File No. 33-90228 CIK No. 941135
Securities and Exchange Commission
Washington, D. C. 20549-1004
Post-Effective
Amendment No. 2
to
Form S-6
For Registration under the Securities Act of 1933 of
Securities of Unit Investment Trusts Registered on
Form N-8B-2
Delaware-Voyageur Tax-Exempt Trust, Series 2
(Exact Name of Trust)
Delaware Management Company, Inc.
(Exact Name of Depositor)
One Commerce Square
Philadelphia, Pennsylvania 19103
(Complete address of Depositor's principal executive offices)
Delaware Management Company, Inc. Chapman and Cutler
Attention: George M. Chamberlain, Jr. Attention: Mark J. Kneedy
One Commerce Square 111 West Monroe Street
Philadelphia, Pennsylvania 19103 Chicago, Illinois 60603
(Name and complete address of agents for service)
( X ) Check if it is proposed that this filing will become effective on
June 30, 1997 pursuant to paragraph (b) of Rule 485.
<PAGE>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
COLORADO INSURED SERIES 2 -- 302,995 UNITS
OREGON INSURED SERIES 2 -- 257,308 UNITS
PROSPECTUS
Part One
Dated June 30, 1997
NOTE: PART ONE OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED
BY PART TWO.
In the opinion of Counsel, interest income to the Trusts and to
Unitholders, with certain exceptions, is exempt under existing law from all
Federal income taxes. In addition, the interest income is, in the opinion of
Special Counsel, exempt to the extent indicated from state and local income
taxes. Capital gains, if any, are subject to Federal tax.
THE TRUST
Delaware-Voyageur Tax-Exempt Trust, Series 2 (the "TRUST") consists of
a fixed portfolio of interest-bearing obligations issued by or on behalf of
municipalities and other governmental authorities within the states of Colorado
and Oregon, counties, municipalities, authorities and political subdivisions
thereof, the interest on which is, in the opinion of recognized bond counsel to
the issuing governmental authorities, exempt from all Federal income taxes and
from state and local income taxes under existing law. At February 28, 1997, each
Unit represented a 1/302,995 and 1/257,308 undivided interest, for Colorado
Insured and Oregon Insured, respectively, in the principal and net income of the
Trusts (see "The Trusts" in Part Two).
The Units being offered by this Prospectus are issued and outstanding
Units which have been purchased by the Sponsor in the secondary market or from
the Trustee after having been tendered for redemption. The profit or loss
resulting from the sale of Units will accrue to the Sponsor. No proceeds from
the sale of Units will be received by the Trusts.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units is equal to the net assets of
the Trust divided by the number of Units outstanding, plus a sales charge of
5.50% of the Public Offering Price (5.820% of the amount invested). At February
28, 1997 the Public Offering Price per Unit was $10.43 and $10.46 for Colorado
Insured and Oregon Insured, respectively (see "Public Offering" in Part Two).
Please retain all parts of this Prospectus for future reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
DELAWARE MANAGEMENT COMPANY, INC.
SPONSOR
<PAGE>
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
Estimated Current Return to Unitholders as of February 28, 1997 was
5.09% for Colorado Insured and 4.99% for Oregon Insured. Estimated Long-Term
Return to Unitholders as of February 28, 1997 was 4.84% for Colorado Insured and
4.64% for Oregon Insured. Estimated Current Return is calculated by dividing the
Estimated Net Annual Interest Income per Unit by the Public Offering Price.
Estimated Long-Term Return is calculated using a formula which (1) takes into
consideration and determines and factors in the relative weightings of the
market values, yields (which take into account the amortization of premiums and
the accretion of discounts) and estimated retirements of all of the Bonds in the
Trust; (2) takes into account a compounding factor and the expenses and sales
charge associated with each Unit of the Trust; and (3) takes into effect the
tax-adjusted yield from potential capital gains at the Date of Deposit. 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 Current
Return and Estimated Long-Term Return indicated above will be realized in the
future. Estimated Current Return and Estimated Long-Term Return are expected to
differ because the calculation of the Estimated Long-Term Return reflects the
estimated date and amount of principal returned while the Estimated Current
Return calculations include only Net Annual Interest Income and Public Offering
Price. The above figures are based on estimated per Unit cash flows. Estimated
cash flows will vary with changes in fees and expenses, with changes in current
interest rates, and with the principal prepayment, redemption, maturity, call,
exchange or sale of the underlying Bonds. See "Estimated Current Return and
Estimated Long-Term Return" in Part Two.
<PAGE>
<TABLE>
<CAPTION>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
SUMMARY OF ESSENTIAL INFORMATION AS OF FEBRUARY 28, 1997
SPONSOR: DELAWARE MANAGEMENT COMPANY, INC.
DISTRIBUTOR: DELAWARE DISTRIBUTORS, L.P.
EVALUATOR: MULLER DATA CORPORATION
TRUSTEE: THE CHASE MANHATTAN BANK
Colorado Oregon
Insured Insured
Series 2 Series 2
---------- ---------
<S> <C> <C>
Principal Amount (Par Value) of Bonds........................................ $2,965,000 $2,500,000
Number of Units.............................................................. 302,995 257,308
Fractional Undivided Interest in the Trust per Unit.......................... 1/302,995 1/257,308
Principal Amount (Par Value) of Bonds per Unit............................... $9.786 $9.716
Public Offering Price: Net Assets............................................ $2,988,970 $2,543,319
Net Asset Value Per Unit..................................................... $9.86 $9.88
Sales Charge 5.5% (5.781% and 5.865% of the Net Asset Value) per Unit(1)..... $.57 $.58
Public Offering Price per Unit(1)(2)......................................... $10.43 $10.46
Redemption Price per Unit(2)(3).............................................. $9.86 $9.88
Excess of Public Offering Price per Unit Over Redemption Price
per Unit................................................................. $.57 $.58
Minimum Value of the Trust under which Trust Agreement
may be terminated........................................................ $593,000 $500,000
Minimum Principal Distribution.................................$1.00 per Unit
First Settlement Date..........................................March 30, 1995
Mandatory Termination Date..................................December 31, 2044
Calculation of Estimated Net Annual Unit Income:
Estimated Annual Interest Income per Unit................................ $0.55661 $0.54924
Less: Estimated Annual Expense per Unit.................................. $0.02561 $0.02755
-------- --------
Estimated Net Annual Interest Income per Unit............................ $0.53100 $0.52169
Estimated Normal Monthly Distribution per Unit(4)............................ $0.04425 $0.04347
Estimated Daily Rate of Net Interest Accrual per Unit........................ $0.00147 $0.00145
Estimated Current Return Based on Public Offering Price(1)(4)(5)............. 5.09% 4.99%
Estimated Long-Term Return(1)(4)(5).......................................... 4.84% 4.64%
Trustee's Initial Annual Fee per $1,000 Principal Amount of Bonds(6)......... $2.00 $2.05
Evaluator's Annual Evaluation Fee per Unit................................... $0.00100 $0.00200
Record Dates..........................................First day of each month
Distribution Dates................................Fifteenth day of each month
<PAGE>
Evaluations for purpose of sale, purchase or redemption of Units are made as of
4:00 P.M. Eastern time on days of trading on the New York Stock Exchange next
following receipt of an order for a sale or purchase of Units or receipt by the
Trustee of Units tendered for redemption.
(1) The sales charge is decreased and the Estimated Current Return and
Estimated Long-Term Return are increased for transactions entitled to a
reduced sales charge. See "Public Offering--General."
(2) Anyone ordering Units for settlement after the First Settlement Date
will pay accrued interest from such date to the date of settlement
(normally five business days after order) less distributions from the
Interest Account subsequent to the First Settlement Date. After the
initial offering period, the Sponsor's Repurchase Price per Unit will
be determined as described under the caption "Public Offering--Public
Market."
(3) See "Rights of Unitholders--Redemption of Units."
(4) These figures are based on estimated per Unit cash flows. Estimated
cash flows will vary with changes in fees and expenses, with changes in
current interest rates and with the principal prepayment, redemption,
maturity, call, exchange or sale of the underlying Bonds. The estimated
cash flows for each Trust are available upon request at no charge from
the Sponsor.
(5) The Estimated Current Return is calculated by dividing the estimated
net annual interest income per Unit by the Public Offering Price. The
estimated net annual interest income per Unit will vary with changes in
fees and expenses of the Trustee, the Sponsor and the Evaluator and
with the principal prepayment, redemption, maturity, exchange or sale
of Bonds 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
determines and factors in the relative weightings of, the market
values, yields (which takes into account the amortization of premiums
and the accretion of discounts) and estimated retirements of all of the
Bonds in a Trust and (2) takes into account a compounding factor and
the expenses and sales charge associated with each Trust Unit. Since
the market values and estimated retirements of the Bonds and the
expenses of a Trust will change, there is no assurance that the present
Estimated Long-Term Return as indicated above will be realized in the
future. The Estimated Current Return and Estimated Long-Term Return are
expected to differ because the calculation of the Estimated Long-Term
Return reflects the estimated date and amount of principal returned
while the Estimated Current Return calculation includes only net annual
interest income and Public Offering Price.
(6) During the first year, the Trustee agreed to reduce its fee (and to the
extent necessary pay expenses of the Trusts) for Oregon Insured Series
2 in the amount of $.00013 per $1,000 Principal Amount of Bonds. The
Trustee has agreed to the foregoing to cover all or a portion of the
interest on any Bonds accruing prior to their expected dates of
delivery, since interest will not accrue to the benefit of Unitholders
of a Trust until such Bonds are actually delivered to the Trust. The
estimated net annual interest income per Unit will remain as indicated.
See "The Fund" and "Estimated Current Return and Estimated Long-Term
Return."
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Unitholders and Trustee
Delaware-Voyageur Tax-Exempt Trust, Series 2:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Colorado Insured Series 2 and Oregon Insured
Series 2 (Trusts within Delaware-Voyageur Tax-Exempt Trust, Series 2) as of
February 28, 1997, the related statements of operations, changes in net assets
and the supplementary information for the year ended February 28, 1997 and for
the period from March 23, 1995 (commencement of operations) to February 29,
1996. These financial statements and the supplementary information are the
responsibility of the Trusts' management. Our responsibility is to express an
opinion on these financial statements and the supplementary information based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Investments held in
custody are confirmed to us by the trustee. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Colorado Insured Series 2 and
Oregon Insured Series 2 at February 28, 1997, and the results of their
operations, changes in their net assets and the supplementary information for
the period stated in the first paragraph above, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 11, 1997
<PAGE>
<TABLE>
<CAPTION>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
STATEMENTS OF ASSETS AND LIABILITIES FEBRUARY 28, 1997
- ------------------------------------------------------------------------------------------------
COLORADO OREGON
INSURED INSURED
SERIES 2 SERIES 2
----------- -----------
<S> <C> <C>
ASSETS
Investments in securities, at market value
(cost: $2,881,482 and $2,446,999, respectively)
(note 3 to schedule of investments) .................... $ 2,988,970 $ 2,543,319
Interest receivable ........................................... 57,246 39,894
----------- -----------
Total assets ............................................. $ 3,046,216 $ 2,583,213
=========== ===========
LIABILITIES AND NET ASSETS
Bank overdraft ................................................ 42,387 26,798
Accrued dividends payable ..................................... 13,404 11,185
Accrued expenses payable ...................................... 1,455 1,911
----------- -----------
Total liabilities ........................................ 57,246 39,894
----------- -----------
Net assets (units of fractional undivided interest outstanding:
302,995, and 257,308, respectively):
Original cost to investors of 302,995 and 257,308
units, respectively (note B) ......................... 3,029,950 2,573,080
Less:
Gross underwriting commissions (note C) .............. (148,468) (126,081)
----------- -----------
Total .................................................... 2,881,482 2,446,999
Net unrealized appreciation of investments (note D) ........... 107,488 96,320
----------- -----------
Net assets ............................................... $ 2,988,970 $ 2,543,319
=========== ===========
Net asset value per unit (302,995 and 257,308 units,
respectively) .......................................... $ 9.86 $ 9.88
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------
COLORADO OREGON
INSURED INSURED
SERIES 2 SERIES 2
-------------------------- --------------------------
YEAR PERIOD FROM YEAR PERIOD FROM
ENDED MARCH 23, 1995* ENDED MARCH 23, 1995*
FEBRUARY 28, TO FEBRUARY 29, FEBRUARY 28, TO FEBRUARY 29,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment income, interest ................. $ 168,650 $ 155,064 $ 141,325 $ 129,621
--------- --------- --------- ---------
Expenses:
Trustee fees and expenses .............. 6,463 5,942 5,575 4,806
Evaluator fees ......................... 297 273 515 460
Accounting fees ........................ 1,000 1,000 1,000 1,000
--------- --------- --------- ---------
Total expenses ....................... 7,760 7,215 7,090 6,266
--------- --------- --------- ---------
Investment income, net ............... 160,890 147,849 134,235 123,355
--------- --------- --------- ---------
Unrealized gain (loss) in investments,
net (notes A and D)
Net change in unrealized appreciation
(depreciation) ..................... 3,128 104,360 (747) 97,067
--------- --------- --------- ---------
Net gain (loss) on investments ..... 3,128 104,360 (747) 97,067
--------- --------- --------- ---------
Net increase in net assets resulting
from operations .................. $ 164,018 $ 252,209 $ 133,488 $ 220,422
========= ========= ========= =========
- ------------------------------------
*Commencement of operations
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------
COLORADO OREGON
INSURED INSURED
SERIES 2 SERIES 2
------------------------------ ----------------------------
YEAR PERIOD FROM YEAR PERIOD FROM
ENDED MARCH 23, 1995* ENDED MARCH 23, 1995*
FEBRUARY 28, TO FEBRUARY 29, FEBRUARY 28, TO FEBRUARY 29,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations
Investment income, net ..................... $ 160,890 $ 147,849 $ 134,235 $ 123,355
Net change in unrealized appreciation
(depreciation) ....................... 3,128 104,360 (747) 97,067
----------- ----------- ----------- -----------
Net increase in net assets resulting
From operations ........................ 164,018 252,209 133,488 220,422
----------- ----------- ----------- -----------
Distributions to unitholders from (notes E):
Investment income, net ..................... (160,890) (147,849) (134,235) (123,355)
----------- ----------- ----------- -----------
Total distributions ...................... (160,890) (147,849) (134,235) (123,355)
----------- ----------- ----------- -----------
Total increase (decrease) in net assets . 3,128 104,360 (747) 97,067
Net assets:
Beginning of period ........................ 2,985,842 2,881,482 2,544,066 2,446,999
----------- ----------- ----------- -----------
End of period .............................. $ 2,988,970 $ 2,985,842 $ 2,543,319 $ 2,544,066
=========== =========== =========== ===========
- ------------------------------------
* Commencement of operations
See accompanying notes to financial statements.
</TABLE>
<PAGE>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
(A) The financial statements of Delaware-Voyageur Tax-Exempt Trust, Series
2 (formerly Voyageur Tax-Exempt Trust, Series 2) are prepared on the
accrual basis of accounting. Security transactions are accounted for on
the date the securities are purchased or sold. The Trust was organized
on March 23, 1995 and is registered under the Investment Company Act of
1940. The Trust will terminate on the mandatory termination date of
December 31, 2044.
(B) For financial reporting purposes, cost of the bonds reflects no
amortization or accretion of bond premium or discount.
(C) The gross underwriting commission represents the aggregate sales charge
paid in connection with the initial public offering.
(D) At February 28, 1997, the gross unrealized market appreciation was
$107,488 and $96,320 and the gross unrealized market depreciation was
$0 and $0 for Colorado Insured Series 2, and Oregon Insured Series 2,
respectively. The net unrealized market appreciation was $107,488 and
$96,320 for Colorado Insured Series 2, and Oregon Insured Series 2,
respectively.
(E) Distributions of net interest income to unitholders are paid monthly.
(F) During the current period units redeemed in Colorado Insured Series 2
and Oregon Insured Series 2 were offered in the secondary market.
(G) No provision for income taxes has been made because the Trust is not an
association taxable as a corporation for federal or state income tax
purposes. Each unitholder will be treated as the owner of a pro rata
portion of the Trust and will be taxed on his or her pro rata share of
the investment income and securities gains or losses, if any.
(H) The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of net
increases (decreases) in net assets from operations during the
reporting period. Actual results could differ from those estimates.
(I) Each Trust pays fees to Muller Data Corporation for acting as the
evaluator. The evaluator fee is paid in monthly installments and will
not exceed $0.001 and $0.002 per unit on an annual basis for Colorado
Insured Series 2 and Oregon Insured Series 2, respectively. Each Trust
also pays Trustee's fees and various out-of-pocket expenses.
<PAGE>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 28, 1997
(J) Supplementary Information
Select data for a unit of each Trust outstanding throughout each period
follows:
<TABLE>
<CAPTION>
COLORADO OREGON
INSURED INSURED
SERIES 2 SERIES 2
---------------------- ----------------------
PERIOD FROM PERIOD FROM
YEAR MARCH 23, YEAR MARCH 23,
ENDED 1995* TO ENDED 1995* TO
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income ........................ $ 0.56 $ 0.51 $ 0.55 $ 0.50
Expenses ............................... (0.03) (0.02) (0.03) (0.02)
-------- -------- -------- --------
Net investment income .................. 0.53 0.49 0.52 0.48
Income distributions ................... (0.53) (0.49) (0.52) (0.48)
-------- -------- -------- --------
0.00 0.00 0.00 0.00
Net change in unrealized appreciation
(depreciation) ....................... 0.01 0.34 (0.01) 0.38
-------- -------- -------- --------
Increase (decrease) in net asset value . 0.01 0.34 (0.01) 0.38
Net asset value, beginning of period ... 9.85 9.51 9.89 9.51
-------- -------- -------- --------
Net asset value, end of period ......... $ 9.86 $ 9.85 $ 9.88 $ 9.89
======== ======== ======== ========
- ------------------------------------
* Commencement of operations
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COLORADO INSURED SERIES 2
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1997
Aggregate
Ratings principal Title of bonds deposited Coupon rate Redemption Market
(1) amount in trust or contracted for and maturity features (2) value (3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(PERCENTAGE OF EACH INVESTMENT CATEGORY RELATES TO TOTAL NET ASSETS.)
COLORADO MUNICIPAL BONDS (100.0%):
GENERAL OBLIGATION (8.1%):
--------------------------------------------------------------------------------------
AAA/Aaa $250,000 Adams County Colorado School District 5.25% @ 2017 2003 @ 100 $242,700
No. 1, (Mapleton Public Schools), Adams 2013 @ 100 S.F. --------
County, Colorado, General Obligation
Refunding Bonds, Series 1993,
(MBIA Insured)#
EDUCATION REVENUE (25.5%):
---------------------------------------------------------------------------------------
AAA/Aaa 250,000 Auraria Higher Education Center, State of 5.30% @ 2012 2003 @ 101 247,180
Colorado, Parking Facilities System 2009 @ 100 S.F.
Refunding Revenue Bonds, Series 1993,
(FSA Insured)#
AAA/Aaa 500,000 State of Colorado, Department of Higher 6.00% @ 2019 2005 @ 100 514,355
Education, By State Board for Community
Colleges and Occupational Education,
Systemwide Revenue Bonds,
Series 1995, (AMBAC Insured)#
--------
761,535
--------
INDUSTRIAL REVENUE (17.0%):
---------------------------------------------------------------------------------------
AAA/Aaa 500,000 Adams County, Colorado, Pollution Control 5.875% @ 2014 2003 @ 101 509,640
Refunding Revenue Bonds, 1993 --------
Series A, (Public Service Company of
Colorado Project), (MBIA Insured)#
SALES AND USE TAX REVENUE (16.3%):
---------------------------------------------------------------------------------------
AAA/Aaa 465,000 City of Broomfield, Colorado, Sales and 6.00% @ 2015 2005 @ 100 486,297
Use Tax Revenue Bonds, Series 1995, --------
(AMBAC Insured)#
HEALTH CARE REVENUE (25.2%):
---------------------------------------------------------------------------------------
AAA/Aaa 500,000 Colorado Health Facilities Authority 5.875% @ 2023 2004 @ 102 508,945
Hospital Revenue Improvement and 2010 @ 100 S.F.
Refunding Bonds, (Boulder Community
Hospital Project), Series 1994B
(MBIA Insured)#
AAA/Aaa 250,000 Sisters of Charity Health Care Systems, 5.25% @ 2014 2004 @ 102 245,018
Inc., Colorado Health Facilities Authority 2006 @ 100 S.F.
Revenue Bonds, Series 1994,
(MBIA Insured)#
--------
753,963
--------
UTILITY REVENUE (7.9%):
---------------------------------------------------------------------------------------
AAA/Aaa 250,000 Municipal Subdistrict, Northern Colorado, 5.00% @ 2017 2004 @ 100 234,835
Water Conservancy District Water 2011 @ 100 S.F. --------
Revenue Refunding Bonds,
Series E, (AMBAC Insured)#
- ---------------------------------------------------------------------------------------------------------------
$2,965,000 Total Bonds (cost: $2,881,482) $2,988,970
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to schedules of investments.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OREGON INSURED SERIES 2
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1997
Aggregate
Ratings principal Title of bonds deposited Coupon rate Redemption Market
(1) amount in trust or contracted for and maturity features (2) value (3)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(PERCENTAGE OF EACH INVESTMENT CATEGORY RELATES TO TOTAL NET ASSETS.)
OREGON MUNICIPAL BONDS (100.0%):
GENERAL OBLIGATION (48.7%):
---------------------------------------------------------------------------------------
AAA/Aaa $500,000 City of Portland, Oregon, General Obligation 5.75% @ 2015 2005 @ 100 $ 511,135
Bonds, Series 1995A, (MBIA Insured)#
AAA/Aaa 500,000 Tualatin Hills Park and Recreation District, 5.75% @ 2012 2005 @ 100 515,185
Washington County, Oregon, General 2011 @ 100 S.F.
Obligation Bonds, Series 1995,
(MBIA Insured)#
AAA/Aaa 200,000 Washington County School District No. 88J 6.10% @ 2012 2005 @ 100 212,788
Sherwood, Oregon, General Obligation 2008 @ 100 S.F.
Bonds, Series 1994, (FSA Insured)
---------
1,239,108
---------
UTILITY REVENUE (31.0% ):
---------------------------------------------------------------------------------------
AAA/Aaa 500,000 City of McMinnville, Yamhill County, Oregon, 5.00% @ 2014 2004 @ 102 483,905
Sewerage System Revenue Bonds, 2010 @ 100 S.F.
Series 1994A, (FGIC Insured)#
AAA/Aaa 300,000 Emerald People's Utility District, Lane County 5.75% @ 2016 2002 @ 102 304,143
Oregon, Electric System Revenue 2013 @ 100 S.F.
Refunding Bonds, Series 1992,
(AMBAC Insured)#
---------
788,048
---------
EDUCATION REVENUE (10.4%):
---------------------------------------------------------------------------------------
AAA/Aaa 250,000 State of Oregon, Health, Housing, Education 6.00% @ 2013 2004 @ 102 263,993
and Cultural Facilities Authority, Revenue 2006 @ 100 S.F. ---------
Bonds, (Lewis & Clark College Project)
Series 1994A, (MBIA Insured)#
HEALTH CARE REVENUE (9.9%):
---------------------------------------------------------------------------------------
AAA/Aaa 250,000 Hospital Facility Authority of the Western 5.75% @ 2019 2004 @ 102 252,170
Lane Hospital District, Revenue Refunding 2013 @ 100 S.F. ---------
Bonds, Series 1994, (Sisters of St. Joseph
of Peace, Health and Hospital Services),
(MBIA Insured)#
- ---------------------------------------------------------------------------------------------------------------
$2,500,000 Total Bonds (cost: $2,446,999) $2,543,319
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to schedules of investments.
</TABLE>
<PAGE>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
NOTES TO SCHEDULES OF INVESTMENTS
FEBRUARY 28, 1997
(1) All ratings (unaudited) are by Standard & Poor's Corporation and/or
Moody's Investors Service. As a result of the insurance related to each
Bond, each Bond is rated "AAA" by Standard & Poor's and/or "Aaa" by
Moody's.
(2) Unless otherwise indicated, there is shown under this heading the year
in which each issue of bonds initially is redeemable and the redemption
price for that year; each such issue continues to be redeemable at
declining prices thereafter, but not below par. "S.F." indicates a
sinking fund has been or will be established with respect to an issue
of bonds. In addition, certain bonds in the portfolio may be redeemed
in whole or in part other than by operation of the stated redemption or
sinking fund provisions under certain unusual or extraordinary
circumstances specified in the instruments setting forth the terms and
provisions of such bonds. A sinking fund is a reserve fund accumulated
over a period of time for retirement of debt. A callable bond is one
which is subject to redemption prior to maturity at the option of the
issuer.
