECURITIES
(1)For a description of the meaning of the applicable rating symbols as
published by Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc., Moody's Investors Service(*), Fitch Investor Services, Inc.(**) and
Duff & Phelps Credit Rating Co. (***), see Part B, "Bond Ratings".
(2) There is shown under this heading the year in which each issue of Bonds
initially is redeemable and the redemption price for that year; unless
otherwise indicated, each issue continues to be redeemable at declining
prices thereafter, but not below par. "SF" indicates a sinking fund has been
or will be established with respect to an issue of Bonds. The prices at
which Bonds may be redeemed or called prior to maturity may or may not
include a premium and, in certain cases, may be less than the cost of the
Bonds to a Trust. Certain Bonds in a Portfolio, including Bonds listed as
not being subject to redemption provisions, may be redeemed in whole or in
part other than by operation of the stated redemption or sinking fund
provision under certain unusual or extraordinary circumstances specified in
the instruments setting forth the terms and provisions of such Bonds. For
example, see discussion of obligations of housing authorities in Part B,
"Tax Exempt Securities Trust--Portfolio."
(3) Contracts to purchase Bonds were entered into during the period October 19,
1994, through November 18, 1994, with the final settlement date on December
15, 1994. The Profit to Sponsors on Deposit totals $214,666, $11,874 and
$63,538 for the National Trust, California Trust and New York Trust,
respectively.
(4) Evaluation of the Bonds by the Evaluator is made on the basis of current
offering prices for the Bonds. The current offering prices of the Bonds are
greater than the current bid prices of the Bonds. The Redemption Price per
Unit and the public offering price of the Units in the secondary market are
determined on the basis of the current bid prices of the Bonds. (See Part B,
"Public Offering--Offering Price" and "Rights of Unit Holders--Redemption of
Units.") Yield of Bonds was computed on the basis of offering prices on the
date of deposit. The aggregate bid price of the Bonds in the National Trust,
California Trust and New York Trust on November 18, 1994, was $18,918,863,
$2,832,564 and $7,073,796, respectively.
A-14
<PAGE>
PROSPECTUS--PART B:
- --------------------------------------------------------------------------------
NOTE THAT PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED
BY PART A.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST
THE TRUSTS
Each Trust is one of a series of similar but separate unit investment trusts
created under the laws of the State of New York by a Trust Indenture and
Agreement and related Reference Trust Agreement dated the Date of Deposit
(collectively, the "Trust Agreement"), among Smith Barney Inc. and Kidder,
Peabody & Co. Incorporated, as sponsors (the "Sponsors" or "Co-sponsors"),
United States Trust Company of New York, as Trustee, and Kenny Information
Systems, Inc., as Evaluator. Each Trust containing Bonds of a State for which
such Trust is named (a "State Trust") and each National Trust, Selected Term
Trust, Long-Intermediate Term Trust, Intermediate Term Trust, Short-
Intermediate Term Trust and Short Term Trust are referred to herein as the
"Trust" or "Trusts," unless the context requires otherwise. On the Date of
Deposit, the Sponsors deposited contracts and funds (represented by a certified
check or checks and/or an irrevocable letter or letters of credit, issued by a
major commercial bank) for the purchase of certain interest-bearing obligations
(the "Bonds") and/or Units of preceding Series of Tax Exempt Securities Trust
(such Bonds and Units of preceding Series of Tax Exempt Securities Trust, if
any, (the "Deposited Units") being referred to herein collectively as the
"Securities"). The Trustee thereafter delivered to the Sponsors registered
certificates of beneficial interest (the "Certificates") representing the units
(the "Units") comprising the entire ownership of each Trust, which Units are
being offered hereby. References to multiple Trusts in Part B herein should be
read as references to a single Trust if Part A indicates the creation of only
one Trust.
Notwithstanding the availability of the above-mentioned certified check or
checks and/or irrevocable letter or letters of credit, it is expected that the
Sponsors will pay for the Bonds as the contracts for their purchase become due.
A substantial portion of such contracts have not become due by the date of this
Prospectus. To the extent Units are sold prior to the settlement of such
contracts, the Sponsors will receive the purchase price on such Units prior to
the time at which they pay for Bonds pursuant to such contracts and have the
use of such funds during this period.
OBJECTIVES
The objectives of the Trusts are tax-exempt income and conservation of
capital through an investment in a diversified portfolio of municipal bonds
primarily with maturities in the range of 10-17 years. There is, of course, no
guarantee that a Trust's objectives will be achieved since the payment of
interest and the preservation of principal are dependent upon the continued
ability of the issuers of the bonds to meet such obligations. Subsequent to the
Date of Deposit, the ratings of the Bonds set forth in Part A--"Portfolio of
Securities" may decline due to, among other factors, a decline in
creditworthiness of the issuer of said Bonds.
Investment-grade municipal bonds can be appropriate investments for risk-
averse investors in order to meet financial goals such as planning for
retirement, saving for a college education or a dependable stream of Federally
tax-exempt interest income. The Sponsors believe that building a diversified
and affordable portfolio of municipal bonds requires sound research and
specialized expertise, especially in view of more than 200,000 available issues
with a variety of purposes, credit qualities and maturities. A tax-exempt unit
investment trust provides many of the same benefits as individual nod purchases
in a single convenient package, without the complexity of the purchaser's
analyzing, selecting and monitoring a multi-bond portfolio. The Sponsors
believe that a unit trust's combination of professional selection, ongoing
portfolio supervision, and low expense structure offers one of the best
packages for taking advantage of total return potential. Trust Income
distribution are dependable because they are paid monthly and generally remain
relatively constant unless bonds in the Trust are sold, called or mature;
however, income will also depend on the financial condition of the issuers and
may change if Trust expenses change.
PORTFOLIOS
The following factors, among others, were considered in selecting the Bonds
for each Trust: (1) the Bonds are obligations of the states, counties,
territories or municipalities of the United States and authorities or political
subdivisions thereof, so that the interest on them will, in the opinion of
recognized bond counsel to the issuing governmental authorities, be exempt from
Federal tax under existing law to the extent described in "Taxes", (2) all the
Bonds deposited in a State Trust are obligations of the State for which such
Trust is named or of the counties, territories or municipalities of such State,
and authorities or political subdivisions thereof, or of the Territory of Guam
or the Commonwealth of Puerto Rico, so that the interest on them will, in the
opinion of recognized bond counsel to the issuing governmental authorities, be
exempt from Federal income tax under existing law to the extent described in
"Taxes" and from state
B-1
<PAGE>
income taxes in the state for which such State Trust is named to the extent
described in Part C, (3) the Bonds were chosen in part on the basis of their
respective maturity dates, (4) the Bonds are diversified as to purpose of issue
and location of issuer, except in the case of a State Trust where the Bonds are
diversified only as to purpose of issue, and (5) in the opinion of the
Sponsors, the Bonds are fairly valued relative to other bonds of comparable
quality and maturity.
The Bonds in the Portfolio of a Trust were chosen in part on the basis of
their respective maturity dates. The Bonds in each Trust will have a dollar-
weighted average portfolio maturity as designated in Part A--"Portfolio Summary
as of Date of Deposit." For the actual maturity date of each of the Bonds
contained in a Trust, which date may be earlier or later than the dollar-
weighted average portfolio maturity of the Trust, see Part A, "Portfolio of
Securities." A sale or other disposition of a Bond by the Trust prior to the
maturity of such Bond may be at a price which results in a loss to the Trust.
The inability of an issuer to pay the principal amount due upon the maturity of
a Bond would result in a loss to the Trust.
In the event that any contract for the purchase of any Bond fails, the
Sponsors are authorized under the Trust Agreement, subject to the conditions
set forth below, to instruct the Trustee to acquire other securities (the
"Replacement Bonds") for inclusion in the Portfolio of the affected Trust. Any
Replacement Bonds must be deposited not later than the earlier of (i) the first
monthly Distribution Date of the Trust and (ii) 90 days after such Trust was
established. The cost and aggregate principal amount of a Replacement Bond may
not exceed the cost and aggregate principal amount of the Bond which it
replaces. In addition, a Replacement Bond must (1) be a tax-exempt bond; (2)
have a fixed maturity or disposition date comparable to the Bond it replaces;
(3) be purchased at a price that results in a yield to maturity and in a
current return, in each case as of the execution and delivery of the Trust
Agreement, which is approximately equivalent to the yield to maturity and
current return of the Bond which it replaces; (4) be purchased within twenty
days after delivery of notice of the failed contracts and; (5) be rated in a
category A or better by Standard & Poor's, Moody's, Fitch, or Duff & Phelps.
Whenever a Replacement Bond has been acquired for a Trust, the Trustee shall,
within five days thereafter, notify all Unit holders of such Trust of the
acquisition of the Replacement Bond.
In the event that a contract to purchase Bonds fails and Replacement Bonds
are not acquired, the Trustee will, not later than the second monthly
Distribution Date, distribute to Unit holders the funds attributable to the
failed contract. The Sponsors will, in such a case, refund the sales charge
applicable to the failed contract. If less than all the funds attributable to a
failed contract are applied to purchase Replacement Bonds, the remaining moneys
will be distributed to Unit holders not later than the second monthly
Distribution Date. Moreover, the failed contract will reduce the Estimated Net
Annual Income per Unit, and may lower the Estimated Current Return and
Estimated Long-Term Return.
RISK FACTORS
Certain Bonds in a Trust may have been purchased by the Sponsors on a "when,
as and if issued" basis; that is, they had not yet been issued by their
governmental entity on the Date of Deposit (although such governmental entity
had committed to issue such Bonds). Contracts relating to such "when, as and if
issued" Bonds are not expected to be settled by the first settlement date for
Units. In the case of these and/or certain other Bonds, the delivery of the
Bonds may be delayed ("delayed delivery") or may not occur. Unit holders who
purchased their Units of a Trust prior to the date such Bonds are actually
delivered to the Trustee may have to make a downward adjustment in the tax
basis of their Units for interest accruing on such "when, as and if issued" or
"delayed delivery" Bonds during the interval between their purchase of Units
and delivery of such Bonds, since the Trust and the Unit holders will not be
reimbursing the Sponsors for interest accruing on such "when, as and if issued"
or "delayed delivery" Bonds during the period between the settlement date for
the Units and the delivery of such Bonds into the Trust. (See "Taxes.") Such
adjustment has been taken into account in computing the Estimated Current
Return and Estimated Long-Term Return set forth herein, which is slightly lower
than Unit holders may receive after the first year. (See Part A, "Summary of
Essential Information.") To the extent that the delivery of such Bonds is
delayed beyond their respective expected delivery dates, the Estimated Current
Return and Estimated Long-Term Return for the first year may be lower than
indicated in the "Summary of Essential Information" in Part A.
Most of the Bonds in the Portfolio of a Trust are subject to redemption prior
to their stated maturity date pursuant to sinking fund or call provisions. (See
Part A--"Portfolio Summary as of Date of Deposit" for information relating to
the particular Trust described therein.) In general, a call or redemption
provision is more likely to be exercised when the offering price valuation of a
bond is higher than its call or redemption price, as it might be in periods of
declining interest rates, than when such price valuation is less than the
bond's call or redemption price. To the extent that a Bond was deposited in a
Trust at a price higher than the price at which it is redeemable, redemption
will result in a loss of capital when compared with the original public
offering price of the Units. Conversely, to the extent that a Bond was acquired
at a price lower than the redemption price, redemption will result in an
increase in capital when compared with the original public offering price of
the Units. Monthly distributions will generally be reduced by the amount of the
income which would otherwise have been paid with respect to redeemed bonds. The
Estimated Current Return and Estimated Long-Term Return of the Units may be
affected by such redemptions. Each Portfolio of Securities in Part A contains a
listing of the sinking fund and call provisions, if any, with respect to each
of the Bonds in a Trust. Because certain of the Bonds may from time to time
under certain circumstances be sold or redeemed or will mature in accordance
with their terms and the proceeds from such events will be distributed
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to Unit holders and will not be reinvested, no assurance can be given that a
Trust will retain for any length of time its present size and composition.
NEITHER THE SPONSORS NOR THE TRUSTEE SHALL BE LIABLE IN ANY WAY FOR ANY
DEFAULT, FAILURE OR DEFECT IN ANY BOND.
The Portfolio of the Trust may consist of some Bonds whose current market
values were below face value on the Date of Deposit. A primary reason for the
market value of such Bonds being less than face value at maturity is that the
interest coupons of such Bonds are at lower rates than the current market
interest rate for comparably rated Bonds, even though at the time of the
issuance of such Bonds the interest coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds selling at
market discounts tend to increase in market value as they approach maturity
when the principal amount is payable. A market discount tax-exempt Bond held to
maturity will have a larger portion of its total return in the form of taxable
ordinary income and less in the form of tax-exempt income than a comparable
Bond bearing interest at current market rates. Under the provisions of the
Internal Revenue Code in effect on the date of this Prospectus any ordinary
income attributable to market discount will be taxable but will not be realized
until maturity, redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit", the Trust may
contain or be concentrated in one or more of the classifications of Bonds
referred to below. A Trust is considered to be "concentrated" in a particular
category when the Bonds in that category constitute 25% or more of the
aggregate value of the Portfolio. (See Part A--"Portfolio Summary as of Date of
Deposit" for information relating to the particular Trust described therein.)
An investment in Units of the Trust should be made with an understanding of the
risks that these investments may entail, certain of which are described below.
GENERAL OBLIGATION BONDS. Certain of the Bonds in the Portfolio may be
general obligations of a governmental entity that are secured by the taxing
power of the entity. General obligation bonds are backed by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. However, the taxing power of any governmental entity may be limited
by provisions of state constitutions or laws and an entity's credit will depend
on many factors, including an erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse impact upon both their revenues
and expenditures, as well as other factors, many state and local governments
are confronting deficits and potential deficits which are the most severe in
recent years. Many issuers are facing highly difficult choices about
significant tax increases and/or spending reductions in order to restore
budgetary balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits or cash flow
needs.
In addition, certain of the Bonds in the Trust may be obligations of issuers
(including California issuers) who rely in whole or in part on ad valorem real
property taxes as a source of revenue. Certain proposals, in the form of state
legislative proposals or voter initiatives, to limit ad valorem real property
taxes have been introduced in various states, and an amendment to the
constitution of the State of California, providing for strict limitations on ad
valorem real property taxes, has had a significant impact on the taxing powers
of local governments and on the financial conditions of school districts and
local governments in California. It is not possible at this time to predict the
final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on their
abilities to make future payments on their outstanding debt obligations.
INDUSTRIAL DEVELOPMENT REVENUE BONDS ("IDRS"). IDRs, including pollution
control revenue bonds, are tax-exempt securities issued by states,
municipalities, public authorities or similar entities ("issuers") to finance
the cost of acquiring, constructing or improving various projects, including
pollution control facilities and certain industrial development facilities.
These projects are usually operated by corporate entities. IDRs are not general
obligations of governmental entities backed by their taxing power. Issuers are
only obligated to pay amounts due on the IDRs to the extent that funds are
available from the unexpended proceeds of the IDRs or receipts or revenues of
the issuer under arrangements between the issuer and the corporate operator of
a project. These arrangements may be in the form of a lease, installment sale
agreement, conditional sale agreement or loan agreement, but in each case the
payments to the issuer are designed to be sufficient to meet the payments of
amounts due on the IDRs.
IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable under the
issuer's arrangements with the corporate operator of a particular project have
been assigned and pledged to the holders of the IDRs or a trustee for the
benefit of the holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the IDRs or a trustee as
additional security for the IDRs. In addition, IDRs are frequently directly
guaranteed by the corporate operator of the project or by another affiliated
company. Regardless of the structure, payment of IDRs is solely dependent upon
the creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors that are industrial companies may
be affected by many factors which may have an adverse impact on the credit
quality of the particular company or industry. These include cyclicality of
revenues and earnings, regulatory and environmental restrictions, litigation
resulting from accidents or environmentally-caused illnesses, extensive
competition (including that of low-cost foreign companies), unfunded pension
fund liabilities or off-balance sheet items, and financial deterioration
resulting from leveraged buy-outs or
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takeovers. However, certain of the IDRs in the Portfolio may be additionally
insured or secured by letters of credit issued by banks or
otherwise guaranteed or secured to cover amounts due on the IDRs in the event
of default in payment by an issuer.
HOSPITAL AND HEALTH CARE FACILITY BONDS. The ability of hospitals and other
health care facilities to meet their obligations with respect to revenue bonds
issued on their behalf is dependent on various factors, including the level of
payments received from private third-party payors and government programs and
the cost of providing health care services.
A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government programs
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially decrease the rate of program payments for health care facilities.
Certain special revenue obligations (i.e., Medicare or Medicaid revenues) may
be payable subject to appropriations by state legislatures. There can be no
assurance that payments under governmental programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients participating in such programs. In addition, there
can be no assurance that a particular hospital or other health care facility
will continue to meet the requirements for participation in such programs.
The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures, rate-
setting, and compliance with building codes and environmental laws. Facilities
are subject to periodic inspection by governmental and other authorities to
assure continued compliance with the various standards necessary for licensing
and accreditation. These regulatory requirements are subject to change and, to
comply, it may be necessary for a hospital or other health care facility to
incur substantial capital expenditures or increased operating expenses to
effect changes in its facilities, equipment, personnel and services.
Hospitals and other health care facilities are subject to claims and legal
actions by patients and others in the ordinary course of business. Although
these claims are generally covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care facility or
that insurance coverage will be available to a facility. In addition, a
substantial increase in the cost of insurance could adversely affect the
results of operations of a hospital or other health care facility. The Clinton
Administration may impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party payors or other
measures to reduce health care costs and make health care available to more
individuals, which would reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a hospital
cannot adjust to the new system by reducing expenses or raising rates,
financial difficulties may arise. Also, Blue Cross has denied reimbursement for
some hospitals for services other than emergency room services. The lost volume
would reduce revenues unless replacement patients were found.
Certain hospital bonds may provide for redemption at par at any time upon the
sale by the issuer of the hospital facilities to a non-affiliated entity, if
the hospital becomes subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to perform
procedures against specified religious principles or to disclose information
that is considered confidential or privileged. Certain FHA-insured bonds may
provide that all or a portion of these bonds, otherwise callable at a premium,
can be called at par in certain circumstances. If a hospital defaults upon a
bond obligation, the realization of Medicare and Medicaid receivables may be
uncertain and, if the bond obligation is secured by the hospital facilities,
legal restrictions on the ability to foreclose upon the facilities and the
limited alternative uses to which a hospital can be put may severely reduce its
collateral value.
The Internal Revenue Service is currently engaged in a program of intensive
audits of certain large tax-exempt hospital and health care facility
organizations. Although these audits have not yet been completed, it has been
reported that the tax-exempt status of some of these organizations may be
revoked. At this time, it is uncertain whether any of the hospital and health
care facility bonds held by the Trust will be affected by such audit
proceedings.
SINGLE FAMILY AND MULTI-FAMILY HOUSING BONDS. Multi-family housing revenue
bonds and single family mortgage revenue bonds are state and local housing
issues that have been issued to provide financing for various housing projects.
Multi-family housing revenue bonds are payable primarily from the revenues
derived from mortgage loans to housing projects for low to moderate income
families. Single-family mortgage revenue bonds are issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages on
residences.
Housing obligations are not general obligations of the issuer although
certain obligations may be supported to some degree by Federal, state or local
housing subsidy programs. Budgetary constraints experienced by these programs
as well as the failure by a state or local housing issuer to satisfy the
qualifications required for coverage under these programs or any legal or
administrative determinations that the coverage of these programs is not
available to a housing issuer, probably will result in a decrease or
elimination of subsidies available for payment of amounts due on the issuer's
obligations. The ability of housing issuers to make debt service payments on
their obligations will also be affected by various economic and non-economic
developments including, among other things,
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the achievement and maintenance of sufficient occupancy levels and adequate
rental income in multi-family projects, the rate of default on mortgage loans
underlying single family issues and the ability of mortgage insurers to pay
claims, employment and income conditions prevailing in local markets, increases
in construction costs, taxes, utility costs and other operating expenses, the
managerial ability of project managers, changes in laws and governmental
regulations and economic trends generally in the localities in which the
projects are situated. Occupancy of multi-family housing projects may also be
adversely affected by high rent levels and income limitations imposed under
Federal, state or local programs.
All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot be
determined. However, the average life of these obligations will ordinarily be
less than their stated maturities. Single-family issues are subject to
mandatory redemption in whole or in part from prepayments on underlying
mortgage loans; mortgage loans are frequently partially or completely prepaid
prior to their final stated maturities as a result of events such as declining
interest rates, sale of the mortgaged premises, default, condemnation or
casualty loss. Multi-family issues are characterized by mandatory redemption at
par upon the occurrence of monetary defaults or breaches of covenants by the
project operator. Additionally, housing obligations are generally subject to
mandatory partial redemption at par to the extent that proceeds from the sale
of the obligations are not allocated within a stated period (which may be
within a year of the date of issue). To the extent that these obligations were
valued at a premium when a Holder purchased Units, any prepayment at par would
result in a loss of capital to the Holder and, in any event, reduce the amount
of income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends on qualification
under Section 143 of the Internal Revenue Code of 1986, as amended (the
"Code"), in the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in the case of certain
multi-family housing revenue bonds (including Section 8 assisted bonds). These
sections of the Code or other provisions of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of the
residences financed with the proceeds of the single family mortgage revenue
bonds and the income levels of tenants of the rental projects financed with the
proceeds of the multi-family housing revenue bonds. While the issuers of the
bonds and other parties, including the originators and servicers of the single-
family mortgages and the owners of the rental projects financed with the multi-
family housing revenue bonds, generally covenant to meet these ongoing
requirements and generally agree to institute procedures designed to ensure
that these requirements are met, there can be no assurance that these ongoing
requirements will be consistently met. The failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly retroactively
to the date of issuance, thereby reducing the value of the bonds, subjecting
the Holders to unanticipated tax liabilities and possibly requiring the Trustee
to sell the bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under the
applicable mortgage or permit the holder to accelerate payment of the bond or
require the issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage bonds.
POWER FACILITY BONDS. The ability of utilities to meet their obligations with
respect to revenue bonds issued on their behalf is dependent on various
factors, including the rates they may charge their customers, the demand for a
utility's services and the cost of providing those services. Utilities, in
particular investor-owned utilities, are subject to extensive regulations
relating to the rates which they may charge customers. Utilities can experience
regulatory, political and consumer resistance to rate increases. Utilities
engaged in long-term capital projects are especially sensitive to regulatory
lags in granting rate increases. Any difficulty in obtaining timely and
adequate rate increases could adversely affect a utility's results of
operations.
The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities,
for example, have experienced increased competition as a result of the
availability of other energy sources, the effects of conservation on the use of
electricity, self-generation by industrial customers and the generation of
electricity by co-generators and other independent power producers. Also,
increased competition will result if federal regulators determine that
utilities must open their transmission lines to competitors. Utilities which
distribute natural gas also are subject to competition from alternative fuels,
including fuel oil, propane and coal.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of capital,
the availability and cost of fuel and other factors. In addition, natural gas
pipeline and distribution companies have incurred increased costs as a result
of long-term natural gas purchase contracts containing "take or pay" provisions
which require that they pay for natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future they
will also incur increasing capital and operating expenses to comply with
environmental legislation such as the Clean Air Act of 1990, and other energy,
licensing and other laws and regulations relating to, among other things, air
emissions, the quality of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and siting and licensing of
facilities. Environmental legislation and regulations are changing rapidly and
are the subject of current public policy debate and legislative proposals. It
is increasingly likely that some or many utilities will be subject to
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more stringent environmental standards in the future that could result in
significant capital expenditures. Future legislation and regulation could
include, among other things, regulation of so-called electromagnetic fields
associated with electric transmission and distribution lines as well as
emissions of carbon dioxide and other so-called greenhouse gases associated
with the burning of fossil fuels. Compliance with these requirements may limit
a utility's operations or require substantial investments in new equipment and,
as a result, may adversely affect a utility's results of operations.
The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new generating units, (c)
uncertainties in predicting future load requirements, (d) increased financing
requirements coupled with limited availability of capital, (e) exposure to
cancellation and penalty charges on new generating units under construction,
(f) problems of cost and availability of fuel, (g) compliance with rapidly
changing and complex environmental, safety and licensing requirements, (h)
litigation and proposed legislation designed to delay or prevent construction
of generating and other facilities, (i) the uncertain effects of conservation
on the use of electric energy, (j) uncertainties associated with the
development of a national energy policy, (k) regulatory, political and consumer
resistance to rate increases and (l) increased competition as a result of the
availability of other energy sources. These factors may delay the construction
and increase the cost of new facilities, limit the use of, or necessitate
costly modifications to, existing facilities, impair the access of electric
utilities to credit markets, or substantially increase the cost of credit for
electric generating facilities. The Sponsors cannot predict at this time the
ultimate effect of such factors on the ability of any issuers to meet their
obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of
electricity access to its transmission system for wholesale customers, thereby
increasing competition for electric utilities. NEPA also mandated demand-side
management policies to be considered by utilities. NEPA prohibits the Federal
Energy Regulatory Commission from mandating electric utilities to engage in
retail wheeling, which is competition among suppliers of electric generation to
provide electricity to retail customers (particularly industrial retail
customers) of a utility. However, under NEPA, a state can mandate retail
wheeling under certain conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the "1990 Amendments"). The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ("EPA") must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two
phases. Phase I addresses specific generating units named in the 1990
Amendments. In Phase II the total U.S. emissions will be capped at 8.9 million
tons by the year 2000. The 1990 Amendments contain provisions for allocating
allowances to power plants based on historical or calculated levels. An
allowance is defined as the authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of toxic air
emissions from electric generating units pending the results of several federal
government studies to be conducted over the next three to four years with
respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various
plant systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial liability also arise
from the operation of nuclear facilities and from the use, handling, and
possible radioactive emissions associated with nuclear fuel. Insurance may not
cover all types or amounts of loss which may be experienced in connection with
the ownership and operation of a nuclear plant and severe financial
consequences could result from a significant accident or occurrence. The
Nuclear Regulatory Commission has promulgated regulations mandating the
establishment of funded reserves to assure financial capability for the
eventual decommissioning of licensed nuclear facilities. These funds are to be
accrued from revenues in amounts currently estimated to be sufficient to pay
for decommissioning costs.
The ability of state and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to them
pursuant to power supply or similar agreements. Courts in Washington, Oregon
and Idaho have held that certain agreements between the Washington Public Power
Supply System ("WPPSS") and the WPPSS participants are unenforceable
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because the participants did not have the authority to enter into the
agreements. While these decisions are not specifically applicable to agreements
entered into by public entities in other states, they may cause a reexamination
of the legal structure and economic viability of certain projects financed by
joint power agencies, which might exacerbate some of the problems referred to
above and possibly lead to legal proceedings questioning the enforceability of
agreements upon which payment of these bonds may depend.
WATER AND SEWER REVENUE BONDS. Water and sewer bonds are generally payable
from user fees. The ability of state and local water and sewer authorities to
meet their obligations may be affected by failure of municipalities to utilize
fully the facilities constructed by these authorities, economic or population
decline and resulting decline in revenue from user charges, rising construction
and maintenance costs and delays in construction of facilities, impact of
environmental requirements, failure or inability to raise user charges in
response to increased costs, the difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no growth" zoning ordinances. In some cases this ability may be affected by
the continued availability of Federal and state financial assistance and of
municipal bond insurance for future bond issues.
UNIVERSITY AND COLLEGE BONDS. The ability of universities and colleges to
meet their obligations is dependent upon various factors, including the size
and diversity of their sources of revenues, enrollment, reputation, management
expertise, the availability and restrictions on the use of endowments and other
funds, the quality and maintenance costs of campus facilities, and, in the case
of public institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, demographic trends, geographic location, geographic diversity
and quality of the student body, quality of the faculty and the diversity of
program offerings.
Legislative or regulatory action in the future at the Federal, state or local
level may directly or indirectly affect eligibility standards or reduce or
eliminate the availability of funds for certain types of student loans or grant
programs, including student aid, research grants and work-study programs, and
may affect indirect assistance for education.
LEASE RENTAL BONDS. Lease rental bonds are issued for the most part by
governmental authorities that have no taxing power or other means of directly
raising revenues. Rather, the authorities are financing vehicles created solely
for the construction of buildings (administrative offices, convention centers
and prisons, for example) or the purchase of equipment (police cars and
computer systems, for example) that will be used by a state or local government
(the "lessee"). Thus, the bonds are subject to the ability and willingness of
the lessee government to meet its lease rental payments which include debt
service on the bonds. Willingness to pay may be subject to changes in the views
of citizens and government officials as to the essential nature of the finance
project. Lease rental bonds are subject, in almost all cases, to the annual
appropriation risk, i.e., the lessee government is not legally obligated to
budget and appropriate for the rental payments beyond the current fiscal year.
These bonds are also subject to the risk of abatement in many states--rental
bonds cease in the event that damage, destruction or condemnation of the
project prevents its use by the lessee. (In these cases, insurance provisions
and reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the lessee
government, in the event it defaults on its rental payments, from the purchase
or use of similar equipment for a certain period of time. This safeguard is
designed to insure that the lessee government will appropriate the necessary
funds even though it is not legally obligated to do so, but its legality
remains untested in most, if not all, states.
CAPITAL IMPROVEMENT FACILITY BONDS. The Portfolio of a Trust may contain
Bonds which are in the capital improvement facilities category. Capital
improvement bonds are bonds issued to provide funds to assist political
subdivisions or agencies of a state through acquisition of the underlying debt
of a state or local political subdivision or agency which bonds are secured by
the proceeds of the sale of the bonds, proceeds from investments and the
indebtedness of a local political subdivision or agency. The risks of an
investment in such bonds include the risk of possible prepayment or failure of
payment of proceeds on and default of the underlying debt.
SOLID WASTE DISPOSAL BONDS. Bonds issued for solid waste disposal facilities
are generally payable from tipping fees and from revenues that may be earned by
the facility on the sale of electrical energy generated in the combustion of
waste products. The ability of solid waste disposal facilities to meet their
obligations depends upon the continued use of the facility, the successful and
efficient operation of the facility and, in the case of waste-to-energy
facilities, the continued ability of the facility to generate electricity on a
commercial basis. All of these factors may be affected by a failure of
municipalities to fully utilize the facilities, an insufficient supply of waste
for disposal due to economic or population decline, rising construction and
maintenance costs, any delays in construction of facilities, lower-cost
alternative modes of waste processing and changes in environmental regulations.
Because of the relatively short history of this type of financing, there may be
technological risks involved in the satisfactory construction or operation of
the projects exceeding those associated with most municipal enterprise
projects. Increasing environmental regulation on the federal, state and local
level has a significant impact on waste disposal facilities. While regulation
requires more waste producers to use waste disposal facilities, it also imposes
significant costs on the facilities. These costs include compliance with
frequently changing and complex regulatory requirements, the cost of obtaining
construction and operating permits, the cost of conforming to prescribed and
changing equipment standards and required methods of operation and, for
incinerators or waste-to-energy facilities, the cost of disposing of the waste
residue that remains after the disposal process in an environmentally safe
manner. In addition, waste disposal facilities frequently face
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substantial opposition by environmental groups and officials to their location
and operation, to the possible adverse effects upon the public health and the
environment that may be caused by wastes disposed of at the facilities and to
alleged improper operating procedures. Waste disposal facilities benefit from
laws which require waste to be disposed of in a certain manner but any
relaxation of these laws could cause a decline in demand for the facilities'
services. Finally, waste-to-energy facilities are concerned with many of the
same issues facing utilities insofar as they derive revenues from the sale of
energy to local power utilities (see Power Facility Bonds above).
MORAL OBLIGATION BONDS. The Trust may also include "moral obligation" bonds.
If an issuer of moral obligation bonds is unable to meet its obligations, the
repayment of the bonds becomes a moral commitment but not a legal obligation of
the state or municipality in question. Even though the state may be called on
to restore any deficits in capital reserve funds of the agencies or authorities
which issued the bonds, any restoration generally requires appropriation by the
state legislature and accordingly does not constitute a legally enforceable
obligation or debt of the state. The agencies or authorities generally have no
taxing power.
REFUNDED BONDS. Refunded Bonds are typically secured by direct obligations of
the U.S. Government, or in some cases obligations guaranteed by the U.S.
Government, placed in an escrow account maintained by an independent trustee
until maturity or a predetermined redemption date. These obligations are
generally noncallable prior to maturity or the predetermined redemption date.
In a few isolated instances to date, however, bonds which were thought to be
escrowed to maturity have been called for redemption prior to maturity.
AIRPORT, PORT AND HIGHWAY REVENUE BONDS. Certain facility revenue bonds are
payable from and secured by the revenues from the ownership and operation of
particular facilities, such as airports (including airport terminals and
maintenance facilities), bridges, marine terminals, turnpikes and port
authorities. For example, the major portion of gross airport operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, facilities, service fees, concessions and leases.
Airport operating income may therefore be affected by the ability of the
airlines to meet their obligations under the use agreements. The air transport
industry is experiencing significant variations in earnings and traffic, due to
increased competition, excess capacity, increased aviation fuel costs,
deregulation, traffic constraints, the recent recession and other factors. As a
result, several airlines are experiencing severe financial difficulties.
Several airlines including America West Airlines have sought protection from
their creditors under Chapter 11 of the Bankruptcy Code. In addition, other
airlines such as Midway Airlines Inc., Eastern Airlines, Inc. and Pan American
Corporation have been liquidated. However, Continental Airlines and Trans World
Airlines have emerged from bankruptcy. The Sponsors cannot predict what effect
these industry conditions may have on airport revenues which are dependent for
payment on the financial condition of the airlines and their usage of the
particular airport facility. Furthermore, proposed Legislation would provide
the U.S. Secretary of Transportation with the temporary authority to freeze
airport fees upon the occurrence of disputes between a particular airport
facility and the airlines utilizing that facility.
Similarly, payment on bonds related to other facilities is dependent on
revenues from the projects, such as use fees from ports, tolls on turnpikes and
bridges and rents from buildings. Therefore, payment may be adversely affected
by reduction in revenues due to such factors and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
SPECIAL TAX BONDS. Special tax bonds are payable from and secured by the
revenues derived by a municipality from a particular tax such as a tax on the
rental of a hotel room, on the purchase of food and beverages, on the rental of
automobiles or on the consumption of liquor. Special tax bonds are not secured
by the general tax revenues of the municipality, and they do not represent
general obligations of the municipality. Therefore, payment on special tax
bonds may be adversely affected by a reduction in revenues realized from the
underlying special tax due to a general decline in the local economy or
population or due to a decline in the consumption, use or cost of the goods and
services that are subject to taxation. Also, should spending on the particular
goods or services that are subject to the special tax decline, the municipality
may be under no obligation to increase the rate of the special tax to ensure
that sufficient revenues are raised from the shrinking taxable base.
TAX ALLOCATION BONDS. Tax allocation bonds are typically secured by
incremental tax revenues collected on property within the areas where
redevelopment projects, financed by bond proceeds are located ("project
areas"). Such payments are expected to be made from projected increases in tax
revenues derived from higher assessed values of property resulting from
development in the particular project area and not from an increase in tax
rates. Special risk considerations include: reduction of, or a less than
anticipated increase in, taxable values of property in the project area, caused
either by economic factors beyond the Issuer's control (such as a relocation
out of the project area by one or more major property owners) or by destruction
of property due to natural or other disasters; successful appeals by property
owners of assessed valuations; substantial delinquencies in the payment of
property taxes; or imposition of any constitutional or legislative property tax
rate decrease.
TRANSIT AUTHORITY BONDS. Mass transit is generally not self-supporting from
fare revenues. Therefore, additional financial resources must be made available
to ensure operation of mass transit systems as well as the timely payment of
debt service. Often such financial resources include Federal and state
subsidies, lease rentals paid by funds of the state or local government or a
pledge of a special tax
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such as a sales tax or a property tax. If fare revenues or the additional
financial resources do not increase appropriately to pay for rising operating
expenses, the ability of the issuer to adequately service the debt may be
adversely affected.
CONVENTION FACILITY BONDS. The Portfolio of a Trust may contain Bonds of
issuers in the convention facilities category. Bonds in the convention
facilities category include special limited obligation securities issued to
finance convention and sports facilities payable from rental payments and
annual governmental appropriations. The governmental agency is not obligated to
make payments in any year in which the monies have not been appropriated to
make such payments. In addition, these facilities are limited use facilities
that may not be used for purposes other than as convention centers or sports
facilities.
PUERTO RICO. The Portfolio may contain bonds of issuers which will be
affected by general economic conditions in Puerto Rico. Puerto Rico's
unemployment rate remains significantly higher than the U.S. unemployment rate.
Furthermore, the economy is largely dependent for its development upon U.S.
policies and programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of Commonwealth and Federal
investment incentive programs. For example, Section 936 of the Internal Revenue
Code (the "Code") provides for a credit against Federal income taxes for U.S.
companies operating on the island if certain requirements are met. The Omnibus
Budget Reconciliation Act of 1993 imposes limits on such credit, effective for
tax years beginning after 1993. In addition, from time to time proposals are
introduced in Congress which, if enacted into law, would eliminate some or all
of the benefits of Section 936. Although no assessment can be made at this time
of the precise effect of such limitation, it is expected that the limitation of
Section 936 credits would have a negative impact on Puerto Rico's economy.
Aid for Puerto Rico's economy has traditionally depended heavily on Federal
programs, and current Federal budgetary policies suggest that an expansion of
aid to Puerto Rico is unlikely. An adverse effect on the Puerto Rican economy
could result from other U.S. policies, including a reduction of tax benefits
for distilled products, further reduction in transfer payment programs such as
food stamps, curtailment of military spending and policies which could lead to
a stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican electorate chose to
continue Puerto Rico's Commonwealth status. Previously proposed legislation,
which was not enacted, would have preserved the federal tax exempt status of
the outstanding debts of Puerto Rico and its public corporations regardless of
the outcome of the referendum, to the extent that similar obligations issued by
states are so treated and subject to the provisions of the Code currently in
effect. There can be no assurance that any pending or future legislation
finally enacted will include the same or similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both direct and
indirect consequences on such matters as the basic characteristics of future
Puerto Rico debt obligations, the markets for these obligations, and the types,
levels and quality of revenue sources pledged for the payment of existing and
future debt obligations. Such possible consequences include, without
limitation, legislative proposals seeking restoration of the status of Section
936 benefits otherwise subject to the limitations discussed above. However, no
assessment can be made at this time of the economic and other effects of a
change in federal laws affecting Puerto Rico as a result of the November 1993
plebiscite.
INSURANCE. Certain Bonds (the "Insured Bonds") may be insured or guaranteed
by AMBAC Indemnity Corporation ("AMBAC"), Asset Guaranty Reinsurance Company
("Asset Guaranty"), Capital Guaranty Insurance Company ("CGIC"), Capital
Markets Assurance Corp. ("CAPMAC"), Connie Lee Insurance Company ("Connie
Lee"), Financial Guaranty Insurance Company "Financial Guaranty"), Financial
Security Assurance Inc. ("FSA"), or Municipal Bond Investors Assurance
Corporation ("MBIA") (collectively, the "Insurance Companies"). The claims-
paying ability of each of these companies, unless otherwise indicated, is rated
AAA by Standard & Poor's or another acceptable national rating service. The
ratings are subject to change at any time at the discretion of the rating
agencies. In determining whether to insure bonds, the Insurance Companies
severally apply their own standards. The cost of this insurance is borne either
by the issuers or previous owners of the bonds or by the Sponsors. The
insurance policies are non-cancellable and will continue in force so long as
the Insured Bonds are outstanding and the insurers remain in business. The
insurance policies guarantee the timely payment of principal and interest on
but do not guarantee the market value of the Insured Bonds or the value of the
Units. The insurance policies generally do not provide for accelerated payments
of principal or, except in the case of any portfolio insurance policies, cover
redemptions resulting from events of taxability. If the issuer of any Insured
Bond should fail to make an interest or principal payment, the insurance
policies generally provide that the Trustee or its agent shall give notice of
nonpayment to the Insurance Company or its agent and provide evidence of the
Trustee's right to receive payment. The Insurance Company is then required to
disburse the amount of the failed payment to the Trustee or its agent and is
thereafter subrogated to the Trustee's right to receive payment from the
issuer.
The following are brief descriptions of certain of the insurance companies
that may insure or guarantee certain Bonds. The financial information presented
for each company has been determined on a statutory basis and is unaudited.
AMBAC is a Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of the State of Wisconsin, and licensed to do business in
various states, with admitted assets of approximately $1,988,000,000 and
policyholders' surplus of approximately $749,000,000 as of March 31, 1994.
AMBAC is a wholly-owned subsidiary of AMBAC Inc., a financial holding company
which is publicly owned following a complete divestiture by Citibank during the
first quarter of 1992.
Asset Guaranty is a New York State insurance company licensed to write
financial guarantee, credit, residual value and surety insurance. Asset
Guaranty commenced operations in mid-1988 by providing reinsurance to several
major monoline insurers. Asset
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Guaranty also issued limited amounts of primary financial guaranty insurance,
but not in direct competition with the primary mono-line companies for which it
acts as a reinsurer. The parent holding company of Asset Guaranty, Asset
Guarantee Inc. (AGI), merged with Enhance Financial Services (EFS) in June,
1990 to form Enhance Financial Services Group Inc. (EFSG). The two main, 100%-
owned subsidiaries of EFSG, Asset Guaranty and Enhance Reinsurance Company
(ERC), share common management and physical resources. After an initial public
offering completed in February 1992 and the sale by Merrill Lynch & Co. of its
stake, EFSG is 49.8%-owned by the public, 29.9% by US West Financial Services,
14.1% by Manufacturers Life Insurance Co. and 6.2% by senior management. Both
ERC and Asset Guaranty are rated "AAA" for claims paying ability by Duff &
Phelps. ERC is rated triple-A for claims-paying ability by both S&P and
Moody's. Asset Guaranty received a "AA" claims-paying-ability rating from S&P
during August 1993, but remains unrated by Moody's. As of March 31, 1994 Asset
Guaranty had admitted assets of approximately $142,000,000 and policyholders'
surplus of approximately $73,000,000.
CAPMAC commenced operations in December 1987, as the second monoline
financial guaranty insurance company (after FSA) organized solely to insure
non-municipal obligations. CAPMAC, a New York corporation, is a wholly-owned
subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in 1992 by Citibank
(New York State) to a group of 12 investors led by the following: Dillon Read's
Saratoga Partners II; L.P. (Saratoga), an acquisition fund; Caprock Management,
Inc., representing Rockefeller family interests; Citigrowth Fund, a Citicorp
venture capital group; and CAPMAC senior management and staff. These groups
control approximately 70% of the stock of CHI. CAPMAC had traditionally
specialized in guaranteeing consumer loan and trade receivable asset-backed
securities. Under the new ownership group CAPMAC intends to become involved in
the municipal bond insurance business, as well as their traditional non-
municipal business. As of March 31, 1994 CAPMAC's admitted assets were
approximately $188,000,000 and its policyholders' surplus was approximately
$145,000,000.
CGIC, a monoline bond insuror headquartered in San Francisco, California, was
established in November 1986 to assume the financial guaranty business of
United States Fidelity and Guaranty Company ("USF&G"). It is a wholly-owned
subsidiary of Capital Guaranty Corporation ("CGC") whose stock is owned by:
Constellation Investments, Inc., an affiliate of Baltimore Gas & Electric,
Fleet/Norstar Financial Group, Inc., Safeco Corporation, Sibag Finance
Corporation, an affiliate of Siemens AG, and USF&G, the 8th largest
property/casualty company in the U.S. as measured by net premiums written, and
CGC management. As of March 31, 1994, CGIC had total admitted assets of
approximately $288,000,000 and policyholders' surplus of approximately
$171,000,000.
Connie Lee is a wholly owned subsidiary of College Construction Loan
Insurance Association ("CCLIA"), a government-sponsored enterprise established
by Congress to provide American academic institutions with greater access to
low-cost capital through enhancement. Connie Lee, the operating insurance
company, was incorporated in 1987 and began business as a reinsurer of tax-
exempt bonds of colleges, universities, and teaching hospitals with a
concentration on the hospital sector. During the fourth quarter of 1991 Connie
Lee began underwriting primary bond insurance which will focus largely on the
college and university sector. CCLIA's founding shareholders are the U.S.
Department of Education, which owns 36% of CCLIA, and the Student Loan
Marketing Association ("Sallie Mae"), which owns 14%. The other principal
owners are: Pennsylvania Public School Employees' Retirement System,
Metropolitan Life Insurance Company, Kemper Financial Services, Johnson family
funds and trusts, Northwestern University, Rockefeller & Co., Inc. administered
trusts and funds, and Stanford University. Connie Lee is domiciled in the state
of Wisconsin and has licenses to do business in 47 states and the District of
Columbia. As of March 31, 1994, its total admitted assets were approximately
$185,000,000 and policyholders' surplus was approximately $104,000,000.