(3) The market value is determined by the evaluator on the basis of current
bid prices for the bonds. Determinations of the aggregate bid price of
the bonds, for the purposes of secondary market transactions by the
Sponsor and redemptions by the Trustee, will be made on each business
day on which the New York Stock Exchange is open for business.
(4) For financial reporting purposes the Trust does not amortize bond
premium and discount.
# Indicates Bond was issued at either an original issue discount or
purchased at a market discount.
<PAGE>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
PART ONE
MUST BE ACCOMPANIED BY PART TWO
--------------
PROSPECTUS
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Sponsor: Delaware Management Company, Inc.
One Commerce Square
Philadelphia, Pennsylvania 19103
Trustee: The Chase Manhattan Bank
4 New York Plaza
New York, New York 10004-2413
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, securities in any jurisdiction to any person to whom it is not
lawful to make such offer in such jurisdiction.
This Prospectus does not contain all the information set forth in the
registration statement 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.
<PAGE>
DELAWARE-VOYAGEUR TAX-EXEMPT TRUST SERIES
PROSPECTUS PART TWO OF THIS PROSPECTUS
PART TWO MAY NOT BE DISTRIBUTED
JUNE 13, 1997 WITHOUT PART ONE
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THE FUND. Delaware-Voyageur Tax-Exempt Trust Series (the "Fund")
consists of the underlying separate unit investment trusts set forth in Part One
of this Prospectus. The various trusts are collectively referred to herein as
the "Trusts." Territorial Insured Series and National Insured Series are
referred to herein as the "Insured National Trusts", while Arizona Insured
Series, Colorado Insured Series, Minnesota Insured Series, Oregon Insured Series
and Pennsylvania Insured Series are collectively referred to herein as the
"Insured State Trusts." Collectively, the Insured National Trusts and Insured
State Trusts may be referred to herein as the "Insured Trusts." Because not all
of the Bonds in the New Mexico Series are insured, New Mexico Series is not an
Insured State Trust. New Mexico Series and the Insured State Trusts,
collectively, may be referred to herein as the "State Trusts." Each Trust
consists of interest-bearing obligations issued by or on behalf of states and
territories of the United States and political subdivisions and authorities
thereof, the interest on which is, with certain exceptions, in the opinion of
recognized bond counsel to the issuing governmental authorities, exempt from all
Federal income taxes under existing law (the "Bonds"). In addition, the interest
income of each State Trust is, in the opinion of counsel, exempt to the extent
indicated from state and local taxes when held by residents of the state where
the issuers of Bonds in such State Trust are located. Investors should consult
their tax advisers to determine the extent to which such interest income is
exempt from taxation in their state of residence. Capital gains, if any, are
subject to Federal and state tax. All Bonds in the Insured Trusts have insurance
guaranteeing the payments of principal and interest, when due, or are escrowed
to maturity. All such insurance remains effective so long as the Bonds are
outstanding. IT SHOULD BE NOTED THAT THE INSURANCE RELATES ONLY TO THE BONDS IN
AN INSURED TRUST AND NOT TO THE UNITS OFFERED HEREBY OR TO THE MARKET VALUE
THEREOF. As a result of such insurance or escrow, the Bonds of each Insured
Trust are rated "AAA" by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's") and/or "Aaa" by Moody's
Investors Service, Inc. ("Moody's"). Both Standard & Poor's and Moody's have
indicated that their respective rating is not a recommendation to buy, hold or
sell Units nor does it take into account the extent to which expenses of an
Insured Trust or sales by an Insured Trust of Bonds for less than the purchase
price paid by such Trust will reduce payment to Unitholders of the interest and
principal required to be paid on such Bonds. See "Insurance on the Bonds in the
Insured Trusts." No representation is made as to any insurer's ability to meet
its commitments. NO INSURANCE POLICY HAS BEEN OBTAINED FOR ANY OF THE BONDS IN
THE NEW MEXICO SERIES; HOWEVER, CERTAIN OF THE BONDS CONTAINED THEREIN MAY BE
INSURED. Certain of the Bonds in certain of the Trusts may have been acquired at
prices which resulted in such Bonds being purchased at a discount from the
aggregate par value of such Bonds. Gains based upon the difference, if any,
between the value of such Bonds at maturity, redemption or sale and their
purchase price at a discount (plus earned original issue discount) may
constitute taxable ordinary income with respect to a Unitholder who is not a
dealer with respect to his Units.
UNITS OF THE TRUSTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED OR OTHERWISE PROTECTED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY AND INVOLVE INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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 INVESTOR IS ADVISED TO READ AND RETAIN BOTH PART ONE AND PART TWO OF THIS
PROSPECTUS FOR FUTURE REFERENCE.
<PAGE>
INVESTMENT OBJECTIVES OF THE FUND. The objectives of the Fund are
income exempt from Federal income tax and, in the case of the State Trusts,
Federal and state income tax (if any) and conservation of capital through an
investment in diversified portfolios of Federal and state tax-exempt
obligations. The Trusts may be an appropriate investment vehicle for investors
who desire to participate in a portfolio of tax-exempt fixed income securities
with greater diversification than they might be able to acquire individually. In
addition, securities of the type deposited in the Trusts are often not available
in small amounts. There is, of course, no guarantee that the Trusts will achieve
their objectives. The payment of interest and the preservation of principal are
dependent upon the continuing ability of the issuers and/or obligors of the
Bonds and of the insurers thereof to meet their respective obligations.
PUBLIC OFFERING PRICE. The Public Offering Price of the Units of each
Trust is equal to the aggregate bid price of the Bonds in such Trust's portfolio
and cash, if any, in the Principal Account held or owned by such Trust divided
by the number of Units outstanding, plus the applicable sales charge and accrued
interest, if any. If the Bonds in each Trust were available for direct purchase
by investors, the purchase price of the Bonds would not include the sales charge
included in the Public Offering Price of the Units. See "Public Offering."
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN. The Estimated
Current Return and Estimated Long-Term Return to Unitholders are as set forth
under "Summary of Essential Financial Information" in Part One of this
Prospectus. The methods of calculating Estimated Current Return and Estimated
Long-Term Return are set forth in the footnotes to the "Summary of Essential
Financial Information" in Part One of this Prospectus and under "Estimated
Current Return and Estimated Long-Term Return."
DISTRIBUTIONS. Unitholders will receive distributions on a monthly
basis. See "Rights of Unitholders-- Distributions of Interest and Principal."
Record dates will be the first day of each month. Distributions will be made on
the fifteenth day of the month subsequent to the respective record dates.
MARKET FOR UNITS. Although not obligated to do so, an affiliate of the
Sponsor, Delaware Distributors, L.P., intends to maintain a secondary market for
the Units at prices based upon the aggregate bid price of the Bonds in the
portfolio of a Trust. If such a market is not maintained and no other
over-the-counter market is available, a Unitholder will be able to dispose of
his Units through redemption at prices based upon the bid prices of the
underlying Bonds (see "Rights of Unitholders--Redemption of Units").
REINVESTMENT OPTION. Unitholders have the opportunity to have their
distributions reinvested into an open-end management investment company as
described herein. See "Rights of Unitholders-- Reinvestment Option."
RISK FACTORS. An investment in the Trusts should be made with an
understanding of the risks associated therewith, including, among other factors,
the inability of the issuer or an insurer to pay the principal of or interest on
a Bond when due, volatile interest rates, early call provisions, and changes to
the tax status of the Bonds. See "The Trusts--Risk Factors" for the applicable
Trust and "Risk Factors."
<PAGE>
THE FUND
GENERAL. The Fund was created under the laws of the State of New York
pursuant to a Trust Agreement (the "Trust Agreement"), dated each Trust's
Initial Date of Deposit, as defined in "Summary of Essential Financial
Information"in Part One of this Prospectus, with Delaware Management Company,
Inc. as Sponsor, Muller Data Corporation, as Evaluator, and The Chase Manhattan
Bank, as Trustee.
The Fund consists of separate unit investment trusts, each having a
portfolio of interest-bearing obligations issued by or on behalf of states and
territories of the United States, and political subdivisions and authorities
thereof, the interest on which is, in the opinion of recognized bond counsel to
the issuing governmental authorities, exempt from all Federal income taxes under
existing law. All issuers of Bonds in a State Trust are located in the State for
which such Trust is named or in United States territories or possessions and
their public authorities; consequently, in the opinion of counsel, the related
interest earned on such Bonds is exempt to the extent indicated from state and
local taxes of such State or territory. In addition, in the case of an Insured
National Trust, interest income may also be exempt from certain state and local
taxes for residents of various states. Illinois, Indiana, Virginia and
Washington residents may only purchase Units of an Insured National Trust by
this Prospectus.
Each Unit represents the fractional undivided interest in each Trust as
indicated under "Summary of Essential Financial Information" in Part One of this
Prospectus. To the extent that any Units are redeemed by the Trustee, the
fractional undivided interest in a Trust represented by each unredeemed Unit
will increase, although the actual interest in such Trust represented by such
fraction will remain unchanged. Units will remain outstanding until redeemed
upon tender to the Trustee by Unitholders, which may include the Sponsor, or
until the termination of the Trust Agreement.
REPLACEMENT BONDS. Because certain of the Bonds in a Trust may from
time to time under certain circumstances be sold or redeemed or will mature in
accordance with their terms and because the proceeds from such events will be
distributed to Unitholders and will not be reinvested, no assurance can be given
that a Trust will retain for any length of time its present size and
composition. Neither the Sponsor nor the Trustee shall be liable in any way for
any default, failure or defect in any Bond. In the event of a failure to deliver
any Bond that has been purchased for a Trust under a contract, including those
securities purchased on a "when, as and if issued" basis ("Failed Bonds"), the
Sponsor is authorized under the Trust Agreement to direct the Trustee to acquire
other securities ("Replacement Bonds") to make up the original corpus of the
affected Trust.
The Replacement Bonds must be purchased within 20 days after delivery
of the notice of the failed contract and the purchase price (exclusive of
accrued interest) may not exceed the amount of funds reserved for the purchase
of the Failed Bonds. The Replacement Bonds shall (i) be tax-exempt bonds, issued
by states or territories of the United States or political subdivisions thereof
and shall have the benefit of an exemption from state taxation of interest to an
extent equal to or greater than that of the bonds they replace, with fixed
maturity dates substantially the same as those of the Failed Bonds; (ii) be
purchased at a price that results in a yield to maturity and in a current
return, in each
<PAGE>
case as of the Initial Date of Deposit, at least equal to that of the Failed
Bonds; (iii) be payable in U.S. currency; (iv) not be when, as and if issued
bonds; (v) be rated at least"AAA" by Standard & Poor's and/or "Aaa" by Moody's
in the case of an Insured Trust and at least "BBB" by Standard & Poor's and/or
"Baa" by Moody's in the case of an uninsured Trust; and (vi) be insured by one
of the Insurers if such Bonds are purchased for an Insured Trust. Whenever a
Replacement Bond has been acquired for a Trust, the Trustee shall, within five
days thereafter, notify all Unitholders of such Trust of the acquisition of the
Replacement Bond and shall, on the next monthly distribution date which is more
than 30 days thereafter, make a pro rata distribution of the amount, if any, by
which the cost to the affected Trust of the Failed Bond exceeded the cost of the
Replacement Bond plus accrued interest. Once the original corpus of a Trust is
acquired, the Trustee will have no power to vary the investment of the Trust;
i.e., the Trust will have no managerial power to take advantage of market
variations to improve a Unitholder's investment.
If the right of limited substitution described in the preceding
paragraph shall not be utilized to acquire Replacement Bonds in the event of a
failed contract, the Sponsor will refund the sales charge attributable to such
Failed Bonds to all Unitholders of the affected Trust and distribute the
principal and accrued interest (at the coupon rate of such Failed Bonds to the
date the Failed Bonds are removed from the Trust) attributable to such Failed
Bonds not later than the next Distribution Date following such removal or such
earlier time as the Trustee in its sole discretion deems to be in the interest
of the Unitholders. In the event a Replacement Bond should not be acquired by a
Trust, the estimated net annual interest income per Unit for the Trust would be
reduced and the Estimated Current Return and the Estimated Long-Term Return
thereon might be lowered. In addition, Unitholders should be aware that they may
not be able at the time of receipt of such principal to reinvest such proceeds
in other securities at a yield equal to or in excess of the yield which such
proceeds were earning to Unitholders in the affected Trust.
INVESTMENT OBJECTIVES AND PORTFOLIO SELECTION
The objectives of the Fund are to gain interest income exempt from
Federal income tax and, in the case of a State Trust, Federal and state income
taxation and to conserve capital through an investment in diversified portfolios
of Federal and state tax-exempt obligations. There is, of course, no guarantee
that the Trusts will achieve their objectives. The Fund may be an appropriate
investment vehicle for investors who desire to participate in a portfolio of
tax-exempt fixed income securities with greater diversification than they might
be able to acquire individually. In addition, securities of the type deposited
in the Fund are often not available in small amounts.
Insurance guaranteeing the timely payment, when due, of all principal
and interest on the Bonds in each Insured Trust has been obtained by the issuer
of such Bonds, by a prior owner of such Bonds or by the Sponsor prior to the
deposit of such Bonds in such Insured Trust from one of several insurance
companies (the "Insurers"). Certain Bonds may be escrowed to maturity. No
representation is made as to any Insurer's ability to meet its commitments. All
Bonds insured by an Insurer receive a "AAA" rating by Standard & Poor's and a
"Aaa" rating by Moody's. All Bonds selected for an uninsured Trust were rated in
no case less than "BBB" by Standard & Poor's or "Baa"
<PAGE>
by Moody's. See "Description of Bond Ratings." NO PORTFOLIO INSURANCE HAS BEEN
OBTAINED BY THE SPONSOR FOR BONDS CONTAINED IN THE NEW MEXICO SERIES.
In selecting Bonds for the Trusts the following factors, among others,
were considered by the Sponsor: (i) either the Standard & Poor's rating of the
securities was in no case less than AAA in the case of the Insured Trusts and
BBB in the case of the uninsured Trusts, or the Moody's rating of the Securities
was in no case less than Aaa in the case of the Insured Trusts and Baa in the
case of the uninsured Trusts, including provisional or conditional ratings,
respectively, or, if not rated, the Securities had, in the opinion of the
Sponsor, credit characteristics sufficiently similar to the credit
characteristics of interest-bearing tax-exempt obligations that were so rated as
to be acceptable for acquisition by the Fund, (ii) whether the Bonds are insured
by an Insurer in the case of an Insured Trust, (iii) the prices of the Bonds
relative to other bonds of comparable quality and maturity and (iv) the
diversification of Bonds as to purpose of issue and location of issuer, (v) with
respect to the Insured Trusts, the availability and cost of insurance for the
prompt payment of principal and interest, when due, on the Bonds. Subsequent to
a Trust's Initial Date of Deposit, a Bond may cease to be rated or its rating
may be reduced below either the applicable Standard & Poor's or Moody's ratings
set forth above or both. Neither event requires elimination of such Bonds from
the portfolio of a Trust but may be considered in the Sponsor's determination as
to whether or not to direct the Trustee to dispose of the Bonds. See "Trust
Administration-- Portfolio Administration."
To the best knowledge of the Sponsor, there is no litigation pending as
of the date of this Prospectus in respect of any Bonds which might reasonably be
expected to have a material adverse effect upon the Fund or any of the Trusts.
At any time after the date of this Prospectus, litigation may be initiated on a
variety of grounds with respect to Bonds in the Fund. Such litigation, as, for
example, suits challenging the issuance of pollution control revenue bonds under
environmental protection statutes, may affect the validity of such Bonds or the
tax-free nature of the interest thereon. While the outcome of litigation of such
nature can never be entirely predicted, the Fund has received or will receive
opinions of bond counsel to the issuing authorities of each Bond on the date of
issuance to the effect that such Bonds have been validly issued and that the
interest thereon is exempt from Federal and applicable state income taxation. In
addition, other factors may arise from time to time which potentially may impair
the ability of issuers to meet obligations undertaken with respect to the Bonds.
THE TRUSTS
RISK FACTORS SPECIFIC TO ARIZONA. The following brief summary regarding
the economy of Arizona is based upon information drawn from publicly available
sources and is included for the purpose of providing the information about
general economic conditions that may or may not affect issuers of the Arizona
Bonds. The Sponsor has not independently verified any of the information
contained in such publicly available documents.
Arizona is the nation's sixth largest state in terms of area. Arizona's
main economic/employment sectors include services, trade, tourism and
manufacturing. Mining and
<PAGE>
agriculture are also significant, although they tend to be more capital than
labor intensive. Services is the single largest economic sector. Many of these
jobs are directly related to tourism.
Employment in the services sector increased 7.3% during 1995 and is
projected to increase 6.2% for 1996 and 6.0% for 1997. Construction employment
showed an 8.3% job growth in 1995 with projections in job growth for 1996 and
1997 declining to 6.5% and 4.4%, respectively. Trade employment also had a high
increase in job growth in 1995 at 7.7%, with 1996 and 1997 estimates at 4.4%,
and 4.2%, respectively. Overall, Arizona's wage and salary employment grew 5.4%
in 1995 and is expected to increase 4.3% in 1996, 3.7% in 1997, and 3.0% in
1998-1999. This translates into an increase of over 153,000 new jobs through
1997. Total employment growth for Arizona from 1995-96 was 4.2%, which compares
favorably with the national figure of 2.3% during 1995-96. Arizona's economy is
expected to continue to show moderate growth, albeit at slower rates over the
next few years.
The unemployment rate in Arizona as of January 1997 was 5.4%. This is
lower than the national rate of 5.9% in January 1997.
In 1986, the value of Arizona real estate began a steady decline,
reflecting a market which had been overbuilt in the previous decade with a
resulting surplus of completed inventory. This decline adversely affected both
the construction industry and those Arizona financial institutions which had
aggressively pursued many facets of real estate lending. In the near future,
Arizona's financial institutions are likely to continue to experience problems
until the excess inventories of commercial and residential properties are
absorbed. The problems of the financial institutions have adversely affected
employment and economic activity. Longer-term prospects are brighter. Arizona
has been, and is projected to continue to be, one of the fastest growing areas
in the United States. Over the last several decades, the State has outpaced most
other regions of the country in virtually every major category of growth,
including population, personal income, gross state product and job creation.
Arizona's per capita personal income in 1994 and 1995 was $19,389 and
$20,489, respectively, a 5.7% increase. The national increase for the same
period was 5.3%. Arizona ranked third in the nation in personal income growth
during 1990-95. Personal income growth for Arizona is estimated at 8% in 1996,
6.7% in 1997, 6.1% in 1998, and 5.5% in 1999.
BUDGETARY PROCESS. Arizona operates on a fiscal year beginning July 1
and ending June 30. Fiscal Year 1996 refers to the year ending June 30, 1996.
Arizona began fiscal year 1996 with a $269.5 million cash surplus.
Total sources of funds in the general fund for fiscal year 1996 were $4,933.0
million. Total expenditures were $4,533.1 million, leaving a cash surplus for
fiscal year 1997 of $399.9 million. This was 50% higher than projected and set a
record for the State. That record balance did not include $235 million in the
Budget Stabilization Fund and $14.1 million in the Medical Services
Stabilization Fund.
Total revenue for the General Fund in fiscal year 1996 was $4.663
billion. Approximately 45% of this budgeted revenue came from sales and use
taxes, 42% from income taxes (individual and corporate), and 4% from property
taxes. All taxes totaled approximately $4.408 billion, or
<PAGE>
94.5% of General Fund revenues. Non-tax revenue includes items such as income
from state lottery, licenses, fees and permits, and interest.
For fiscal year 1996, General Fund expenditures totaled $4.378 billion.
These expenditures fell into the following major categories: education 58%
($2.527 billion), health and welfare 23% ($1.032 billion), protection and safety
10% ($469.6 million), general government 6% ($273.1 million), and inspection and
regulation, transportation, and natural resources 3% ($149.6 million).
Fiscal year 1997 revenues will most likely be impacted by a $200
million property tax reduction in 1996. This reduction has reduced Fiscal year
1997 revenues by almost 3.2%; yet, General Fund revenues are expected to
increase 2.4% from fiscal year 1996. Total revenues in the General Fund for
fiscal year 1997 are forecast at $4.776 billion. General Fund expenditures are
estimated at $4.771 billion. Total sources of funds for fiscal year 1997 are
estimated at $5,176.0 million with expenditures at $4,921.1 million, leaving a
projected $254.9 million cash surplus for fiscal year 1998. However, fiscal year
1998 ending balance is projected at only $11.2 million. The Budget Stabilization
Fund is expected to grow to $246.7 million at the end of fiscal year 1998. The
Medical Services Stabilization Fund is estimated at $74.2 million for fiscal
year 1998 and $17.2 million is projected for the Temporary Assistance
Stabilization Fund. General Fund revenues for fiscal year 1998 are forecast to
increase 3.4% to $4.939 billion, with expenditures at $4.94 billion.
Most or all of the Bonds of the Arizona Trust are not obligations of
the State of Arizona, and are not supported by the State's taxing powers. The
particular source of payment and security for each of the Bonds is detailed in
the instruments themselves and in related offering materials. There can be no
assurances, however, with respect to whether the market value or marketability
of any of the Bonds issued by an entity other than the State of Arizona will be
affected by the financial or other condition of the State or of any entity
located within the State. In addition, it should be noted that the State of
Arizona, as well as counties, municipalities, political subdivisions and other
public authorities of the state, are subject to limitations imposed by Arizona's
constitution with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the state legislature cannot appropriate revenues in
excess of 7% of the total personal income by the state in any fiscal year. These
limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
On July 21, 1994, the Arizona Supreme Court rendered its opinion in
ROOSEVELT ELEMENTARY SCHOOL DISTRICT NUMBER 66, ET AL V. DIANNE BISHOP, ET AL
(the "Roosevelt Opinion"). In this opinion, the Arizona Supreme Court held that
the present statutory financing scheme for public education in the State of
Arizona does not comply with the Arizona constitution. Subsequently, the Arizona
School Boards Association, with the approval of the appellants and the appellees
to the Roosevelt Opinion, and certain Arizona school districts, filed with the
Arizona Supreme Court motions for clarification of the Roosevelt Opinion,
specifically with respect to seeking prospective application of the Roosevelt
Opinion. On July 29, 1994, the Arizona Supreme Court clarified the Roosevelt
Opinion to hold that such opinion will have prospective effect only.
Certain other circumstances are relevant to the market value,
marketability and payment of any hospital and health care revenue bonds in the
Arizona Trust. The Arizona Legislature has in the
<PAGE>
past sought to enact health care cost control legislation. Certain other health
care regulatory laws have expired. It is expected that the Arizona Legislature
will at future sessions continue to attempt to adopt legislation concerning
health care cost control and related regulatory matters. The effect of any such
legislation or of the continued absence of any legislation restricting hospital
bed increases and limiting new hospital construction on the ability of Arizona
hospitals and other health care providers to pay debt service on their revenue
bonds cannot be determined at this time.
Arizona does not participate in the federally administered Medicaid
program. Instead, the state administers an alternative program, Arizona Health
Care Cost Containment System ("AHCCCS"), which provides health care to indigent
persons meeting certain financial eligibility requirements, through managed care
programs. In fiscal year 1996, AHCCCS was financed approximately 55% by federal
funds and 45% by state funds.
In 1996, voters in Arizona passed an initiative (Proposition 203) which
provides for an expansion of eligibility for AHCCCS. For 1997, the Executive
recommended an $8.3 million supplemental to the AHCCCS for disproportionate
share hospital payments. Actual expenditures for the program in fiscal year 1996
were $128.9 million, and are projected at $135.3 million in fiscal year 1997.
Under state law, hospitals retain the authority to raise rates with
notification and review by, but not approval from, the Department of Health
Services. Hospitals in Arizona have experienced profitability problems along
with those in other states. At least two Phoenix-based hospitals have defaulted
on or reported difficulties in meeting their bond obligations in recent years.
Insofar as tax-exempt Arizona public utility pollution control revenue
bonds are concerned, the issuance of such bonds and the periodic rate increases
needed to cover operating costs and debt service are subject to regulation by
the Arizona Corporation Commission, the only significant exception being the
Salt River Project Agricultural Improvement and Power District which, as a
Federal instrumentality, is exempt from rate regulation. On July 15, 1991,
several creditors of Tucson Electric Power Company ("Tucson Electric") filed
involuntary petitions under Chapter 11 of the U.S. Bankruptcy Code to force
Tucson Power to reorganize under the supervision of the bankruptcy court. On
December 31, 1991, the Bankruptcy Court approved the utility's motion to dismiss
the July petition, after five months of negotiations between Tucson Electric and
its creditors to restructure the utility's debts and other obligations. In
December 1992, Tucson Electric announced that it had completed its financial
restructuring. In January 1993, Tucson Electric asked the Arizona Corporation
Commission for a 9.3% average rate increase. Tucson Electric services
approximately 270,000 customers, primarily in the Tucson area. Inability of any
regulated public utility to secure necessary rate increases could adversely
affect, to an indeterminable extent, its ability to pay debt service on its
pollution control revenue bonds.