Financial Guaranty, a New York stock insurance company, is a wholly-owned
subsidiary of FGIC Corporation which is wholly-owned by General Electric
Capital Corporation. The investors in the FGIC Corporation are not obligated to
pay the debts of or the claims against Financial Guaranty. Financial Guaranty
commenced its business of providing insurance and financial guarantees for a
variety of investment instruments in January 1984 and is currently authorized
to provide insurance in 49 states and the District of Columbia. It files
reports with state regulatory agencies and is subject to audit and review by
those authorities. As of March 31, 1994, its total admitted assets were
approximately $1,995,000,000 and its policyholders' surplus was approximately
$805,000,000.
FSA is a monoline property and casualty insurance company incorporated in New
York in 1984. It is a wholly-owned subsidiary of Financial Security Assurance
Holdings Ltd., which was acquired in December 1989 by US West, Inc., the
regional Bell Telephone Company serving the Rocky Mountain and Pacific
Northwestern states. U.S. West is currently seeking to sell FSA. FSA is
licensed to engage in the surety business in 42 states and the District of
Columbia. FSA is engaged exclusively in the business of writing financial
guaranty insurance on both tax-exempt and non-municipal securities. As of March
31, 1994, FSA had policyholders' surplus of approximately $368,000,000 and
total admitted assets of approximately $759,000,000.
MBIA is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally Aetna Casualty and Surety Company,
The Fund American Companies, Inc., subsidiaries of CIGNA Corporation and Credit
Local de France, CAECL, S.A. These principal shareholders now own approximately
13% of the outstanding common stock of MBIA Inc., following a series of four
public equity offerings over a five-year period. As of March 31, 1994, MBIA had
admitted assets of approximately $3,152,000,000 and policyholders' surplus of
approximately $998,000,000.
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Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate, among
other things, to: the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; deposits of securities for the benefit of policyholders; approval
of policy forms and premium rates; periodic examinations of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. Regulatory
agencies require that premium rates not be excessive, inadequate or unfairly
discriminatory. Insurance regulation in many states also includes "assigned
risk" plans, reinsurance facilities, and joint underwriting associations, under
which all insurers writing particular lines of insurance within the
jurisdiction must accept, for one or more of those lines, risks unable to
secure coverage in voluntary markets. A significant portion of the assets of
insurance companies is required by law to be held in reserve against potential
claims on policies and is not available to general creditors.
Although the Federal government does not regulate the business of insurance,
Federal initiatives can significantly impact the insurance business. Current
and proposed Federal measures which may significantly affect the insurance
business include pension regulation (ERISA), controls on medical care costs,
minimum standards for no-fault automobile insurance, national health insurance,
personal privacy protection, tax law changes affecting life insurance companies
or the relative desirability of various personal investment vehicles and repeal
of the current antitrust exemption for the insurance business. (If this
exemption is eliminated, it will substantially affect the way premium rates are
set by all property-liability insurers.) In addition, the Federal government
operates in some cases as a co-insurer with the private sector insurance
companies.
Insurance companies are also affected by a variety of state and Federal
regulatory measures and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These include judicial
redefinitions of risk exposure in areas such as products liability and state
and Federal extension and protection of employee benefits, including pension,
workers' compensation, and disability benefits. These developments may result
in short-term adverse effects on the profitability of various lines of
insurance. Longer-term adverse effects can often be minimized through prompt
repricing of coverages and revision of policy terms. In some instances, these
developments may create new opportunities for business growth. All insurance
companies write policies and set premiums based on actuarial assumptions about
mortality, injury, the occurrence of accidents and other insured events. These
assumptions, while well supported by past experience, necessarily do not take
account of future events. The occurrence in the future of unforeseen
circumstances could affect the financial condition of one or more insurance
companies. The insurance business is highly competitive and with the
deregulation of financial service businesses, it should become more
competitive. In addition, insurance companies may expand into non-traditional
lines of business which may involve different types of risks.
The above financial information relating to the Insurance Companies has been
obtained from publicly available information. No representation is made as to
the accuracy or adequacy of the information or as to the absence of material
adverse changes since the information was made available to the public.
LITIGATION AND LEGISLATION. To the best knowledge of the Sponsors, there is
no litigation pending as of the Initial Date in respect of any Bonds which
might reasonably be expected to have a material adverse effect upon the Trust.
At any time after the Initial Date of Deposit, litigation may be initiated on a
variety of grounds, or legislation may be enacted, with respect to Bonds in the
Trust. Litigation, for example, challenging the issuance of pollution control
revenue bonds under environmental protection statutes may affect the validity
of Bonds or the tax-free nature of their interest. While the outcome of
litigation of this nature can never be entirely predicted, opinions of bond
counsel are delivered on the date of issuance of each Bond to the effect that
the Bond has been validly issued and that the interest thereon is exempt from
Federal income tax. In addition, other factors may arise from time to time
which potentially may impair the ability of issuers to make payments due on the
Bonds.
Under the Federal Bankruptcy Act, a political subdivision or public agency or
instrumentality of any state, including municipalities, may proceed to
restructure or otherwise alter the terms of its obligations, including those of
the type comprising the Trust's Portfolio. The Sponsors are unable to predict
what effect, if any, this legislation might have on the Trust.
From time to time Congress considers proposals to tax the interest on state
and local obligations, such as the Bonds. The Supreme Court clarified in South
Carolina v. Baker (decided April 20, 1988) that the U.S. Constitution does not
prohibit Congress from passing a nondiscriminatory tax on interest on state and
local obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult their own
tax advisers.
TAX EXEMPTION. In the opinion of bond counsel rendered on the date of
issuance of each Bond, the interest on each Bond is excludable from gross
income under existing law for regular Federal income tax purposes (except in
certain circumstances depending on the Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of the
Bonds may become subject to regular Federal income tax, perhaps retroactively
to their date of issuance, as a result of changes in Federal law or as a result
of the failure of issuers (or other users of the proceeds of the Bonds) to
comply with certain ongoing requirements.
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Moreover, the Internal Revenue Service announced on June 14, 1993 that it
will be expanding its examination program with respect to tax-exempt bonds. The
expanded examination program will consist of, among other measures, increased
enforcement against abusive transactions, broader audit coverage (including the
expected issuance of audit guidelines) and expanded compliance achieved by
means of expected revisions to the tax-exempt bond information return forms. At
this time, it is uncertain whether the tax exempt status of any of the Bonds
would be affected by such proceedings, or whether such effect, if any, would be
retroactive.
In certain cases, a Bond may provide that if the interest on the Bond should
ultimately be determined to be taxable, the Bond would become due and payable
by its issuer, and, in addition, may provide that any related letter of credit
or other security could be called upon if the issuer failed to satisfy all or
part of its obligation. In other cases, however, a Bond may not provide for the
acceleration or redemption of the Bond or a call upon the related letter of
credit or other security upon a determination of taxability. In those cases in
which a Bond does not provide for acceleration or redemption or in which both
the issuer and the bank or other entity issuing the letter of credit or other
security are unable to meet their obligations to pay the amounts due on the
Bond as a result of a determination of taxability, the Trustee would be
obligated to sell the Bond and, since it would be sold as a taxable security,
it is expected that it would have to be sold at a substantial discount from
current market price. In addition, as mentioned above, under certain
circumstances Holders could be required to pay income tax on interest received
prior to the date on which the interest is determined to be taxable.
THE UNITS
On the Date of Deposit, each Unit in a Trust represented a fractional
undivided interest in the principal and net income of such Trust as is set
forth in Part A, "Summary of Essential Information."
If any Units are redeemed after the date of this Prospectus by the Trustee,
the principal amount of Bonds in the affected Trust will be reduced by an
amount allocable to redeemed Units and the fractional undivided interest in the
affected Trust represented by each unredeemed Unit will be increased. Units
will remain outstanding until redeemed upon tender to the Trustee by any Unit
holder, which may include the Sponsors, or until the termination of the Trust
Agreement. (See "Amendment and Termination of the Trust Agreement--
Termination.")
TAXES
The following discussion addresses only the tax consequences of Units held as
capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing law:
The Trusts are not associations taxable as corporations for Federal
income tax purposes, and income received by the Trusts will be treated as
the income of the Unit holders ("Holders") in the manner set forth below.
Each Holder of Units of a Trust will be considered the owner of a pro
rata portion of each Bond in the Trust under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to determine the face amount of a Holder's pro rata
portion of each Bond on the Date of Deposit, see "Aggregate Principal"
under "Portfolio of Securities". The total cost to a Holder of his Units,
including sales charges, is allocated to his pro rata portion of each Bond,
in proportion to the fair market values thereof on the date the Holder
purchases his Units, in order to determine his tax cost for his pro rata
portion of each Bond. In order for a Holder who purchases his Units on the
Date of Deposit to determine the fair market value of his pro rata portion
of each Bond on such date, see "Cost of Securities to Trust" under
"Portfolio of Securities".
Each Holder of Units of a Trust will be considered to have received the
interest on his pro rata portion of each Bond when interest on the Bond is
received by the Trust. In the opinion of bond counsel (delivered on the
date of issuance of each Bond), such interest will be excludable from gross
income for regular Federal income tax purposes (except in certain limited
circumstances referred to below). Amounts received by a Trust pursuant to a
bank letter of credit, guarantee or insurance policy with respect to
payments of principal, premium or interest on a Bond in the Trust will be
treated for Federal income tax purposes in the same manner as if such
amounts were paid by the issuer of the Bond.
The Trusts may contain Bonds which were originally issued at a discount
("original issue discount"). The following principles will apply to each
Holder's pro rata portion of any Bond originally issued at a discount. In
general, original issue discount is defined as the difference between the
price at which a debt obligation was issued and its stated redemption price
at maturity. Original issue discount on a tax-exempt obligation issued
after September 3, 1982, is deemed to accrue as tax-exempt interest over
the life of the obligation under a formula based on the compounding of
interest. Original issue discount on a tax-exempt obligation issued before
July 2, 1982 is deemed to accrue as tax-exempt interest ratably over the
life of the obligation. Original issue discount on any tax-exempt
obligation issued during the period beginning July 2, 1982 and ending
September 3, 1982 is also deemed to accrue as tax-exempt interest over the
life of the obligation, although it is not clear whether such accrual is
ratable or is determined under a formula based on the compounding of
interest. If a Holder's tax cost for his pro rata portion of a Bond issued
with original issue discount is greater than its "adjusted issue price" but
less than its stated redemption price at maturity (as may be adjusted for
certain payments), the Holder will be considered to have purchased his pro
rata portion of the Bond at an "acquisition premium." A
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Holder's adjusted tax basis for his pro rata portion of a Bond issued with
original issue discount will include original issue discount accrued during
the period such Holder held his Units. Such increases to the Holder's tax
basis in his pro rata portion of the Bond resulting from the accrual of
original issue discount, however, will be reduced by the amortization of
any such acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond in the
Holder's Trust exceeds the redemption price at maturity thereof (subject to
certain adjustments), the Holder will be considered to have purchased his
pro rata portion of the Bond with "amortizable bond premium". The Holder is
required to amortize such bond premium over the term of the Bond. Such
amortization is only a reduction of basis for his pro rata portion of the
Bond and does not result in any deduction against the Holder's income.
Therefore, under some circumstances, a Holder may recognize taxable gain
when his pro rata portion of a Bond is disposed of for an amount equal to
or less than his original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Bond in his Trust is disposed of by the Trust for an
amount greater or less than his adjusted tax basis. Any such taxable gain
or loss will be capital gain or loss, except that any gain from the
disposition of a Holder's pro rata portion of a Bond acquired by the Holder
at a "market discount" (i.e., where the Holder's original basis for his pro
rata portion of the Bond (plus any original issue discount which will
accrue thereon until its maturity) is less than its stated redemption price
at maturity) would be treated as ordinary income to the extent the gain
does not exceed the accrued market discount. Capital gains are generally
taxed at the same rate as ordinary income. However, the excess of net long-
term capital gains over net short-term capital losses may be taxed at a
lower rate than ordinary income for certain noncorporate taxpayers. A
capital gain or loss is long-term if the asset is held for more than one
year and short-term if held for one year or less. The deduction of capital
losses is subject to limitations. A Holder will also be considered to have
disposed of all or part of his pro rata portion of each Bond when he sells
or redeems all or some of his Units.
Under Section 265 of the Code, a Holder (except a corporate Holder) is
not entitled to a deduction for his pro rata share of fees and expenses of
a Trust because the fees and expenses are incurred in connection with the
production of tax-exempt income. Further, if borrowed funds are used by a
Holder to purchase or carry Units of any Trust, interest on such
indebtedness will not be deductible for Federal income tax purposes. In
addition, under rules used by the Internal Revenue Service, the purchase of
Units may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of Units.
Similar rules may be applicable for state tax purposes.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on
the tax-exempt status of the Bonds. It is impossible to predict whether any
legislation in respect of the tax status of interest on such obligations
may be proposed and eventually enacted at the Federal or state level.
The forgoing discussion relates only to Federal income taxes. Depending
on their state of residence, Holders may be subject to state and local
taxation and should consult their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August 7, 1986 will be a
preference item for purposes of the alternative minimum tax ("AMT"). The
Sponsors believe that interest (including any original issue discount) on the
Bonds should not be subject to the AMT for individuals or corporations under
this rule. A corporate Holder should be aware, however, that the accrual or
receipt of tax-exempt interest not subject to the AMT may give rise to an
alternative minimum tax liability (or increase an existing liability) because
the interest income will be included in the corporation's "adjusted current
earnings" for purposes of the adjustment to alternative minimum taxable income
required by Section 56(g) of the Code and will be taken into account for
purposes of the environmental tax on corporations under Section 59A of the
Code, which is based on an alternative minimum taxable income.
In addition, interest on the Bonds must be taken into consideration in
computing the portion, if any, of social security benefits that will be
included in an individual's gross income and subject to Federal income tax.
Holders are urged to consult their own tax advisers concerning an investment in
Units.
At the time of issuance of each Bond, an opinion relating to the validity of
the Bond and to the exemption of interest thereon from regular Federal income
taxes was or will be rendered by bond counsel. Neither the Sponsors nor Davis
Polk & Wardwell have made or will make any review of the proceedings relating
to the issuance of the Bonds or the basis for these opinions. The tax exemption
is dependent upon the issuer's (and other users') compliance with certain
ongoing requirements, and the opinion of bond counsel assumes that these
requirements will be complied with. However, there can be no assurance that the
issuer (and other users) will comply with these requirements, in which event
the interest on the Bond could be determined to be taxable retroactively to the
date of issuance.
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<PAGE>
In the case of certain of the Bonds, the opinions of bond counsel indicate
that interest on such Bonds received by a "substantial user" of the facilities
being financed with the proceeds of such Bonds, or persons related thereto, for
periods while such Bonds are held by such a user or related person, will not be
exempt from regular Federal income taxes, although interest on such Bonds
received by others would be exempt from regular Federal income taxes.
"Substantial user" is defined under U.S. Treasury Regulations to include only a
person whose gross revenue derived with respect to the facilities financed by
the issuance of bonds is more than 5% of the total revenue derived by all users
of such facilities, or who occupies more than 5% of the usable area of such
facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" are defined to
include certain related natural persons, affiliated corporations, partners and
partnerships. Similar rules may be applicable for state tax purposes.
After the end of each calendar year, the Trustee will furnish to each Holder
an annual statement containing information relating to the interest received by
the Trust on the Bonds, the gross proceeds received by the Trust from the
disposition of any Bond (resulting from redemption or payment at maturity of
any Bond or the sale by the Trust of any Bond), and the fees and expenses paid
by the Trust. The Trustee will also furnish annual information returns to each
Holder and to the Internal Revenue Service. Holders are required to report to
the Internal Revenue Service the amount of tax-exempt interest received during
the year.
EXPENSES AND CHARGES
Initial Expenses
All of the expenses of creating and establishing the Trusts, including the
cost of the initial preparation and execution of the Trust Agreement, initial
preparation and printing of the certificates for Units, the fees of the
Evaluator during the initial public offering, legal expenses, advertising and
selling expenses and other out-of-pocket expenses will be paid at no cost to
the Trusts.
Trustee's, Sponsors' and Evaluator's Fees
The Trustee will receive for its ordinary recurring services to a Trust an
annual fee in the amount set forth under Part A, "Summary of Essential
Information." For a discussion of the services performed by the Trustee
pursuant to its obligations under the Trust Agreement, see "Rights of Unit
Holders." The Trustee will receive the benefit of any reasonable cash balances
in the Income and Principal Accounts.
The Portfolio supervision fee (the "Supervision Fee") which is earned for
Portfolio supervisory services is based upon the greatest face amount of Bonds
in the Trust at any time during the calendar year with respect to which the fee
is being computed.
The Supervision Fee, which is not to exceed the amount set forth in Part A--
"Summary of Essential Information", may exceed the actual costs of providing
Portfolio supervisory services for such Trust, but at no time will the total
amount the Sponsors receive for Portfolio supervisory services rendered to all
series of Tax Exempt Securities Trust in any calendar year exceed the aggregate
cost to them of supplying such services in such year. In addition, the Sponsors
may also be reimbursed for bookkeeping and other administrative services
provided to the Trust in amounts not exceeding their costs of providing these
services.
The Evaluator will receive a fee in the amount set forth under Part A,
"Summary of Essential Information," for each evaluation of the Bonds in a
Trust. For a discussion of the services performed by the Evaluator pursuant to
its obligations under the Trust Agreement, see "Evaluator--Responsibility" and
"Public Offering--Offering Price."
Any of such fees may be increased without approval of the Unit holders by
amounts not exceeding proportionate increases in consumer prices for services
as measured by the United States Department of Labor's Consumer Price Index
entitled "All Services Less Rent" or, if such Index is no longer published, in
a similar Index to be determined by the Trustee and the Sponsors.
Other Charges
The following additional charges are or may be incurred by a Trust: all
expenses of the Trustee (including fees and expenses of counsel and auditors)
incurred in connection with its activities under the Trust Agreement, including
reports and communications to Unit holders; expenses and costs of any action
undertaken by the Trustee to protect a Trust and the rights and interests of
the Unit holders; fees of the Trustee for any extraordinary services performed
under the Trust Agreement; indemnification of the Trustee for any loss or
liability accruing to it without gross negligence, bad faith or willful
misconduct on its part, arising out of or in connection with its acceptance or
administration of a Trust; to the extent lawful, expenses (including legal,
accounting and printing expenses) of maintaining registration or qualification
of the Units and/or a Trust under Federal or state securities laws subsequent
to initial registration so long as the Sponsors are maintaining a market for
the Units and all taxes and other governmental charges imposed upon the Bonds
or any part of a Trust (no such taxes or charges are being levied or made or,
to the knowledge of the Sponsors, contemplated). The above expenses, including
the Trustee's fee, when paid by or owing to the Trustee, are secured by a lien
on the Trust. In addition, the Trustee is empowered to sell Bonds in order to
make funds available to pay all expenses.
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<PAGE>
PUBLIC OFFERING
OFFERING PRICE
During the initial public offering period, the Public Offering Price of the
Units of a Trust is determined by adding to the Evaluator's determination of
the aggregate OFFERING price of the Bonds per Unit a sales charge equal to a
percentage of the Public Offering Price of the Units of the Trust, as set forth
in the table below. After the initial public offering period, the Public
Offering Price of the Units of a Trust will be determined by adding to the
Evaluator's determination of the aggregate BID price of the Bonds per Unit a
sales charge equal to 4.00% of the Public Offering Price (4.167% of the
aggregate bid price of the Bonds per Unit). A proportionate share of accrued
and undistributed interest on the Bonds in a Trust at the date of delivery of
the Units of such Trust to the purchaser is also added to the Public Offering
Price. (See "Rights of Unit Holders--Distribution of Interest and Principal.")
During the initial public offering period, the sales charge and dealer
concession for a Trust will be reduced pursuant to the following scales (see
Part A, "The Public Offering Price" for the unreduced sales charge to determine
the applicable table):
<TABLE>
<CAPTION>
------------------------------------
PERCENT OF PERCENT OF
PUBLIC NET AMOUNT DEALER
UNITS PURCHASED+ OFFERING PRICE INVESTED CONCESSION
---------------- -------------- ---------- ----------
<S> <C> <C> <C>
1- 99.......................... 3.70% 3.842% $27.00
100-249.......................... 3.25% 3.359% $22.00
250-499.......................... 3.00% 3.093% $20.00
500-749.......................... 2.75% 2.828% $17.50
750-999.......................... 2.50% 2.564% $15.00
1,000 or more...................... 2.00% 2.041% $12.50
</TABLE>
The Sponsors may at any time change the amount by which the sales charge is
reduced, or discontinue the discount completely.
- -------
+ The reduced sales charge is also applied on a dollar basis utilizing a
breakpoint equivalent in the above table of $1,000 for one Unit, etc.
Pursuant to employee benefit plans, Units of a Trust are available to
employees of certain of the Sponsors, during the initial public offering
period, at a Public Offering Price equal to the Evaluator's determination of
the aggregate offering price of the Bonds of a Trust per Unit plus a sales
charge of 1.25% of the Public Offering Price and after the initial public
offering period, at a Public Offering Price equal to the Evaluator's
determination of the aggregate bid price of the Bonds of a Trust per Unit plus
a sales charge of 1.25% of the Public Offering Price. Sales through such plans
to employees of the Sponsors result in less selling effort and selling expenses
than sales to the general public.
METHOD OF EVALUATION
During the initial public offering period, the aggregate offering price of
the Bonds is determined by the Evaluator (1) on the basis of current offering
prices for the Bonds*, (2) if offering prices are not available for any Bonds,
on the basis of current offering prices for comparable securities, (3) by
appraisal, or (4) by any combination of the above. Such determinations are made
each business day as of the Evaluation Time set forth in the "Summary of
Essential Information," in Part A, effective for all sales made subsequent to
the last preceding determination. Following the initial public offering period,
the aggregate bid price of the Bonds (which is used to calculate the price at
which the Sponsors repurchase and sell Units in the secondary market and the
Redemption Price at which Units may be redeemed) will be determined by the
Evaluator (1) on the basis of the current bid prices for the Bonds*, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices of
comparable securities, (3) by appraisal, or (4) by any combination of the
above. Such determinations will be made each business day as of the Evaluation
Time set forth in the "Summary of Essential Information," in Part A, effective
for all sales made subsequent to the last preceding determination. The term
"business day," as used herein shall exclude Saturdays, Sundays and any day on
which the New York Stock Exchange is closed. The difference between the bid and
offering prices of the Bonds may be expected to average approximately 1 1/2% of
principal amount. In the case of actively traded securities, the difference may
be as little as 1/2 of 1%, and in the case of inactively traded securities such
difference will usually not exceed 3%. The price at which Units may be
repurchased by the Sponsors in the secondary market could be less than the
price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per Unit by the amounts set forth under "Summary of Essential
Information" in Part A. For information relating to the calculation of the
Redemption Price per Unit, which is also based upon the aggregate bid price of
the underlying Bonds and which may be expected to be less than the Public
Offering Price per Unit, see "Rights of Unit Holders--Redemption of Units."