Based on a recent U.S. Supreme Court ruling, the State has determined
to refund $197 million, including statutory interest, in State income taxes
previously collected from Federal retirees on their pensions. This payment will
be made over a four-year period beginning with approximately $14.6 million in
tax refunds in fiscal year 1994. A combination of tax refunds and tax credits
will be used to satisfy this liability.
<PAGE>
ARIZONA STATE TAXATION. For a discussion of the Federal tax status of
income earned on Arizona Trust Units, see "Tax Status."
The assets of the Arizona Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Arizona (the "State"), its
political subdivisions and authorities (the "Bonds"), provided the interest on
such Bonds received by the Trust is exempt from State income taxes.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing law:
1. For Arizona income tax purposes, each Unitholder will be treated as
the owner of a pro rata portion of the Arizona Trust, and the income of the
Arizona Trust therefore will be treated as the income of the Unitholder under
State law.
2. For Arizona income tax purposes, interest on the Bonds which is
excludable from Federal gross income and which is exempt from Arizona income
taxes when received by the Arizona Trust, and which would be excludable from
Federal gross income and exempt from Arizona income taxes if received directly
by a Unitholder, will retain its status as tax-exempt interest when received by
the Arizona Trust and distributed to the Unitholders.
3. To the extent that interest derived from the Arizona Trust by a
Unitholder with respect to the Bonds is excludable from Federal gross income,
such interest will not be subject to Arizona income taxes.
4. Each Unitholder will receive taxable gain or loss for Arizona income
tax purposes when Bonds held in the Arizona Trust are sold, exchanged, redeemed
or paid at maturity, or when the Unitholder redeems or sells Units, at a price
that differs from original cost as adjusted for amortization of Bond discount or
premium and other basis adjustments, including any basis reduction that may be
required to reflect a Unitholder's share of interest, if any, accruing on Bonds
during the interval between the Unitholder's settlement date and the date such
Bonds are delivered to the Arizona trust, if later.
5. Amounts paid by the insurer under an insurance policy or policies
issued to the Arizona Trust, if any, with respect to the Bonds in the Arizona
Trust which represent maturing interest on defaulted Bonds held by the Trustee
will be exempt from State income taxes if, and to the same extent as, such
interest would have been so exempt if paid by the issuer of the defaulted Bonds
provided that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the reasonable
expectation that the issuer of the obligations, rather than the insurer, will
pay debt service on the Bonds.
6. Arizona law does not permit a deduction for interest paid or
incurred on indebtedness incurred or continued to purchase or carry Units in the
Arizona Trust, the interest on which is exempt from Arizona income taxes.
7. Neither the Bonds nor the Units will be subject to Arizona property
taxes, sales tax or use tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Arizona law. Ownership of the Units may result in
collateral Arizona tax consequences
<PAGE>
to certain taxpayers. Prospective investors should consult their tax advisors as
to the applicability of any such collateral consequences.
RISK FACTORS SPECIFIC TO COLORADO. The State Constitution requires that
expenditures for any fiscal year not exceed revenues for such fiscal year. By
statute, the amount of General Fund revenues available for appropriation is
based upon revenue estimates which, together with other available resources,
must exceed annual appropriations by the amount of the unappropriated reserve
(the "Unappropriated Reserve"). The Unappropriated Reserve requirement for
fiscal year 1991, 1992 and 1993 was set at 3% of total appropriations from the
General Fund. For fiscal years 1994 and thereafter, the Unappropriated Reserve
requirement is set at 4%. In addition to the Unappropriated Reserve, a
constitutional amendment approved by Colorado voters in 1992 requires the State
and each local government to reserve a certain percentage of its fiscal year
spending (excluding bonded debt service) for emergency use (the "Emergency
Reserve"). The minimum Emergency Reserve is set at 2% for 1994 and 3% for 1995
and later years. For fiscal year 1992 and thereafter, General Fund
appropriations are also limited by statute to an amount equal to the cost of
performing certain required reappraisals of taxable property plus an amount
equal to the lesser of (i) five percent of Colorado personal income or (ii) 106%
of the total General Fund appropriations for the previous fiscal year. This
restriction does not apply to any General Fund appropriations which are required
as a result of a new federal law, a final state or federal court order or moneys
derived from the increase in the rate or amount of any tax or fee approved by a
majority of the registered electors of the State voting at any general election.
In addition, the statutory limit on the level of General Fund appropriations may
be exceeded for a given fiscal year upon the declaration of a State fiscal
emergency by the State General Assembly.
The 1995 fiscal year ending General Fund balance was $486.7 million,
which was $260.7 million over the combined Unappropriated Reserve and Emergency
Reserve requirement. The 1996 fiscal year ending General Fund balance was $368.5
million, or $211.8 million over the required Unappropriated Reserve and
Emergency Reserve. Based on March 20, 1997, estimates, the 1997 fiscal year
ending General Fund balance is expected to be $433.3 million, or $267.2 million
over the required Unappropriated Reserve and Emergency Reserve. The March 20,
1997 estimates show fiscal year 1998 total revenues at $4,795.5 million and
expenditures at $4,417.2 million, with an ending balance of $382.0 million, or
$205.3 million over the required Unappropriated Reserve and Emergency Reserve.
On November 3, 1992, voters in Colorado approved a constitutional
amendment (the "Amendment") which, in general, became effective December 31,
1992, and which could restrict the ability of the State and local governments to
increase revenues and impose taxes. The Amendment applies to the State and all
local governments, including home rule entities ("Districts"). Enterprises,
defined as government-owned businesses authorized to issue revenue bonds and
receiving under 10% of annual revenue in grants from all Colorado state and
local governments combined, are excluded from the provisions of the Amendment.
The provisions of the Amendment are unclear and have required judicial
interpretation. Among other provisions, beginning November 4, 1992, the
Amendment requires voter approval prior
<PAGE>
to tax increases, creation of debt, or mill levy or valuation for assessment
ratio increases. The Amendment also limits increases in government spending and
property tax revenues to specified percentages. The Amendment requires that
District property tax revenues yield no more than the prior year's revenues
adjusted for inflation, voter approved changes and (except with regard to school
districts) local growth in property values according to a formula set forth in
the Amendment. School districts are allowed to adjust tax levies for changes in
student enrollment. Pursuant to the Amendment, local government spending is to
be limited by the same formula as the limitation for property tax revenues. The
Amendment limits increases in expenditures from the State General Fund and
program revenues (cash funds) to the growth in inflation plus the percentage
change in State population in the prior calendar year. The basis for spending
and revenue limits for each fiscal year is the prior fiscal year's spending and
property taxes collected in the prior calendar year. Debt service changes,
reductions and voter-approved revenue changes are excluded from the calculation
basis. The Amendment also prohibits new or increased real property transfer tax
rates, new State real property taxes and local District income taxes.
Litigation concerning several issues relating to the Amendment was
filed in the Colorado courts. The litigation dealt with three principal issues:
(i) whether Districts can increase mill levies to pay debt service on general
obligation bonds without obtaining voter approval; (ii) whether a multi-year
lease-purchase agreement subject to annual appropriations is an obligation which
requires voter approval prior to execution of the agreement; and (iii) what
constitutes an "enterprise" which is excluded from the provisions of the
Amendment. In September, 1994, the Colorado Supreme Court held that Districts
can increase mill levies to pay debt service on general obligation bonds issued
after the effective date of the Amendment; in June 1995, the Colorado Supreme
Court validated mill levy increases to pay general obligation bonds issued prior
to the Amendment. In late 1994, the Colorado Court of Appeals held that
multi-year lease-purchase agreements subject to annual appropriation do not
require voter approval. The time to file an appeal in that case has expired.
Finally, in May, 1995, the Colorado Supreme Court ruled that entities with the
power to levy taxes may not themselves be "enterprises" for purposes of the
Amendment; however, the Court did not address the issue of how valid enterprises
may be created. Litigation in the "enterprise' arena may be filed in the future
to clarify these issues.
According to the COLORADO ECONOMIC PERSPECTIVE, THIRD QUARTER, FY
1996-97, MARCH 20, 1997 (the "Economic Report"), inflation for 1995 was 4.3% and
population grew at the rate of 2.3% in Colorado. Accordingly, under the
Amendment, increases in State expenditures during the 1997 fiscal year will be
limited to 6.6% over expenditures during the 1996 fiscal year. The limitation
for the 1998 fiscal year is 5.5%, based on inflation of 3.5% for 1996 and
population growth of 2.0% during 1996. The 1996 fiscal year is the base year for
calculating the limitation for the 1997 fiscal year. For the 1996 fiscal year,
General Fund revenues totaled $4,230.8 million and program revenues (cash funds)
totaled $1,893.5 million, resulting in total base revenues of $6,124.3 million.
Expenditures for the 1997 fiscal year, therefore, cannot exceed $6,528.5
million. The 1997 fiscal year General Fund and program revenues (cash funds) are
projected to be only $6,527.0 million, or $1.5 million less than expenditures
allowed under the spending limitation. This is the closest the State has come to
the limit since its implementation in 1992.
<PAGE>
There is also a statutory restriction on the amount of annual increases
in taxes that the various taxing jurisdictions in Colorado can levy without
electoral approval. This restriction does not apply to taxes levied to pay
general obligation debt.
As the State experienced revenue shortfalls in the mid-1980s, it
adopted various measures, including impoundment of funds by the Governor,
reduction of appropriations by the General Assembly, a temporary increase in the
sales tax, deferral of certain tax reductions and inter-fund borrowings. On a
GAAP basis, the State had General Fund balances (before reserves) at June 30 of
approximately $326.6 million in fiscal year 1993, $405.1 million in fiscal year
1994, $486.7 million in fiscal year 1995 and $368.5 million in fiscal year 1996.
The fiscal year 1997 ending General Fund balance (before reserves) is projected
to be $433.3 million.
Revenues for the fiscal year ending June 30, 1996, showed Colorado's
general fund continuing to slow. Revenues grew by $272.3 million, to $4,268.7
million, a 6.8% increase from 1995. However, this figure was down from the
fiscal year 1995 pace of 7.3%. General Fund expenditures rose substantially and
exceeded revenues by $142.5 million. Reasons for this consist of a change in how
the state manages its emergency reserve, and a significant increase in the
transfer of reserves to the Capital Construction Fund, and the Police and Fire
Pension Association (increases of $29 million and $32 million, respectively).
For fiscal year 1996, the following tax categories generated the
following respective revenue percentages of the State's $4,268.7 million total
gross receipts: individual income taxes represented 54.3% of gross fiscal year
1996 receipts; sales, use and other excise taxes represented 31% of gross fiscal
year 1996 receipts; and corporate income taxes represented 4.8% of gross fiscal
year 1996 receipts. The percentages of General Fund revenue generated by type of
tax for fiscal year 1997 are not expected to be significantly different from
fiscal year 1996 percentages.
For fiscal year 1997, General Fund revenues are projected at $4,602.0
million. Revenue growth is expected to increase 7.8% over FY 1996 actual
revenues. General fund expenditures are estimated at $4,151.9 million. The
ending General Fund balance for fiscal year 1997, after reserve set-asides, is
$267.2 million.
Under its constitution, the State of Colorado is not permitted to issue
general obligation bonds secured by the full faith and credit of the State.
However, certain agencies and instrumentalities of the State are authorized to
issue bonds secured by revenues from specific projects and activities. The State
enters into certain lease transactions which are subject to annual renewal at
the option of the State. In addition, the State is authorized to issue
short-term revenue anticipation notes. Local governmental units in the State are
also authorized to incur indebtedness. The major source of financing for such
local government indebtedness is an ad valorem property tax. In addition, in
order to finance public projects, local governments in the State can issue
revenue bonds payable from the revenues of a utility or enterprise or from the
proceeds of an excise tax, or assessment bonds payable from special assessments.
Colorado local governments can also finance public projects through leases which
are subject to annual appropriation at the option of the local government. Local
governments in Colorado also issue tax anticipation notes. The Amendment
<PAGE>
requires prior voter approval for the creation of any multiple fiscal year debt
or other financial obligation whatsoever, except for refundings at a lower rate
or obligations of an enterprise.
Based on data published by the Colorado Department of Labor and
Employment, total wage and salary employment in 1996 was 1896.9 million. This
was an increase of 62,500 from 1995. Services and trade were the number one and
two largest growing industries in Colorado in 1996, adding 27,700 (5.2%
increase) and 11,200 (2.5% increase) employees, respectively. Construction
reported the largest percentage gain from 1995 to 1996, at 8.8%, with an
additional 9,000 employees. Mining continued to be the weakest industry sector,
dropping 9% or 1,200 employees in 1996.
The annual average unemployment rate in Colorado from 1994 to 1996 has
remained stable at 4.2%. In 1996, the unemployment rate for the nation was 5.4%.
Colorado's job growth rate increased 3.4% in 1996, a decrease from the 4.5%
growth rate in 1995. In comparison, the job growth rate for the United States in
1995 and 1996 was 2.7% and 2.0%, respectively.
Personal income rose 6.6% in Colorado during 1996 as compared with 5.5%
for the nation as a whole. In 1997, Colorado's personal income is expected to
rise to 6.9%, outpacing the nation's 1997 estimated rate of 5.4%.
Economic conditions in the State may have continuing effects on other
governmental units within the State (including issuers of the Bonds in the
Colorado Trust), which, to varying degrees, have also experienced reduced
revenues as a result of recessionary conditions and other factors.
COLORADO STATE TAXATION. For a discussion of the Federal tax status of
income earned on Colorado Trust Units, see "Tax Status."
The assets of the Colorado Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Colorado ("COLORADO") or
counties, municipalities, authorities or political subdivisions thereof (the
"COLORADO BONDS") the interest on which is expected to qualify as exempt from
Colorado income taxes.
Neither the Sponsor nor its counsel has independently examined the
Bonds to be deposited in and held in the Colorado Trust. However, although
Chapman and Cutler expresses no opinion with respect to the issuance of the
Bonds, in rendering its opinion expressed herein, it has assumed that: (i) the
Bonds were validly issued; (ii) the interest thereon is excludable from gross
income for Federal income tax purposes; and (iii) interest on the Bonds, if
received directly by a Unitholder, would be exempt from the income tax imposed
by the State of Colorado that is applicable to individuals and corporations (the
"State Income Tax"). This opinion does not address the taxation of persons other
than full time residents of Colorado.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Colorado law:
1. Because Colorado income tax law is based upon the Federal
law, the Colorado Trust is not an association taxable as a corporation
for purposes of Colorado income taxation.
2. With respect to Colorado Unitholders, in view of the
relationship between Federal and Colorado tax computations described
above:
<PAGE>
(i) Each Colorado Unitholder will be treated as
owning a pro rata share of each asset of the Colorado Trust
for Colorado income tax purposes in the proportion that the
number of Units of such Trust held by the Unitholder bears to
the total number of outstanding Units of the Colorado Trust,
and the income of the Colorado Trust will therefore be treated
as the income of each Colorado Unitholder under Colorado law
in the proportion described and an item of income of the
Colorado Trust will have the same character in the hands of a
Colorado Unitholder as it would have in the hands of the
Trustee;
(ii) Interest on Bonds that would not be includable
in income for Colorado income tax purposes when paid directly
to a Colorado Unitholder will be exempt from Colorado income
taxation when received by the Colorado Trust and attributed to
such Colorado Unitholder and when distributed to such Colorado
Unitholder;
(iii) Any proceeds paid under individual policies
obtained by issuers of Bonds in the Colorado Trust which
represent maturing interest on defaulted obligations held by
the Trustee will be excludable from Colorado adjusted gross
income if, and to the same extent as, such interest is so
excludable for Federal income tax purposes if paid in the
normal course by the issuer notwithstanding that the source of
payment is from insurance proceeds provided that, at that time
such policies are purchased, the amounts paid for such
policies are reasonable, customary and consistent with the
reasonable expectation that the issuer of the Bonds, rather
than the insurer, will pay debt service on the Bonds;
(iv) Each Colorado Unitholder will realize taxable
gain or loss when the Colorado Trust disposes of the Bonds
(whether by sale, exchange, redemption, or payment at
maturity) or when the Colorado Unitholder redeems or sells
Units at a price that differs from original cost as adjusted
for amortization of bond discount or premium and other basis
adjustments (including any basis reduction that may be
required to reflect a Colorado Unitholder's share of interest,
if any, accruing on Bonds during the interval between the
Colorado Unitholder's settlement date and the date such Bonds
are delivered to the Colorado Trust, if later);
(v) Tax basis reduction requirements relating to
amortization of bond premium may, under some circumstances,
result in Colorado Unitholders realizing taxable gain when
their Units are sold or redeemed for an amount equal to or
less than their original cost; and
(vi) If interest on indebtedness incurred or
continued by a Colorado Unitholder to purchase Units in the
Colorado Trust is not deductible for Federal income tax
purposes, it also will be non-deductible for Colorado income
tax purposes.
Unitholders should be aware that all tax-exempt interest, including
their share of interest on the Bonds paid to the Colorado Trust, is taken into
account for purposes of determining eligibility for the Colorado Property
Tax/Rent/Heat Rebate. No opinion is expressed regarding the Colorado taxation of
foreign or domestic insurance companies.
<PAGE>
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Colorado law. Ownership of the Units may result in
collateral Colorado tax consequences to certain taxpayers. Prospective investors
should consult with their tax advisors as to the applicability of any such
collateral consequences.
RISK FACTORS SPECIFIC TO MINNESOTA. In the early 1980s the State of
Minnesota experienced financial difficulties due to a downturn in the State's
economy resulting from the national recession. In recent years, Minnesota has
ranked as one of the top five states in production for dairy products, soy
beans, hogs, corn, turkeys, sugar beets, barley, hay, sweet corn, oats, green
peas, and sunflowers. In 1994, Minnesota ranked first in the nation in cash
receipts for sugar beets. Total cash receipts in 1994 were $6.522 billion, with
dairy products and soy beans contributing 18.3% and 15.6%, respectively.
Between 1985 and 1994, more than 435,000 jobs were added in Minnesota,
resulting in employment growth of 24.1% compared to the national average of
16.9%. The four fastest growing industries in Minnesota were: services;
manufacturing; finance, insurance and real estate (FIRE); and transportation,
communications and public utilities (TCPU).
Employment growth in Minnesota continues to outpace the U.S. economy in
fiscal year 1996. Payroll employment grew by 2.3%, significantly above the U.S.
growth of 2.0%. Between November 1995 and November 1996, Minnesota added 54,800
jobs, growing at a rate of 2.3% for total nonfarm wage and salary employment.
This brings the total number of nonfarm jobs in the state to 2,470,800. In the
last year, the services division accounted for almost 38% of the growth and
trade made up another 25%. From November 1995 to November 1996, the services
sector grew 3.2%, or 20,700 jobs, the largest percentage increase of any
industry division in the state. Manufacturing added 2,700 jobs, a .6% increase.
FIRE gained 2,900 jobs for a growth rate of 2.1%. TCPU increased by 2.7%, or
3,200 jobs.
The annual unemployment rate in Minnesota has been below the U.S. and
Midwest rates every year since 1985. In 1995 and 1996, the Minnesota
unemployment rate was 3.7% and 3.6%, respectively, compared to rates of 5.6% and
5.4%, respectively, for the nation.
In 1995, per capita personal income in Minnesota was $23,271, exceeding
the national average by 3%. In 1996, Minnesota's per capita personal income rose
to $24,498, an increase of 5.3% from 1995. The U.S. increase for 1996 is
predicted at 4.7%.
Total personal income in the state, however, grew more slowly than in
the rest of the nation. Total wage and salary disbursements in the state, which
account for about two-thirds of personal income, grew at a 4.9% rate in fiscal
year 1996, noticeably slower than the U.S. wide growth rate of 6.2%. Much of
this difference is attributed to increases in the number of hours worked by part
time employees. During the past year, economic conditions in Minnesota have been
such that part time workers are already working all of the hours they desire.
The Minnesota economy is expected to track the national economy during
fiscal year 1997. Growth rates for personal income in Minnesota and nationally
are projected to be identical. Job growth in Minnesota is forecast to be only
slightly stronger than that for the entire U.S., while total
<PAGE>
wage and salary disbursements are expected to lag slightly, reflecting the
belief that part time workers elsewhere in the nation will continue to add hours
at a faster rate than those in Minnesota. The 1996 farm bill will add to farm
income in the state in both 1996 and 1997.
Minnesota's fiscal period is a biennium. General Fund revenues and
transfers-in totaled $9.619 billion for fiscal year 1996, up 9% from those for
fiscal year 1995. Actual total resources were $10.421 billion. General Fund
expenditures and transfers-out for the year totaled $9.638 billion, an increase
of 11.7% from the previous year. Of this amount, $6.749 billion (70%) is in the
form of grants and subsidies to local governments, individuals and non-profit
organizations.
Total net revenue for the General Fund for the fiscal year ending June
30, 1996 was $9.617 billion. Of this amount, approximately 43% or $4.135 billion
was from individual income taxes, 30.1% or $2.897 billion was from sales tax,
and 7.3% or $702 million was from corporate income tax. Total General Fund
expenditures for fiscal year 1996 were $8.554 billion.
The budgetary fund balance for the General Fund at the end of fiscal
year 1996 was $1.357 billion, and the undesignated fund balance was $506
million, a $47.9 million increase from fiscal year 1995. A budgetary reserve of
$570 million was provided for in fiscal year 1996, compared to $500 million in
1995.
Total net revenue for the Special Revenue Fund for the fiscal year
ending June 30, 1996 was $1.553 billion. Total expenditures for this fund were
$1.026 billion. The budgetary fund balance for the Special Revenue Fund at the
end of fiscal year 1996 was $379.2 million, with the undesignated fund balance
at $298.7 million.
Estimated General Fund revenues for the 1996-97 fiscal year are $19,089
million. Total resources are forecast at $20.110 billion. General Fund
expenditures and transfers for fiscal year 1996-97 are predicted at $18,811
million, leaving an estimated budgetary balance of $502 million.
Total expenditures for the 1996-97 biennium are predicted at $29,801
million. Of this amount, $18,080 million is from the general fund, $10,127 are
from the special revenue funds, and $563 million is from the Debt Service Fund.
National economic growth for the remainder of the decade is predicted
to generate a corresponding growth in state revenues without increasing tax
rates. Minnesota's revenues are expected to grow by $1.4 billion, 7.4% in the
1998-99 biennium, and 8.1% in the following biennium. Since the state forecast
is based on a strong 2.4% annual growth rate, a return to a more moderate rate
of growth, similar to the 2.0% growth rate in 1995, would materially reduce
forecast revenues.
Spending for fiscal years 1998 and 1999 is estimated at 3.3% and 2.3%,
respectively, both below Minnesota's projected personal income growth rates of
4.9% and 4.7% for the same periods.
The 1998-99 General Fund beginning balance is estimated at $1.299
billion. The Governor recommended General Fund revenues for the 1998-99 biennium
of $19.99 billion, a 4.7% increase from the previous biennium. The Governor also
recommended total expenditures and transfers for the 1998-99 biennium of $20.344
billion, an 8.2% increase from the 1996-97 biennium. The
<PAGE>
budgetary balance of $3 million at the end of the 1998-99 biennium is $499
million less than the previous biennium.
The State's budget reserve for the 1998-99 biennium is doubled to $522
million (an increase from $261 million in fiscal year 1997) or 5% of fiscal year
1999 spending to protect against economic uncertainty.
The November 1996 forecast shows total resources for the 1998-99
biennium at $21.804 billion, total expenditures and transfers at $19.568
billion, and a budgetary balance of $1.439 billion.
The state issued $439.6 million of new general obligation bonds, and
$170.6 million of general obligation bonds were redeemed during 1996, leaving an
outstanding balance of $2.2 billion. General obligation bonds authorized but
unissued as of June 30, 1996 were $1.101 billion.
Minnesota Statutes, Section 16A.641 provides for an annual
appropriation for transfer to the Debt Service Fund. The amount of the
appropriation is to be such that, when combined with the balance on hand in the
Debt Service Fund on December 1 of each year for state bonds, it will be
sufficient to pay all general obligation bond principal and interest due and to
become due through July 1 in the second ensuing year. If the amount appropriated
is insufficient when combined with the balance on hand in the Debt Service Fund,
the state constitution requires the state auditor to levy a statewide property
tax to cover the deficiency. No such property tax has been levied since 1969
when the law was enacted requiring the appropriation. In fiscal year 1996, total
operating transfers to the Debt Service Fund were $277.522 million.
The Governor's budget recommends a General Fund appropriation of $545.6
million for fiscal year 1998-99 for debt service on bonds sold for existing
authorizations, bonds authorized but unissued, and new bonds anticipated to be
authorized in the 1998 legislative session. This amount represents 2.8% of total
general fund spending. The Governor also proposed $16.6 million be appropriated
to pay remaining state claims from the Cambridge Bank Litigation judgment,
rather than issuing additional revenue bonds for this purpose.
In May 1996, Moody's Investor Services upgraded Minnesota's general
obligation bond rating to Aaa. S&P's current rating is AA+, and Fitch's rates
Minnesota bonds at AAA.
LITIGATION. In September 1995, in MINNEAPOLIS BRANCH OF THE NAACP V.
STATE OF MINNESOTA, plaintiffs filed suit claiming that the segregation of
minority and poor students in the Minneapolis public schools has deprived the
students of an adequate education in violations of the Minnesota Constitution.
It is impossible at this point to estimate the State's exposure in this case
especially since the plaintiffs have not articulated what relief they are
seeking. While the complaint does not request monetary damages, it does request
injunctive relief that could force the State to spend over $10 million for
additional funding of various items for the Minneapolis schools, and increased
busing expenses. District court proceedings continue.
In MINNESOTA HOME HEALTH CARE ASSOCIATION V. GOMEZ, plaintiffs have
sued the Department of Human Services ("DHS") for declaratory and injunctive
relief claiming that DHS violated federal law by failing to determine payment
rates for home health care service providers which are
<PAGE>
consistent with efficiency, economy, and quality of care, and which provide
adequate patient access. The potential loss to the State is estimated at $20
million and may impact the Accounting General Fund. The State prevailed in
District Court. The case is on appeal to the Eighth Circuit Court of Appeals.
In PEPSICO, ET AL. V. COMMISSIONER OF REVENUE, twelve corporate
taxpayers claim unconstitutional treatment under certain provisions of Minnesota
tax law. The Department of Revenue has not determined the potential refund
liability should the plaintiffs prevail; however, the aggregate refunds to all
similarly-situated taxpayers could exceed $10 million.
In RURAL AMERICAN BANK - ADA F/K/A FIRST BANK OF ADA, ET AL. V.
COMMISSIONER OF REVENUE, filed in Ramsey County District Court, taxpayers claim
they are entitled to refunds pursuant to the Court's decision in CAMBRIDGE STATE
BANK, in which the Court struck down a provision of the franchise tax law which
taxed interest income from federal obligations. The complaint and alternative
writ of mandamus seek to require the Commissioner to pay refunds to 130 banks
who were not parties to the CAMBRIDGE and CAMBRIDGE-related cases. The
Commissioner denies any liability, but it is possible that the State could be
ordered to pay in excess of $10 million dollars.
MINNESOTA STATE TAXATION. For a discussion of the Federal tax status of
income earned on Minnesota Trust Units, see "Tax Status."
Counsel to the Minnesota Trust understands that the Minnesota Trust
will only have income consisting of (i) interest from bonds issued by the State
of Minnesota and its political and governmental subdivisions, municipalities and
governmental agencies and instrumentalities (the "Minnesota Bonds") and bonds
issued by possessions of the United States (the "Possession Bonds" and, with the
Minnesota Bonds, the "Bonds") which would be exempt from Federal and Minnesota
income taxation when paid directly to an individual, trust or estate, (ii) gain
on the disposition of such Bonds and (iii) proceeds paid under certain insurance
policies issued to the issuers of the Bonds which represent maturing interest or
principal payments on defaulted Bonds held by the Trustee.
Neither the Sponsor nor its counsel has independently examined the
Bonds to be deposited in and held in the Trust. However, although no opinion is
expressed herein regarding such matters, it is assumed that: (i) the Bonds were
validly issued, (ii) the interest thereon is excludible from gross income for
Federal income tax purposes and (iii) the interest thereon is exempt from income
tax imposed by Minnesota that is applicable to individuals, trusts and estates
(the "Minnesota Income Tax"). It should be noted that interest on the Minnesota
Bonds is subject to tax in the case of corporations subject to the Minnesota
Corporate Franchise Tax or the Corporate Alternative Minimum Tax and is a factor
in the computation of the Minimum Fee applicable to financial institutions; no
opinion is expressed with respect to the treatment of interest on the Possession
Bonds for purposes of such taxes. The opinion set forth below does not address
the taxation of persons other than full time residents of Minnesota.
Although Minnesota state law provides that interest on Minnesota bonds
is exempt from Minnesota state income taxation, the Minnesota state legislature
has enacted a statement of intent that interest on Minnesota bonds should be
subject to Minnesota state income taxation if it is
<PAGE>
judicially determined that the exemption discriminates against interstate
commerce, effective for the calendar year in which such a decision becomes
final. It cannot be predicted whether a court would render such a decision or
whether, as a result thereof, interest on Minnesota bonds and therefore
distributions by the Minnesota Trust would become subject to Minnesota state
income taxation
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Minnesota income tax law as of the date of this prospectus and based
upon the assumptions above:
1. The Minnesota Trust is not an association taxable as a
corporation and each Unitholder of the Minnesota Trust will be treated
as the owner of a pro rata portion of the Minnesota Trust, and the
income of such portion of the Minnesota Trust will therefore be treated
as the income of the Unitholder for Minnesota Income Tax purposes;
2. Income on the Bonds, excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax when received by the
Minnesota Trust, and which would be excludable from Minnesota taxable
income for purposes of the Minnesota Income Tax if received directly by
a Unitholder, will be excludable from Minnesota taxable income for
purposes of the Minnesota Income Tax when received by the Minnesota
Trust and distributed to such Unitholder;
3. To the extent that interest on certain Bonds, if any, which
is includible in the computation of "alternative minimum taxable
income" for Federal income tax purposes, such interest will also be
includible in the computation of "alternative minimum taxable income"
for purposes of the Minnesota Alternative Minimum Tax imposed on
individuals, estates and trusts;
4. Each Unitholder of the Minnesota Trust will recognize gain
or loss for Minnesota Income Tax purposes if the Trustee disposes of a
Bond (whether by redemption, sale or otherwise) or if the Unitholder
redeems or sells Units of the Minnesota Trust to the extent that such a
transaction results in a recognized gain or loss to such Unitholder for
Federal income tax purposes;
5. Tax basis reduction requirements relating to amortization
of bond premium may, under some circumstances, result in Unitholders
realizing taxable gain for Minnesota Income Tax purposes when their
Units are sold or redeemed for an amount equal to or less than their
original cost;
6. Proceeds, if any, paid under individual insurance policies
obtained by issuers of Bonds which represent maturing interest on
defaulted obligations held by the Trustee will be excludible from
Minnesota net income if, and to the same extent as, such interest would
have been so excludible from Minnesota net income if paid in the normal
course by the issuer of the defaulted obligation provided that, at the
time such policies are purchased, the amounts paid for such policies
are reasonable, customary and consistent with the reasonable
<PAGE>
expectation that the issuer of the bonds, rather than the insurer, will
pay debt service on the bonds; and
7. To the extent that interest derived from the Minnesota
Trust by a Unitholder with respect to any Possession Bonds is
excludible from gross income for Federal income tax purposes, such
interest will not be subject to the Minnesota Income Tax. As noted
above, we have expressed no opinion as to the treatment of interest on
the Possession Bonds for purposes of the Minnesota Corporate Franchise
Tax or the Alternative Minimum Tax or whether it is a factor in the
computation of the Minimum Fee applicable to financial institutions.
Although a federal statute currently provides that bonds issued by the
Government of Puerto Rico, or by its authority, are exempt from all
state and local taxation, the Supreme Court of Minnesota has held that
interest earned on bonds issued by the Government of Puerto Rico may be
included in taxable net income for purposes of computing the Minnesota
bank excise tax. The State of Minnesota could apply the same reasoning
in determining whether interest on the Possession Bonds is subject to
the taxes listed above on which we express no opinion.
Chapman and Cutler has not examined any of the Bonds to be deposited
and held in the Minnesota Trust or the proceedings for the issuance thereof or
the opinions of bond counsel with respect thereto, and therefore express no
opinions as to the exemption from State income taxes of interest on the Bonds if
received directly by a Unitholder. Chapman and Cutler has expressed no opinion
with respect to taxation under any other provision of Minnesota law. Ownership
of the Units may result in collateral Minnesota tax consequences to certain
taxpayers. Prospective investors should consult their tax advisors as to the
applicability of any such collateral consequences.
RISK FACTORS SPECIFIC TO NEW MEXICO. The following brief summary
regarding the economy of New Mexico is based upon information drawn from
publicly available sources and is included for the purpose of providing the
information about general economic conditions that may or may not affect issuers
of the New Mexico Bonds. The Sponsor has not independently verified any of the
information contained in such publicly available documents.
Major industries in the State are energy resources, services,
construction, trade, tourism, agriculture-agribusiness, manufacturing, mining,
and government. From 1994-95, the value of construction contracts increased 6.9%
to $2.1 billion. In 1995, the total of gas and oil sales was $3.12 billion,
however, this was a 9.7% decrease from 1994. In 1994, the value of mineral
production (i.e., crude petroleum, natural gas, uranium, and coal) was
approximately $5.05 billion. Major federally funded scientific research
facilities at Los Alamos, Albuquerque and White Sands are also a notable part of
the State's economy.
The State has a thriving tourist industry. In 1994, there were
approximately 2.29 million visits to national parks and about 4.9 million visits
to State parks. According to a 1991 estimate by the U.S. Travel Data Center, the
State's tourist industry generated about $2.3 billion in revenue and more than
38,370 jobs. However, 1995 was a slower year for tourism and travel in New
Mexico. Total gross receipts for hotels and other lodging places dropped 1.4%,
compared with a 5.6% gain
<PAGE>
in 1994. Air travel was also down 0.4%. In addition, visits to New Mexico's
national parks and monuments, affected partly by federal government shutdowns in
the fall and winter, dropped 1.7%.
Agriculture is a major part of the State's economy, producing $1.521
billion in 1995. This was a 0.4% decrease from 1994. As a high, relatively dry
region with extensive grasslands, the State is ideal for raising cattle, sheep,
and other livestock. Livestock receipts dropped 3.0% from 1994-95, to $1.066
billion due to significant declines in prices for beef cattle and calves.
Because of irrigation and a variety of climatic conditions, the State's farmers
are able to produce a diverse assortment of quality products. The State's
farmers are major producers of alfalfa hay, wheat, chile peppers, cotton,
fruits, and pecans. Crop revenues in 1995 rose 6.4% to $455 million.
Agricultural businesses include chile canneries, wineries, alfalfa pellets,
chemical and fertilizer plants, farm machinery, feed lots, and commercial
slaughter plants.
Job growth in New Mexico in 1993 was the highest since 1984. However,
in 1995, the total employment growth rate was 1.7%, less than half the 1994
growth rate of 4.2%, while the unemployment rate stabilized, remaining level at
6.3% in 1994 and 1995 after reaching a seven year high of 7.7% in 1993. The fact
that the State's 1995 unemployment rate is higher than the national rate of 5.6%
can be partially explained by population growth in New Mexico that is well in
excess of the national average. New Mexico's population growth is 1.8%, about
twice the national rate. Job growth in New Mexico has increased migration which
has kept the unemployment rate higher than it otherwise would have been. New
Mexico ranks 5th in the nation in unemployment as of April 1996, up from 10th
highest in April 1995.
The New Mexico economy recorded solid gains in 1995, but the rate of
expansion had slowed by the end of the year. Nonagricultural wage and salary
employment rose 4.9%, or 32,500 jobs, for all of 1995, reaching 689,700 jobs.
This was about the same as the 1994 increase (5.0%) and marked the third year in
a row that job growth surpassed 4%. Total personal income was up 8.1% to $30.4
billion, exceeding the 6.9% gain in 1994, and the U.S. gain of 6.0%. State job
growth and personal income gain have exceeded the national rate since 1988.
However, the rapid growth of New Mexico's population has had a negative
impact on per capita income. The 1995 per capita income of $18,055 was
approximately 79% of the national figure of $22,788 and ranked 48th out of the
50 states and the District of Columbia, although New Mexico's per capita income
growth rate of 6.0% was 1.0% above the national rate and ranked ninth
nationally.
Construction, services and trade were the job growth leaders in 1995.
Construction employment rose by 4,200 jobs, or 10.1%. Although this was a
sizable jump, it was down from the previous annual increase, 16.5%. The advance
in services increased by 15,200 jobs, or 8.6%, while growth in trade employment
rose 5.5%, or 8,600 jobs. Transportation and public utilities placed fourth,
with an increase of 3.7%. Finance, insurance and real estate recorded gains of
only 1.7%. Government and manufacturing were the weakest industries at 1.3%
each. Mining employment remained unchanged at 15,700 for both 1994 and 1995.
<PAGE>
The state's economy will still expand at a healthy pace in 1996, but
not as fast as last year. The slowing trend is expected to continue into 1997.
From fiscal year 1989 through fiscal year 1992, the annual base revenue
growth in New Mexico (recurring revenues adjusted to exclude legislative changes
or extraordinary receipts) was in the range of 3.0% to 4.5%. In fiscal year
1993, base revenue growth was about 5.5%, exclusive of gains in the volatile
energy-related areas. For fiscal year 1994, base revenues were forecast to
increase by 6.5%, reflecting the State's economic strength. The outlook was for
stronger economic and revenue growth to continue for several years.
Because of this strong revenue growth, cash balances and recurring
revenues were substantially higher in 1994 than expected from 1993. Prior to
1994 appropriations, New Mexico's Department of Finance and Administration
projected the fiscal year 1994 ending General Fund balances to be about $300
million, which was almost 13% of total appropriations. Since the State typically
tries to maintain a 5% reserve ratio, this anticipated total was two and
one-half times the usual reserve objective. Thus, substantial funds were
available for nonrecurring appropriations or tax cuts. Total recurring
expenditures for fiscal year 1994 were $2,368.8 million. Total general fund
revenue for 1994 was $2.559 billion.
Reflecting strength in the economy and sufficient revenues, the 1994
Legislature cut General Fund revenues for fiscal year 1995 by almost $60 million
by restoring low income/personal income tax rebates, lowering personal income
tax rates, especially for married filers, suspending 2 cents of the gasoline tax
for a 3-year period and diverting the governmental gross receipts tax to an
infrastructure fund. Scheduled personal income tax rate cuts in 1995 and 1996
were to reduce personal income tax revenues an additional $25 million by fiscal
year 1997.
The fiscal plan adopted by the 1994 legislature overstated fiscal year
1995 and 1996 general fund revenue by more than $100 million. While state
revenue was growing, it was not growing as fast as estimated. In September of
1995, the Governor ordered a reduction of general fund allotments to all state
agencies.
Total general fund revenue for fiscal year 1995 was $2.630 billion, a
2.7% increase from fiscal year 1994. Recurring revenue for fiscal year 1995
totaled $2.643 billion, an increase of 3.3% from fiscal year 1994. Recurring
appropriations for fiscal year 1995 totaled $2.623 billion, up 9.3% from fiscal
year 1994. Total expenditures for fiscal year 1995 were $2.715 billion, 5.0%
higher than 1994, with a total ending balance of $58.822 million.
For the fiscal year ending June 30, 1996, recurring revenue totaled
$2.747 billion, an increase of 3.9% over the previous fiscal year. Total General
Fund Revenue was $2.752 billion, up 4.6% from fiscal year 1995. The fiscal year
1996 revenue was below a December 1995 estimate by $2 million, or 0.1%. In
general, weakness in broad-based taxes was offset by strength in revenue related
to the production of natural gas and crude oil. Strength relative to the
estimate was also evident for interest earnings, miscellaneous receipts and
reversions.
Preliminary results for fiscal year 1996 show general fund total
receipts and recurring appropriations at $2.75 billion. Fiscal year 1996
receipts are up 4.6% from fiscal year 1995 while
<PAGE>
recurring appropriations are up 4.9%. Nonrecurring appropriations for fiscal
year 1996 were $22 million, down 76% from fiscal year 1995. The net transfer
necessary from the operating reserve is $24.3 million and is within the $30
million transfer authority authorized by the 1996 legislature.
The 1996 legislature also established the risk reserve fund within the
general fund. General fund balances including the risk reserve fund are
projected to total over $137 million. Without the risk reserve, balances would
be $21.5 million. The fiscal year 1996 balance in the operating reserve is $16.8
million, or only 0.6% of fiscal year 1996 total revenue.
The state support reserve received a $3.37 million transfer from public
school support and the ending balance is $4.7 million for fiscal year 1996.
Disaster allotments from the appropriation contingency fund totaled
over $5.4 million, primarily due to the drought and the severe wildfires
experienced during 1996 and the ending balance in the appropriation contingency
fund is a nominal $35,000 due to a reversion.
For fiscal year 1997, the Governor proposed a budget which took into
consideration spending requirements in Medicaid (an 18.2% increase, or $30.9
million) and in the criminal justice system (a 5.7% increase, or $6.9 million),
and placed a high priority on public school funding (a 2.0% increase, or $26.2
million).
Estimated results for fiscal year 1997 show general fund total receipts
of $2.955 billion and recurring appropriations of $2.862 billion with
expenditures totaling $2.883 billion. The estimated fiscal year 1997 total
ending balance is $210 million, an increase of 53% over the preliminary fiscal
year 1996 results of $137 million.
The foregoing information constitutes only a brief summary of some of
the financial difficulties which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the New Mexico Trust are subject. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of the issuers of Bonds, could
affect or could have an adverse impact on the financial condition of the State
and various agencies and political subdivisions located in the State. The
Sponsor is unable to predict whether or to what extent such factors or other
factors may affect the issuers of Bonds, the market value or marketability of
the Bonds or the ability of the respective issuers of the Bonds acquired by the
New Mexico Trust to pay interest on or principal of the Bonds.
NEW MEXICO STATE TAXATION. For a discussion of the Federal tax status
of income earned on New Mexico Trust Units, see "Tax Status."
The assets of the New Mexico Trust will consist of interest-bearing
obligations issued by or on behalf of the State of New Mexico ("New Mexico") or
counties, municipalities, authorities or political subdivisions thereof (the
"New Mexico Bonds"), and by or on behalf of the government of Puerto Rico, the
government of the Guam, or the government of the Virgin Islands (collectively
the "Possession Bonds")(collectively the New Mexico Bonds and the Possession
Bonds shall be referred
<PAGE>
to herein as the "Bonds") the interest on which is expected to qualify as exempt
from New Mexico income taxes.
Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the New Mexico Trust. However, although no
opinion is expressed herein regarding such matter, it is assumed that: (i) the
Bonds were validly issued, (ii) the interest thereon is excludable from gross
income for federal income tax purposes and (iii) interest on the Bonds, if
received directly by a Unit holder, would be exempt from the New Mexico income
taxes applicable to individuals and corporation (collectively, the "New Mexico
State Income Tax"). At the respective times of issuance of the Bonds, opinions
relating to the validity thereof and to the exemption of interest thereon from
federal income tax were rendered by bond counsel to the respective issuing
authorities. In addition, with respect to the Bonds, bond counsel to the issuing
authorities rendered opinions as to the exemption of interest from the New
Mexico State Income Tax. Neither the Sponsor nor its counsel has made any review
for the New Mexico Trust of the proceedings relating to the issuance of the
Bonds or of the bases for the opinions rendered in connection therewith. The
opinion set forth below does not address the taxation of persons other than full
time residents of New Mexico.
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing law and based upon the assumptions set forth above:
1. The New Mexico Trust will not be subject to tax under the
New Mexico State Income Tax.
2. Interest on the Bonds which is exempt from the New Mexico
State Income Tax when received by the New Mexico Trust, and which would
be exempt from the New Mexico State Income Tax if received directly by
a Unitholder, will retain its status as exempt from such tax when
received by the New Mexico Trust and distributed to such Unitholder
provided that the New Mexico Trust complies with the reporting
requirements contained in the New Mexico State Income Tax Regulations.
3. To the extent that interest income derived from the New
Mexico Trust by a Unitholder with respect to Possession Bonds is exempt
from state taxes pursuant to 48 U.S.C. Section 745, 48 U.S.C. Section
1423a or 48 U.S.C. Section 1403, such interest income will not be
subject to New Mexico State Income Tax.
4. Each Unitholder will recognize gain or loss for New Mexico
State Income Tax purposes if the Trustee disposes of a bond (whether by
redemption, sale or otherwise) or if the Unitholder redeems or sells
Units of the New Mexico Trust to the extent that such a transaction
results in a recognized gain or loss to such Unitholder for federal
income tax purposes.
5. The New Mexico State Income Tax does not permit a deduction
of interest paid on indebtedness or other expenses incurred (or
continued) in connection with the purchase or carrying of Units in the
New Mexico Trust to the extent that interest income related to the
ownership of Units is exempt from the New Mexico State Income Tax.
<PAGE>
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provisions of New Mexico law. Prospective investors should
consult their tax advisors regarding collateral tax consequences under New
Mexico law relating to the ownership of the Units, including, but not limited
to, the inclusion of income attributable to ownership of the Units in "modified
gross income" for the purposes of determining eligibility for and the amount of
the low income comprehensive tax rebate, the child day care credit, and the
elderly taxpayers' property tax rebate and the applicability of other New Mexico
taxes, such as the New Mexico estate tax.
RISK FACTORS SPECIFIC TO OREGON. Similar to the nation as a whole,
economic growth in Oregon is likely to be restricted to its long-term trend rate
by near capacity labor markets and rising costs. Oregon's jobless rate is
unlikely to fall below its current 5.0% for any sustained period. This will have
the effect of limiting job growth to the rate of increase in the state's labor
force. The labor force is expected to increase sufficiently to keep Oregon's
employment growth well above the national average but not enough to match the
job growth rates of the 1994 to 1996 period. The state's tight labor markets and
expanding high technology industries should continue to push Oregon's wages and
per capita income up toward the national average.
Oregon's unemployment rate increased from 4.8% in 1995 to 5.2% in 1996.
This compares favorably with the national unemployment rates of 5.6% in 1995 and
5.4% in 1996. However, as of April 1997, Oregon's unemployment rate was 5.6%
while the U.S. unemployment rate was 4.9%.
Per capita personal income in Oregon increased 5.6% in 1996, to
$22,828. Oregon's personal income is forecast to increase 6.9% in 1997 and 5.6%
in 1998, down from 7.0% in 1996 but still well above the national forecast of
5.8% growth in 1997 and 4.7% in 1998. Non-farm payroll employment is expected to
increase 3.5% in 1997, compared to 2.2% for the nation.
The state's tight labor markets are expected to continue pushing
Oregon's wages toward the national average. Manufacturing wages grew 5.5% in
1996 while private service wages increased 5.0%. In 1997, both manufacturing
wages and private service wages are projected to increase another 4.7%. Wage
growth is a key factor stimulating demand and retail sales in Oregon but it also
is a growing concern among Oregon businesses because higher wages mean higher
costs.
It is the expanding high technology manufacturing sector that has been
the catalyst for the state's rapid growth over the 1994 to 1996 period. Though
slowing, high tech manufactures are expected to generate 3.3% job growth in
1997.
The rest of the state will benefit from a generally healthy agriculture
section (with the exception of the cattle industry), a stabilizing timber
harvest and increasing cost advantages relative to the Willamette Valley and
Portland metropolitan area. The statewide timber harvest in 1996 decreased .8%
to 4.284 billion board feet. However, it is expected to increase to 4.317
billion board feet in 1997. Although the harvest is not expected to show further
significant declines, it is forecast to remain at extremely low levels relative
to the post World War II norm. Lumber and wood products jobs are forecast to
increase 1.7% in 1997 after decreasing 2.6% in 1996.
The major components of personal income are expected to grow more
slowly in 1997 with the exception of dividend, interest and rent income and
transfer payments. Non-farm proprietor
<PAGE>
income is forecast to increase 5.5% in 1997, down from 7.1% in 1996. Farm
proprietor income is expected to increase 2.8% in 1997 after dropping 65.6% in
1995 and 17.4% in 1996. Wage and salary income is expected to increase 8.0% in
1997, after growing 8.6% in 1996.
The forecast of rising short-term interest rates pushes up dividend,
interest and rent income 5.9% in 1997, compared to a 4.0% growth rate in 1996.
Transfer payments are projected to increase 6.0% in 1997, up only 0.1% from
1996.
Total non-agricultural employment increased by 56,400 or 4.0% between
1995 and 1996, the third-highest increase achieved in at least 25 years. The
goods-producing sector increased 4.1% or 12,200 jobs from 1995-96 and the
service-producing sector increased 4.3% or 47,900 jobs. Continued employment
growth is expected in 1997, although perhaps not at the pace of 1996.