- -------
* Current offering or bid prices of the Deposited Units, if any, are based on
prevailing weekly evaluations of the obligations underlying such Deposited
Units.
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<PAGE>
DISTRIBUTION OF UNITS
During the initial public offering period Units of a Trust will be
distributed to the public at the Public Offering Price determined in the manner
provided above (see "Public Offering--Offering Price") through the Underwriters
and dealers. The initial public offering period is 30 days unless all Units of
a Trust are sold prior thereto, in which case the initial public offering
period terminates with the sale of all Units. So long as all Units initially
offered have not been sold, the Sponsors may extend the initial public offering
period for up to four additional successive 30-day periods. Upon completion of
the initial public offering, Units which remain unsold or which may be acquired
in the secondary market (see "Public Offering--Market for Units") may be
offered by this Prospectus at the Public Offering Price determined in the
manner provided above (see "Public Offering--Offering Price").
It is the Sponsors' intention to qualify Units of a Trust for sale through
the Underwriters and dealers who are members of the National Association of
Securities Dealers, Inc. Units of a State Trust will be offered for sale only
in the State for which the Trust is named, except that Units of a New York
Trust will also be offered for sale to residents of the State of Connecticut,
the State of Florida and the Commonwealth of Puerto Rico. Units will initially
be sold to dealers at prices which represent a concession equal to the amount
designated in the tables under "Public Offering--Offering Price" herein, for a
Trust with an unreduced sales charge as specified in Part A--"The Public
Offering Price." The Sponsors reserve the right to change the amount of the
concession to dealers from time to time. After the initial offering period the
dealer concession is negotiated on a case-by-case basis.
Sales will be made only with respect to whole Units, and the Sponsors reserve
the right to reject, in whole or in part, any order for the purchase of Units.
A purchaser does not become a Unit holder (Certificate holder) or become
entitled to exercise the rights of a Unit holder (including the right to redeem
his Units) until he has paid for his Units. Generally, such payment must be
made within five business days after an order for the purchase of Units has
been placed. The price paid by a Unit holder is the Public Offering Price in
effect at the time his order is received, plus accrued interest (see "Public
Offering--Method of Evaluation"). This price may be different from the Public
Offering Price in effect on any other day, including the day on which he made
payment for the Units.
MARKET FOR UNITS
Following the initial public offering period the Sponsors, although not
obligated to do so, presently intend to maintain a market for the Units of a
Trust and continuously to offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds. For information relating to the
method and frequency of the Evaluator's determination of the aggregate bid
price of the underlying Bonds, see "Public Offering--Method of Evaluation." The
Sponsors may cease to maintain such a market at any time and from time to time
without notice if the supply of Units of a Trust of this Series exceeds demand
or for any other reason. In this event the Sponsors may nonetheless purchase
Units, as a service to Unit holders, at prices based on the current Redemption
Price of those Units. In the event that a market is not maintained for the
Units of a Trust, a Unit holder of such Trust desiring to dispose of his Units
may be able to do so only by tendering such Units to the Trustee for redemption
at the Redemption Price, which is based upon the aggregate bid price of the
underlying Bonds. The aggregate bid price of the underlying Bonds of a Trust
may be expected to be less than the aggregate offering price.
EXCHANGE OPTION
Unit holders may elect to exchange any or all of their Units of this series
for units of one or more of any series of Tax Exempt Securities Trust (the
"Exchange Trust") available for sale in the state in which the Unit holder
resides at a Public Offering Price for the units of the Exchange Trust to be
acquired based on a fixed sales charge of $25 per unit. The Sponsors reserve
the right to modify, suspend or terminate this plan at any time without further
notice to Unit holders. Therefore, there is no assurance that a market for
units will in fact exist on any given date on which a Unit holder wishes to
sell his Units of this series and thus there is no assurance that the Exchange
Option will be available to a Unit holder. Exchanges will be effected in whole
units ONLY. If the proceeds from the Units being surrendered are less than the
cost of a whole number of units being acquired, the exchanging Holder will be
permitted to add cash in an amount to round up to the next highest number of
whole units.
An exchange of Units pursuant to the Exchange Option for units of an Exchange
Trust will generally constitute a "taxable event" under the Code, i.e., a
Holder will recognize a gain or loss at the time of exchange. However, an
exchange of Units of this Trust for units of any other series of the Tax Exempt
Securities Trust which are grantor trusts for U.S. Federal income tax purposes
will not constitute a taxable event to the extent that the underlying
securities in each trust do not differ materially either in kind or in extent.
Unit holders are urged to consult their own tax advisors as to the tax
consequences to them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the Exchange Option at the bid
prices of the underlying securities in the particular portfolio involved per
unit plus a fixed charge of $25 per unit. As an example, assume that a Unit
holder, who has three units of a trust with a current price of $1,020 per unit
based on the bid prices of the underlying securities, desires to exchange his
Units for units of a series of an Exchange Trust with a current price of $880
per unit based on the bid prices of the underlying securities. In this example,
B-16
<PAGE>
the proceeds from the Unit holder's units will aggregate $3,060. Since only
whole units of an Exchange Trust may be purchased under the Exchange Option,
the Unit holder would be able to acquire four units in the Exchange Trust for a
total cost of $3,620 ($3,520 for the units and $100 for the sales charge).
REINVESTMENT PROGRAMS
Distributions of interest and principal, if any, are made to Unit holders
monthly. The Unit holder will have the option of either receiving his monthly
income check from the Trustee or participating in one of the reinvestment
programs offered by certain of the Sponsors provided such Unit holder meets the
minimum qualifications of the reinvestment program and such program lawfully
qualifies for sale in the jurisdiction in which the Unit holder resides. Upon
enrollment in a reinvestment program, the Trustee will direct monthly interest
distributions and principal distributions, if any, to the reinvestment program
selected by the Unit holder. Since each Sponsor has arranged for different
reinvestment alternatives, Unit holders should contact the Sponsors for more
complete information, including charges and expenses. The appropriate
prospectus will be sent to the Unit holder. The Unit holder should read the
prospectus for a reinvestment program carefully before deciding to participate.
Participation in the reinvestment program will apply to all Units of a Trust
owned by a Unit holder and may be terminated at any time by the Unit holder, or
the program may be modified or terminated by the Trustee or the program's
Sponsor.
SPONSORS' AND UNDERWRITERS' PROFITS
For their services the Underwriters (see Part A, "Underwriting") receive a
commission based on the sales charge of a particular Trust (see "Public
Offering--Offering Price") as adjusted pursuant to the Agreement Among
Underwriters. The Sponsors receive a gross commission equal to the applicable
sales charge for any Units they have underwritten, and receive the difference
between the applicable sales charge and the Underwriter's commission for the
remainder of the Units. In addition, the Sponsors may realize profits or
sustain losses, as the case may be, in the amount of any difference between the
cost of the Bonds to a Trust (which is based on the aggregate offering price of
the underlying Bonds on the Date of Deposit) and the purchase price of such
Bonds to the Sponsors (which is the cost of the Bonds at the time they were
acquired for the account of a Trust and the cost of the Deposited Units at the
time they were acquired by the Sponsors). (See Part A, "Portfolio of
Securities"--Note (3).) Under certain circumstances, an Underwriter may be
entitled to share in such profits, if any, realized by the Sponsors. A Sponsor
may also realize profits or sustain losses with respect to Bonds deposited in a
Trust which were acquired from its own organization or from underwriting
syndicates of which it was a member. During the initial public offering period
the Underwriters also may realize profits or sustain losses as a result of
fluctuations after the Date of Deposit in the offering prices of the Bonds and
hence in the Public Offering Price received by the Underwriters for Units.
Cash, if any, made available to the Sponsors prior to the anticipated first
settlement date for the purchase of Units may be used in the Sponsors'
businesses to the extent permitted by applicable regulations and may be of use
to the Sponsors.
In maintaining a market for the Units of a Trust (see "Public Offering--
Market for Units"), the Sponsors will also realize profits or sustain losses in
the amount of any difference between the price at which they buy such Units and
the price at which they resell or redeem such Units (see "Public Offering--
Offering Price").
RIGHTS OF UNIT HOLDERS
CERTIFICATES
Ownership of Units of a Trust is evidenced by registered certificates
executed by the Trustee and the Sponsors. Certificates are transferable by
presentation and surrender to the Trustee properly endorsed or accompanied by a
written instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or any multiple
thereof. A Unit holder may be required to pay $2.00 per certificate reissued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. For new certificates issued
to replace destroyed, stolen or lost certificates, the Unit holder must furnish
indemnity satisfactory to the Trustee and must pay such expenses as the Trustee
may incur. Mutilated certificates must be surrendered to the Trustee for
replacement.
DISTRIBUTION OF INTEREST AND PRINCIPAL
Interest and principal received by a Trust will be distributed on each
monthly Distribution Date on a pro rata basis to Unit holders in such Trust of
record as of the preceding Record Date. All distributions will be net of
applicable expenses and funds required for the redemption of Units and, if
applicable, reimbursements to the Trustee for interest payments advanced to
Unit holders on previous Monthly Distribution Dates. (See Part A, "Summary of
Essential Information," "Tax Exempt Securities Trust--Expenses and Charges" and
"Rights of Unit Holders--Redemption of Units.")
The Trustee will credit to the Interest Account of a Trust all interest
received by such Trust, including that part of the proceeds of any disposition
of Bonds of such Trust which represents accrued interest. Other receipts will
be credited to the Principal Account of a
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<PAGE>
Trust. The pro rata share of the Interest Account and the pro rata share of
cash in the Principal Account represented by each Unit of a Trust will be
computed by the Trustee each month as of the Record Date. (See Part A, "Summary
of Essential Information.") Proceeds received from the disposition of any of
the Bonds subsequent to a Record Date and prior to the next succeeding
Distribution Date will be held in the Principal Account and will not be
distributed until the following Distribution Date. The distribution to the Unit
holders as of each Record Date will be made on the following Distribution Date
or shortly thereafter and shall consist of an amount substantially equal to
one-twelfth of such holders' pro rata share of the estimated annual income to
the Interest Account after deducting estimated expenses (the "Monthly Income
Distribution") plus such holders' pro rata share of the cash balance in the
Principal Account computed as of the close of business on the preceding Record
Date. Persons who purchase Units between a Record Date and a Distribution Date
will receive their first distribution on the second Distribution Date following
their purchase of Units. No distribution need be made from the Principal
Account if the balance therein is less than an amount sufficient to distribute
$1.00 per Unit. The Monthly Income Distribution per Unit initially will be in
the amount shown under Part A, "Summary of Essential Information" for a Trust
and will change as the income and expenses of such Trust change and as Bonds
are exchanged, redeemed, paid or sold.
Normally, interest on the Bonds in the Portfolio of a Trust is paid on a
semi-annual basis. Because Bond interest is not received by a Trust at a
constant rate throughout the year, any Monthly Income Distribution may be more
or less than the amount credited to the Interest Account as of the Record Date.
In order to eliminate fluctuations in Monthly Income Distributions resulting
from such variances, the Trustee is required by the Trust Agreement to advance
such amounts as may be necessary to provide Monthly Income Distributions of
approximately equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available from the Interest Account on the
next ensuing Record Date or Record Dates, as the case may be. If all or a
portion of the Bonds for which advances have been made subsequently fail to pay
interest when due, the Trustee may recoup advances made by it in anticipation
of receipt of interest payments on such Bonds by reducing the amount
distributed per Unit in one or more Monthly Interest Distributions. If units
are redeemed subsequent to such advances by the Trustee, but prior to receipt
by the Trustee of actual notice of such failure to pay interest, the amount of
which was so advanced by the Trustee, each remaining Unit holder will be
subject to a greater pro rata reduction in his Monthly Interest Distribution
than would have occurred absent such redemptions. Funds which are available for
future distributions, payments of expenses and redemptions are in accounts
which are non-interest bearing to Unit holders and are available for use by
United States Trust Company of New York, pursuant to normal banking procedures.
The Trustee is entitled to the benefit of any reasonable cash balances in the
Income and Principal Accounts. Because of the varying interest payment dates of
the Bonds comprising a Trust Portfolio, accrued interest at any point in time
will be greater than the amount of interest actually received by a Trust and
distributed to Unit holders. This excess accrued but undistributed interest
amount will be added to the value of the units on any purchase made after the
Date of Deposit. If a Unit holder sells all or a portion of his Units a portion
of his sale proceeds will be allocable to his proportionate share of the
accrued interest. Similarly, if a Unit holder redeems all or a portion of his
Units, the Redemption Price per Unit which he is entitled to receive from the
Trustee will also include his accrued interest on the Bonds. (See "Rights of
Unit Holders--Redemption of Units--Computation of Redemption Price per Unit.")
The Trustee is also entitled to withdraw from the Interest Account, and to the
extent funds are not sufficient therein, from the Principal Account, on one or
more Record Dates as may be appropriate, amounts sufficient to recoup advances
which it has made in anticipation of the receipt by the Trust of interest in
respect of Bonds which subsequently fail to pay interest when due.
As of the first day of each month the Trustee will deduct from the Interest
Account of a Trust and, to the extent funds are not sufficient therein, from
the Principal Account of such Trust, amounts necessary to pay the expenses of
such Trust. (See "Tax Exempt Securities Trust--Expenses and Charges.") The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out of a
Trust. Amounts so withdrawn shall not be considered a part of the Trust's
assets until such time as the Trustee shall return all or any part of such
amounts to the appropriate account. In addition, the Trustee may withdraw from
the Interest Account and the Principal Account such amounts as may be necessary
to cover redemption of Units by the Trustee. (See "Rights of Unit Holders--
Redemption of Units.")
The Trustee has agreed to advance to a Trust the amount of accrued interest
due on the Bonds of such Trust from their respective issue dates or previous
interest payment dates through the Date of Deposit. This accrued interest
amount will be paid to the Sponsors as the holders of record of all Units on
the first settlement date for the Units. Consequently, when the Sponsors sell
Units of a Trust, the amount of accrued interest to be added to the Public
Offering Price of the Units purchased by an investor will include only accrued
interest from the day after the Date of Deposit, to, but not including, the
date of settlement of the investor's purchase (normally five business days
after purchase), less any distributions from the Interest Account. The Trustee
will recover its advancements to a Trust (without interest or other cost to
such Trust) from interest received on the Bonds deposited in such Trust.
REPORTS AND RECORDS
The Trustee shall furnish Unit holders in connection with each distribution a
statement of the amount of interest, if any, and the amount of other receipts,
if any, which are being distributed, expressed in each case as a dollar amount
per Unit. In the event that the
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<PAGE>
issuer of any of the Bonds fails to make payment when due of any interest or
principal and such failure results in a change in the amount which would
otherwise be distributed as a monthly distribution, the Trustee will, with the
first such distribution following such failure, set forth in an accompanying
statement, the issuer and the Bond, the amount of the reduction in the
distribution per Unit resulting from such failure, the percentage of the
aggregate principal amount of Bonds which such Bond represents and, to the
extent then determined, information regarding any disposition or legal action
with respect to such Bond. Within a reasonable time after the end of each
calendar year, the Trustee will furnish to each person who at any time during
the calendar year was a Unit holder of record, a statement (1) as to the
Interest Account: interest received (including amounts representing interest
received upon any disposition of Bonds), deductions for payment of applicable
taxes and for fees and expenses of a Trust, redemptions of Units and the
balance remaining after such distributions and deductions, expressed both as a
total dollar amount and as a dollar amount representing the pro rata share of
each Unit outstanding on the last business day of such calendar year; (2) as to
the Principal Account: the dates of disposition of any Bonds and the net
proceeds received therefrom (excluding any portion representing interest),
deductions for payments of applicable taxes and for fees and expenses of a
Trust, redemptions of Units, and the balance remaining after such distributions
and deductions, expressed both as a total dollar amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the last business
day of such calendar year; (3) a list of the Bonds held and the number of Units
outstanding on the last business day of such calendar year; (4) the Redemption
Price per Unit based upon the last computation thereof made during such
calendar year; and (5) amounts actually distributed during such calendar year
from the Interest Account and from the Principal Account, separately stated,
expressed both as total dollar amounts and as dollar amounts representing the
pro rata share of each Unit outstanding. The accounts of a Trust shall be
audited not less frequently than annually by independent auditors designated by
the Sponsors, and the report of such auditors shall be furnished by the Trustee
to Unit holders upon request.
The Trustee shall keep available for inspection by Unit holders at all
reasonable times during usual business hours, books of record and account of
its transactions as Trustee including records of the names and addresses of
Unit holders, certificates issued or held, a current list of Bonds in the
Portfolio of a Trust and a copy of the Trust Agreement.
REDEMPTION OF UNITS
Units may be tendered to the Trustee for redemption at its unit investment
trust office at 770 Broadway, New York, New York 10003, upon payment of any
relevant tax. At the present time there are no specific taxes related to the
redemption of the Units. No redemption fee will be charged by the Sponsors or
the Trustee. Units redeemed by the Trustee will be cancelled.
Certificates for Units to be redeemed must be properly endorsed or
accompanied by a written instrument of transfer. Unit holders must sign exactly
as their name appears on the face of the certificate with the signature
guaranteed by an officer of a national bank or trust company or by a member of
either the New York, Midwest or Pacific Stock Exchange. In certain instances
the Trustee may require additional documents such as, but not limited to, trust
instruments, certificates of death, appointments as executor or administrator
or certificates of corporate authority.
Within seven calendar days following such tender, the Unit holder will be
entitled to receive in cash an amount for each Unit tendered equal to the
Redemption Price per Unit computed as of the Evaluation Time set forth in the
"Summary of Essential Information" in Part A on the date of tender. (See
"Redemption of Units--Computation of Redemption Price per Unit.") The "date of
tender" is deemed to be the date on which Units are received by the Trustee,
except as regards Units received after the close of trading on the New York
Stock Exchange, the date of tender is the next day on which such Exchange is
open for trading, and such Units will be deemed to have been tendered to the
Trustee on such day for redemption at the Redemption Price computed on that
day. For information relating to the purchase by the Sponsors of Units tendered
to the Trustee for redemption at prices in excess of the Redemption Price, see
"Redemption of Units--Purchase by the Sponsors of Units Tendered for
Redemption."
Accrued interest paid on redemption shall be withdrawn from the Interest
Account, or, if the balance therein is insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn from the
Principal Account. The Trustee is empowered to sell Bonds in order to make
funds available for redemption. Such sales, if required, could result in a sale
of Bonds by the Trustee at a loss. To the extent Bonds are sold, the size and
diversity of a Trust will be reduced.
The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than weekend and
holiday closings, or trading on that Exchange is restricted or during which (as
determined by the Securities and Exchange Commission) an emergency exists as a
result of which disposal or evaluation of the underlying Bonds is not
reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted.
COMPUTATION OF REDEMPTION PRICE PER UNIT--The Redemption Price per Unit of a
Trust is determined by the Trustee on the basis of the bid prices of the Bonds
in such Trust as of the Evaluation Time on the date any such determination is
made. The Redemption Price per Unit of a Trust is each Unit's pro rata share,
determined by the Trustee, of: (1) the aggregate value of the Bonds in such
Trust on
B-19
<PAGE>
the bid side of the market (determined by the Evaluator as set forth below),
(2) cash on hand in such Trust (other than funds covering contracts to purchase
Bonds), and accrued and unpaid interest on the Bonds as of the date of
computation, less (a) amounts representing taxes or governmental charges
payable out of such Trust, (b) the accrued expenses of such Trust, and (c) cash
held for distribution to Unit holders of such Trust of record as of a date
prior to the evaluation. The Evaluator may determine the value of the Bonds in
the Trust (1) on the basis of current bid prices for the Bonds, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices for
comparable securities, (3) by appraisal, or (4) by any combination of the
above.
The difference between the bid and offering prices of the Bonds may be
expected to average approximately 1 1/2% of principal amount. In the case of
actively traded securities, the difference may be as little as 1/2 of 1%, and
in the case of inactively traded securities such difference usually will not
exceed 3%. The price at which Units may be redeemed could be less than the
price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per Unit by the amounts set forth under Part A, "Summary of
Essential Information."
PURCHASE BY THE SPONSORS OF UNITS TENDERED FOR REDEMPTION--The Trust
Agreement requires that the Trustee notify the Sponsors of any tender of Units
for redemption. So long as the Sponsors are maintaining a bid in the secondary
market, the Sponsors, prior to the close of business on the second succeeding
business day, will purchase any Units tendered to the Trustee for redemption at
the price so bid by making payment therefor to the Unit holder in an amount not
less than the Redemption Price not later than the day on which the Units would
otherwise have been redeemed by the Trustee. (See "Public Offering--Market for
Units.")
The offering price of any Units resold by the Sponsors will be the Public
Offering Price determined in the manner provided in this Prospectus. (See
"Public Offering--Offering Price.") Any profit resulting from the resale of
such Units will belong to the Sponsors which likewise will bear any loss
resulting from a lower offering or redemption price subsequent to their
acquisition of such Units. (See "Public Offering--Sponsors' and Underwriters'
Profits.")
SPONSORS
Smith Barney Inc., 1345 Avenue of the Americas, New York, New York 10105
("Smith Barney"), was incorporated in Delaware in 1960 and traces its history
through predecessor partnerships to 1873. Smith Barney, an investment banking
and securities broker-dealer firm, is a member of the New York Stock Exchange,
Inc. and other major securities and commodities exchanges, the National
Association of Securities Dealers, Inc. and the Securities Industry
Association. Smith Barney is an indirect wholly-owned subsidiary of The
Travelers Inc.
Kidder, Peabody & Co. Incorporated, 60 Broad Street, New York, New York 10004
("Kidder, Peabody"), was incorporated in Delaware in 1956 and traces its
history through predecessor partnerships to 1865. Kidder, Peabody, an
investment banking and securities broker-dealer firm, is a member of the New
York Stock Exchange, Inc. and other major securities and option exchanges, the
National Association of Securities Dealers, Inc. and the Securities Industry
Association.
Smith Barney or an affiliate is investment adviser, principal underwriter or
distributor of thirty-three open-end investment companies and investment
manager of ten closed-end investment companies. Smith Barney also sponsors all
Series of Corporate Securities Trust, Government Securities Trust, Harris,
Upham Tax-Exempt Fund and Tax Exempt Securities Trust, and acts as co-sponsor
of most Series of Defined Assets Funds. Kidder, Peabody sponsors Target
Corporate High Yield Series Unit Trust and a family of open-end investment
companies, presently including: Kidder, Peabody Government Money Fund, Inc.,
Kidder, Peabody Premium Account Fund, Kidder, Peabody Tax Exempt Money Fund,
Inc., Kidder, Peabody Cash Reserve Fund, Inc., Kidder, Peabody Equity Income
Fund, Inc., Kidder, Peabody Government Income Fund, Inc., Kidder, Peabody
California Tax Exempt Money Fund, Liquid Institutional Reserves (Government
Securities Income Fund, Money Market Fund and Treasury Securities Fund),
Kidder, Peabody Global Equity Fund, Kidder, Peabody Intermediate Fixed Income
Fund, Kidder, Peabody Adjustable Rate Government Fund, Kidder, Peabody Global
Fixed Income Fund, Kidder, Peabody Municipal Money Market Series (Connecticut,
New Jersey and New York), Kidder, Peabody Municipal Bond Fund, Kidder, Peabody
Emerging Markets Equity Fund, Kidder, Peabody Small Cap Equity Fund,
Institutional Adjustable Rate Government Portfolio and Kidder, Peabody Asset
Allocation Fund. Kidder Peabody Asset Management, Inc., a subsidiary of Kidder,
Peabody, is the investment adviser and/or manager of each of these open-end
investment companies. The Sponsors have acted previously as managing
underwriters of other investment companies. In addition to participating as a
member of various underwriting and selling groups or as agent of other
investment companies, the Sponsors also execute orders for the purchase and
sale of securities of investment companies and sell securities to such
companies in their capacities as brokers or dealers in securities.
LIMITATIONS ON LIABILITY
The Sponsors are jointly and severally liable for the performance of their
obligations arising from their responsibilities under the Trust Agreement, but
will be under no liability to Unit holders for taking any action or refraining
from any action in good faith or for errors in judgment or responsible in any
way for depreciation or loss incurred by reason of the sale of any Bonds,
except in cases of willful misfeasance, bad faith, gross negligence or reckless
disregard of their obligations and duties. (See "Sponsors--Responsibility
below.")
B-20
<PAGE>
RESPONSIBILITY
The Sponsors are empowered to direct the Trustee to dispose of Bonds when
certain events occur that adversely affect the value of the Bonds, including
default in payment of interest or principal, default in payment of interest or
principal on other obligations of the same issuer, institution of legal
proceedings, default under other documents adversely affecting debt service,
decline in price or the occurrence of other market or credit factors, or
decline in projected income pledged for debt service on revenue Bonds and
advanced refunding that, in the opinion of the Sponsors, may be detrimental to
the interests of the Unit holders.
The Sponsors intend to provide portfolio services for each Trust in order to
determine whether the Trustee should be directed to dispose of any such Bonds.
It is the responsibility of the Sponsors to instruct the Trustee to reject
any offer made by an issuer of any of the Bonds to issue new obligations in
exchange and substitution for any Bonds pursuant to a refunding or refinancing
plan, except that the Sponsors may instruct the Trustee to accept such an offer
or to take any other action with respect thereto as the Sponsors may deem
proper if the issuer is in default with respect to such Bonds or in the
judgment of the Sponsors the issuer will probably default in respect to such
Bonds in the foreseeable future.
Any obligations so received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the Trust Agreement to the same
extent as Bonds originally deposited thereunder. Within five days after the
deposit of obligations in exchange or substitution for underlying Bonds, the
Trustee is required to give notice thereof to each Unit holder, identifying the
Bonds eliminated and the Bonds substituted therefor. Except as stated in this
and the preceding paragraph, the acquisition by a Trust of any securities other
than the Bonds initially deposited in the Trust is prohibited.
Smith Barney Inc. has been appointed by Kidder, Peabody & Co. Incorporated as
agent for purposes of taking any action required or permitted to be taken by
the Sponsors under the Trust Agreement. If the Sponsors are unable to agree
with respect to action to be taken jointly by them under the Trust Agreement
and they cannot agree as to which Sponsor shall act as sole Sponsor, then Smith
Barney Inc. shall act as sole Sponsor. If one of the Sponsors fails to perform
its duties under the Trust Agreement or becomes incapable of acting or becomes
bankrupt or its affairs are taken over by public authorities, that Sponsor is
automatically discharged under the Trust Agreement and the remaining Sponsor
acts as Sponsor.
RESIGNATION
Any Sponsor may resign provided that at the time of such resignation each
remaining Sponsor maintains a net worth of $1,000,000 and is agreeable to such
resignation. Concurrently with or subsequent to such resignation a new Sponsor
may be appointed by the remaining Sponsors and the Trustee to assume the duties
of the resigning Sponsor. If all Sponsors resign or otherwise fail or become
unable to perform their duties under the Trust Agreement, and no express
provision is made for action by the Trustee in such event, the Trustee may
appoint a successor sponsor or terminate the Trust Agreement and liquidate the
Trusts.
TRUSTEE
The Trustee is United States Trust Company of New York, with its principal
place of business at 114 West 47th Street, New York, New York 10036. United
States Trust Company of New York has, since its establishment in 1853, engaged
primarily in the management of trust and agency accounts for individuals and
corporations. The Trustee is a member of the New York Clearing House
Association and is subject to supervision and examination by the Superintendent
of Banks of the State of New York, the Federal Deposit Insurance Corporation
and the Board of Governors of the Federal Reserve System. In connection with
the storage and handling of certain Bonds deposited in the Trust, the Trustee
may use the services of The Depository Trust Company. These services may
include safekeeping of the Bonds and coupon-clipping, computer book-entry
transfer and institutional delivery services. The Depository Trust Company is a
limited purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System and a clearing agency
registered under the Securities Exchange Act of 1934.
LIMITATIONS ON LIABILITY
The Trustee shall not be liable or responsible in any way for depreciation or
loss incurred by reason of the disposition of any moneys, securities or
certificates or in respect of any evaluation or for any action taken in good
faith reliance on prima facie properly executed documents except in cases of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties. In addition, the Trustee shall not be personally liable
for any taxes or other governmental charges imposed upon or in respect of a
Trust which the Trustee may be required to pay under current or future law of
the United States or any other taxing authority having jurisdiction. (See "Tax
Exempt Securities Trust-- Portfolio.") For information relating to the
responsibilities and indemnification of the Trustee under the Trust Agreement,
reference is made to the material set forth under "Rights of Unit Holders",
"Sponsors--Resignation" and "Other Charges."
B-21
<PAGE>
RESIGNATION
By executing an instrument in writing and filing the same with the Sponsors,
the Trustee and any successor may resign. In such an event the Sponsors are
obligated to appoint a successor trustee as soon as possible. If the Trustee
becomes incapable of acting or becomes bankrupt or its affairs are taken over
by public authorities, the Sponsors may remove the Trustee and appoint a
successor as provided in the Trust Agreement. Such resignation or removal shall
become effective upon the acceptance of appointment by the successor trustee.
If no successor has accepted the appointment within thirty days after notice of
resignation, the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The resignation or removal of
a trustee becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor trustee.
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a division of Kenny
Information Systems, Inc., with main offices located at 65 Broadway, New York,
New York 10006.
LIMITATIONS ON LIABILITY
The Trustee, Sponsors and Unit holders may rely on any evaluation furnished
by the Evaluator and shall have no responsibility for the accuracy thereof.
Determination by the Evaluator under the Trust Agreement shall be made in good
faith upon the basis of the best information available to it; provided,
however, that the Evaluator shall be under no liability to the Trustee, the
Sponsors, or Unit holders for errors in judgment. But this provision shall not
protect the Evaluator in cases of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
RESPONSIBILITY
The Trust Agreement requires the Evaluator to evaluate the Bonds of a Trust
on the basis of their bid prices on the last business day of June and December
in each year, on the day on which any Unit of such Trust is tendered for
redemption and on any other day such evaluation is desired by the Trustee or is
requested by the Sponsors. For information relating to the responsibility of
the Evaluator to evaluate the Bonds on the basis of their offering prices, see
"Public Offering--Offering Price."
RESIGNATION
The Evaluator may resign or may be removed by the joint action of the
Sponsors and the Trustee, and in such event, the Sponsors and the Trustee are
to use their best efforts to appoint a satisfactory successor. Such resignation
or removal shall become effective upon the acceptance of appointment by a
successor evaluator. If upon resignation of the Evaluator no successor has
accepted appointment within thirty days after notice of resignation, the
Evaluator may apply to a court of competent jurisdiction for the appointment of
a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
AMENDMENT
The Sponsors and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unit holders when such an amendment is (1) to
cure any ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein, or (2) to make such other provisions as shall not adversely
affect the interests of the Unit holders; provided, that the Trust Agreement is
not amended to increase the number of Units issuable thereunder or to permit
the deposit or acquisition of securities either in addition to or in
substitution for any of the Bonds initially deposited in a Trust, except for
the substitution of certain refunding securities for such Bonds or to permit
the Trustee to engage in business or investment activities not specifically
authorized in the Trust Agreement as originally adopted. In the event of any
amendment, the Trustee is obligated to notify promptly all Unit holders of the
substance of such amendment.
TERMINATION
The Trust Agreement provides that if the principal amount of Bonds held in
Trust is less than 50% of the principal amount of the Bonds originally
deposited in such Trust, the Trustee may in its discretion and will, when
directed by the Sponsors, terminate such Trust. A Trust may be terminated at
any time by 100% of the Unit holders. However, in no event may a Trust continue
beyond the Mandatory Termination Date set forth under Part A, "Summary of
Essential Information." In the event of termination, written notice thereof
will be sent by the Trustee to all Unit holders. Within a reasonable period
after termination, the Trustee will sell any Bonds remaining in the affected
Trust, and, after paying all expenses and charges incurred by such Trust, will
distribute to each Unit holder, upon surrender for cancellation of his
certificate for Units, his pro rata share of the balances remaining in the
Interest and Principal Account of such Trust.
B-22
<PAGE>
LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell, 450
Lexington Avenue, New York, New York 10017, as special counsel for the
sponsors.
AUDITORS
The statements of financial condition and the portfolios of securities
included in this Prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
BOND RATINGS+
ALL RATINGS SHOWN UNDER PART A, "PORTFOLIO OF SECURITIES", EXCEPT THOSE
IDENTIFIED OTHERWISE, ARE BY STANDARD & POOR'S.
STANDARD & POOR'S
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and in the majority of instances they differ from AAA issues only in
small degrees.
A--Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than bonds in higher-rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher-rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings: The letter "p" following a rating indicates the rating
is provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to such
likelihood and risk.
Conditional rating(s), indicated by "Con" are given to bonds for which the
continuance of the security rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows and/or the security rating is conditional upon the
issuance of insurance by the respective insurance company.
- -------
+As described by the rating agencies.
B-23
<PAGE>
MOODY'S
A brief description of the applicable Moody's rating symbols and their
meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. Aa bonds are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations:
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Rating symbols may include numerical modifiers "1," "2," or "3." The
numerical modifier "1" indicates that the security ranks at the high end, "2"
in the mid-range, and "3" nearer the low end of the generic category. These
modifiers of rating symbols "Aa," "A" and "Baa" are to give investors a more
precise indication of relative debt quality in each of the historically defined
categories.
FITCH
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong,
is somewhat less than for AAA rated securities or more subject to possible
change over the term of the issue.
A--These bonds are considered to be investment grade and of good quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however are more likely to weaken this ability than bonds with
higher ratings.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
DUFF & PHELPS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
B-24
<PAGE>
FEDERAL TAX FREE VS. TAXABLE INCOME
This table shows the approximate yields which taxable securities must earn in
various income brackets to produce, after Federal income tax, returns
equivalent to specified tax-exempt bond yields. The table is computed on the
theory that the taxpayer's highest bracket tax rate is applicable to the entire
amount of any increase or decrease in his or her taxable income resulting from
a switch from taxable to tax-exempt securities or vice versa. The table
reflects the Federal income tax rates and the tax brackets for the 1993 taxable
year under the Code as in effect on the date of this Prospectus. Because the
Federal rate brackets are subject to adjustment based on changes in the
Consumer Price Index, the taxable equivalent yields for subsequent years may
vary somewhat from those indicated in the table. Use this table to find your
tax bracket. Read across to determine the approximate taxable yield you would
need to equal a return free of Federal income tax.
1994 TAX YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE INCOME BRACKET* TAX EXEMPT YIELD
JOINT RETURN SINGLE RETURN % TAX RATE 3.5% 4% 4.5% 5.00% 5.50% 6.00% 6.50% 7.00%
TAXABLE EQUIVALENT YIELD
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UP TO $36,900 UP TO $22,100 15.0% 4.117 4.705 5.294 5.882 6.470 7.059 7.647 8.235
$ 36,900- 89,150 $ 22,100- 53,500 28.0% 4.861 5.555 6.250 6.944 7.638 8.333 9.028 9.722
$ 89,150-140,000 $ 53,500-115,000 31.0% 5.072 5.797 6.521 7.246 7.971 8.696 9.420 10.145
$140,000-250,000 $115,000-250,000 36.0% 5.468 6.250 7.031 7.812 8.593 9.375 10.156 10.937
OVER $250,000 OVER $250,000 39.6% 5.794 6.622 7.450 8.278 9.105 9.933 10.761 11.589
- --------------------------------------------------------------------------------------------------
</TABLE>
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions or the standard
deduction. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should take into account the
provisions of the Code under which the benefit of certain itemized deductions
and the benefit of personal exemptions are limited in the case of higher
income individuals. Under the Code, individual taxpayers with adjusted gross
income in excess of a $111,800 threshold amount are subject to an overall
limitation on certain itemized deductions, requiring a reduction equal to the
lesser of (i) 3% of adjusted gross income in excess of the $111,800 threshold
amount or (ii) 80% of the amount of such itemized deductions otherwise
allowable. The benefit of each personal exemption is phased-out for married
taxpayers filing a joint return with adjusted gross income in excess of
$167,700 and for single taxpayers with adjusted gross income in excess of
$111,800. Personal exemptions are phased out at the rate of two percentage
points for each $2,500 (or fraction thereof) of adjusted gross income in
excess of the applicable threshold amount. The first three Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will
be adjusted for inflation for each year. The 36.0% and 39.6% Federal tax
brackets will be adjusted for inflation for each year after 1994.
B-25
<PAGE>
PROSPECTUS--PART C:
- --------------------------------------------------------------------------------
NOTE: PART C OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PARTS A AND B.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST, TARGET MATURITY TRUST--THE STATE TRUSTS
Potential purchasers of the Units of a State Trust should consider the fact
that the Trust's Portfolio consists primarily of Bonds issued by the state for
which such State Trust is named or its municipalities or authorities and
realize the substantial risks associated with an investment in such Bonds. Each
State Trust is subject to certain additional risk factors. The Sponsors believe
the discussions of risk factors summarized below describe some of the more
significant aspects of the State Trusts. The sources of such information are
the official statements of issuers as well as other publicly available
documents. While the Sponsors have not independently verified this information,
they have no reason to believe that such information is not correct in all
material respects. Investment in a State Trust should be made with an
understanding that the value of the underlying Portfolio may decline with
increases in interest rates.
CALIFORNIA TRUST
RISK FACTORS--
Since the start of the 1990-91 fiscal year, California has faced the worst
economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), exports and financial services, among
others, have all been severely affected. Job losses have been the worst of any
post-war recession and have continued through the end of 1993. Employment
levels are expected to stabilize before net employment starts to increase, and
pre-recession job levels are not expected to be reached for several more years.
Unemployment is expected to remain above 9% through 1994.
The recession has seriously affected State tax revenues, which basically
mirror economic conditions. It has also caused increased expenditures for
health and welfare programs. The State has also been facing a structural
imbalance in its budget with the largest programs supported by the General
Fund--K-12 schools and community colleges, health, welfare and corrections--
growing at rates higher than the growth rates for the principal revenue sources
of the General Fund. (The General Fund, the State's main operating fund,
consists of revenues which are not required to be credited to any other fund.)
As a result, the State has experienced recurring budget deficits. The State
Controller reports that expenditures exceeded revenues for four of the five
fiscal years ending with 1991-92, and were essentially equal in 1992-93. By
June 30, 1993, according to the Department of Finance, the State's Special Fund
for Economic Uncertainties had a deficit, on a budget basis, of approximately
$2.8 billion. (Special Funds account for revenues obtained from specific
revenue sources, and which are legally restricted to expenditures for specified
purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction Plan to
repay this deficit over two years. The original budget for 1993-94 reflected
revenues which exceeded expenditures by approximately $2.8 billion. As a result
of continuing recession, the excess of revenues over expenditures for the
fiscal year is now expected to be only about $500 million. Thus, the
accumulated budget deficit at June 30, 1994 is now estimated by the Department
of Finance to be approximately $2 billion, and the deficit will not be retired
by June 30, 1995 as planned. The accumulated budget deficits over the past
several years, together with expenditures for school funding which have not
been reflected in the budget, and the reduction of available internal
borrowable funds, have combined to significantly deplete the State's cash
resources to pay its ongoing expenses. In order to meet its cash needs, the
State has had to rely for several years on a series of external borrowings,
including borrowings past the end of a fiscal year.
The State's tax revenue clearly reflects sharp declines in employment, income
and retail sales on a scale not seen in over 50 years. The May 1994 revision to
the 1994-95 Governor's Budget (the "May Revision"), released May 20, 1994,
assumes that the State will start recovery from recessionary conditions in
1994, with a modest upturn beginning in 1994 and continuing into 1995, a year
later than predicted in the May 1993 Department of Finance economic projection.
Pre-recession job levels are not expected to be reached until 1997.
However, there is growing evidence that California is showing signs of an
economic turnaround, and the May Revision is revised upward from the Governor's
January Budget forecast. Since the Governor's January Budget forecast, 1993
non-farm employment has been revised upward by 31,000 jobs. Employment in the
early months of 1994 has shown encouraging signs of growth, several months
sooner than was contemplated in the January Budget forecast. Between December
1993 and April 1994, payrolls are up by 50,000 jobs.
On January 17, 1994 the Northridge earthquake, measuring an estimated 6.8 on
the Richter Scale, struck Los Angeles. Significant property damage to private
and public facilities occurred in a four-county area including northern Los
Angeles County, Ventura County, and parts of Orange and San Bernadino Counties,
which were declared as State and federal disaster areas by January 18. Current
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estimates of total property damage (private and public) are in the range of $20
billion or more, but these estimates are still subject to change.
Despite such damage, on the whole, the vast majority of structures in the
areas, including large manufacturing and commercial buildings and all modern
high-rise offices, survived the earthquake with minimal or no damage,
validating the cumulative effect of strict building codes and thorough
preparation for such emergency by the State and local agencies.
Damage to State-owned facilities included transportation corridors and
facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and
210. Most of the major highways (Interstates 5 and 10) have now been reopened.
The campus at California State University Northridge (very near the epicenter)
suffered an estimated $350 million damage, resulting in the temporary closure
of the campus. It reopened using borrowed facilities elsewhere and many
temporary structures. There was also some damage to the University of
California at Los Angeles and to the Van Nuys State Office Building (now open
after a temporary closure). Overall, except for the temporary road and bridge
closures, and CSU-Northridge, the earthquake did not and is not expected to
significantly affect State government operations.
The State in conjunction with the federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to provide for the repair and
replacement of State-owned facilities. The federal government has provided
substantial earthquake assistance. The President immediately allocated some
available disaster funds, and Congress has approved additional funds for a
total of $9.5 billion of federal funds for earthquake relief, including
assistance to homeowners and small businesses, and costs for repair of damaged
public facilities. It is now estimated that the overall effect of the
earthquake on the regional and State economy will not be serious. The
earthquake may have dampened economic activity briefly during late January and
February, but the rebuilding efforts are now adding a small measure of
stimulus.
Sectors which are now contributing to California's recovery include
construction and related manufacturing, wholesale and retail trade,
transportation and several service industries such as amusements and
recreation, business services and management consulting. Electronics is showing
modest growth and the rate of decline in aerospace manufacturing is slowly
diminishing. These trends are expected to continue, and by next year, must of
the restructuring in the finance and utilities industries should be nearly
completed. As a result of these factors, average 1994 non-farm employment is
now forecast to maintain 1993 levels compared to a projected 0.6% decline in
the Governor's January Budget forecast. 1995 employment is expected to be up
1.6% compared to 0.7% in the January Budget forecast.
The Northridge earthquake resulted in a downward revision of this year's
personal income growth--from 4% in the Governor's January Budget forecast to
3.6%. However, this decline is more than explained by the $5.5 billion charge
against rental and proprietor's income--equal to 0.8% of total income--
reflecting uninsured damage from the quake. Next year, without the quake's
effects, income is projected to grow 6.1% compared to 5% projected in the
January Budget forecast. Without the quake's effects, income was little changed
in the May Revision compared to the January Budget forecast.
The housing forecast remains essentially unchanged from the January Budget
forecast. Although existing sales have strengthened and subdivision surveys
indicated increased new home sales, building permits are up only slightly from
recession lows. Gains are expected in the months ahead, but higher mortgage
interest rates will dampen the upturn. Essentially, the Northridge earthquake
adds a few thousand housing units to the forecast, but this effect is offset by
higher interest rates.
Interest rates represent one of several downside risks to the forecast. The
rise in interest rates has occurred more rapidly than contemplated in the
Governor's January Budget forecast. In addition to affecting housing, higher
rates may also dampen consumer spending, given the high percentage of
California homeowners with adjustable-rate mortgages. The May Revision forecast
includes a further rise in the Federal Funds rate to nearly 5% by the beginning
of 1995. Should rates rise more steeply, housing and consumer spending would be
adversely affected.
The unemployment upturn is still tenuous. The Employment Development
Department revised down February's employment gain and March was revised to a
small decline. Unemployment rates in California have been volatile since
January, ranging from 10.1% to a low of 8.6%, with July's figure at 9%. The
small sample size coupled with changes made to the survey instrument in January
contributed to this volatility.
1993-94 BUDGET
The Governor's Budget, introduced on January 8, 1993, proposed General Fund
expenditures of $37.3 billion, with projected revenues of $39.9 billion. To
balance the budget in the face of declining revenues, the Governor proposed a
series of revenue shifts from local government, reliance on increased federal
aid, and reductions in State spending.