Construction employment, which increased by 9,600 jobs or 13.9% from
1995 to 1996, is expected to slow to growth of 3.6% in 1997, though it is likely
to remain at a high level of activity. Housing starts, which increased 9.1% in
1995 and 6.1% in 1996, are expected to decrease 6.7% in 1997. This is due to an
anticipated end to the construction boom which began in 1994.
Overall manufacturing employment is forecast to increase 3.3% in 1997
after averaging 3.0% growth for the 1994 to 1996 period. The expanding high tech
sector is likely to make it increasingly difficult for other manufacturers to
find skilled labor at wages consistent with their competitive position.
The state's service-producing sectors are expected to continue growing
but they too are likely to be constrained by labor availability. Services added
21,800 jobs in 1996, a 6.0% increase. Jobs in the state's largest sector,
non-health services, are expected to grow 5.9%, down from 7.1% in 1996.
Combined, retail and wholesale trade are projected to increase 3.6% in 1997,
compared to only 2.3% growth in 1996.
The government sector in Oregon is forecast to continue shrinking
relative to the overall economy. Overall government jobs are projected to
increase 0.9% in 1997, compared to 2.5% in 1996, marking the sixth consecutive
year in which public sector jobs have grown more slowly than private sector
jobs.
Impact of recent initiatives has put pressure on the General Fund for
revenue for certain purposes. The "kicker law" says if biennial General Fund
revenues exceed estimated revenues by 2% or more, the entire excess must be
refunded. In 1990, Ballot Measure 5 diverted General Fund money to replace
reduced property taxes for local schools and community colleges. Since then,
$3.27 billion has been transferred to local schools. This money was previously
allocated to human resources, natural resources, and higher education programs.
In 1994, Ballot Measure 11 increased criminal sentences, ultimately requiring
more than $1 billion from the General Fund to build prisons, requiring still
more to operate them. In November of 1996, voters approved Ballot Measure 47,
the property tax cut and cap. It will reduce revenues to schools, cities and
counties by as much as $1 billion and put pressure on the General Fund to make
up some or all of the difference.
<PAGE>
Ballot Measure 50, passed by Oregon voters in May of 1997, cuts taxes
by $870 million during two years. However, it provides breaks for Portland's
police and firefighter pensions, hospital districts and communities that passed
tax levies last year in elections with at least a 50% turnout. Generally, tax
bills in the fall of 1997 will be about 10% lower than in 1996 or about 17%
lower than if no tax limitation had been passed. The biggest reductions will be
in areas where property values have been increasing the fastest. Measure 50
requires the Legislature to replace property taxes that schools lose. The
measure rolls back assessed values, cuts tax levies and freezes tax rates.
Values can grow by only 3% a year.
Actual General Fund revenue for the 1993-95 biennium was $6,536.1
million. The May 1997 forecast for the 1995-97 General Fund revenue is $7,543.9
million, a 15.4% increase from the 1993-95 biennium. The 1995-97 estimate is
also an increase of $82.9 million from the March 1997 estimate and $582.4
million or 8.4% from the 1995 Close of Legislative Session (COS) forecast. The
beginning balance is estimated to be $496.3 million, leaving total General Fund
resources available for the 1995-97 biennium of $8,040.3 million. The General
Fund resources estimate is $595.5 million higher than the COS estimate.
General Fund revenue is projected to be $8,184.6 million for the
1997-99 biennium. The beginning balance is estimated to be $681.6 million for a
total General Fund resource estimate of $8,866.2 million. The May 1997-99
General Fund revenue estimate is $17.5 million higher than the March 1997
forecast. The overall General Fund resource projection is $98.9 million more
than the March forecast.
General Fund revenue growth is expected to slow to 8.5% in the 1997-99
biennium, down from an estimated 15.4% in 1995-97. The anticipation of 2%
surplus kicker refunds is the primary factor slowing revenue growth. Slower
economic growth and changes in tax law are also important reasons for the
expected decline in the rate of growth.
The foregoing information constitutes only a brief summary of some of
the financial difficulties which may impact certain issuers of Bonds and does
not purport to be a complete or exhaustive description of all adverse conditions
to which the issuers in the Oregon Trust are subject. Additionally, many factors
including national economic, social and environmental policies and conditions,
which are not within the control of the issuers of Bonds, could affect or could
have an adverse impact on the financial condition of the State and various
agencies and political subdivisions located in the State. The Sponsor is unable
to predict whether or to what extent such factors or other factors may affect
the issuers of Bonds, the market value or marketability of the Bonds or the
ability of the respective issuers of the Bonds acquired by the Oregon Trust to
pay interest on or principal of the Bonds.
OREGON STATE TAXATION. For a discussion of the Federal tax status of
income earned on Oregon Trust Units, see "Tax Status."
The assets of the Oregon Trust will consist of interest-bearing
obligations issued by or on behalf of the State of Oregon (the "State") or
counties, municipalities, authorities or political subdivisions thereof (the
"Oregon Bonds") or by the Commonwealth of Puerto Rico, Guam and the
<PAGE>
United States Virgin islands (the "Possession Bonds") (collectively, the
"Bonds"). Neither the Sponsor nor its counsel have independently examined the
Bonds to be deposited in and held in the Oregon Trust. However, although no
opinion is expressed herein regarding such matters, it is assumed that: (i) the
Bonds were validly issued; (ii) the interest thereon is excludable from gross
income for Federal income tax purposes; and (iii) interest on the Bonds, if
received directly by an Oregon Unitholder, would be exempt from the Oregon
income tax applicable to individuals (the "Oregon Personal Income Tax").
In the opinion of Chapman and Cutler, counsel to the Sponsor, under
existing Oregon law and based on the assumptions set forth above:
1. The Oregon Trust is not an association taxable as a
corporation and based upon an administrative rule of the Oregon State
Department of Revenue, each Oregon Unitholder of the Oregon Trust will
be essentially treated as the owner of a pro rata portion of the Oregon
Trust and the income of such portion of the Oregon Trust will be
treated as the income of the Oregon Unitholder for Oregon Personal
Income Tax purposes;
2. Interest on the Bonds which is exempt from the Oregon
Personal Income Tax when received by the Oregon Trust, and which would
be exempt from the Oregon Personal Income Tax if received directly by
an Oregon Unitholder, will retain its status as exempt from such tax
when received by the Oregon Trust and distributed to an Oregon
Unitholder;
3. To the extent that interest derived from the Oregon Trust
by an Oregon Unitholder with respect to the Possession Bonds is
excludable from gross income for Federal income tax purposes pursuant
to 48 U.S.C. Section 745, 48 U.S.C. Section 1423a and 48 U.S.C. Section
1403, such interest will not be subject to the Oregon Personal Income
Tax.
4. Each Oregon Unitholder of the Oregon Trust will recognize
gain or loss for Oregon Personal Income Tax purposes if the Trustee
disposes of a bond (whether by redemption, sale or otherwise) or if the
Oregon Unitholder redeems or sells Units of the Oregon Trust to the
extent that such a transaction results in a recognized gain or loss to
such Oregon Unitholder for Federal income tax purposes; and
5. The Oregon Personal Income Tax does not permit a deduction
of interest paid or incurred on indebtedness incurred or continued to
purchase or carry Units in the Oregon Trust, the interest on which is
exempt from such Tax.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Oregon law. Ownership of the Units may result in
collateral Oregon tax consequences to certain taxpayers including, but not
limited to, the calculation of "net pension income" tax credits for retirees and
the applicability of other Oregon taxes. Prospective investors should consult
their tax advisors as to the applicability of any such collateral consequences.
Chapman and Cutler has not examined any of the Bonds to be deposited
and held in the Oregon Trust or the proceedings for the issuance thereof or the
opinions of bond counsel with respect thereto and therefore it expresses no
opinion as to the exemption from the Oregon Personal Income
<PAGE>
Tax of interest on the Bonds if received directly by an Oregon Unitholder. In
addition, prospective purchasers subject to the Oregon corporate income tax
should be advised that for purposes of the Oregon Corporate Income (Excise) Tax,
interest on the Bonds received by the Oregon Trust and distributed to an Oregon
Unitholder subject to such tax will be added to the corporate Oregon
Unitholder's Federal taxable income and therefore will be taxable. No opinion is
expressed regarding the Oregon taxation of foreign or domestic insurance
companies.
RISK FACTORS SPECIFIC TO PENNSYLVANIA. Prospective investors should
consider the financial difficulties and pressures which the Commonwealth of
Pennsylvania and certain of its municipal subdivisions have undergone. Both the
Commonwealth and the City of Philadelphia have historically experienced
significant revenue shortfalls. There can be no assurance that the Commonwealth
will not experience further declines in economic conditions or that portions of
the municipal obligations purchased by the Fund will not be affected by such
declines. Without intending to be complete, the following briefly summarizes
some of these difficulties and the current financial situation, as well as some
of the complex factors affecting the financial situation in the Commonwealth. It
is derived from sources that are generally available to investors and is based
in part on information obtained from various agencies in the Commonwealth. No
independent verification has been made of the following information.
STATE ECONOMY. Pennsylvania has been historically identified as a
heavy-industry state although that reputation has changed recently as the
industrial composition of the Commonwealth diversified when the coal, steel and
railroad industries began to decline. The major new sources of growth in the
Commonwealth are in the service sector, including trade, medical and the health
services, education and financial institutions. The Commonwealth's agricultural
industries are also an important component of its economic structure, accounting
for more than $3.6 billion in crop and livestock products annually while
agribusiness and food related industries support $39 billion in economic
activity annually.
Non-manufacturing employment in the Commonwealth has increased steadily
since 1980 to its 1995 level of 82.1 percent of total Commonwealth employment.
The growth in employment experienced in the Commonwealth during such periods is
comparable to the growth in employment in Middle Atlantic region of the United
States. Manufacturing, which contributed 17.9 percent of 1995 non-agricultural
employment, has fallen behind both the services sector and the trade sector as
the largest single source of employment within the Commonwealth. In 1995, the
services sector accounted for 30.4 percent of all non-agricultural employment in
the Commonwealth while the trade sector accounted for 22.8 percent.
The Commonwealth recently experienced a slowdown in its economy.
Moreover, economic strengths and weaknesses vary in different parts of the
Commonwealth. In general, heavy industry and manufacturing have been facing
increasing competition from foreign producers. During 1995, the annual average
unemployment rate in the Commonwealth was 5.9 percent compared to 5.6 percent
for the United States. For March 1996 the unadjusted unemployment rate was 5.9
percent in the Commonwealth and 5.8 percent in the United States, while the
seasonally adjusted
<PAGE>
unemployment rate for the Commonwealth was 5.6 percent and for the United States
was 5.6 percent.
STATE BUDGET. The Commonwealth operates under an annual budget that is
formulated and submitted for legislative approval by the Governor each February.
The Pennsylvania Constitution requires that the Governor's budget proposal
consist of three parts: (i) a balanced operating budget setting forth proposed
expenditures and estimated revenues from all sources and, if estimated revenues
and available surplus are less than proposed expenditures, a recommendation for
specific additional sources of revenue sufficient to pay the deficiency, (ii) a
capital budget setting forth proposed expenditures to be financed from the
proceeds of obligations of the Commonwealth or its agencies or from operating
funds; and (iii) a financial plan for not less than the succeeding five fiscal
years, that includes for each year projected operating expenditures and
estimated revenues and projected expenditures for capital projects. The General
Assembly may add, change or delete any items in the budget prepared by the
Governor, but the Governor retains veto power over the individual appropriations
passed by the legislature. The Commonwealth's fiscal year begins on July 1 and
ends on June 30.
All funds received by the Commonwealth are subject to appropriation in
specific amounts by the General Assembly or by executive authorization by the
Governor. Total appropriations enacted by the General Assembly may not exceed
the ensuing year's estimated revenues, plus (less) the unappropriated fund
balance (deficit) of the preceding year, except for constitutionally authorized
debt service payments. Appropriations from the principal operating funds of the
Commonwealth (the General Fund, the Motor License Fund and the State Lottery
Fund) are generally made for one fiscal year and are returned to the
unappropriated surplus of the fund if not spent or encumbered by the end of the
fiscal year. The Constitution specifies that a surplus of operating funds at the
end of a fiscal year must be appropriated for the ensuing year.
Pennsylvania uses the "fund" method of accounting. For purposes of
government accounting, a "fund" is an independent fiscal and accounting entity
with a self-balancing set of accounts, recording cash and/or other resources
together with all related liabilities and equities that are segregated for the
purpose of carrying on specific activities or attaining certain objectives in
accordance with the fund's special regulations, restrictions or limitations. In
the Commonwealth, funds are established by legislative enactment or in certain
cases by administrative action. Over 150 funds have been established for the
purpose of recording the receipt and disbursement of moneys received by the
Commonwealth. Annual budgets are adopted each fiscal year for the principal
operating funds of the Commonwealth and several other special revenue funds.
Expenditures and encumbrances against these funds may only be made pursuant to
appropriation measures enacted by the General Assembly and approved by the
Governor. The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bond indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
<PAGE>
Financial information for the principal operating funds of the
Commonwealth is maintained on a budgetary basis of accounting, which is used for
the purpose of ensuring compliance with the enacted operating budget. Since
1984, the Commonwealth has also prepared annual financial statements in
accordance with generally accepted accounting principles ("GAAP"). Budgetary
basis financial reports are based on a modified cash basis of accounting, as
opposed to a modified accrual basis of accounting prescribed by GAAP. The
budgetary basis financial information is adjusted at fiscal year-end to reflect
appropriate accruals for financial reporting in conformity with GAAP.
RECENT FINANCIAL CONDITIONS. From fiscal 1984, when the Commonwealth
first prepared its financial statements on a GAAP basis, through fiscal 1989,
the Commonwealth reported a positive unreserved-undesignated fund balance for
its governmental fund types at each fiscal year end. Slowing economic growth
during 1990, leading to a national economic recession beginning in fiscal 1991,
reduced revenue growth and increased costs of certain governmental programs and
contributed to negative unreserved-undesignated fund balances at the end of the
1990 and 1991 fiscal years. The negative unreserved-undesignated fund balance
was due largely to operating deficits in the General Fund and the State Lottery
Fund during those fiscal years. Actions taken during fiscal 1992 to bring the
General Fund budget back into balance, including tax increases and expenditure
restraints, resulted in a $1.1 billion reduction to the unreserved-undesignated
fund deficit for combined governmental fund types and a return to a positive
fund balance. Financial performance continued to improve during the 1993 and
1994 fiscal years. The fund balance for the governmental fund types increased
from $1,692.8 million on June 30, 1993, as restated, to $1,982.0 million on June
30, 1994, an increase of $289.2 million. An unreserved-undesignated fund balance
of $334.7 million was recorded for fiscal 1994 year end. At June 30, 1995, the
fund balance totaled $1,927.6 million, including an unreserved-undesignated fund
balance of $104.8 million.
FINANCIAL RESULTS FOR RECENT FISCAL YEARS. For the five-year period
from fiscal 1991 through fiscal 1995, total revenues and other sources rose at a
9.1 percent average annual rate while total expenditures and other uses grew by
7.4 percent annually. Over two-thirds of the increase in total revenues and
other sources during this period occurred during fiscal 1992 when a $2.7 billion
tax increase was enacted to address a fiscal 1991 budget deficit and to fund
increased expenditures for fiscal 1992. For the four-year period from fiscal
1992 through fiscal 1995, total revenues and other sources increased at an
annual average of 3.3 percent, less than one-half the rate of increase for the
five-year period beginning with fiscal 1991. This slower rate of growth was due,
in part, to tax rate reductions and other tax law revisions that restrained the
growth of tax receipts for fiscal years 1993, 1994 and 1995.
Expenditures and other uses followed a pattern similar to that for
revenues, although with smaller growth rates, during the fiscal 1991 through
fiscal 1995 period. Program areas having the largest increase in costs for the
fiscal 1991 to fiscal 1995 period related to protection of persons and property,
an expansion of state prisons, and public health and welfare. Recently, efforts
to restrain the rapid expansion of public health and welfare program costs have
resulted in expenditure increases at or below the total rate of increase for
total expenditures in each fiscal year.
<PAGE>
FISCAL 1994 FINANCIAL RESULTS. Commonwealth revenues during the 1994
fiscal year totaled $15,210.7 million, $38.6 million above the fiscal year
estimate, and 3.9 percent over Commonwealth revenues during the 1993 fiscal
year. The sales tax was an important contributor to the higher than estimated
revenues. The strength of collections from the sales tax offset the lower than
budgeted performance of the personal income tax that ended the 1994 fiscal year
$74.4 million below estimate. The shortfall in the personal income tax was
largely due to shortfalls in income not subject to withholding such as interest,
dividends and other income. Expenditures, excluding pooled financing
expenditures and net of all fiscal 1994 appropriation lapses, totaled $14,934.4
million representing a 7.2 percent increase over fiscal 1993 expenditures.
Medical assistance and prisons spending contributed to the rate of spending
growth for the 1994 fiscal year. The Commonwealth maintained an operating
balance on a budgetary basis for fiscal 1994 producing a fiscal year ending
unappropriated surplus of $335.8 million.
FISCAL 1995 FINANCIAL RESULTS. Commonwealth revenues for the 1995
fiscal year were above estimate and exceeded fiscal year expenditures and
encumbrances. Fiscal 1995 was the fourth consecutive fiscal year the
Commonwealth reported an increase in the fiscal year-end unappropriated balance.
Prior to reserves for transfer to the Tax Stabilization Reserve Fund, the fiscal
1995 closing unappropriated surplus was $540.0 million, an increase of $204.2
million over the fiscal 1994 closing unappropriated surplus prior to transfers.
Commonwealth revenues during the 1995 fiscal year were $4159.4 million,
2.9 percent, above the estimate of revenues used at the time the 1995 fiscal
year budget was enacted. Corporation taxes contributed $329.4 million of the
additional receipts, largely due to higher receipts from the corporate net
income tax. Fiscal 1995 revenues from the corporate net income tax were 22.6
percent over collections in fiscal 1994 and include the effects of the reduction
of the tax rate from 12.25 percent to 11.99 percent that became effective with
tax years beginning on and after January 1, 1994. The sales and use tax and
miscellaneous revenues also showed strong year-over-year growth that produced
above-estimate revenue collections. Sales and use tax revenues were $5,526.9
million, $128.8 million above the enacted budget estimate and 7.9 percent over
fiscal 1994 collections. Tax receipts from both motor vehicle and non-motor
vehicle sales contributed to the higher collections. Miscellaneous revenue
collections for fiscal 1995 were $183.5 million, $44.9 million above estimate
and were largely due to additional investment earnings, escheat revenues and
other miscellaneous revenues.
FISCAL 1996 BUDGET. On June 30, 1995, the Governor signed a $16.2
billion general fund budget, an increase of approximately 2.7 percent over the
total appropriations from Commonwealth revenues in the fiscal 1995 budget. The
appropriations increase for fiscal 1996 is one of the lowest rates in recent
years. Areas receiving the largest budgetary increases are medical assistance
and basic education. In addition, the budget accelerated corporate net income
tax rate reductions, eliminated the inheritance tax paid by a surviving spouse
on jointly-owned property, and made other business tax reductions.
FISCAL 1997 BUDGET. In February 1996, the Governor presented his
proposed fiscal 1997 budget to the General Assembly. Proposed appropriations
from General Fund Commonwealth
<PAGE>
revenues totals $16,189.9 million, a reduction from the estimated $16,219.9
million (including proposed supplemental appropriations) for fiscal 1996. The
proposed reduction represents a decline of approximately 0.2 percent in
appropriations from the prior fiscal year. Revenue receipts are estimated to
increase by $403.9 million, or 2.5 percent, over anticipated receipts for fiscal
1996. The anticipated increased revenues, together with the projected $140
million of appropriation lapses during fiscal 1996 and the proposed draw-down of
approximately $95 million of surplus provide the funding sources for the
proposed budget. The proposed draw-down of the fiscal 1996 unappropriated
surplus produces a projected 1997 fiscal year end surplus of under $5 million,
without any consideration of possible appropriation lapses for fiscal 1997. The
decline in appropriation authority over the prior fiscal year in the proposed
budget relies on several program changes, including $329 million of cost
containment efforts in public health and welfare programs. Other significant
cost restraints include reductions to appropriations for the state-aided
colleges and universities and no increases for the state-related colleges and
universities.
DEBT LIMITS AND OUTSTANDING DEBT. The Pennsylvania Constitution permits
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster; (ii) electorate approved debt; (iii)
debt for capital projects subject to an aggregate outstanding debt limit of 1.75
times the annual average tax revenues of the preceding five fiscal years; and
(iv) tax anticipation notes payable in the fiscal year of issuance.
Under the Pennsylvania Fiscal Code, the Auditor General is required to
certify to the Governor and the General Assembly certain information regarding
the Commonwealth's indebtedness. According to the February 29, 1996 Auditor
General certificate, the average annual tax revenues deposited in all funds in
the five fiscal years ended June 30, 1995 was approximately $17.7 billion, and,
therefore, the net debt limitation for the 1996 fiscal year is $30.9 billion.
Outstanding net debt totaled $3.9 billion at June 30, 1995, approximately equal
to the net debt at June 30, 1994. At February 29, 1996, the amount of debt
authorized by law to be issued, but not yet incurred, was $16.5 billion.
Outstanding general obligation debt totaled $5,045.4 million at June
30, 1995, a decrease of $30.4 million from June 30, 1994. Over the ten-year
period ending June 30, 1995, total outstanding general obligation debt increased
at an annual rate of 1.1 percent. Within the most recent five-year period,
outstanding general obligation debt has grown at an annual rate of 1.7 percent.
DEBT RATINGS. All outstanding general obligation bonds of the
Commonwealth are rated AA - by S&P and Al by Moody's.
CITY OF PHILADELPHIA. The City of Philadelphia (the "CITY" or
"PHILADELPHIA") is the largest city in the Commonwealth, with an estimated
population of 1,585,577 according to the 1990 Census. Philadelphia experienced a
series of general fund deficits for fiscal years 1988 through 1992 which have
culminated in serious financial difficulties for the City. In its 1992
Comprehensive Annual Financial Report, Philadelphia reported a cumulative
general fund deficit of $71.4 million for fiscal year 1992.
In June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to assist
Philadelphia in remedying fiscal
<PAGE>
emergencies. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. The legislation empowered PICA to
issue notes and bonds on behalf of Philadelphia, and also authorized
Philadelphia to levy a one-percent sales tax, the proceeds of which would be
used to pay off the bonds. In return for Pica's fiscal assistance, Philadelphia
is required, among other things, to establish five-year financial plans that
include balanced annual budgets. Under the legislation, if Philadelphia does not
comply with such requirements, PICA may withhold bond revenues and certain state
funding. At this time, the City is operating under a five-year fiscal plan
approved by PICA on April 17, 1995. Technical modifications were made to that
plan as of July 12, 1995 and the revised plan, incorporating such technical
modifications, was approved by PICA on July 18, 1995. As of November 15, 1995,
PICA has issued approximately $1,418.7 million of its Special Tax Revenue Bonds.
No further PICA bonds are to be issued by PICA for the purpose of
financing a capital project or deficit, as the authority for such bond sales
expired on December 31, 1994. PICA's authority to issue debt for the purpose of
financing a cash flow deficit expires on December 31, 1996. Its ability to
refund existing outstanding debt is unrestricted.
In January 1993, Philadelphia anticipated a cumulative general fund
budget deficit of $57 million for the 1993 fiscal year. In response to the
anticipated deficit, the Mayor unveiled a financial plan eliminating the budget
deficit for the 1993 budget year through significant service cuts that included
a plan to privatize certain city-provided services. Due to an upsurge in tax
receipts, cost-cutting and additional PICA borrowings, Philadelphia completed
the 1993 fiscal year with a balanced general fund budget. The audit findings for
fiscal year 1993 show a cumulative general fund surplus of approximately $3
million for the fiscal year ended June 30, 1993.
In January 1994, the Mayor proposed a $2.3 billion city general fund
budget that included no tax increases, no significant service cuts and a series
of modest health and welfare program increases. At that time, the Mayor also
unveiled a $2.2 billion program (the "PHILADELPHIA ECONOMIC STIMULUS PROGRAM")
designed to stimulate Philadelphia's economy and stop the loss of 1,000 jobs a
month. In its 1994 Comprehensive Annual Financial Report, Philadelphia reported
a cumulative general fund surplus of approximately $15.4 million for the fiscal
year ended June 30, 1994, up from approximately $3 million as of June 30, 1993.
Philadelphia's preliminary unaudited General Fund financial statements at June
30, 1995 project a surplus approximating $59.6 million.
S&P's rating on Philadelphia's general obligation bonds is "BBB-."
Moody's rating is currently "Baa."