The May Revision of the Governor's budget, released on May 20, 1993,
projected the State would have an accumulated deficit of about $2.75 billion by
June 30, 1993, essentially unchanged from the prior year. The Governor proposed
to eliminate this deficit over an
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18-month period. Unlike previous years, the Governor's Budget and May Revision
did not calculate a "gap" to be closed, but rather set forth revenue and
expenditure forecasts and proposals designed to produce a balanced budget.
The 1993-94 Budget Act was signed by the Governor on June 30, 1993, along
with implementing legislation. The Governor vetoed about $71 million in
spending. With enactment of the Budget Act, the State carried out its regular
cash flow borrowing program for the fiscal year with the issuance of $2 billion
of revenue anticipation notes maturing June 28, 1994.
The 1993-94 Budget Act was predicated on revenue and transfer estimates of
$40.6 billion, $400 million below 1992-93 (and the second consecutive year of
actual decline). The principal reasons for declining revenue were the continued
weak economy and the expiration (or repeal) of three fiscal steps taken in
1991--a half cent temporary sales tax, a deferral of operating loss carry
forwards, and repeal by initiative of a sales tax on candy and snack foods.
The 1993-94 Budget Act also assumed Special Fund revenues of $11.9 billion,
an increase of 2.9% over 1992-93. The 1993-94 Budget Act included General Fund
expenditures of $38.5 billion (a 6.3% reduction from projected 1992-93
expenditures of $41.1 billion), in order to keep a balanced budget within the
available revenues. The Budget also included Special Fund expenditures of $12.1
billion, a 4.2% increase. The Budget Act reflected the following major
adjustments:
1. Changes in local government financing to shift about $2.6 billion in
property taxes from cities, counties, special districts and redevelopment
agencies to school and community college districts. The property tax losses
for cities and counties were offset in part by additional sales tax
revenues and relief from some state mandated programs. Litigation by local
governments challenging this shift has so far been unsuccessful. In
November 1993 the voters approved the permanent extension of the 0.5% sales
tax for local public safety purposes.
2. The Budget projected K-12 Proposition 98 funding on a cash basis at
the same per-pupil level as 1992-93 by providing schools a $609 million
loan payable from future years' Proposition 98 funds.
3. The Budget assumed receipt of $692 million in aid to the State from
the federal government to offset health and welfare costs associated with
foreign immigrants living in the State. About $411 million of this amount
was one-time funding. Congress ultimately appropriated only $450 million.
4. Reductions of $600 million in health and welfare programs.
5. A 2-year suspension of the renters' tax credit ($390 million
expenditure reduction in 1993-94).
6. Miscellaneous one-time items, including deferral of payment to the
Public Employees Retirement Fund ($339 million) and a change in accounting
for debt service from accrual to cash basis, saving $107 million.
Administration reports during the course of the 1993-94 fiscal year have
indicated that, although economic recovery appears to have started in the
second half of the fiscal year, recessionary conditions continued longer than
had been anticipated when the 1993-94 Budget Act was adopted. Overall, revenues
for the 1993-94 fiscal year were about $800 million lower than original
projections, and expenditures were about $780 million higher, primarily because
of higher health and welfare caseloads, lower property taxes, which require
greater State support for K-14 education to make up the shortfall, and lower
than anticipated federal government payments for immigration-related costs. The
most recent reports, however, in May and June 1994, indicated that revenues in
the second half of the 1993-94 fiscal year have been very close to the
projections made in the Governor's Budget of January 10, 1994, which is
consistent with a slow turnaround in the economy.
During the 1993-94 fiscal year, the State implemented the Deficit Reduction
Plan, which was a part of the 1993-94 Budget Act, by issuing $1.2 billion of
revenue anticipation warrants in February 1994, maturing December 21, 1994.
This borrowing reduced the cash deficit at the end of the 1993-94 fiscal year.
Nevertheless, because of the $1.5 billion variance from the original Budget Act
assumption, the General Fund ended the fiscal year at June 30, 1994 carrying
forward an accumulated deficit of approximately $2 billion. Because of the
revenue shortfall and the State's reduced internal borrowing cash resources, in
addition to the $1.2 billion of revenue anticipation warrants issued as part of
the Deficit Reduction Plan, the State issued an additional $2 billion of
revenue anticipation warrants, maturing July 26, 1994, which were needed to
fund the State's obligations and expenses through the end of the 1993-94 fiscal
year.
1994-95 BUDGET
The 1994-95 fiscal year represents the fourth consecutive year the Governor
and Legislature were faced with a very difficult budget environment to produce
a balanced budget. Many program cuts and budgetary adjustments have already
been made in the last three years. The Governor's May Revision to his Budget
proposal recognized that the accumulated deficit could not be repaid in one
year, and proposed a two-year solution. The May Revision sets forth revenue and
expenditure forecasts and revenue and expenditure proposals which result in
operating surpluses for the budget for both 1994-95 and 1995-96, and lead to
the elimination of the accumulated deficit, estimated at about $2 billion at
June 30, 1994, by June 30, 1996.
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The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projects
revenues and transfers of $41.9 billion, about $2.1 billion higher than
revenues in 1993-94. This reflects the Administration's forecast of an improved
economy. Also included in this figure is the projected receipt of about $360
million from the Federal Government to reimburse the State for the cost of
incarcerating undocumented immigrants. The State will not know how much the
Federal Government will actually provide until the Federal fiscal year 1995
Budget is completed, which is expected to be by October 1994. The Legislature
took no action on a proposal in the Governor's January Budget to undertake
expansion of the transfer of certain programs to counties, which would also
have transferred to counties 0.5% of the State's current sales tax. The Budget
Act projects Special Fund revenues of $12.1 billion, a decrease of 2.4% from
1993-94 estimated levels.
The 1994-95 Budget Act projects General Fund expenditures of $40.9 billion,
an increase of $1.6 billion over 1993-94. The Budget Act also projects Special
Fund expenditures of $13.7 billion, a 5.4% increase over 1993-94 estimated
expenditures. The principal features of the Budget Act were the following:
1. Receipt of additional federal aid in 1994-95 of about $400 million for
costs of refugee assistance and medical care for undocumented aliens,
thereby offsetting a similar General Fund cost. The State will not know how
much of these funds it will receive until the Federal fiscal year 1994
Budget is passed.
2. Reductions of approximately $1.1 billion in health and welfare
programs.
3. A General Fund increase of approximately $38 million in support for
the University of California and $65 million for the California State
University. It is anticipated that student fees for both the U.C. and the
C.S.U will increase up to 10%.
4. Proposition 98 funding for K-14 schools is increased by $526 million
from the 1993-94 levels, representing an increase for enrollment growth and
inflation. Consistent with previous budget agreements, Proposition 98
funding provides approximately $4,217 per student for K-12 schools, equal
to the level in the past three years.
5. Legislation enacted with the Budget Act clarifies laws passed in 1992
and 1993 requiring counties and other local agencies to transfer funds to
local school districts, thereby reducing State aid. Some counties had
implemented programs providing less moneys to schools if there were
redevelopment agencies projects. The legislation bans this method of
transfers.
6. The Budget Act provides funding for anticipated growth in the State's
prison inmate population, including provisions for implementing recent
legislation (the so-called "Three Strikes" law) which requires mandatory
life sentences for certain third-time felony offenders.
7. Additional miscellaneous cuts ($500 million) and fund transfers ($255
million) totalling in the aggregate approximately $755 million.
The 1994-95 Budget Act contains no tax increases. Under legislation enacted
for the 1993-94 Budget, the renters' tax credit was suspended for 1993 and
1994. A ballot proposition to permanently restore the renters' credit after
this year failed at the June 1994 election. The Legislature enacted a further
one-year suspension of the renters' tax credit, saving about $390 million in
the 1995-96 fiscal year. The 1994-95 Budget assumes that the State will use a
cash flow borrowing program in 1994-95 which combines one-year notes and
warrants. Issuance of the warrants allows the State to defer repayment of
approximately $1 billion of its accumulated budget deficit into the 1995-96
fiscal year.
THE FOREGOING DISCUSSION OF THE 1993-94 AND 1994-95 FISCAL YEAR BUDGETS IS
BASED IN LARGE PART ON STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL
STATEMENT" DISTRIBUTED BY THE STATE OF CALIFORNIA. IN THAT DOCUMENT, THE STATE
INDICATED THAT ITS DISCUSSION OF THE 1994-95 FISCAL YEAR BUDGET IS BASED ON
ESTIMATES AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL
YEAR AND MUST NOT BE CONSTRUED AS STATEMENTS OF FACT. THE STATE NOTED FURTHER
THAT THE ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY
BE AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE
STATE AND THE NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES
WILL BE ACHIEVED.
STATE APPROPRIATIONS LIMIT
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"), and is prohibited
from spending "appropriations subject to limitation" in excess of the
Appropriations Limit. Article XIIIB, originally adopted in 1979, was modified
substantially by Propositions 98 and 111 in 1988 and 1990, respectively.
"Appropriations subject to limitation" are authorizations to spend "proceeds of
taxes," which consist of tax revenues and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent
that such proceeds exceed the reasonable cost of providing the regulation,
product or service. The Appropriations Limit is based on the limit for the
prior year, adjusted annually for certain changes, and is tested over
consecutive two-year periods. Any excess of the aggregate proceeds of taxes
received over such two-year period
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above the combined Appropriation Limits for those two years is divided equally
between transfers to K-14 districts and refunds to taxpayers.
Exempted from the Appropriations Limit are debt service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax revenues
dedicated to specific uses and expressly exempted from the Article XIIIB
limits. The Appropriations Limit may also be exceeded in cases of emergency
arising from civil disturbance or natural disaster declared by the Governor and
approved by two-thirds of the Legislature. If not so declared and approved, the
Appropriations Limit for the next three years must be reduced by the amount of
the excess.
Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be
transferred to schools and community college districts instead of returned to
the taxpayers. Determination of the minimum level of funding is based on
several tests set forth in Proposition 98. During fiscal year 1991-1992
revenues were smaller than expected, thus reducing the payment owed to schools
in 1991-92 under alternate "test" provisions. In response to the changing
revenue situation, and to fully fund the Proposition 98 guarantee in the 1991-
1992 and 1992-1993 fiscal years without exceeding it, the Legislature enacted
legislation to reduce 1991-92 appropriations. The amount budgeted to schools
but which exceeded the reduced appropriation was treated as a non-Proposition
98 short-term loan in 1991-92. As part of the 1992-93 Budget, $1.083 billion of
the amount budgeted to K-14 schools was designated to "repay" the prior year
loan, thereby reducing cash outlays in 1992-93 by that amount. To maintain per-
average daily attendance ("ADA") funding, the 1992-93 Budget included loans of
$732 million to K-12 schools and $241 million to community colleges, to be
repaid from future Proposition 98 entitlements. The 1993-94 Budget also
provided new loans of $609 million to K-12 schools and $178 million to
community colleges to maintain ADA funding. These loans have been combined with
the 1992-93 fiscal year loans into one loan of $1.760 billion, to be repaid
from future years' Proposition 98 entitlements, and conditioned upon
maintaining current funding levels per pupil at K-12 schools. A Sacramento
County Superior Court in California Teachers' Association, et al. v Gould, et
al., has ruled that the 1992-93 loans to K-12 schools and community colleges
violate Proposition 98. The impact of the court's ruling on the State budget
and funding for schools is unclear and will remain unclear until the Court's
written ruling, which is currently being prepared, is issued.
The 1994-95 Budget Act has appropriated $14.4 billion of Proposition 98 funds
for K-14 schools, exceeding the minimum Proposition 98 guaranty by $8 million
to maintain K-12 funds per pupil at $4,217. Based upon State revenues, growth
rates and inflation factors, the 1994-95 Budget Act appropriations an
additional $286 million within Proposition 908 for the 1993-94 fiscal year to
reflect a need in appropriations for school district and county officers of
education, as well as an anticipated deficiency in special education funding.
Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and
exemptions and the impossibility of predicting future appropriations, the
Sponsor cannot predict the impact of this or related legislation on the bonds
in the Trust Portfolio. Other Constitutional amendments affecting state and
local taxes and appropriations have been proposed from time to time. If any
such initiatives are adopted, the State could be pressured to provide
additional financial assistance to local governments or appropriate revenues as
mandated by such initiatives. Propositions such as Proposition 98 and others
that may be adopted in the future, may place increasing pressure on the State's
budget over future years, potentially reducing resources available for other
State programs, especially to the extent the Article XIIIB spending limit would
restrain the States's ability to fund such other programs by raising taxes.
STATE INDEBTEDNESS
As of July 1, 1994, the State had over $18.39 billion aggregate amount of its
general obligation bonds outstanding. General obligation bond authorizations in
aggregate amount of approximately $5.16 billion remained unissued as of July 1,
1994. The State also builds and acquires capital facilities through the use of
lease purchase borrowing. As of June 30, 1994, the State had approximately
$5.09 billion of outstanding Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and authorities
had approximately $23.3 billion aggregate principal amount of revenue bonds and
notes outstanding as of June 30, 1994. Revenue bonds represent both obligations
payable from State revenue-producing enterprises and projects, which are not
payable from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by such revenue bonds.
Such enterprises and projects include transportation projects, various public
works and exposition projects, educational facilities (including the California
State University and University of California systems), housing, health
facilities and pollution control facilities.
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LITIGATION
The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. In addition, the State is involved in certain
other legal proceedings that, if decided against the State, might require the
State to make significant future expenditures or impair future revenue sources.
Examples of such cases include challenges to certain vehicle license fees, and
challenges to the State's use of Public Employee Retirement System funds to
offset future State and local pension contributions. Other cases which could
significantly impact revenue or expenditures involve reimbursement to school
districts for voluntary school desegregation and state mandated costs,
challenges to Medi-Cal eligibility, recovery for flood damages, and liability
for toxic waste cleanup. Because of the prospective nature of these
proceedings, it is not presently possible to predict the outcome of such
litigation or estimate the potential impact on the ability of the State to pay
debt service on its obligation.
On June 20, 1994, the United States Supreme Court, in two companion cases,
upheld the validity of California's prior method of taxing multinational
corporations under a "unitary" method of accounting for their worldwide
earnings, thus avoiding tax refunds of approximately $1.55 billion by the
State, and enabling the State to collect $620 million in previous assessments.
Barclays Bank PLC v. Franchise Tax Board concerned foreign corporations, and
Colgate-Palmolive v. Franchise Tax Board concerned domestic corporations.
RATINGS
On July 15, 1994, Standard & Poor's Corporation ("Standard & Poor's"),
Moody's Investors Service, Inc. ("Moody's"), and Fitch Investors Service, Inc.
("Fitch") all downgraded their ratings of California's general obligation
bonds. These bonds are usually sold in 20- to 30-year increments and used to
finance the construction of schools, prisons, water systems and other projects.
The ratings were reduced by Standard & Poor's from "A+" to "A", by Moody's from
"Aa" to "A1", and by Fitch from "AA" to "A". Since 1991, when it had a "AAA"
rating, the State's rating has been downgraded three times by all three ratings
agencies. All three agencies cite the 1994-95 Budget Act's dependence on a
"questionable" federal bailout to pay for the cost of illegal immigrants, the
Propositions 98 guaranty of a minimum portion of State revenues for
kindergarten through community college, and the persistent deficit requiring
more borrowing as reasons for the reduced rating. Another concern was the
State's reliance on a standby mechanism which could trigger across-the-board
reductions in all State programs, and which could disrupt State operations,
particularly in fiscal year 1995-96. However, a Standard & Poor's spokesman
stated that, although the lowered ratings means California is a riskier
borrower, Standard & Poor's anticipates that the State will pay off its debts
and not default. There can be no assurance that such ratings will continue for
any given period of time or that they will not in the future be further
revised.
CALIFORNIA TAXES
In the opinion of Messrs. Adams, Duque & Hazeltine, Los Angeles, California,
special counsel on California tax matters, under existing law:
The California Trust is not an association taxable as a corporation under
the income tax laws of the State of California;
The income, deductions and credits against tax of the California Trust
will be treated as the income, deductions and credits against tax of the
holders of Units in the California Trust under the income tax laws of the
State of California;
Interest on the bonds held by the California Trust to the extent that
such interest is exempt from taxation under California law will not lose
its character as tax-exempt income merely because that income is passed
through to the holders of Units; however, a corporation subject to the
California franchise tax is required to include that interest income in its
gross income for purposes of determining its franchise tax liability;
Each holder of a Unit in the California Trust will have a taxable event
when the California Trust disposes of a bond (whether by sale, exchange,
redemption, or payment at maturity) or when the Unit holder redeems or
sells his Units. The total tax cost of each Unit to a holder of a Unit in
the California Trust is allocated among each of the bond issues held in the
California Trust (in accordance with the proportion of the California Trust
comprised by each bond issue) in order to determine the holder's per Unit
tax cost for each bond issue, and the tax cost reduction requirements
relating to amortization of bond premium will apply separately to the per
Unit tax cost of each bond issue. Therefore, under some circumstances, a
holder of a Unit may realize taxable gain when the California Trust which
issued such Unit disposes of a bond or the holder's Units are sold or
redeemed for an amount equal to or less than his original cost of the bond
or Unit;
Each holder of a Unit in the California Trust is deemed to be the owner
of a pro rata portion of the California Trust under the personal property
tax laws of the State of California; and
Each Unit holder's pro rata ownership of the bonds held by the California
Trust, as well as the interest income therefrom, is exempt from California
personal property taxes.
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NEW YORK TRUST
RISK FACTORS--Prospective investors should consider the financial
difficulties and pressures which the State of New York and several of its
public authorities and municipal subdivisions have undergone. The following
briefly summarizes some of these difficulties and the current financial
situation, based principally on certain official statements currently
available; copies may be obtained without charge from the issuing entity.
NEW YORK STATE. In recent fiscal years, there have been extended delays in
adopting the State's budget, repeated revisions of budget projections,
significant revenue shortfalls (as well as increased expenses) and year-end
borrowing to finance deficits. These developments reflect faster long-term
growth in State spending than revenues and that the State was earlier and more
severely affected by the recent economic recession than most of the rest of the
country, as well as its substantial reliance on non-recurring revenue sources.
The State's general fund incurred cash basis deficits of $775 million, $1,081
million and $575 million, respectively, for the 1990-92 fiscal years. Measures
to deal with deteriorating financial conditions included transfers from reserve
funds, recalculating the State's pension fund obligations (recently ruled
illegal), hiring freezes and layoffs, reduced aid to localities, sales of State
property to State authorities, and additional borrowings (including issuance of
additional short-term tax and revenue anticipation notes payable out of
impounded revenues in the next fiscal year). The general fund realized a $671
million surplus for fiscal year ended March 31, 1993, and a $1.54 billion
surplus for the fiscal year ended March 31, 1994.
Approximately $5.4 billion of State general obligation debt was outstanding
at March 31, 1994. The State's net tax-supported debt (restated to reflect
LGAC's assumption of certain obligations previously funded through issuance of
short-term debt) was $27.5 billion at March 31, 1994, up from $11.7 billion in
1984. A proposed constitutional amendment passed by the Legislature would limit
additional lease-purchase and contractual obligation financing for State
facilities, but would authorize the State without voter referendum to issue
revenue bonds within a formula-based cap, secured solely by a pledge of certain
State tax receipts. It would also restrict State debt to capital projects
included in a multi-year capital financing plan. The proposal is subject to
approval by the next Legislature and then by voters. S&P reduced its ratings of
the State's general obligation bonds on January 13, 1992 to A-(its lowest
rating for any state). Moody's reduced its ratings of State general obligation
bonds from A1 to A on June 6, 1990 and to Baa1, its rating of $14.2 billion of
appropriation-backed debt of the State and State agencies (over two-thirds of
the total debt) on January 6, 1992.
In May 1991 (over 2 months after the beginning of the 1992 fiscal year), the
State Legislature adopted a budget to close a projected $6.5 billion gap
(including repayment of $905 million of fiscal 1991 deficit notes). Measures
included $1.2 billion in new taxes and fees, $0.9 billion in non-recurring
measures and about $4.5 billion of reduced spending by State agencies
(including layoffs), reduced aid to localities and school districts, and
Medicaid cost containment measures. After the Governor vetoed $0.9 billion in
spending, the State adopted $0.7 billion in additional spending, together with
various measures including a $100 million increase in personal income taxes and
$180 million of additional non-recurring measures. Due primarily to declining
revenues and escalating Medicaid and social service expenditures, $0.4 billion
of administrative actions, $531 million of year-end short-term borrowing and a
$44 million withdrawal from the Tax Stabilization Reserve Fund were required to
meet the State's cash flow needs.
The State budget to close a projected $4.8 billion gap for the State's 1993
fiscal year (including repayment of the fiscal 1992 short-term borrowing)
contained a combination of $3.5 billion of spending reductions (including
measures to reduce Medicaid and social service spending, as well as further
employee layoffs, reduced aid to municipalities and schools and reduced support
for capital programs), deferral of scheduled tax reductions, and some new and
increased fees. Nonrecurring measures aggregated $1.18 billion. The City and
its Board of Education sued the Governor and various other State officials in
March 1993, claiming that the State's formula for allocating aid to education
discriminated against City schools by at least $274 million in the 1993 fiscal
year.
To close a projected budget gap of nearly $3 billion for the fiscal year
ended March 31, 1994, the State budget contained various measures including
further deferral of scheduled income tax reductions, some tax increases, $1.6
billion in spending cuts, especially for Medicaid, and further reduction of the
State's work force. The budget increased aid to schools, and included a formula
to channel more aid to districts with lower-income students and high property
tax burdens. State legislation requires deposit of receipts from the petroleum
business tax and certain other transportation-related taxes into funds
dedicated to transportation purposes. Nevertheless, $516 million of these
monies were retained in the general fund during this fiscal year. The Division
of the Budget has estimated that non-recurring income items other than the $671
million surplus from the 1993 fiscal year aggregated $318 million. $89 million
savings from bond refinancings was deposited in a contingency reserve fund to
pay litigation settlements, particularly to repay monies received under the
State's abandoned property law, which the State will be required to give up as
described below.
The budget for the fiscal year that began April 1, 1994, increases spending
by 3.8% (greater than inflation for the first time in six years). Tax revenue
projections are based on assumed modest growth in the State economy. It
provides a tax credit for low income families and increases aid to education,
especially in the poorer districts. The litigation fund will be increased and
then paid out during the year. The State is reducing coverage and placing
additional restrictions on certain health care services. Over $1 billion
results from postponement of scheduled reductions in personal income taxes for
a fifth year and in taxes on hospital income; another $1 billion comes from
rolling over the projected surplus from the previous fiscal year. Other non-
recurring measures would be reduced to $78 million. The
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State Legislature passed legislation to implement a budget agreement more than
two months after the beginning of the year. Taxes (principally business taxes)
would be reduced by $475 million in the current fiscal year and by $1.6
billion annually after fully phased in. In November 1993 the State's Court of
Appeals ruled unconstitutional 1990 legislation which postponed employee
pension contributions by the State and localities (other than New York City).
The amounts to be made up, estimated to aggregate $4 billion (half from the
State), would be repaid in increasing amounts over 12-20 years under a plan
proposed by the State Comptroller, trustee of the State pension system, and
previous contribution levels will not be exceeded until 1999. While a small
surplus has been projected for the current fiscal year, following the election
of a new governor in November 1994, the State estimated the budget gap for the
next fiscal year could be as high as $4 billion. State and other estimates are
subject to uncertainties including the effects of Federal tax legislation and
economic developments.
The State normally adjusts its cash basis balance by deferring until the
first quarter of the succeeding fiscal year substantial amounts of tax refunds
and other disbursements. For many years, it also paid in that quarter more
than 40% of its annual assistance to local governments. Payment of these
annual deferred obligations and the State's accumulated deficit was
substantially financed by issuance of short-term tax and revenue anticipation
notes shortly after the beginning of each fiscal year. The New York Local
Government Assistance Corporation ("LGAC") was established in 1990 to issue
long-term bonds over several years, payable from a portion of the State sales
tax, to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation will normally
limit the State's short-term borrowing, together with net proceeds of LGAC
bonds ($3.9 billion to date), to a total of $4.7 billion. The State's latest
seasonal borrowing, in May 1993, was $850 million.
Generally accepted accounting principles ("GAAP") for municipal entities
apply modified accrual accounting and give no effect to payment deferrals. On
an audited GAAP basis, the State's government funds group recorded operating
deficits of $1.2 billion and $1.4 billion for the 1990 and 1991 fiscal years.
For the same periods the general fund recorded deficits (net of transfers from
other funds) of $0.7 billion and $1.0 billion. Reflecting $1.6 billion, $881
million and $875 million of payments by LGAC to local governments out of
proceeds from bond sales, the general fund realized surpluses of $1.7 billion,
$2.1 billion and $0.9 billion for the 1992, 1993 and 1994 fiscal years,
respectively, leaving an accumulated deficit of $2.551 billion.
For decades, the State's economy has grown more slowly than that of the rest
of the nation as a whole. Part of the reason for this decline has been
attributed to the combined State and local tax burden, which is the second
highest in the nation (over 60% above the national average). The State's
dependence on Federal funds and sensitivity to changes in economic cycles, as
well as the high level of taxes, may continue to make it difficult to balance
State and local budgets in the future. The total employment growth rate in the
State has been below the national average since 1984. The State lost 524,000
jobs in 1990-1992. It regained approximately 134,000 jobs between November
1992 and August 1994, but continues to have higher unemployment than the
national average.
New York City (the "City"). The City is the State's major political
subdivision. In 1975, the City encountered severe financial difficulties,
including inability to refinance $6 billion of short-term debt incurred to
meet prior annual operating deficits. The City lost access to the public
credit markets for several years and depended on a variety of fiscal rescue
measures including commitments by certain institutions to postpone demands for
payment, a moratorium on note payment (later declared unconstitutional),
seasonal loans from the Federal government under emergency congressional
legislation, Federal guarantees of certain City bonds, and sales and exchanges
of bonds by The Municipal Assistance Corporation for the City of New York
("MAC") to fund the City's debt.
MAC has no taxing power and pays its obligations out of sales taxes imposed
within the City and per capita State aid to the City. The State has no legal
obligation to back the MAC bonds, although it has a "moral obligation" to do
so. MAC is now authorized to issue bonds only for refunding outstanding issues
and up to $1.5 billion should the City fail to fund specified transit and
school capital programs. The State also established the Financial Control
Board ("FCB") to review the City's budget, four-year financial plans,
borrowings and major contracts. These were subject to FCB approval until 1986
when the City satisfied statutory conditions for termination of such review.
The FCB is required to reimpose the review and approval process in the future
if the City were to experience certain adverse financial circumstances. The
City's fiscal condition is also monitored by a Deputy State Comptroller.
The City projects that it is emerging from four years of economic recession.
From 1989 to 1993, the gross city product declined by 10.1% and employment, by
almost 11%, while the public assistance caseload grew by over 25%.
Unemployment averaged 10.8% in 1992 and 10.1% in 1993, peaking at 13.4% in
January 1993, the highest level in 25 years. It dropped to 8.2% in October
1994. The number of persons on welfare exceeds 1.1 million, the highest level
since 1972, and one in seven residents is currently receiving some form of
public assistance.
While the City, as required by State law, has balanced its budgets in
accordance with GAAP since 1981, this has required exceptional measures in
recent years. The FCB has commented that City expenditures have grown faster
than revenues each year since 1986, masked in part by a large number of non-
recurring gap closing actions. To eliminate potential budget gaps of $1-$3
billion each year since 1988 the City has taken a wide variety of measures. In
addition to increased taxes and productivity increases, these have included
hiring freezes and layoffs, reductions in services, reduced pension
contributions, and a number of nonrecurring measures such as bond refundings,
transfers of surplus funds from MAC, sales of City property and tax
receivables. The FCB concluded that the City has neither the economy nor the
revenues to do everything its citizens have been accustomed to expect.
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The City closed a budget gap for the 1993 fiscal year (estimated at $1.2
billion) through actions including service reductions, productivity
initiatives, transfer of $0.5 billion surplus from the 1992 fiscal year and
$100 million from MAC. A November 1992 revision offset an additional $561
million in projected expenditures through measures including a refunding to
reduce current debt service costs, reduction in the reserve and an additional
$81 million of gap closing measures. Over half of the City's actions to
eliminate the gap were non-recurring.
The Financial Plan for the City's 1994 fiscal year relied on increases in
State and Federal aid, as well as the 1993 $280 million surplus and a partial
hiring freeze, to close a gap resulting primarily from labor settlements and
decline in property tax revenues. The Plan contained over $1.3 billion of one-
time revenue measures including bond refundings, sale of various City assets
and borrowing against future property tax receipts. On July 2, 1993, the
previous Mayor ordered spending reductions of about $130 million for the 1994
fiscal year and $400 million for the 1995 fiscal year. A new Mayor and City
Comptroller assumed office in January 1994. Various fiscal monitors criticized
reliance on non-recurring revenues, with attendant increases in the gaps for
future years. The new Mayor initiated a program to reduce non-personnel costs
by up to $150 million. The FCB reported that although a $98 million surplus was
projected for the year (the surplus was actually $81 million), a $312 million
shortfall in budgeted revenues and $904 million of unanticipated expenses
(including an unbudgeted increase of over 3,300 in the number of employees and
a record level of overtime), net of certain increased revenues and other
savings, resulted in depleting prior years' surpluses by $326 million. The new
City Comptroller criticized retention of a proposal to sell delinquent property
tax receivables.
The City's Financial Plan for the current fiscal year (that began July 1,
1994) proposed both to eliminate the projected $2.3 billion budget gap and to
stabilize overall spending while beginning to reduce some business and other
taxes. It called for a reduction of 15,000 in the City workforce by June 1995
unless equivalent productivity savings are negotiated with unions; with the aid
of $200 million from MAC, the City induced 6,100 workers to accept voluntary
severance, and union leaders accepted transfer of remaining employees between
agencies. The Plan projected about $560 million of increased State and Federal
aid, some of which has not yet been approved. Non-recurring measures include
$225 million from refinancing outstanding bonds (which the FCB estimates will
cancel almost 10% of the debt service savings anticipated from the recent
capital plan reduction), extension of the repayment schedule of a debt to City
pension funds and revision of actuarial assumptions to reduce contribution
levels, and sale of a City-owned hotel.
Since the current year's Financial Plan was adopted, the City has experienced
lower than anticipated tax collections, higher than budgeted costs
(particularly overtime) and liability claims and increased likelihood that
various revenue measures including certain anticipated Federal and State aid,
and sale of certain City assets will not occur, at least during the current
fiscal year. In July 1994, the Mayor ordered expenditure reductions of $250
million during the next six months and a contingency plan for another $200
million. In late October, the Mayor proposed an additional $800 million of
spending cuts to address a projected $1.1 billion remaining budget gap for the
current fiscal year. He reached an agreement with City unions for an additional
severance offer, to avert layoffs. Another $190 million represents proposed
transfers of excess reserves in employee health care plans, a non-recurring
measure, and he would reduce the City's subsidy to the TA by the $113 million
surplus it expects to realize this year. Expenditure reductions would aggregate
about 6%, and critics contend they would require reduction or elimination of
numerous essential services. Also, maintenance of City infrastructure would be
reduced, which could lead to higher expenses in future years. These amendments
to the City's Financial Plan are subject to approval by the City Council;
certain proposals (including State assumption of $140 million in student
transportation subsidies) will also require action by the State Legislature.
The City Comptroller has projected that an additional $300 million of gap-
closing measures will be required for the current fiscal year. Meanwhile, a
Federal District Court enjoined the Mayor's proposed transfer of welfare center
supervisors to other positions, pending submission of a plan specifying how the
City will continue to comply with Federal and state mandates.
The Mayor is exploring the possibility of privatizing some of the City's
services. The City Council passed legislation which would authorize the Council
to hold hearings on any significant privatization and would require submission
of a cost-benefit analysis. The Mayor has also been seeking greater control
over spending by independent authorities and agencies such as the Board of
Education, the Health and Hospitals Corporation and the TA. The Mayor's efforts
to reduce expenditures by the Board of Education, including appointment of
another fiscal monitor, reduction in City funding of capital projects and
rejection of a tentative labor contract, have strained relations with the
Schools Chancellor at a time of rising enrollments. In March 1994 the Mayor
reduced cash incentives to landlords renting apartments to the homeless. In
October, he announced a proposal to require able-bodied welfare recipients to
render community service. It has been reported that he is considering proposals
including eliminating City financing of a program that creates housing for
single homeless people, charging shelter occupants who refuse offers of
treatment or training a modest rent for use of the shelter, and replacing some
of the subsidies to day care centers with a voucher system. The Mayor is
considering a plan to fingerprint welfare recipients in the City; this could be
subject to legal challenge. Budget gaps of $1.5 billion, $2.0 billion and $2.4
billion have been projected for the 1996 through 1998 fiscal years,
respectively. The State Comptroller suggested the gaps could exceed these
estimates by about $1.2 billion annually, while the FCB estimated risks of over
$2 billion, $3 billion and $3 billion respectively. Even after recent capital
plan reductions, debt service is expected to consume 18.4 % of tax revenue by
the 1998 fiscal year. The FCB commented that, in spite of the Mayor's
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measures, spending (principally debt service, Medicaid costs and health and
pension benefits) would continue to increase faster than revenues.
A major uncertainty is the City's labor costs, which represent about 50% of
its total expenditures. The City's workforce grew by 34% during the 1980s. A
January 1993 agreement covering approximately 44% of the City workers followed
negotiations lasting nearly two years. Workers will receive wage and benefit
raises totalling 8.25% over 39 months ending March 1995. An agreement announced
in August 1993 provides wage increases for City teachers averaging 9% over the
48 1/2 months ending October 1995. The City is seeking to negotiate workforce
productivity initiatives, savings from which would be shared with the workers
involved. Under a tentative contract reached in September 1994, while
sanitation workers would receive an overall increase of 8.25% in wages and
benefits over 39 months, routes would be lengthened by an average of 20%. The
Financial Plan assumes no further wage increases after the 1995 fiscal year.
Also, costs of some previous wage increases were offset by reduced
contributions to pension funds; if fund performance is less than the 9% annual
earnings projected (as is expected in the current fiscal year), the City could
incur increased expenses in future years. Pension fund earnings assumptions are
currently being reviewed, and future City pension contributions could be
increased by a substantial amount.
Budget balance may also be adversely affected by the effect of the economy on
economically sensitive taxes. Reflecting the downturn in real estate prices and
increasing defaults, estimates of property tax revenues have been reduced.
Other uncertainties include additional expenditures to combat deterioration in
the City's infrastructure (such as bridges, schools and water supply), costs of
developing alternatives to ocean dumping of sewage sludge (which the City
expects to defray through increased water and sewer charges), cost of the AIDS
epidemic, problems of drug addiction and homelessness and the impact of any
future State assistance payment reductions. For example, the City may be
ordered to spend up to $8 billion to construct water filtration facilities if
it is not successful in implementing measures to prevent pollution of its
watershed upstate. In late September 1994 the City was held in contempt and
fined for failure to provide shelter on a timely basis for homeless families.
Several similar decisions had been rendered against the previous
administration. Elimination of any additional budget gaps will require various
actions, including by the State, a number of which are beyond the City's
control. Staten Island voters in 1993 approved a proposed charter under which
Staten Island would secede from the City. Secession will require enabling
legislation by the State Legislature; it would also be subject to legal
challenge by the City. The effects of secession on the City cannot be
determined at this time, but questions include responsibility for outstanding
debt, a diminished tax base, and continued use of the Fresh Kills landfill, the
City's only remaining garbage dump. A similar measure with respect to Queens
was approved by the New York State Senate.
In December 1993, a report commissioned by the City was released, describing
the nature of the City's structural deficit. It projects that the City will
need to identify and implement $5 billion in annual gap closing measures by
1998. The report suggests a variety of possible measures for City
consideration. While the new Mayor rejected out of hand many of the proposals
such as tax increases, the State Comptroller urged him to reconsider the
report.
The City sold $1.4 billion, $1.8 billion and $2.2 billion of short-term
notes, respectively, during 1993, 1994 and current fiscal years. The FCB
recently recommended development of a cash budgeting system to reduce short-
term borrowing resulting from timing imbalances. At June 30, 1994, there were
outstanding $21.7 billion of City bonds (not including City debt held by MAC),
$4.2 billion of MAC bonds and $0.8 billion of City-related public benefit
corporation indebtedness, each net of assets held for debt service. Standard &
Poor's and Moody's during the 1975-80 period either withdrew or reduced their
ratings of the City's bonds. S&P currently rates the City's debt A- with a
negative outlook while Moody's rates City bonds Baa1. City-related debt almost
doubled since 1987, although total debt declined as a percentage of estimated
full value of real property. The City's financing program projects long-term
financing during fiscal years 1995-1998 to aggregate $17.8 billion. The City's
latest Ten Year Capital Strategy plans capital expenditures of $45.6 billion
during 1994-2003 (93% of be City funded). The State Comptroller has criticized
recent City bond refinancings for producing short-term savings at the expense
of greater overall costs, especially in future years. Annual debt service is
projected to increase.
OTHER NEW YORK LOCALITIES. In 1992, other localities had an aggregate of
approximately $15.7 billion of indebtedness outstanding. In recent years,
several experienced financial difficulties. A March 1993 report by Moody's
Investors Service concluded that the decline in ratings of most of the State's
largest cities in recent years resulted from the decline in the State's
manufacturing economy. Seventeen localities had outstanding indebtedness for
deficit financing at the close of their respective 1992 fiscal years. Any
reductions in State aid to localities may cause additional localities to
experience difficulty in achieving balanced budgets. If special local
assistance were needed from the State in the future, this could adversely
affect the State's as well as the localities' financial condition. Most
localities depend on substantial annual State appropriations. Legal actions by
utilities to reduce the valuation of their municipal franchises, if successful,
could result in localities becoming liable for substantial tax refunds.
STATE PUBLIC AUTHORITIES. In 1975, after the Urban Development Corporation
("UDC"), with $1 billion of outstanding debt, defaulted on certain short-term
notes, it and several other State authorities became unable to market their
securities. Since 1975 the State has provided substantial direct and indirect
financial assistance to UDC, the Housing Finance Agency ("HFA"), the
Environmental Facilities Corporation and other authorities. Practical and legal
limitations on these agencies' ability to pass on rising costs through rents
and fees could require further State appropriations. 18 State authorities had
an aggregate of $63.5 billion of debt outstanding at September 30,
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1993. At March 31, 1994, approximately $0.4 billion of State public authority
obligations was State-guaranteed, $7.3 billion was moral obligation debt
(including $4.8 billion of MAC debt) and $16.6 billion was financed under
lease-purchase or contractual obligation financing arrangements with the State.
Various authorities continue to depend on State appropriations or special
legislation to meet their budgets.
The Metropolitan Transportation Authority ("MTA"), which oversees operation
of the City's subway and bus system by the City Transit Authority (the "TA")
and operates certain commuter rail lines, has required substantial State and
City subsidies, as well as assistance from several special State taxes.
Measures to balance the TA's 1993 budget included increased funding by the
City, increased bridge and tunnel tolls and allocation of part of the revenues
from the Petroleum Business Tax. While the TA projects a surplus for 1994, cash
basis gaps of $300-600 million are projected for each of the 1995 through 1998
years. Measures proposed to close these gaps include various additional State
aid and possible fare increases. However, it was projected in May 1994 that the
effect of the improving economy on transportation-dedicated taxes and on
ridership, as well as implementation of cost savings, would permit deferral of
fare increases until at least July 1995. A tentative agreement with TA workers
reached in July 1994, which provides 10.4% wage increases over 39 months, would
cost the MTA $337 million. The MTA Chairman stated that this cost would be
partly offset by savings from work rule changes and that money for the
settlement is available in the TA's budget. An earlier settlement with Long
Island Railroad workers is expected to cost the MTA $14 million over 26 months.
The MTA's Chairman proposed a 5 year financial strategy, including a variety
of fare changes; however, even if these are approved, an estimated $700 million
in additional funds will be needed from State and City financial assistance.
Substantial claims have been made against the TA and the City for damages from
a 1990 subway fire and a 1991 derailment. The MTA infrastructure, especially in
the City, needs substantial rehabilitation. In December 1993, a $9.5 billion
MTA Capital Plan was finally approved for 1992-1996, although $500 million is
contingent on increased contributions from the City; the City has until late
1994 to decide if it will make these contributions. The MTA's Chairman has
threatened to raise subway fares and borrow more if the City fails to make up
this amount. The City is seeking State and MAC approval to defer $245 million
of capital contributions to the TA from the current fiscal year until 1998. It
is anticipated that the MTA and the TA will continue to require significant
State and City support. Moody's reduced its rating of certain MTA obligations
to Baa on April 14, 1992.
A Federal District Court ruled in February 1993 that State surcharges of up
to 24% on hospital bills paid by commercial insurance companies and health
maintenance organizations, much of which is used to subsidize care of uninsured
patients, violate Federal law; however, the Court permitted continuance of the
system pending appeal of the ruling.
LITIGATION. The State and the City are defendants in numerous legal
proceedings, including challenges to the constitutionality and effectiveness of
various welfare programs, alleged torts and breaches of contract, condemnation
proceedings and other alleged violations of laws. Adverse judgments in these
matters could require substantial financing not currently budgeted. For
example, in addition to real estate certiorari proceedings, claims in excess of
$343 billion were outstanding against the City at June 30, 1993, for which it
estimated its potential future liability at $2.2 billion. Another action seeks
a judgment that, as a result of an overestimate by the State Board of
Equalization and Assessment, the City's 1992 real estate tax levy exceeded
constitutional limits. In March 1993, the U.S. Supreme Court ruled that if the
last known address of a beneficial owner of accounts held by banks and
brokerage firms cannot be ascertained, unclaimed funds therein belong to the
state of the broker's incorporation rather than where its principal office is
located. New York has obtained about $350 million of abandoned funds that could
have to be paid to other States. (It has agreed to pay Delaware $200 million
over a 5-year period.) The case has been remanded to a special master to
determine disposition of these monies.
Final adverse decisions in any of these cases could require extraordinary
appropriations at either the State or City level or both.
NEW YORK TAXES
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors,
under existing New York law:
Under the income tax laws of the State and City of New York, the Trust is
not an association taxable as a corporation and income received by the
Trust will be treated as the income of the Holders in the same manner as
for Federal income tax purposes. Accordingly, each Holder will be
considered to have received the interest on his pro rata portion of each
Bond when interest on the Bond is received by the Trust. In the opinion of
bond counsel delivered on the date of issuance of the Bond, such interest
will be exempt from New York State and City personal income taxes except
where such interest is subject to Federal income taxes (see Taxes). A
noncorporate Holder of Units of the Trust who is a New York State (and
City) resident will be subject to New York State (and City) personal income
taxes on any gain recognized when he disposes of all or part of his pro
rata portion of a Bond. A noncorporate Holder who is not a New York State
resident will not be subject to New York State or City personal income
taxes on any such gain unless such Units are attributable to a business,
trade, profession or occupation carried on in New York. A New York State
(and City) resident should determine his tax basis for his pro rata portion
of each Bond for New York State (and City) income tax purposes in the same
manner as for Federal income tax purposes. Interest income on a Holder's
pro rata portion of the Bonds is generally not excludable from income in
computing New York State and City corporate franchise taxes.
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TAX FREE VS. TAXABLE INCOME
The following tables show the approximate yields which taxable securities
must earn in various income brackets to equal tax exempt yields under combined
Federal and state individual income tax rates. This table reflects Federal
income tax rates and tax brackets for the 1994 taxable year under the Code as
in effect on the date of this Prospectus and state income tax rates that were
available on the date of the Prospectus. Because the Federal rate brackets are
subject to adjustment based on changes in the Consumer Price Index, the
taxable equivalent yields for subsequent years may be lower than indicated. A
table is computed on the theory that the taxpayer's highest bracket tax rate
is applicable to the entire amount of any increase or decrease in taxable
income (after allowance for any resulting change in state income tax)
resulting from a switch from taxable to tax-free securities or vice versa.
Variations between state and Federal allowable deductions and exemptions are
generally ignored. The state tax is thus computed by applying to the Federal
taxable income bracket amounts shown in the table the appropriate state rate
for those same dollar amounts. For example, a married couple living in the
State of California and filing a Joint Return with $53,000 in taxable income
for the 1994 tax year would need a taxable investment yielding 9.058% in order
to equal a tax-free return of 6.00%. Use the appropriate table to find your
tax bracket. Read across to determine the approximate taxable yield you would
need to equal a return free of Federal income tax and state income tax.