LITIGATION. The Commonwealth is a party to numerous lawsuits in which
an adverse final decision could materially affect the Commonwealth's
governmental operations and consequently its ability to pay debt service on its
obligations. The Commonwealth also faces tort claims made possible by the
limited waiver of sovereign immunity effected by Act 152, approved September 28,
1978, as amended. Under the Act, damages for any loss are limited to $250,000
per person and $1 million for each accident.
<PAGE>
PENNSYLVANIA STATE TAXATION. For a discussion of the Federal tax status
of income earned on Pennsylvania Trust Units, see "Tax Status."
In the opinion of Chapman and Cutler, special counsel for the
Pennsylvania Trust for Pennsylvania tax matters, under existing law:
We have examined certain laws of the State of Pennsylvania (the
"STATE") to determine their applicability to the Pennsylvania Trust (the
"PENNSYLVANIA TRUST") and to the holders of Units in the Pennsylvania Trust who
are residents of the State of Pennsylvania (the "UNITHOLDERS"). The assets of
the Pennsylvania Trust will consist of interest-bearing obligations issued by or
on behalf of the State, any public authority, commission, board or other agency
created by the State or a political subdivision of the State, or political
subdivisions thereof (the "BONDS"). Distributions of income with respect to the
Bonds received by the Pennsylvania Trust will be made monthly.
Although we express no opinion with respect thereto, in rendering the
opinion expressed herein, we have assumed that: (i) the Bonds were validly
issued by the State or its municipalities, as the case may be, (ii) the interest
therein is excludable from gross income for federal income tax purposes, (iii)
the interest thereon is exempt from Pennsylvania State and local taxes and (iv)
the Bonds are exempt from county personal property taxes. This opinion does not
address the taxation of persons other than full-time residents of Pennsylvania.
Based on the foregoing, and review and consideration of existing State
laws as of this date, it is our opinion, and we herewith advise you, as follows:
1. The Pennsylvania Trust will have no tax liability for
purposes of the personal income tax (the "PERSONAL INCOME TAX"), the
corporate income tax (the "CORPORATE INCOME TAX") and the capital
stock-franchise tax (the "FRANCHISE TAX"), all of which are imposed
under the Pennsylvania Tax Reform Code of 1971, or the Philadelphia
School District Investment Net Income Tax (the "PHILADELPHIA SCHOOL
TAX") imposed under Section 19-1804 of the Philadelphia Code of
Ordinances.
2. Interest on the Bonds, net of Pennsylvania Trust expenses,
which is exempt from the Personal Income Tax when received by the
Pennsylvania Trust and which would be exempt from such tax if received
directly by a Unitholder, will retain its status as exempt from such
tax when received by the Pennsylvania Trust and distributed to such
Unitholder. Interest on the Bonds which is exempt from the Corporate
Income Tax and the Philadelphia School Tax when received by the
Pennsylvania Trust and which would be exempt from such taxes if
received directly by a Unitholder, will retain its status as exempt
from such taxes when received by the Pennsylvania Trust and distributed
to such Unitholder.
3. Distributions from the Pennsylvania Trust attributable to
capital gains recognized by the Pennsylvania Trust upon its disposition
of a Bond issued on or after February 1, 1994, will be taxable for
purposes of the Personal Income Tax and the Corporate Income Tax. No
opinion is expressed with respect to the taxation of distributions from
the Pennsylvania Trust attributable to capital gains recognized by the
Pennsylvania Trust upon its disposition of a Bond issued before
February 1, 1994.
<PAGE>
4. Distributions from the Pennsylvania Trust attributable to
capital gains recognized by the Pennsylvania Trust upon its disposition
of a Bond will be exempt from the Philadelphia School Tax if the Bond
was held by the Pennsylvania Trust for a period of more than six months
and the Unitholder held his Unit for more than six months before the
disposition of the Bond. If, however, the Bond was held by the
Pennsylvania Trust or the Unit was held by the Unitholder for a period
of less than six months, then distributions from the Pennsylvania Trust
attributable to capital gains recognized by the Pennsylvania Trust upon
its disposition of a Bond issued on or after February 1, 1994 will be
taxable for purposes of the Philadelphia School Tax; no opinion is
expressed with respect to the taxation of any such gains attributable
to Bonds issued before February 1, 1994.
5. Insurance proceeds paid under policies which represent
maturing interest on defaulted obligations will be exempt from the
Corporate Income Tax to the same extent as such amounts are excluded
from gross income for federal income tax purposes. No opinion is
expressed with respect to whether such insurance proceeds are exempt
from the Personal Income Tax or the Philadelphia School Tax.
6. Each Unitholder will recognize gain for purposes of the
Corporate Income Tax if the Unitholder redeems or sells Units of the
Pennsylvania Trust to the extent that such a transaction results in a
recognized gain to such Unitholder for federal income tax purposes and
such gain is attributable to Bonds issued on or after February 1, 1994.
No opinion is expressed with respect to the taxation of gains realized
by a Unitholder on the sale or redemption of a Unit to the extent such
gain is attributable to Bonds issued prior to February 1, 1994.
7. A Unitholder's gain on the sale or redemption of a Unit
will be subject to the Personal Income Tax, except that no opinion is
expressed with respect to the taxation of any such gain to the extent
it is attributable to Bonds issued prior to February 1, 1994.
8. A Unitholder's gain upon a redemption or sale of Units will
be exempt from the Philadelphia School Tax if the Unitholder held his
Unit for more than six months and the gain is attributable to Bonds
held by the Pennsylvania Trust for a period of more than six months.
If, however, the Unit was held by the Unitholder for less than six
months or the gain is attributable to Bonds held by the Pennsylvania
Trust for a period of less than six months, then the gains will be
subject to the Philadelphia School Tax; except that no opinion is
expressed with respect to the taxation of any such gains attributable
to Bonds issued before February 1, 1994.
9. The Bonds will not be subject to taxation under the County
Personal Property Tax Act of June 17, 1913 (the "PERSONAL PROPERTY
TAX"). Personal property taxes in Pennsylvania are imposed and
administered locally, and thus no assurance can be given as to whether
Units will be subject to the Personal Property Tax in a particular
jurisdiction However, in our opinion, Units should not be subject to
the Personal Property Tax.
<PAGE>
Unitholders should be aware that, generally, interest on indebtedness
incurred or continued to purchase or carry Units is not deductible for purposes
of the Personal Income Tax, the Corporate Income Tax or the Philadelphia School
Tax.
We have not examined any of the Bonds to be deposited and held in the
Pennsylvania Trust or the proceedings for the issuance thereof or the opinions
of bond counsel with respect thereto, and therefore express no opinion as to the
exemption from federal or state income taxation of interest on the Bonds if
interest thereon had been received directly by a Unitholder.
Chapman and Cutler has expressed no opinion with respect to taxation
under any other provision of Pennsylvania law. Ownership of the Units may result
in collateral Pennsylvania tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
RISK FACTORS SPECIFIC TO PUERTO RICO. The economy of Puerto Rico is
closely integrated with that of the mainland United States. During fiscal 1996
approximately 88% of Puerto Rico's exports were to the U.S. mainland, which was
also the source of approximately 62% of Puerto Rico's imports. The economy of
Puerto Rico is dominated by the manufacturing and service sectors. The
manufacturing sector has experienced a basic change over the years as a result
of increased emphasis on higher wage, high technology industries such as
pharmaceuticals, electronics, computers, microprocessors, professional and
scientific instruments, and certain high technology machinery and equipment. The
service sector, including finance, insurance and real estate, also plays a major
role in the economy. It ranks second only to manufacturing in contribution to
the gross domestic product and leads all sectors in providing employment. In
recent years, the service sector has experienced significant growth in response
to the expansion of the manufacturing sector.
Puerto Rico's more than decade-long economic expansion continued
throughout the five-year period from fiscal 1992 through fiscal 1996. Almost
every sector of the economy participated and record levels of employment were
achieved. Factors behind this expansion included government- sponsored economic
development programs, periodic declines in the exchange value of the U.S.
dollar, increases in the level of federal transfers and the relatively low cost
of borrowing. Unemployment, although at relatively low historical levels,
remains above the average for the United States. Average employment increased
from 977,000 in fiscal 1992 to 1,092,300 in fiscal 1996. Average unemployment
decreased from 16.5% in fiscal 1992, to 13.8% in fiscal 1996.
Gross product in fiscal 1992 was $23.7 billion and gross product in
fiscal 1996 was $30.2 billion ($26.7 billion in 1992 prices). This represents an
increase in gross product of 27.7% from fiscal 1992 to 1996 (12.9% in 1992
prices). Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1996, aggregate personal
income was $29.4 billion ($27.8 billion in 1992 prices) and personal income per
capita was $7,882 ($7,459 in 1992 prices).
The gross product forecast for fiscal 1997, made in February 1997,
projects an increase of 2.8% over fiscal 1996. Further growth in the Puerto Rico
economy in fiscal 1997 depends on several factors, including the strength of the
U.S. economy, the relative stability in the price of oil imports,
<PAGE>
increases in the number of visitors to the island, the level of exports, the
exchange value of the U.S. dollar, the level of federal transfers and the cost
of borrowing. During the first seven months of fiscal 1997, total employment
(seasonally adjusted) averaged 1,129,100, compared to 1,089,000 in the same
period in fiscal 1996, an increase of 3.7%.
The Puerto Rican economy is affected by a number of Commonwealth and
federal investment incentive programs. Aid for Puerto Rico's economy has
traditionally depended heavily on federal programs, and current federal
budgetary policies suggest that an expansion of aid to Puerto Rico is unlikely.
An adverse effect on the Puerto Rican economy could result from other U.S.
policies, including further reduction in transfer payment programs such as food
stamps, curtailment of military spending and policies which could lead to a
stronger dollar. One of the factors assisting the development of the Puerto
Rican economy has been the tax incentives offered by the federal and Puerto Rico
governments. Recently enacted federal legislation amending Internal Revenue Code
Section 936, however, phases out the federal tax incentives during a ten-year
period.
On February 26, 1997, legislation was introduced in the U.S. House of
Representatives proposing a mechanism to settle permanently the political
relationship between Puerto Rico and the United States, either through full self
government (e.g., statehood or independence, including, as an alternative, free
association via a bilateral treaty) or continued commonwealth. Under the
legislation, failure to settle on full self government after completion of the
referendum process provided therein would result in retention of commonwealth
status. Any change in the current status of Puerto Rico could have a material
adverse impact on such matters as the basic characteristics of future Puerto
Rico debt obligations, the markets for these obligations, and the types, levels
and quality of revenue sources pledged for the payment of existing and future
debt obligations. However, no assessment can be made at this time of the
economic and other effects of a change in federal laws affecting Puerto Rico.
FEDERAL TAXATION. For a discussion of the Federal tax status of income
earned on Territorial Trust Units, see "Tax Status."
EQUIVALENT TAXABLE ESTIMATED CURRENT RETURNS
As of the date of this Prospectus, the following table shows the
approximate taxable estimated current returns for individuals that are
equivalent to tax-exempt estimated current returns under combined Federal and
State (if applicable) taxes using the published Federal and State (if
applicable) tax rates scheduled to be in effect in 1997. This table illustrates
approximately what you would have to earn on taxable investments to equal the
tax-exempt estimated current return in your income tax bracket. For cases in
which more than one State bracket falls within a Federal bracket, the highest
State bracket is combined with the Federal bracket. The combined State and
Federal tax rates shown reflect the fact that State tax payments are currently
deductible for Federal tax purposes. The table does not show the approximate
taxable estimated current returns for individuals who are subject to the
alternative minimum tax. The taxable equivalent estimated current returns may be
somewhat higher than the equivalent returns indicated in the following table for
those individuals who have adjusted gross incomes in excess of $121,200. The
table does not reflect the effect of
<PAGE>
limitations on itemized deductions and the deduction for personal exemptions
which were designed to phase out certain benefits of these deductions for higher
income taxpayers. These limitations, in effect, raise the marginal maximum
Federal tax rate to approximately 44 percent for taxpayers filing a joint return
and entitled to four personal exemptions and to approximately 41 percent for
taxpayers filing a single return entitled to only one personal exemption. These
limitations are subject to certain maximums, which depend on the number of
exemptions claimed and the total amount of the taxpayer's itemized deductions.
For example, the limitation on itemized deductions will not cause a taxpayer to
lose more than 80 percent of his allowable itemized deductions, with certain
exceptions. See "Tax Status" for a more detailed discussion of recent Federal
tax legislation, including a discussion of provisions affecting corporations.
<TABLE>
<CAPTION>
Arizona Tax Equivalent Table
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
------------------------- ---------------------------------------------------------
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
------ ------ ------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24.65 $ 0- 41.20 17.8% 5.47% 6.08% 6.69% 7.30% 7.91% 8.52% 9.12%
41.20-99.60 30.8 6.50 7.23 7.95 8.67 9.39 10.12 10.84
24.65-59.75 31.5 6.57 7.30 8.03 8.76 9.49 10.22 10.95
59.75-124.65 99.60-151.75 34.3 6.85 7.61 8.37 9.13 9.89 10.65 11.42
151.75-271.05 39.1 7.39 8.21 9.03 9.85 10.67 11.49 12.32
124.65-271.05 39.3 7.41 8.24 9.06 9.88 10.71 11.53 12.36
Over 271.05 Over 271.05 42.7 7.85 8.73 9.60 10.47 11.34 12.22 13.09
</TABLE>
<TABLE>
<CAPTION>
Colorado Tax Equivalent Table
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
------------------------- ---------------------------------------------------------
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
------ ------ ------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.65 $ 0 - 41.20 19.3% 5.58% 6.20% 6.82% 7.43% 8.05% 8.67% 9.29%
24.65 - 59.75 41.20 - 99.60 31.6 6.58 7.31 8.04 8.77 9.50 10.23 10.96
59.75 - 124.65 99.60 - 151.75 34.5 6.87 7.63 8.40 9.16 9.92 10.69 11.45
124.65 - 271.05 151.75 - 271.05 39.2 7.40 8.22 9.05 9.87 10.69 11.51 12.34
Over 271.05 Over 271.05 42.6 7.84 8.71 9.58 10.45 11.32 12.20 13.07
</TABLE>
<TABLE>
<CAPTION>
Minnesota Tax Equivalent Table
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
------------------------- ---------------------------------------------------------
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
------ ------ ------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.65 $ 0 - 41.20 21.8% 5.75% 6.39% 7.03% 7.67% 8.31% 8.95% 9.59%
24.65 - 59.75 41.20 - 99.60 34.1 6.83 7.59 8.35 9.10 9.86 10.62 11.38
59.75 - 124.65 99.60 - 151.75 36.9 7.13 7.92 8.72 9.51 10.30 11.09 11.89
124.65 - 271.05 151.75 - 271.05 41.4 7.68 8.53 9.39 10.24 11.09 11.95 12.80
Over 271.05 Over 271.05 44.7 8.14 9.04 9.95 10.85 11.75 12.66 13.56
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
National Tax Equivalent Table
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
------------------------- ---------------------------------------------------------
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
------ ------ ------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.65 $ 0 - 41.20 15.0% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82%
24.65 - 59.75 41.20 - 99.60 28.0 6.25 6.94 7.64 8.33 9.03 9.72 10.42
59.75 - 124.65 99.60 - 151.75 31.0 6.52 7.25 7.97 8.70 9.42 10.14 10.87
124.65 - 271.05 151.75 - 271.05 36.0 7.03 7.81 8.59 9.38 10.16 10.94 11.72
Over 271.05 Over 271.05 39.6 7.45 8.28 9.11 9.93 10.76 11.59 12.42
</TABLE>
<TABLE>
<CAPTION>
New Mexico Tax Equivalent Table
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
------------------------- ---------------------------------------------------------
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
------ ------ ------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24.65 20.1% 5.63% 6.26% 6.88% 7.51% 8.14% 8.76% 9.39%
$ 0 - 41.20 21.0 5.70 6.33 6.96 7.59 8.23 8.86 9.49
24.65 - 59.75 41.20 - 99.60 33.7 6.79 7.54 8.30 9.05 9.80 10.56 11.31
59.75 - 124.65 99.60 - 151.75 36.9 7.13 7.92 8.72 9.51 10.30 11.09 11.89
124.65 - 271.05 151.75 - 271.05 41.4 7.68 8.53 9.39 10.24 11.09 11.95 12.80
Over 271.05 Over 271.05 44.7 8.14 9.04 9.95 10.85 11.75 12.66 13.56
</TABLE>
<TABLE>
<CAPTION>
Oregon Tax Equivalent Table
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
------------------------- ---------------------------------------------------------
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket* Equivalent Taxable Estimated Current Return
------ ------ ------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.65 $ 0 - 41.20 22.7% 5.82% 6.47% 7.12% 7.76% 8.41% 9.06% 9.70%
24.65 - 59.75 41.20 - 99.60 34.5 6.87 7.63 8.40 9.16 9.92 10.69 11.45
59.75 - 124.65 99.60 - 151.75 37.2 7.17 7.96 8.76 9.55 10.35 11.15 11.94
124.65 - 271.05 151.75 - 271.05 41.8 7.73 8.59 9.45 10.31 11.17 12.03 12.89
Over 271.05 Over 271.05 45.0 8.18 9.09 10.00 10.91 11.82 12.73 13.64
* The State tax brackets are those for 1996. The 1997 brackets may be indexed by
a cost-of-living adjustment.
</TABLE>
<TABLE>
<CAPTION>
Pennsylvania Tax Equivalent Table
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
------------------------- ---------------------------------------------------------
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
------ ------ ------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0- 24.65 $ 0- 41.20 17.4% 5.45% 6.05% 6.66% 7.26% 7.87% 8.47% 9.08%
24.65 - 59.75 41.20 - 99.60 30.0 6.43 7.14 7.86 8.57 9.29 10.00 10.71
59.75 - 124.65 99.60 - 151.75 32.9 6.71 7.45 8.20 8.94 9.69 10.43 11.18
124.65 - 271.05 151.75 - 271.05 37.8 7.23 8.04 8.84 9.65 10.45 11.25 12.06
Over 271.05 Over 271.05 41.3 7.67 8.52 9.37 10.22 11.07 11.93 12.78
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Territorial Tax Equivalent Table
Taxable Income ($1,000's) Tax-Exempt Estimated Current Return
------------------------- ---------------------------------------------------------
Single Joint Tax 4-1/2% 5% 5-1/2% 6% 6-1/2% 7% 7-1/2%
Return Return Bracket Equivalent Taxable Estimated Current Return
------ ------ ------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24.65 $ 0 - 41.20 15.0% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82%
24.65 - 59.75 41.20 - 99.60 28.0 6.25 6.94 7.64 8.33 9.03 9.72 10.42
59.75 - 124.65 99.60 - 151.75 31.0 6.52 7.25 7.97 8.70 9.42 10.14 10.87
124.65 - 271.05 151.75 - 271.05 36.0 7.03 7.81 8.59 9.38 10.16 10.94 11.72
Over 271.05 Over 271.05 39.6 7.45 8.28 9.11 9.93 10.76 11.59 12.42
* The table reflects the Federal tax rate and does not reflect any effect that Puerto Rico taxes may have in
determining the taxable equivalent yield for residents of Puerto Rico.
</TABLE>
RISK FACTORS
GENERAL. Certain of the Bonds in the Trusts may have been acquired at a
market discount from par value. The coupon interest rates on the discount bonds
at the time they were purchased and deposited in the Trusts were lower than the
current market interest rates for newly issued bonds of comparable rating and
type. If such interest rates for newly issued comparable bonds increase, the
market discount of previously issued bonds will become greater, and if such
interest rates for newly issued comparable bonds decline, the market discount of
previously issued bonds will be reduced, other things being equal. Investors
should also note that the value of bonds purchased at a market discount will
increase in value faster than Bonds purchased at a market premium if interest
rates decrease. Conversely, if interest rates increase, the value of bonds
purchased at a market discount will decrease faster than Bonds purchased at a
market premium. In addition, if interest rates rise, the prepayment risk of
higher yielding, premium bonds and the prepayment benefit for lower yielding,
discount bonds will be reduced. A discount bond held to maturity will have a
larger portion of its total return in the form of taxable income and capital
gain and less in the form of tax-exempt interest income than a comparable bond
newly issued at current market rates. See "Tax Status." Market discount
attributable to interest changes does not indicate a lack of market confidence
in the issue. Neither the Sponsor, the Distributor nor the Trustee shall be
liable in any way for any default, failure or defect in any of the Bonds.
Certain of the Bonds in the Trusts may be original issue discount
bonds. Under current law, the original issue discount, which is the difference
between the stated redemption price at maturity and the issue price of the
Bonds, is deemed to accrue on a daily basis and the accrued portion is treated
as tax-exempt interest income for Federal income tax purposes. On sale or
redemption, any gain realized that is in excess of the earned portion of
original issue discount will be taxable as capital gain unless the gain is
attributable to market discount in which case the accretion of market discount
is taxable as ordinary income. See "Tax Status." The current value of an
original issue discount bond reflects the present value of its stated redemption
price at maturity. The market value tends to increase in greater increments as
the Bonds approach maturity.
Certain of the original issue discount bonds may be zero coupon bonds
(including bonds known as multiplier bonds, money multiplier bonds, capital
appreciation bonds, capital accumulator
<PAGE>
bonds, compound interest bonds and money discount maturity payment bonds). Zero
coupon bonds do not provide for the payment of any current interest and
generally provide for payment at maturity at face value unless sooner sold or
redeemed. Zero coupon bonds may be subject to more price volatility than
conventional bonds. While some types of zero coupon bonds, such as multipliers
and capital appreciation bonds, define par as the initial offering price rather
than the maturity value, they share the basic zero coupon bond features of (i)
not paying interest on a semi-annual basis and (ii) providing for the
reinvestment of the bond's semi-annual earnings at the bond's stated yield to
maturity. While zero coupon bonds are frequently marketed on the basis that
their fixed rate of return minimizes reinvestment risk, this benefit can be
negated in large part by weak call protection, i.e., a bond's provision for
redemption at only a modest premium over the accreted value of the bond. See
footnote (6) in "The Trusts -- Notes to Schedules of Investments" in Part One of
this Prospectus.
Certain of the Bonds in the Trusts may have been acquired at a market
premium from par value at maturity. The coupon interest rates on the premium
bonds at the time they were purchased and deposited in the Trusts were higher
than the current market interest rates for newly issued bonds of comparable
rating and type. If such interest rates for newly issued and otherwise
comparable bonds decrease, the market premium of previously issued bonds will be
increased, and if such interest rates for newly issued comparable bonds
increase, the market premium of previously issued bonds will be reduced, other
things being equal. The current returns of bonds trading at a market premium are
initially higher than the current returns of comparable bonds of a similar type
issued at currently prevailing interest rates because premium bonds tend to
decrease in market value as they approach maturity when the face amount becomes
payable. Because part of the purchase price is thus returned not at maturity but
through current income payments, early redemption of a premium bond at par or
early prepayments of principal will result in a reduction in yield. Redemption
pursuant to call provisions generally will, and redemption pursuant to sinking
fund provisions may, occur at times when the redeemed Bonds have an offering
side valuation which represents a premium over par or for original issue
discount Bonds a premium over the accreted value. To the extent that the Bonds
were deposited in the Fund at a price higher than the price at which they are
redeemed, this will represent a loss of capital when compared to the original
Public Offering Price of the Units. Because premium bonds generally pay a higher
rate of interest than Bonds priced at or below par, the effect of the redemption
of premium bonds would be to reduce estimated net annual unit income by a
greater percentage than the par amount of such bonds bears to the total par
amount of Bonds in the affected Trust. Although the actual impact of any such
redemptions that may occur will depend upon the specific Bonds that are
redeemed, it can be anticipated that the estimated net annual unit income will
be significantly reduced after the dates on which such Bonds are eligible for
redemption. A Trust may be required to sell zero coupon bonds prior to maturity
(at their current market price which is likely to be less than their par value)
in the event that all the Bonds in the portfolio other than the zero coupon
bonds are called or redeemed in order to pay expenses of a Trust or in case a
Trust is terminated. See "Trust Administration--Portfolio Administration" and
"Trust Administration--Amendment or Termination." See "The Trusts--Schedule of
Investments" in Part
<PAGE>
One of this Prospectus for each Trust for the earliest scheduled call date and
the initial redemption price for each Bond.
Certain of the Bonds in certain of the Trusts may be general
obligations of a governmental entity that are backed by the taxing power of such
entity. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such an
investment may entail. All other Bonds in the Trusts are revenue bonds payable
from the income of a specific project or authority and are not supported by the
issuer's power to levy taxes. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds, on the other hand, are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source. There are, of course, variations in the security of the different Bonds
in the Fund, both within a particular classification and between
classifications, depending on numerous factors.
Certain of the Bonds in certain of the Trusts may be obligations which
derive their payments from mortgage loans. Certain of such housing bonds may be
FHA insured or may be single family mortgage revenue bonds issued for the
purpose of acquiring from originating financial institutions notes secured by
mortgages on residences located within the issuer's boundaries and owned by
persons of low or moderate income. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such issuers and
the risks which such an investment may entail. Mortgage loans are generally
partially or completely prepaid prior to their final maturities as a result of
events such as sale of the mortgaged premises, default, condemnation or casualty
loss. Because these bonds are subject to extraordinary mandatory redemption in
whole or in part from such prepayments of mortgage loans, a substantial portion
of such bonds will probably be redeemed prior to their scheduled maturities or
even prior to their ordinary call dates. Extraordinary mandatory redemption
without premium could also result from the failure of the originating financial
institutions to make mortgage loans in sufficient amounts within a specified
time period. Additionally, unusually high rates of default on the underlying
mortgage loans may reduce revenues available for the payment of principal of or
interest on such mortgage revenue bonds. These bonds were issued under Section
103A of the Internal Revenue Code, which Section contains certain requirements
relating to the use of the proceeds of such bonds in order for the interest on
such bonds to retain its tax-exempt status. In each case the issuer of the bonds
has covenanted to comply with applicable requirements and bond counsel to such
issuer has issued an opinion that the interest on the bonds is exempt from
Federal income tax under existing laws and regulations. Certain issuers of
housing bonds have considered various ways to redeem bonds they have issued
prior to the stated first redemption dates for such bonds. In connection with
any housing bonds held by the Fund, the Sponsor at the Initial Date of Deposit
is not aware that any of the respective issuers of such Bonds are actively
considering the redemption of such Bonds prior to their respective stated
initial call dates.
Certain of the Bonds in certain of the Trusts may be health care
revenue bonds. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of
<PAGE>
such issuers and the risks which such an investment may entail. Ratings of bonds
issued for health care facilities are often based on feasibility studies that
contain projections of occupancy levels, revenues and expenses. A facility's
gross receipts and net income available for debt service may be affected by
future events and conditions including, among other things, demand for services
and the ability of the facility to provide the services required, physicians'
confidence in the facility, management capabilities, competition with other
health care facilities, efforts by insurers and governmental agencies to limit
rates, legislation establishing state rate-setting agencies, expenses, the cost
and possible unavailability of malpractice insurance, the funding of Medicare,
Medicaid and other similar third party payor programs, government regulation and
the termination or restriction of governmental financial assistance, including
that associated with Medicare, Medicaid and other similar third party payor
programs. Medicare reimbursements are currently calculated on a prospective
basis utilizing a single nationwide schedule of rates. Prior to such
legislation, Medicare reimbursements were based on the actual costs incurred by
the health facility. The current legislation may adversely affect reimbursements
to hospitals and other facilities for services provided under the Medicare
program.
Certain of the Bonds in certain of the Trusts may be obligations of
public utility issuers, including those selling wholesale and retail electric
power and gas. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which such
an investment may entail. General problems of such issuers would include the
difficulty in financing large construction programs in an inflationary period,
the limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in absorbing
utility debt, the difficulty in obtaining fuel at reasonable prices and the
effect of energy conservation. All of such issuers have been experiencing
certain of these problems in varying degrees. In addition, Federal, state and
municipal governmental authorities may from time to time review existing, and
impose additional, regulations governing the licensing, construction and
operation of nuclear power plants, which may adversely affect the ability of the
issuers of certain of the Bonds in the portfolio to make payments of principal
and/or interest on such Bonds.
Certain of the Bonds in certain of the Trusts may be obligations of
issuers whose revenues are derived from the sale of water and/or sewerage
services. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such an
investment may entail. Such Bonds are generally payable from user fees. The
problems of such issuers include the ability to obtain timely and adequate rate
increases, population decline resulting in decreased user fees, the difficulty
of financing large construction programs, the limitations on operations and
increased costs and delays attributable to environmental considerations, the
increasing difficulty of obtaining or discovering new supplies of fresh water,
the effect of conservation programs and the impact of "no growth" zoning
ordinances. All of such issuers have been experiencing certain of these problems
in varying degrees.
Certain of the Bonds in certain of the Trusts may be industrial revenue
bonds ("IRBs"). In view of this an investment in such a Trust should be made
with an understanding of the
<PAGE>
characteristics of such issuers and the risks which such an investment may
entail. IRBs have generally been issued under bond resolutions pursuant to which
the revenues and receipts payable under the arrangements with the operator of a
particular project have been assigned and pledged to purchasers. In some cases,
a mortgage on the underlying project may have been granted as security for the
IRBs. Regardless of the structure, payment of IRBs is solely dependent upon the
creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors may be affected by many factors
which may have an adverse impact on the credit quality of the particular company
or industry. These include cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents or environ-
mentally-caused illnesses, extensive competition and financial deterioration
resulting from a corporate restructuring pursuant to a leveraged buy-out,
takeover or otherwise. Such a restructuring may result in the operator of a
project becoming highly leveraged which may impact on such operator's
creditworthiness which in turn would have an adverse impact on the rating and/or
market value of such Bonds. Further, the possibility of such a restructuring may
have an adverse impact on the market for and consequently the value of such
Bonds, even though no actual takeover or other action is ever contemplated or
effected.
Certain of the Bonds in certain of the Trusts may be obligations that
are secured by lease payments of a governmental entity (hereinafter called
"lease obligations"). Lease obligations are often in the form of certificates of
participation. In view of this an investment in such a Trust should be made with
an understanding of the characteristics of such issuers and the risks which such
an investment may entail. Although the lease obligations do not constitute
general obligations of the municipality for which the municipality's taxing
power is pledged, a lease obligation is ordinarily backed by the municipality's
covenant to appropriate for and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease
payments in future years unless money is appropriated for such purpose on a
yearly basis. A governmental entity that enters into such a lease agreement
cannot obligate future governments to appropriate for and make lease payments
but covenants to take such action as is necessary to include any lease payments
due in its budgets and to make the appropriations therefor. A governmental
entity's failure to appropriate for and to make payments under its lease
obligation could result in insufficient funds available for payment of the
obligations secured thereby. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult.
Certain of the Bonds in certain of the Trusts may be obligations of
issuers which are, or which govern the operation of, schools, colleges and
universities and whose revenues are derived mainly from ad valorem taxes or, for
higher education systems, from tuition, dormitory revenues, grants and
endowments. In view of this an investment in such a Trust should be made with an
understanding of the characteristics of such issuers and the risks which such an
investment may entail. General problems relating to school bonds include
litigation contesting the state constitutionality of financing public education
in part from ad valorem taxes, thereby creating a disparity in educational funds
available to schools in wealthy areas and schools in poor areas. Litigation or
legislation on this issue may affect the sources of funds available for the
payment of
<PAGE>
school bonds in the Trusts. General problems relating to college and university
obligations include the prospect of a declining percentage of the population
consisting of "college" age individuals, possible inability to raise tuitions
and fees sufficiently to cover increased operating costs, the uncertainty of
continued receipt of Federal grants and state funding, and government
legislation or regulations which may adversely affect the revenues or costs of
such issuers. All of such issuers have been experiencing certain of these
problems in varying degrees.
Certain of the Bonds in certain of the Trusts may be obligations which
are payable from and secured by revenues derived from the ownership and
operation of facilities such as airports, bridges, turnpikes, port authorities,
convention centers and arenas. In view of this an investment in such a Trust
should be made with an understanding of the characteristics of such issuers and
the risks which such an investment may entail. The major portion of an airport's
gross operating income is generally derived from fees received from signatory
airlines pursuant to use agreements which consist of annual payments for leases,
occupancy of certain terminal space and service fees. Airport operating income
may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines are experiencing severe financial difficulties.
The Sponsor cannot predict what effect these industry conditions may have on
airport revenues which are dependent for payment on the financial condition of
the airlines and their usage of the particular airport facility. Similarly,
payment on Bonds related to other facilities is dependent on revenues from the
projects, such as user fees from ports, tolls on turnpikes and bridges and rents
from buildings. Therefore, payment may be adversely affected by reduction in
revenues due to such factors as increased cost of maintenance, decreased use of
facility, lower cost of alternative modes of transportation, scarcity of fuel
and reduction or loss of rents.
Certain of the Bonds in certain of the Trusts may be obligations which
are payable from and secured by revenues derived from the operation of resource
recovery facilities. In view of this an investment in such a Trust should be
made with an understanding of the characteristics of such issuers and the risks
which such an investment may entail. Resource recovery facilities are designed
to process solid waste, generate steam and convert steam to electricity.
Resource recovery bonds may be subject to extraordinary optional redemption at
par upon the occurrence of certain circumstances, including but not limited to:
destruction or condemnation of a project; contracts relating to a project
becoming void, unenforceable or impossible to perform; changes in the economic
availability of raw materials, operating supplies or facilities necessary for
the operation of a project or technological or other unavoidable changes
adversely affecting the operation of a project; administrative or judicial
actions which render contracts relating to the projects void, unenforceable or
impossible to perform; or impose unreasonable burdens or excessive liabilities.
The Sponsor cannot predict the causes or likelihood of the redemption of
resource recovery bonds in a Trust prior to the stated maturity of the Bonds.
An investment in Units of the Trusts should be made with an
understanding of the interest rate risk associated with such an investment.
Generally, bond prices (and therefore Unit prices) will
<PAGE>
move inversely with interest rates, and bonds (Trusts) with longer maturities
are likely to exhibit greater fluctuations in market value, all other things
being equal, than bonds (Trusts) with shorter maturities.
REDEMPTIONS OF BONDS. Certain of the Bonds in certain of the Trusts are
subject to redemption prior to their stated maturity date pursuant to sinking
fund provisions, call provisions or extraordinary optional or mandatory
redemption provisions or otherwise. A sinking fund is a reserve fund accumulated
over a period of time for retirement of debt. A callable debt obligation is one
which is subject to redemption or refunding prior to maturity at the option of
the issuer. A refunding is a method by which a debt obligation is redeemed, at
or before maturity, by the proceeds of a new debt obligation. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. The exercise of
redemption or call provisions will (except to the extent the proceeds of the
called Bonds are used to pay for Unit redemptions) result in the distribution of
principal and may result in a reduction in the amount of subsequent interest
distributions and it may also affect the current return on Units of the Trust
involved. Each Trust portfolio contains a listing of the sinking fund and call
provisions, if any, with respect to each of the Bonds. Extraordinary optional
redemptions and mandatory redemptions result from the happening of certain
events. Generally, events that may permit the extraordinary optional redemption
of Bonds or may require the mandatory redemption of Bonds include, among others:
the substantial damage or destruction by fire or other casualty of the project
for which the proceeds of the Bonds were used; an exercise by a local, state or
Federal governmental unit of its power of eminent domain to take all or
substantially all of the project for which the proceeds of the Bonds were used;
changes in the economic availability of raw materials, operating supplies or
facilities or technological or other changes which render the operation of the
project for which the proceeds of the Bonds were used uneconomic; changes in law
or an administrative or judicial decree which renders the performance of the
agreement under which the proceeds of the Bonds were made available to finance
the project impossible or which creates unreasonable burdens or which imposes
excessive liabilities, such as taxes, not imposed on the date the Bonds are
issued on the issuer of the Bonds or the user of the proceeds of the Bonds; an
administrative or judicial decree which requires the cessation of a substantial
part of the operations of the project financed with the proceeds of the Bonds,
an overestimate of the costs of the project to be financed with the proceeds of
the Bonds resulting in excess proceeds of the Bonds which may be applied to
redeem Bonds; or an underestimate of a source of funds securing the Bonds
resulting in excess funds which may be applied to redeem Bonds. The Sponsor is
unable to predict all of the circumstances which may result in such redemption
of an issue of Bonds. See "Schedule of Investments" in Part One of this
Prospectus for each Trust and footnote (3) in "Notes to Schedules of
Investments" in Part One of this Prospectus.
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
As of the opening of business on the date of this Prospectus, the
Estimated Current Returns and the Estimated Long-Term Returns were those
indicated in the "Summary of Essential Financial Information" in Part One of
this Prospectus. The Estimated Current Returns are calculated by
<PAGE>
dividing the estimated net annual interest income per Unit by the Public
Offering Price. The estimated net annual interest income per Unit will vary with
changes in fees and expenses of the Trustee, Sponsor and Evaluator and with the
principal prepayment, redemption, maturity, exchange or sale of Bonds while the
Public Offering Price will vary with changes in the offering price of the
underlying Bonds; therefore, there is no assurance that the present Estimated
Current Returns will be realized in the future. Estimated Long-Term Returns are
calculated using a formula which (i) takes into consideration, and determines
and factors in the relative weightings of, the market values, yields (which
takes into account the amortization of premiums and the accretion of discounts)
and estimated retirements of all the Bonds in a Trust and (ii) takes into
account a compounding factor and the expenses and sales charge associated with
each Trust Unit. Since the market values and estimated retirements of the Bonds
and the expenses of a Trust will change, there is no assurance that the present
Estimated Long-Term Returns will be realized in the future. Estimated Current
Returns and Estimated Long-Term Returns are expected to differ because the
calculation of Estimated Long-Term Returns reflects the estimated date and
amount of principal returned while Estimated Current Returns calculations
include only net annual interest income and Public Offering Price.
TRUST OPERATING EXPENSES
COMPENSATION OF SPONSOR. Delaware Management Company, Inc., which acts
as Sponsor, reserves the right to charge fees for providing supervisory services
in amounts which will not exceed the amounts as set forth under "Summary of
Essential Financial Information" in Part One of this Prospectus. Any such
charges would be payable in monthly installments and would be based on the
number of Units outstanding on the first day of each month of each year. Any
such fees may exceed the actual costs of providing such supervisory services for
this Fund, but at no time will the total amount paid to the Sponsor for
portfolio supervisory services rendered to all unit investment trusts sponsored
by the Sponsor in any calendar year exceed the aggregate cost to the Sponsor of
supplying such services in such year. The foregoing fees may be increased
without approval of the Unitholders by amounts not exceeding proportionate
increases under the category "All Services Less Rent of Shelter" in the Consumer
Price Index published by the United States Department of Labor or, if such
category is no longer published, in a comparable category. An affiliate of the
Sponsor will receive sales commissions and may realize other profits (or losses)
in connection with the sale of Units.
EVALUATOR'S FEE. For its services, the Evaluator will receive an annual
fee as set forth under "Summary of Essential Financial Information." The
Evaluator's fees are payable in monthly installments. The Evaluator's fees may
be increased without approval of the Unitholders by amounts not exceeding
proportionate increases under the category "All Services Less Rent of Shelter"
in the Consumer Price Index published by the United States Department of Labor
or, if such category is no longer published, in a comparable category.
TRUSTEE'S FEE. For its services, the Trustee will receive an annual fee
as set forth under "Summary of Essential Financial Information" in Part One of
this Prospectus. The Trustee's fees are payable in monthly installments (based
on the outstanding principal amount of Bonds in a Trust as of the first day of
each month of each year) on or before the fifteenth day of each month from the
Interest Account to the extent funds are available and then from the Principal
Account. The
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Trustee's fee may be periodically adjusted in response to fluctuations in
short-term interest rates (reflecting the cost to the Trustee of advancing funds
to a Trust to meet scheduled distributions) and may be further increased without
approval of the Unitholders by amounts not exceeding proportionate increases
under the category "All Services Less Rent of Shelter" in the Consumer Price
Index published by the United States Department of Labor or, if such category is
no longer published, in a comparable category. Since the Trustee has the use of
the funds being held in the Principal and Interest Accounts for future
distributions, payment of expenses and redemptions and since such Accounts are
non-interest bearing to Unitholders, the Trustee benefits thereby. Part of the
Trustee's compensation for its services to the Fund is expected to result from
the use of these funds. For a discussion of the services rendered by the Trustee
pursuant to its obligations under the Trust Agreement, see "Rights of
Unitholders--Reports Provided" and "Trust Administration."
MISCELLANEOUS EXPENSES. The following additional charges are or may be
incurred by the Trusts: (i) fees of the Trustee for extraordinary services, (ii)
expenses of the Trustee (including legal and auditing expenses) and of counsel
designated by the Sponsor, (iii) various governmental charges, (iv) expenses and
costs of any action taken by the Trustee to protect a Trust and the rights and
interests of Unitholders, (v) indemnification of the Trustee for any loss,
liability or expenses incurred by it in the administration of a Trust without
gross negligence, bad faith or willful misconduct on its part, (vi) any special
custodial fees payable in connection with the sale of any of the Bonds in a
Trust and (vii) expenditures incurred in contacting Unitholders upon termination
of a Trust.
The fees and expenses set forth herein are payable out of the Trusts.
When such fees and expenses are paid by or owing to the Trustee, they are
secured by a lien on the portfolio or portfolios of the applicable Trust or
Trusts. If the balances in the Interest and Principal Accounts are insufficient
to provide for amounts payable by the Fund, the Trustee has the power to sell
Bonds to pay such amounts.
INSURANCE ON THE BONDS IN THE INSURED TRUSTS
Insurance guaranteeing prompt payment of interest and principal, when
due, on all the Bonds in the Insured Trusts in the Fund has been obtained by the
Sponsor or by the issuers or underwriters of such Bonds. Although no insurance
has been obtained on the Bonds in the uninsured Trusts, certain of the Bonds in
the uninsured Trusts may be insured.
An Insurer has issued a policy or policies of insurance covering each
of the Bonds in the Insured Trusts, each policy to remain in force until the
payment in full of such Bonds and whether or not the Bonds continue to be held
by an Insured Trust. By the terms of each policy, the Insurer will
unconditionally guarantee to the holders or owners of the Insured Bonds the
payment, when due, required of the issuer of the Bonds of an amount equal to the
principal of and interest on the Bonds as such payments shall become due, but
not be paid (except that in the event of any acceleration of the due date of
principal by reason of mandatory or optional redemption, default or otherwise,
the payments guaranteed will be made in such amounts and at such times as would
have been due had there not been an acceleration). The Insurer will be
responsible for such payments, less any amounts received by the holders or
owners of the Bonds from any trustee for the bond issuers or from any
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other sources other than the Insurer. The Insurers' policies relating to small
industrial development bonds and pollution control revenue bonds also guarantee
the full and complete payments required to be made by or on behalf of an issuer
of Bonds pursuant to the terms of the Bonds if there occurs an event which
results in the loss of the tax-exempt status of the interest on such Bonds,
including principal, interest or premium payments, if any, as and when thereby
required. Each Insurer has indicated that its insurance policies do not insure
the payment of principal or interest on bonds which are not required to be paid
by the issuer thereof because the bonds were not validly issued. However, as
indicated under "Tax Status," the respective issuing authorities have received
opinions of bond counsel relating to the valid issuance of each of the Bonds in
the Trusts. Each Insurer's policy also does not insure against non-payment of
principal of or interest on the Bonds resulting from the insolvency, negligence
or any other act or omission of the trustee or other paying agent for the Bonds.
Such policies are not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law. The policies are
non-cancelable and the insurance premiums have been fully paid on or prior to
the date of deposit, either by the Sponsor or, if a policy has been obtained by
a Bond issuer, by such issuer.
Standard & Poor's rates all new issues insured by an Insurer "AAA Prime
Grade." Moody's rates all bond issues insured by an Insurer "Aaa." These ratings
independently reflect each company's current assessment of the creditworthiness
of each Insurer and its ability to pay claims on its policies of insurance. See
"Investment Objectives and Portfolio Selection." Any further explanation as to
the significance of either rating may be obtained only from the company which
issued the respective rating. Neither rating is a recommendation to buy, sell or
hold the Bonds, and such rating may be subject to revision or withdrawal at any
time by the respective issuer. Any downward revision or withdrawal of the rating
may have an adverse effect on the market price of the Bonds.
Because the insurance on the Bonds will be effective so long as the
Bonds are outstanding, such insurance will be taken into account in determining
the market value of the Bonds and therefore some value attributable to such
insurance will be included in the value of the Units of the Insured Trusts. The
insurance does not, however, guarantee the market value of the Bonds or of the
Units.
TAX STATUS
At the respective times of issuance of the Bonds, opinions relating to
the validity thereof and to the exclusion of interest thereon from Federal gross
income were rendered by bond counsel to the respective issuing authorities. In
addition, with respect to State Trusts, where applicable, bond counsel to the
issuing authorities rendered opinions as to the exemption of interest on such
Bonds when held by residents of the State in which issuers of such Bonds are
located, from State income taxes and certain State or local intangibles and
local income taxes. Neither the Sponsor nor Chapman and Cutler have made any
special review for the Fund of the proceedings relating to the issuance of the
Bonds or of the bases for such opinions. If the interest on a Bond should be
determined to be taxable, the Bond would generally have to be sold at a
substantial discount. In addition, investors could be required to pay income tax
on interest received prior to the date on which interest is
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determined to be taxable. Gain realized on the sale or redemption of the Bonds
by the Trustee or of a Unit by a Unitholder is includible in gross income for
Federal income tax purposes and may be includible in gross income for state tax
purposes. (Such gain does not include any amounts received in respect of accrued
interest or accrued original issue discount, if any). If a Bond is acquired with
accrued interest, that portion of the price paid for the accrued interest is
added to the tax basis of the Bond. When this accrued interest is received, it
is treated as a return of capital and reduces the tax basis of the Bond. If a
Bond is purchased for a premium, the amount of the premium is added to the tax
basis of the Bond. Bond premium is amortized over the remaining term of the
Bond, and the tax basis of the Bond is reduced each tax year by the amount of
the premium amortized in that tax year. For purposes of the following opinions,
it is assumed that each asset of the Trust is debt, the interest on which is
excluded for Federal income tax purposes.
In the opinion of Chapman and Cutler, counsel for the Sponsor, under
existing law:
1. Each Trust is not an association taxable as a corporation
for Federal income tax purposes and interest and accrued original issue
discount on Bonds which is excludable from gross income under the
Internal Revenue Code of 1986 (the "Code") will retain its status for
Federal income tax purposes, when received by a Trust and when
distributed to Unitholders; however such interest may be taken into
account in computing the alternative minimum tax, an additional tax on
branches of foreign corporations and the environmental tax (the
"Superfund Tax"), as noted below;
2. Each Unitholder is considered to be the owner of a pro rata
portion of each asset of the respective Trust under subpart E,
subchapter J of chapter 1 of the Code and will have a taxable event
when such Trust disposes of a Bond, or when the Unitholder redeems or
sells his Unit. If the Unitholder disposes of a Unit, he is deemed
thereby to have disposed of his entire pro rata interest in all assets
of the Trust involved including his pro rata portion of all the Bonds
represented by the Unit. Legislative proposals have been made that
would treat certain transactions designed to reduce or eliminate risk
of loss and opportunities for gain as constructive sales for purposes
of recognition of gain (but not loss). Unitholders should consult their
own tax advisors with regard to any such constructive sale
rules.Unitholders must reduce the tax basis of their Units for their
share of accrued interest received by the respective Trust, if any, on
Bonds delivered after the Unitholders pay for their Units to the extent
that such interest accrued on such Bonds before the date the Trust
acquired ownership of the Bonds (and the amount of this reduction may
exceed the amount of accrued interest paid to the seller), and,
consequently, such Unitholders may have an increase in taxable gain or
reduction in capital loss upon the disposition of such Units. Gain or
loss upon the sale or redemption of Units is measured by comparing the
proceeds of such sale or redemption with the adjusted basis of the
Units. If the Trustee disposes of Bonds (whether by sale, payment on
maturity, redemption or otherwise), gain or loss is recognized to the
Unitholder (subject to various non-recognition provisions of the Code).