STATE OF CALIFORNIA
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,384 to 35,324 18.400% 4.289 4.901 5.514 6.127 6.740 7.353 7.966 8.578
$ 35,324 to 36,900 20.100% 4.380 5.006 5.632 6.257 6.883 7.509 8.135 8.761
$ 36,900 to 49,038 32.320% 5.171 5.910 6.648 7.387 8.126 8.865 9.604 10.343
$ 49,038 to 61,974 33.760% 5.283 6.038 6.793 7.548 8.303 9.058 9.813 10.568
$ 61,974 to 89,150 34.696% 5.359 6.125 6.890 7.656 8.422 9.188 9.953 10.719
$ 89,150 to 140,000 37.417% 5.592 6.391 7.190 7.989 8.788 9.587 10.386 11.185
$140,000 to 214,928 41.952% 6.029 6.890 7.752 8.613 9.474 10.336 11.197 12.058
$214,928 to 250,000 42.400% 6.076 6.944 7.812 8.680 9.548 10.416 11.284 12.152
$250,000 to 429,858 45.640% 6.438 7.358 8.278 9.197 10.117 11.037 11.957 12.877
Over $429,858 46.244% 6.510 7.441 8.371 9.301 10.231 11.161 12.091 13.021
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 24,519 to 30,987 33.760% 5.283 6.038 6.793 7.548 8.303 9.058 9.813 10.568
$ 30,987 to 53,500 34.696% 5.359 6.125 6.890 7.656 8.422 9.188 9.953 10.719
$ 53,500 to 107,464 37.417% 5.592 6.391 7.190 7.989 8.788 9.587 10.386 11.185
$107,464 to 115,000 37.900% 5.636 6.441 7.246 8.051 8.856 9.661 10.467 11.272
$115,000 to 214,929 42.400% 6.076 6.944 7.812 8.680 9.548 10.416 11.284 12.152
$214,929 to 250,000 43.040% 6.144 7.022 7.900 8.778 9.655 10.533 11.411 12.289
Over $250,000 46.244% 6.510 7.441 8.371 9.301 10.231 11.161 12.091 13.021
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state income tax). If the standard deduction had been taken
for Federal income tax purposes in order to reach the amount shown in the
table, the taxable equivalent yield required to equal a specified tax-exempt
yield would be at least as great as that shown in the table. It is assumed
that the investor is not subject to the alternative minimum tax. Where
applicable, investors should take into account the provisions of the Code
under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, an individual taxpayer with adjusted gross income in excess
of a $111,800 threshold amount is subject to an overall limitation on
certain itemized deductions, requiring a reduction equal to the lesser of
(i) 3% of adjusted gross income in excess of the $111,800 threshold amount
or (ii) 80% of the amount of such itemized deductions otherwise allowable.
The benefit of each personal exemption is phased out for married taxpayers
filing a joint return with adjusted gross income in excess of $167,700 and
for single taxpayers with adjusted gross income in excess of $111,800.
Personal exemptions are phased out at the rate of two percentage points for
each $2,500 (or fraction thereof) of adjusted gross income in excess of the
applicable threshold amount. California has adopted provisions corresponding
to the Federal law provisions limiting the benefit of certain itemized
deductions and phasing out the benefit of personal exemptions. However, the
California threshold amounts and percentage reductions differ from those
applicable under Federal law. The Federal and California tax brackets, the
threshold amounts at which itemized deductions are subject to reduction, and
the range over which personal exemptions are phased out will be adjusted for
inflation. The 36% and the 39.6% Federal tax brackets will, however, be
adjusted for inflation only for years after 1994.
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STATE OF NEW YORK**
1994 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED TAX EXEMPT YIELD
TAXABLE FEDERAL & STATE 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,000 to 26,000 20.950% 4.427 5.060 5.692 6.325 6.957 7.590 8.222 8.855
$ 26,000 to 36,900 21.693% 4.469 5.108 5.746 6.385 7.023 7.662 8.300 8.939
$ 36,900 to 89,150 33.670% 5.276 6.030 6.784 7.538 8.291 9.045 9.799 10.553
$ 89,150 to 140,000 36.433% 5.506 6.292 7.079 7.865 8.652 9.438 10.225 11.012
$140,000 to 250,000 41.040% 5.936 6.784 7.632 8.480 9.328 10.176 11.024 11.872
Over $250,000 44.356% 6.289 7.188 8.087 8.985 9.884 10.782 11.681 12.579
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,000 to 22,100 21.693% 4.469 5.108 5.746 6.385 7.023 7.662 8.300 8.939
$ 22,100 to 53,500 33.670% 5.276 6.030 6.784 7.538 8.291 9.045 9.799 10.553
$ 53,500 to 115,000 36.433% 5.506 6.292 7.079 7.865 8.652 9.438 10.225 11.012
$115,000 to 250,000 41.040% 5.936 6.784 7.632 8.480 9.328 10.176 11.024 11.872
Over $250,000 44.356% 6.289 7.188 8.087 8.985 9.884 10.782 11.681 12.579
</TABLE>
CITY OF NEW YORK***
<TABLE>
<CAPTION>
APPROX. COMBINED
FEDERAL, STATE & TAX EXEMPT YIELD
TAXABLE NEW YORK CITY 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00
INCOME BRACKET* TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 22,000 to 26,000 24.061% 4.608 5.267 5.925 6.584 7.242 7.901 8.559 9.217
$ 26,000 to 27,000 24.804% 4.654 5.319 5.984 6.649 7.314 7.979 8.644 9.309
$ 27,000 to 36,900 25.331% 4.687 5.356 6.026 6.696 7.365 8.035 8.705 9.374
$ 36,900 to 45,000 36.751% 5.533 6.324 7.114 7.905 8.695 9.486 10.276 11.067
$ 45,000 to 89,150 36.838% 5.541 6.332 7.124 7.916 8.707 9.499 10.290 11.082
$ 89,150 to 108,000 39.469% 5.782 6.608 7.434 8.260 9.086 9.912 10.738 11.564
$108,000 to 140,000 39.511% 5.786 6.612 7.439 8.265 9.092 9.919 10.745 11.572
$140,000 to 250,000 43.894% 6.238 7.129 8.020 8.911 9.802 10.694 11.585 12.476
Over $250,000 47.050% 6.610 7.554 8.498 9.442 10.387 11.331 12.275 13.220
<CAPTION>
SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,000 to 22,100 25.331% 4.687 5.356 6.026 6.696 7.365 8.035 8.705 9.374
$ 22,100 to 25,000 36.751% 5.533 6.324 7.114 7.905 8.695 9.486 10.276 11.067
$ 25,000 to 53,500 36.838% 5.541 6.332 7.124 7.916 8.707 9.499 10.290 11.082
$ 53,500 to 60,000 39.469% 5.782 6.608 7.434 8.260 9.086 9.912 10.738 11.564
$ 60,000 to 115,000 39.511% 5.786 6.612 7.439 8.265 9.092 9.919 10.745 11.572
$115,000 to 250,000 43.894% 6.238 7.129 8.020 8.911 9.802 10.694 11.585 12.476
Over $250,000 47.050% 6.610 7.554 8.498 9.442 10.387 11.331 12.275 13.220
</TABLE>
- -------
* The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deductions for state and local income taxes). If the standard deduction
had been taken for Federal income tax purposes, the taxable equivalent
yield required to equal a specified tax-exempt yield would be at least as
great as that shown in the table. It is assumed that the investor is not
subject to the alternative minimum tax.
** The New York State personal income tax rates are currently scheduled to
change in 1994 and later years. For example, the highest New York State
tax for 1993 is 7.875% and is scheduled to decrease to 7.59375% for 1994,
7.125% for 1995 and 7% for later years. The scheduled reductions in the
New York State top bracket rates will, if implemented, result in taxable
equivalent yields for 1993 and later years that are somewhat lower than
those indicated in the above tables.
*** The City of New York table reflects the surcharges of between .51% and
.55% applicable to City of New York residents in certain instances and the
additional tax equal to 14% of the sum of the income tax and surcharge.
Note:
Where applicable, investors should take into account the provisions of the
Code under which the benefit of certain itemized deductions and the benefit of
personal exemptions are limited in the case of higher income individuals.
Under the Code, an individual taxpayer with adjusted gross income in excess of
a $111,800 threshold amount is subject to an overall limitation on certain
itemized deductions, requiring a reduction equal to the lesser of (i) 3% of
adjusted gross income in excess of the $111,800 threshold amount or (ii) 80%
of the amount of such itemized deductions otherwise allowable. The benefit of
each personal exemption is phased out for married taxpayers filing a joint
return with adjusted gross income in excess of $167,700 and for single
taxpayers with adjusted gross income in excess of $111,800. Personal
exemptions are phased out at the rate of two percentage points for each $2,500
(or fraction thereof) of adjusted gross income in excess of the applicable
threshold amount. The 15%, 28% and 31% Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be adjusted for inflation
for each year. The 36% and the 39.6% Federal tax brackets will be adjusted for
inflation for each year after 1994. For New York State tax purposes, the
benefit of tax rates below 7.875% on taxable income amounts up to $26,000 in
the case of a joint return and $13,000 in the case of a single return is
phased out for a taxpayer with adjusted gross income in excess of a $100,000
threshold amount. The benefit is phased out pro rata over the first $50,000 of
adjusted gross income in excess of $100,000 and the phase out is complete when
New York adjusted gross income equals $150,000. The tables assume that New
York adjusted gross income does not exceed $100,000 in every case in which a
phase out of the benefit of the rate on taxable income below $26,000 would
affect the computation.
C-13
<PAGE>
PROSPECTUS
THIS PROSPECTUS CONTAINS INFORMATION CONCERNING THE TRUST AND THE SPONSORS,
BUT DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE REGISTRATION
STATEMENTS AND EXHIBITS RELATING THERETO, WHICH THE TRUST HAS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C., UNDER THE SECURITIES ACT
OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS
HEREBY MADE.
INDEX:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF ESSENTIAL INFORMATION........................................... A-2
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT.................................... A-4
UNDERWRITING............................................................... A-6
INDEPENDENT AUDITORS' REPORT............................................... A-7
STATEMENTS OF FINANCIAL CONDITION.......................................... A-8
PORTFOLIO OF SECURITIES.................................................... A-9
TAX EXEMPT SECURITIES TRUST................................................ B-1
THE TRUSTS................................................................ B-1
OBJECTIVES................................................................ B-1
PORTFOLIOS................................................................ B-1
RISK FACTORS.............................................................. B-2
THE UNITS................................................................. B-12
TAXES..................................................................... B-12
EXPENSES AND CHARGES...................................................... B-14
PUBLIC OFFERING............................................................ B-15
OFFERING PRICE............................................................ B-15
METHOD OF EVALUATION...................................................... B-15
DISTRIBUTION OF UNITS..................................................... B-16
MARKET FOR UNITS.......................................................... B-16
EXCHANGE OPTION........................................................... B-16
REINVESTMENT PROGRAMS..................................................... B-17
SPONSORS' AND UNDERWRITERS' PROFITS....................................... B-17
RIGHTS OF UNIT HOLDERS..................................................... B-17
CERTIFICATES.............................................................. B-17
DISTRIBUTION OF INTEREST AND PRINCIPAL.................................... B-17
REPORTS AND RECORDS....................................................... B-18
REDEMPTION OF UNITS....................................................... B-19
SPONSORS................................................................... B-20
LIMITATIONS ON LIABILITY.................................................. B-20
RESPONSIBILITY............................................................ B-21
RESIGNATION............................................................... B-21
TRUSTEE.................................................................... B-21
LIMITATIONS ON LIABILITY.................................................. B-21
RESIGNATION............................................................... B-22
EVALUATOR.................................................................. B-22
LIMITATIONS ON LIABILITY.................................................. B-22
RESPONSIBILITY............................................................ B-22
RESIGNATION............................................................... B-22
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT........................... B-22
AMENDMENT................................................................. B-22
TERMINATION............................................................... B-22
LEGAL OPINION............................................................. B-23
AUDITORS................................................................... B-23
BOND RATINGS............................................................... B-23
FEDERAL TAX FREE VS. TAXABLE INCOME........................................ B-25
THE STATE TRUSTS........................................................... C-1
TAX FREE VS. TAXABLE INCOME................................................ C-12
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL
TO MAKE SUCH OFFER IN SUCH STATE.
TAX EXEMPT SECURITIES TRUST
TARGET MATURITY TRUST
------------
30,500 UNITS
------------
Prospectus
Dated November 21, 1994
------------
SPONSORS
SMITH BARNEY INC.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 298-UNIT
------------
KIDDER, PEABODY & CO.
INCORPORATED
60 BROAD STREET
NEW YORK, NEW YORK 10004
(212) 656-1609
<PAGE>
PART II. ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
A. The following information relating to the Depositors is incorporated by
reference to the SEC filings indicated and made a part of this Registration
Statement.
<TABLE>
<CAPTION>
SEC FILE OR
IDENTIFICATION NO.
------------------
<S> <C>
I. Bonding Arrangements and Date of Organization of the Depositors
filed pursuant to Items A and B of Part II of the Registration
Statement on Form S-6 under the Securities Act of 1993:
Smith Barney Inc. 2-55436
Kidder, Peabody & Co. Incorporated
II. Information as to Officers and Directors of the Depositors filed
pursuant to Schedules A and D of Form BD under Rules 15b1-1 and
15b3-1 of the Securities Exchange Act of 1934:
Smith Barney Inc. 8-8177
Kidder, Peabody & Co. Incorporated 8-4831
III. Charter documents of the Depositors filed as Exhibits to the Reg-
istration Statement on Form S-6 under the Securities Act of 1933
(Charter, By-Laws):
Smith Barney Inc. 33-65332, 33-36037
Kidder, Peabody & Co. Incorporated 33-17979, 33-20499
B. The Internal Revenue Service Employer Identification Numbers of the
Sponsors and Trustee are as follows:
Smith Barney Inc. 13-1912900
Kidder, Peabody & Co. Incorporated 13-5650440
United States Trust Company of New York, Trustee 13-5459866
</TABLE>
UNDERTAKING
The Sponsors undertake that (i) they will not instruct the Trustee to accept
from any insurance company affiliated with any of the Sponsors, in settlement
of any claim, less than an amount sufficient to pay any principal or interest
(and, in the case of a taxability redemption, premium) then due on any Security
in accordance with the municipal bond guaranty insurance policy attached to
that Security or (ii) any affiliate of the Sponsors who has any obligation with
respect to any Security, less than the full amount due pursuant to the
obligation, unless those instructions have been approved by the Securities and
Exchange Commission pursuant to Rule 17d-1 under the Investment Company Act of
1940.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
THE REGISTRATION STATEMENT ON FORM S-6 COMPRISES THE FOLLOWING PAPERS AND
DOCUMENTS:
The facing sheet of Form S-6.
The Cross-Reference Sheet (incorporated by reference to the Cross-Reference
Sheet to the Registration Statement of Tax Exempt Securities Trust, Series
384, 1933 Act File No. 33-50915).
The Prospectus.
Additional Information not included in the Prospectus (Part II).
Consent of Independent Auditors.
The following exhibits:
<TABLE>
<C> <S>
1.1 --Form of Trust Indenture and Agreement (incorporated by reference to
Exhibit 4.a to the Registration Statement of Tax Exempt Securities
Trust, Series 265, 1933 Act File No. 33-15123).
1.1.1 --Form of Reference Agreement Trust (incorporated by reference to
Exhibit 4.b to the Registration Statement of Tax Exempt Securities
Trust, Series 384, 1993 Act File No. 33-50915).
1.2 --Form of Agreement Among Underwriters (incorporated by reference to
Exhibit 99 to the Registration Statement of Tax Exempt Securities
Trust, Series 384, 1933 Act File No. 33-50915).
2.1 --Form of Certificate of Beneficial Interest (included in Exhibit 1.1).
3.1 --Opinion of counsel as to the legality of the securities being issued
including their consent to the use of their name under the headings
"Taxes" and "Legal Opinion" in Part B of the Prospectus and "New York
Taxes" in Part C of the Prospectus.
4.1 --Consent of the Evaluator.
</TABLE>
II-2
<PAGE>
SIGNATURES
The registrant, Tax Exempt Securities Trust, Target Maturity Trust (National
Series), Target Maturity Trust (California Series) and Target Maturity Trust
(New York Series) hereby identifies Series 1 and Series 357 of the Tax Exempt
Securities Trust for purposes of the representations required by Rule 487 and
represents the following:
(1) That the portfolio securities deposited in the series as to the
securities of which this Registration Statement is being filed do not
differ materially in type or quality from those deposited in such previous
series;
(2) That, except to the extent necessary to identify the specific
portfolio securities deposited in, and to provide essential financial
information for, the series with respect to the securities of which this
Registration Statement is being filed, this Registration Statement does not
contain disclosures that differ in any material respect from those
contained in the registration statements for such previous series as to
which the effective date was determined by the Commission or the staff; and
(3) That it has complied with Rule 460 under the Securities Act of 1933.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, AND STATE OF NEW YORK, ON THE 21ST DAY OF NOVEMBER, 1994.
Signatures appear on pages II-4 and II-5.
A majority of the members of the Board of Directors of Smith Barney Inc. has
signed this Registration Statement or Amendment to the Registration Statement
pursuant to Powers of Attorney authorizing the person signing this Registration
Statement or Amendment to the Registration Statement to do so on behalf of such
members.
A majority of the members of the Board of Directors of Kidder, Peabody & Co.
Incorporated has signed this Registration Statement or Amendment to the
Registration Statement pursuant to Powers of Attorney authorizing the person
signing this Registration Statement or Amendment to the Registration Statement
to do so on behalf of such members.
II-3
<PAGE>
Smith Barney Inc., Depositor
/s/ George S. Michinard, Jr.
By .................................
(GEORGE S. MICHINARD, JR.)
By the following persons*, who
constitute a majority of the
directors of Smith Barney Inc.:
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Robert F. Greenhill
Jeffrey B. Lane
Robert H. Lessin
Jack L. Rivkin
/s/ George S. Michinard, Jr.
By ..................................
(GEORGE S. MICHINARD, JR.,
ATTORNEY-IN-FACT)
- --------
* Pursuant to Powers of Attorney filed under the 1933 Act file Numbers 33-
56722 and 33-51999.
II-4
<PAGE>
Kidder, Peabody & Co. Incorporated,
Depositor
/s/ Gilbert R. Ott, Jr.
By ..................................
(GILBERT R. OTT, JR.)
By the following persons,* who
constitute a majority of the Board
of Directors of Kidder, Peabody &
Co. Incorporated:
Theodore J. Johnson
John M. Liftin
C. Edward Midgley
James A. Mullin
Richard W. O'Donnell
Thomas F. Ryan, Jr.
Douglas T. Tansill
/s/ Gilbert R. Ott, Jr.
By ..................................
(GILBERT R. OTT, JR., ATTORNEY-IN-
FACT)
- --------
* Pursuant to Powers of Attorney filed under the 1933 Act File Number 33-
52529.
II-5
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
To the Sponsors and Unit Holders of Tax Exempt Securities Trust, Target
Maturity Trust (National Series, California Series and New York Series):
We consent to the use of our report dated November 18, 1994 included herein
and to the reference to our firm under the heading "Auditors" in the
Prospectus.
KPMG Peat Marwick LLP
New York, N.Y.
November 18, 1994
II-6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Statements
of Financial Conditions and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> NATIONAL SERIES
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> NOV-18-1994
<INVESTMENTS-AT-COST> 18,998,863
<INVESTMENTS-AT-VALUE> 18,998,863
<RECEIVABLES> 295,483
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19,294,346
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 295,483
<TOTAL-LIABILITIES> 295,483
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,294,346
<SHARES-COMMON-STOCK> 20,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 18,998,863
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 18,998,863
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Statements
of Financial Conditions and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> CALIFORNIA SERIES
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> NOV-18-1994
<INVESTMENTS-AT-COST> 2,844,563
<INVESTMENTS-AT-VALUE> 2,844,563
<RECEIVABLES> 21,041
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,865,604
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,041
<TOTAL-LIABILITIES> 21,041
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,844,563
<SHARES-COMMON-STOCK> 3,000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,865,604
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,844,563
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from
Statements of Financial Conditions and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> NEW YORK SERIES
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> NOV-18-1994
<INVESTMENTS-AT-COST> 7,103,796
<INVESTMENTS-AT-VALUE> 7,103,796
<RECEIVABLES> 125,815
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,229,611
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 125,815
<TOTAL-LIABILITIES> 125,815
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,229,611
<SHARES-COMMON-STOCK> 7,500
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 7,103,796
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,500
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7,103,796
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
November 18, 1994
Tax Exempt Securities Trust
Target Maturity Trust
National Series
California Series
New York Series
Smith Barney Inc.
Kidder, Peabody & Co., Incorporated
c/oSmith Barney Shearson Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
We have acted as special counsel for you, as sponsors (the "Sponsors") of the
Tax Exempt Securities Trust, Target Maturity Trust (National Series), Target
Maturity Trust (California Series) and Target Maturity Trust (New York Series)
(the "Trusts"), in connection with the issuance of units of fractional
undivided interest in the Trusts (the "Units") in accordance with the Trust
Indenture and Agreement and related Reference Trust Agreement relating to the
Trusts (the "Indenture").
We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents and instruments as
we have deemed necessary or advisable for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsors and (ii) the Units, when duly issued and delivered
by the Sponsors and the Trustee in accordance with the Indenture, will be
legally issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 3.1 to the
Registration Statement relating to the Units filed under the Securities Act of
1933 and to the use of our name in such Registration Statement and in the
related prospectus under the headings "Taxes", "New York Taxes" and "Legal
Opinion".
Very truly yours,
Davis Polk & Wardwell
<PAGE>
EXHIBIT 4.1
KENNY S&P EVALUATION SERVICES
A Division of Kenny Information Systems, Inc.
65 Broadway
New York, New York 10006-2511
Telephone: 212/770-4900
John R. Fitzgerald
Vice President
November 18, 1994
Smith Barney Inc.
1345 Avenue of the Americas
New York, N.Y. 10105
United States Trust Company
114 W. 47th Street
New York, N.Y. 10036
Re: Tax-Exempt Securities Trust
Target Maturity Trust
National Series
California Series
New York Series
Gentlemen:
We have examined Registration Statement File No. 33-56049 for the above-
captioned trusts. We hereby acknowledge that Kenny S&P Evaluation Services, a
division of Kenny Information Systems, Inc. is currently acting as the
evaluator for the trusts. We hereby consent to the use in the Registration
Statement of the reference to Kenny S&P Evaluation Services, a division of
Kenny Information Systems, Inc. as evaluator.
In addition, we hereby confirm that the ratings indicated in the Registration
Statement for the respective bonds comprising the trust portfolios are the
ratings indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter with the Securities
and Exchange Commission.
Sincerely,
John R. Fitzgerald
Vice President