The amount of any such gain or loss is measured by comparing the
Unitholder's pro rata share of the total proceeds from such disposition
with the Unitholder's basis for his or her fractional interest in the
asset disposed
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of. In the case of a Unitholder who purchases Units, such basis (before
adjustment for accrued original issue discount and amortized bond
premium, if any) is determined by apportioning the cost of the Units
among each of the Trust assets ratably according to value as of the
valuation date nearest the date of acquisition of the Units. It should
be noted that certain legislative proposals have been made which could
affect the calculation of basis for Unitholders holding securities that
are substantially identical to the Bonds. Unitholders should consult
their own tax advisors with regard to the calculation of basis. The tax
basis reduction requirements of the Code relating to amortization of
bond premium may, under some circumstances, result in the Unitholder
realizing a taxable gain when his Units are sold or redeemed for an
amount less than or equal to his original cost; and
3. Any proceeds paid under individual policies obtained by
issuers of Bonds which represent maturing interest on defaulted Bonds
held by the Trustee will be excludable from Federal gross income if,
and to the same extent as, such interest would have been excludable if
paid in the normal course by the issuer of the defaulted Bonds provided
that, at the time such policies are purchased, the amounts paid for
such policies are reasonable, customary and consistent with the
reasonable expectation that the issuer of the Bonds, rather than the
Insurer, will pay debt service on the Bonds.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules provide that
original issue discount accrues either on the basis of a constant compound
interest rate or ratably over the term of the Bond, depending on the date the
Bond was issued. In addition, special rules apply if the purchase price of a
Bond exceeds the original issue price plus the amount of original issue discount
which would have previously accrued based upon its issue price (its "adjusted
issue price") to prior owners. If a Bond is acquired with accrued interest, that
portion of the price paid for the accrued interest is added to the tax basis of
the Bond. When this accrued interest is received, it is treated as a return of
capital and reduces the tax basis of the Bond. If a Bond is purchased for a
premium, the amount of the premium is added to the tax basis of the Bond. Bond
premium is amortized over the remaining term of the Bond, and the tax basis of
the Bond is reduced each tax year by the amount of the premium amortized in that
tax year. The application of these rules will also vary depending on the value
of the Bonds on the date a Unitholder acquires his Units and the price the
Unitholder pays for his Units. Unitholders should consult with their tax
advisers regarding these rules and their application.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects
tax-exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the amount (if
any) by which the stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if any, is
attributable to original issue discount not yet accrued) subject to a statutory
DE MINIMIS rule. Market discount can arise based on the price a Trust pays for
Bonds or the price a Unitholder pays for his or her Units. Under the Tax Act,
accretion of market discount is taxable as ordinary income; under prior law the
accretion had been treated as capital gain. Market discount that accretes while
a Trust holds a Bond would be recognized as ordinary income by the Unitholders
when principal payments are received on the
<PAGE>
Bond, upon sale or at redemption (including early redemption), or upon the sale
or redemption of his or her Units, unless a Unitholder elects to include market
discount in taxable income as it accrues. The market discount rules are complex
and Unitholders should consult their tax advisers regarding these rules and
their application.
In the case of certain corporations, the alternative minimum tax and
the Superfund Tax for taxable years beginning after December 31, 1986 depend
upon the corporation's alternative minimum taxable income, which is the
corporation's taxable income with certain adjustments. One of the adjustment
items used in computing the alternative minimum taxable income and the Superfund
Tax of a corporation (other than an S Corporation, Regulated Investment Company,
Real Estate Investment Trust, or REMIC) is an amount equal to 75% of the excess
of such corporation's "adjusted current earnings" over an amount equal to its
alternative minimum taxable income (before such adjustment item and the
alternative tax net operating loss deduction). "Adjusted current earnings"
includes all tax exempt interest, including interest on all of the Bonds in the
Trust. Under current Code provisions, the Superfund Tax does not apply to tax
years beginning on or after January 1, 1996. Legislative proposals have been
introduced that would extend the Superfund Tax. Under the provisions of Section
884 of the Code, a branch profits tax is levied on the "effectively connected
earnings and profits" of certain foreign corporations which include tax-exempt
interest such as interest on the Bonds in the Trusts. Unitholders should consult
their tax advisers with respect to the particular tax consequences to them
including the corporate alternative minimum tax, the Superfund Tax and the
branch profits tax imposed by Section 884 of the Code.
Counsel for the Sponsor has also advised that under Section 265 of the
Code interest on indebtedness incurred or continued to purchase or carry Units
of a Trust is not deductible for Federal income tax purposes. The Internal
Revenue Service has taken the position that such indebtedness need not be
directly traceable to the purchase or carrying of Units (however, these rules
generally do not apply to interest paid on indebtedness incurred to purchase or
improve a personal residence). Also, under Section 265 of the Code, certain
financial institutions that acquire Units would generally not be able to deduct
any of the interest expense attributable to ownership of such Units. Legislative
proposals have been made that would extend the financial institution rules to
all corporations. Investors with questions regarding these issues should consult
with their tax advisers.
In the case of certain of the Bonds in the Trust, the opinions of bond
counsel indicate that interest on such Bonds received by a "substantial user" of
the facilities being financed with the proceeds of these Bonds, or persons
related thereto, for periods while such Bonds are held by such a user or related
person, will not be excludible from Federal gross income, although interest on
such Bonds received by others would be excludible from Federal gross income.
"Substantial user" and "related person" are defined under the Code and U.S.
Treasury Regulations. Any person who believes that he or she may be a
"substantial user" or a "related person" as so defined should contact his or her
tax adviser.
ALL STATEMENTS OF LAW IN THE PROSPECTUS CONCERNING EXCLUSION FROM GROSS
INCOME FOR FEDERAL, STATE OR OTHER TAX PURPOSES ARE THE OPINIONS OF COUNSEL AND
ARE TO BE SO CONSTRUED.
<PAGE>
At the respective times of issuance of the Bonds, opinions relating to
the validity thereof and to the exclusion of interest thereon from Federal gross
income are rendered by bond counsel to the respective issuing authorities.
Neither the Sponsor nor Chapman and Cutler has made any special review for the
Fund of the proceedings relating to the issuance of the Bonds or of the basis
for such opinions.
In the case of corporations, the alternative tax rate applicable to
long-term capital gains is 35% effective for long-term capital gains realized in
taxable years beginning on or after January 1, 1993. For taxpayers other than
corporations, net capital gains are subject to a maximum marginal stated tax
rate of 28%. However, it should be noted that legislative proposals are
introduced from time to time that affect tax rates and could affect relative
differences at which ordinary income and capital gains are taxed. Under the
Code, taxpayers must disclose to the Internal Revenue Service the amount of
tax-exempt interest earned during the year. For purposes of computing the
alternative minimum tax for individuals and corporations and the Superfund Tax
for corporations, interest on certain private activity bonds (which includes
most industrial and housing revenue bonds) issued on or after August 8, 1996 is
included as an item of tax preference.
In general, Section 86 of the Code, provides that 50% of Social
Security benefits are includible in gross income to the extent that the sum of
"modified adjusted gross income" plus 50% of the Social Security benefits
received exceeds a "base amount." The base amount is $25,000 for unmarried
taxpayers, $32,000 for married taxpayers filing a joint return and zero for
married taxpayers who do not live apart at all times during the taxable year and
who file separate returns. Modified adjusted gross income is adjusted gross
income determined without regard to certain otherwise allowable deductions and
exclusions from gross income and by including tax-exempt interest. To the extent
that Social Security benefits are includible in gross income, they will be
treated as any other item of gross income.
In addition, under the Tax Act, for taxable years beginning after
December 31, 1993, up to 85% of Social Security benefits are includible in gross
income to the extent that the sum of "modified adjusted gross income" plus 50%
of Social Security benefits received exceeds an "adjusted base amount." The
adjusted base amount is $34,000 for unmarried taxpayers, $44,000 for married
taxpayers filing a joint return, and zero for married taxpayers who do not live
apart at all times during the taxable year and who file separate returns.
Although tax-exempt interest is included in modified adjusted gross
income solely for the purpose of determining what portion, if any, of Social
Security benefits will be included in gross income, no tax-exempt interest,
including that received from a Trust, will be subject to tax. A taxpayer whose
adjusted gross income already exceeds the base amount or the adjusted base
amount must include 50% or 85%, respectively, of his Social Security benefits in
gross income whether or not he receives any tax-exempt interest. A taxpayer
whose modified adjusted gross income (after inclusion of tax-exempt interest)
does not exceed the base amount need not include any Social Security benefits in
gross income.
<PAGE>
FOR A DISCUSSION OF THE STATE TAX STATUS OF INCOME EARNED ON UNITS OF A
TRUST, SEE "THE TRUSTS--STATE TAXATION" FOR THE APPLICABLE TRUST. EXCEPT AS
NOTED THEREIN, THE EXEMPTION OF INTEREST ON STATE AND LOCAL OBLIGATIONS FOR
FEDERAL INCOME TAX PURPOSES DISCUSSED ABOVE DOES NOT NECESSARILY RESULT IN
EXEMPTION UNDER THE INCOME OR OTHER TAX LAWS OF ANY STATE OR CITY. THE LAWS OF
THE SEVERAL STATES VARY WITH RESPECT TO THE TAXATION OF SUCH OBLIGATIONS.
Ownership of the Units may result in collateral federal income tax
consequences to certain taxpayers, including, without limitation, corporations
subject to either the environmental tax or the branch profits tax, financial
institutions, certain insurance companies, certain S corporations, individual
recipients of Social Security or Railroad Retirement benefits and taxpayers who
may be deemed to have incurred (or continued) indebtedness to purchase or carry
tax-exempt obligations. Prospective investors should consult their tax advisors
as to the applicability of any collateral consequences.
PUBLIC OFFERING
GENERAL. Units are offered at the Public Offering Price. The Public
Offering Price is based on the bid prices of the Bonds in each Trust and
includes a sales charge of 5.5% of the Public Offering Price (5.820% of the
aggregate bid price of the Bonds) plus any accrued interest. Employees, officers
and directors (including their immediate family members, defined as spouses,
children, grandchildren, parents, grandparents, mothers-in-law, fathers-in-law,
sons-in-law and daughters-in-law, and trustees, custodians or fiduciaries for
the benefit of such persons) of the Sponsor and its subsidiaries may purchase
Units of the Trusts without a sales charge in the secondary offering periods.
Investors who purchase Units through registered broker/dealers who
charge periodic fees for financial planning, investment advisory or asset
management services, or provide such services in connection with the
establishment of an investment account for which a comprehensive "wrap fee"
charge is imposed may purchase Units in the secondary offering period at the
Public Offering Price less the concession the Sponsor typically would allow such
broker/dealer. See "Public Offering--Unit Distribution."
ACCRUED INTEREST. Accrued interest is the accumulation of unpaid
interest on a bond from the last day on which interest thereon was paid.
Interest on Bonds generally is paid semi-annually, although a Trust accrues such
interest daily. Because of this, each Trust always has an amount of interest
earned but not yet collected by the Trustee. For this reason, the Public
Offering Price of Units will have added to it the proportionate share of accrued
interest to the date of settlement. Unitholders will receive on the next
distribution date of the respective Trust the amount, if any, of accrued
interest paid on their Units.
Because of the varying interest payment dates of the Bonds, accrued
interest at any point in time will be greater than the amount of interest
actually received by a Trust and distributed to Unitholders. Therefore, there
will always remain an item of accrued interest that is added to the value of the
Units. If a Unitholder sells or redeems all or a portion of his Units, he will
be entitled to receive his proportionate share of the accrued interest from the
purchaser of his Units. Since the
<PAGE>
Trustee has the use of the funds held in the Interest Account for distributions
to Unitholders and since such Account is noninterest-bearing to Unitholders, the
Trustee benefits thereby.
OFFERING PRICE. The Public Offering Price of the Units will vary from
the amounts stated under "Summary of Essential Financial Information" in Part
One of this Prospectus in accordance with fluctuations in the prices of the
underlying Bonds in each Trust.
As indicated above, the price of the Units as of the opening of
business on the date of this Prospectus was determined by adding to the
determination of the aggregate bid price of the Bonds an amount equal to 5.820%
of such value and dividing the sum so obtained by the number of Units
outstanding. This computation produced a gross underwriting profit equal to 5.5%
of the Public Offering Price. The Evaluator will appraise or cause to be
appraised the value of the underlying Bonds on days on which the New York Stock
Exchange is open for each day on which any Unit of a Trust is tendered for
redemption, and it shall determine the aggregate value of such Trust as of 4:00
P.M. Eastern time on such other days as may be necessary. Such Public Offering
Price will be effective for all orders received at or prior to 4:00 P.M. Eastern
time on each such day. Orders received by the Trustee, Sponsor, Distributor or
any dealer for purchases, sales or redemptions after that time, or on a day when
the New York Stock Exchange is closed, will be held until the next determination
of price. For secondary market sales, the Public Offering Price per Unit will be
equal to the aggregate bid price of the Bonds in a Trust plus the secondary
market sales charge. For secondary market purposes such appraisal and adjustment
will be made by the Evaluator as of 4:00 P.M. Eastern time.
The aggregate price of the Bonds in each Trust has been and will be
determined on the basis of bid prices (i) on the basis of current market prices
for the Bonds obtained from dealers or brokers who customarily deal in bonds
comparable to those held by the Trust; (ii) if such prices are not available for
any particular Bonds, on the basis of current market prices for comparable
bonds; (iii) by causing the value of the Bonds to be determined by others
engaged in the practice of evaluation, quoting or appraising comparable bonds;
or (iv) by any combination of the above.
The Public Offering Price and the Redemption Price per Unit are based
on the bid price per Unit of the Bonds in each Trust plus the applicable sales
charge plus accrued interest. The offering price of Bonds in each Trust may be
expected to range from .35%-1% more than the bid price of such Bonds.
Although payment is normally made three business days following the
order for purchase, payment may be made prior thereto. However, delivery of
certificates, if any are requested in writing, representing Units so ordered
will be made as soon as possible following such order or shortly thereafter. A
person will become the owner of Units on the date of settlement provided payment
has been received. Cash, if any, made available to the Sponsor prior to the date
of settlement for the purchase of Units may be used in the Sponsor's business
and may be deemed to be a benefit to the Sponsor, subject to the limitations of
the Securities Exchange Act of 1934.
UNIT DISTRIBUTION. Units repurchased in the secondary market, if any,
may be offered by this prospectus at the secondary Public Offering Price in the
manner described.
<PAGE>
As stated under "Public Market" below, an affiliate of the Sponsor,
Delaware Distributors, L.P. (the "Distributor"), intends to maintain a secondary
market for the Units of the Fund. In so maintaining a market, the Distributor or
any such Underwriters will also realize profits or sustain losses in the amount
of any difference between the price at which Units are purchased and the price
at which Units are resold (which price is based on the bid prices of the Bonds
in a Trust and includes a sales charge). In addition, the Sponsor or the
Distributor will also realize profits or sustain losses resulting from a
redemption of such repurchased Units at a price above or below the purchase
price for such Units, respectively.
At various times, the Sponsor may implement programs under which the
sales forces of Underwriters, brokers, dealers, banks and/or others may be
eligible to win nominal awards for certain sales efforts, or under which the
Sponsor will reallow to any such Underwriters, brokers, dealers, banks and/or
others that sponsor sales contests or recognition programs conforming to
criteria established by the Sponsor, or participate in sales programs sponsored
by the Sponsor, an amount not exceeding the total applicable sales charges on
the sales generated by such person at the public offering price during such
programs. Also, the Sponsor in its discretion may from time to time pursuant to
objective criteria established by the Sponsor pay fees to qualifying
Underwriters, brokers, dealers, banks or others for certain services or
activities which are primarily intended to result in sales of Units of the
Trusts. Such payments are made by the Sponsor out of its own assets, and not out
of the assets of the Trusts. These programs will not change the price
Unitholders pay for their Units or the amount that the Trusts will receive from
the Units sold.
PUBLIC MARKET. Although they are not obligated to do so, the
Distributor intends to maintain a market for the Units offered hereby and to
offer continuously to purchase such Units at the bid price of the Bonds in the
portfolio plus interest accrued to the date of settlement plus any principal
cash on hand, less any amounts representing taxes or other governmental charges
payable out of the Trust and less any accrued Trust expenses. If the supply of
Units exceeds demand or if some other business reason warrants it, the
Distributor may either discontinue all purchases of Units or discontinue
purchases of Units at such prices. In the event that a market is not maintained
for the Units and the Unitholder cannot find another purchaser, a Unitholder
desiring to dispose of his Units may dispose of such Units by tendering them to
the Trustee for redemption at the Redemption Price, which is based upon the
aggregate bid price of the Bonds in the portfolio and any accrued interest. The
aggregate bid prices of the underlying Bonds in a Trust are expected to be less
than the related aggregate offering prices. See "Rights of
Unitholders--Redemption of Units." A UNITHOLDER WHO WISHES TO DISPOSE OF HIS
UNITS SHOULD INQUIRE OF HIS BROKER AS TO CURRENT MARKET PRICES IN ORDER TO
DETERMINE WHETHER THERE IS IN EXISTENCE ANY PRICE IN EXCESS OF THE REDEMPTION
PRICE AND, IF SO, THE AMOUNT THEREOF.
RIGHTS OF UNITHOLDERS
OWNERSHIP OF UNITS. Ownership of Units of any Trust will not be
evidenced by certificates unless a Unitholder, the Unitholder's registered
broker/dealer or the clearing agent for such broker/dealer makes a written
request to the Trustee. Certificates, if issued, will be so noted on the
confirmation statement sent to the Underwriter and broker. Non-receipt of such
certificate(s) must
<PAGE>
be reported to the Trustee within one year; otherwise, a 2% surety bond fee will
be required for replacement.
Units are transferable by making a written request to the Trustee and,
in the case of Units evidenced by a certificate, by presenting and surrendering
such certificate to the Trustee properly endorsed or accompanied by a written
instrument or instruments of transfer which should be sent registered or
certified mail for the protection of the Unitholder. Unitholders must sign such
written request, and such certificate or transfer instrument, exactly as their
names appear on the records of the Trustee and on any certificate representing
the Units to be transferred. Such signatures must be guaranteed by a participant
in the Securities Transfer Agents Medallion Program ("STAMP") or such other
signature guarantee program in addition to, or in substitution for, STAMP, as
may be accepted by the Trustee.
Although no such charge is now made or contemplated, the Trustee may
require a Unitholder to pay a reasonable fee for each certificate reissued or
transferred and to pay any governmental charge that may be imposed in connection
with each such transfer or interchange. Destroyed, stolen, mutilated or lost
certificates will be replaced upon delivery to the Trustee of satisfactory
indemnity, evidence of ownership and payment of expenses incurred. Mutilated
certificates must be surrendered to the Trustee for replacement.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL. Interest received by the
Trusts, including that part of the proceeds of any disposition of Bonds which
represents accrued interest and including any insurance proceeds representing
interest due on defaulted Bonds, is credited by the Trustee to the Interest
Account of the appropriate Trust. Other receipts are credited to the Principal
Account of the appropriate Trust. Interest received by a Trust will be
distributed on or shortly after the fifteenth day of each month on a pro rata
basis to Unitholders of record as of the preceding record date (which will be
the first day of the month). All distributions will be net of applicable
expenses. The pro rata share of cash in the Principal Account will be computed
as of the applicable record date, and distributions to the Unitholders as of
such record date will be made on or shortly after the fifteenth day of such
month. Proceeds received from the disposition of any of the Bonds after such
record date and prior to the following distribution date will be held in the
Principal Account and not distributed until the next distribution date. The
Trustee is not required to pay interest on funds held in the Principal or
Interest Accounts (but may itself earn interest thereon and therefore benefits
from the use of such funds) nor to make a distribution from the Principal
Account unless the amount available for distribution shall equal at least $0.10
per Unit.
The distribution to the Unitholders as of each record date will be made
on the following distribution date or shortly thereafter and shall consist of an
amount substantially equal to one twelfth portion of the Unitholders' pro rata
share of the estimated net annual unit income in the Interest Account after
deducting estimated expenses. Because interest payments are not received by the
Trusts at a constant rate throughout the year, such interest distribution may be
more or less than the amount credited to the Interest Account as of the record
date. For the purpose of minimizing fluctuation in the distributions from the
Interest Account, the Trustee is authorized to advance such amounts as may be
necessary to provide interest distributions of approximately equal amounts. The
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Trustee shall be reimbursed for any such advances from funds in the Interest
Account on the ensuing record date. Persons who purchase Units will commence
receiving distributions only after such person becomes a record owner.
Notification to the Trustee of the transfer of Units is the responsibility of
the purchaser, but in the normal course of business such notice is provided by
the selling broker-dealer.
As of the first day of each month, the Trustee will deduct from the
Interest Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of Trusts (as
determined on the basis set forth under "Trust Operating Expenses"). The Trustee
also may withdraw from said accounts such amounts, if any, as it deems necessary
to establish a reserve for any governmental charges or extraordinary charges
payable out of the Trusts. Amounts so withdrawn shall not be considered a part
of a Trust's assets until such time as the Trustee shall return all for any part
of such amounts to the appropriate accounts. In addition, the Trustee may
withdraw from the Interest and Principal Accounts such amounts as may be
necessary to cover purchases of Replacement Bonds and redemption of Units by the
Trustee.
REINVESTMENT OPTION. Unitholders of the Trusts may elect to have each
distribution of interest income, capital gains and/or principal on their Units
automatically reinvested in shares of any mutual fund advised by the Sponsor or
its affiliate(s) or Delaware International Advisors, Ltd. which are registered
in the Unitholder's state of residence. Such mutual funds are hereinafter
collectively referred to as the "Reinvestment Funds."
Each Reinvestment Fund has investment objectives which differ from
those of the Trusts. The prospectus relating to each Reinvestment Fund describes
the investment policies of such fund and sets forth the procedures to follow to
commence reinvestment. A Unitholder may obtain a prospectus for the respective
Reinvestment Fund from Delaware Distributors, L.P. at 1818 Market Street,
Philadelphia, Pennsylvania 19103.
After becoming a participant in a reinvestment plan, each distribution
of interest income, capital gains and/or principal on the participant's Units
will, on the applicable distribution date, automatically be applied, as directed
by such person, as of such distribution date by the Trustee to purchase shares
(or fractions thereof) of the applicable Reinvestment Fund at a net asset value
as computed as of the closing of trading on the New York Stock Exchange on such
date.
Confirmations of all reinvestments by a Unitholder into a Reinvestment
Fund will be mailed to the Unitholder by such Reinvestment Fund.
A participant may at any time prior to five days preceding the next
succeeding distribution date, by so notifying the Trustee in writing, elect to
terminate his or her reinvestment plan and receive future distributions on his
or her Units in cash. There will be no charge or other penalty for such
termination. Each Reinvestment Fund, its sponsor and its investment adviser
shall have the right to terminate at any time the reinvestment plan relating to
such fund.
REPORTS PROVIDED. The Trustee shall furnish Unitholders of a Trust in
connection with each distribution a statement of the amount of interest and, if
any, the amount of other receipts being
<PAGE>
distributed expressed in each case as a dollar amount representing the pro rata
share of each Unit of a Trust outstanding. For as long as the Sponsor deems it
to be in the best interests of the Unitholders, the accounts of each Trust shall
be audited, not less frequently than annually, by independent certified public
accountants and the report of such accountants shall be furnished by the Trustee
to Unitholders of such Trusts upon request. Within a reasonable period of time
after the end of each calendar year, the Trustee shall furnish to each person
who at any time during the calendar year was a registered Unitholder of a Trust
a statement (i) as to the Interest Account: interest received (including amounts
representing interest received upon any disposition of the Bonds) and the
percentage of such amount by states and territories in which the issuers of such
Bonds are located, deductions for applicable taxes and for fees and expenses of
such Trust, for purchases of Replacement Bonds and for redemptions of Units, if
any, reservations made by the Trustee, if any, and the balance remaining after
such distributions and deductions, expressed in each case both as a total dollar
amount and as a dollar amount representing the pro rata share of each Unit
outstanding on the last business day of such calendar year; (ii) as to the
Principal Account: the dates of disposition of any Bonds and the net proceeds
received therefrom (excluding any portion representing accrued interest), the
amount paid for purchases of Replacement Bonds and for redemptions of Units, if
any, reservations made by the Trustee, if any, deductions for payment of
applicable taxes, fees and expenses of such Trust and the balance remaining
after such distributions and deductions expressed both as a total dollar amount
and as a dollar amount representing the pro rata share of each Unit outstanding
on the last business day of such calendar year; (iii) a list of the Bonds held
and the number of Units outstanding on the last business day of such calendar
year; (iv) the Redemption Price per Unit based upon the last computation thereof
made during such calendar year; and (v) amounts actually distributed during such
calendar year from the Interest and Principal Accounts, separately stated,
expressed both as total dollar amounts and as dollar amounts representing the
pro rata share of each Unit outstanding.
In order to comply with Federal and state tax reporting requirements,
Unitholders will be furnished, upon request to the Trustee, evaluations of the
Bonds in a Trust furnished to it by the Evaluator.
REDEMPTION OF UNITS. A Unitholder who does not dispose of Units in the
secondary market described above may cause Units to be redeemed by the Trustee
by making a written request to the Trustee, at its unit investment trust office,
The Chase Manhattan Bank, Bowling Green Station, P.O. Box 5185, New York, New
York 10274-5185 and, in the case of Units evidenced by a certificate, by
tendering such certificate to the Trustee, properly endorsed or accompanied by a
written instrument or instruments of transfer in form satisfactory to the
Trustee. Unitholders must sign the request, and such certificate or transfer
instrument, exactly as their names appear on the records of the Trustee and on
any certificate representing the Units to be redeemed. If the amount of the
redemption is $25,000 or less and the proceeds are payable to the Unitholder(s)
of record at the address of record, no signature guarantee is necessary for
redemptions by individual account owners (including joint owners). Additional
documentation may be requested, and a signature guarantee is always required,
from corporations, executors, administrators, trustees, guardians or
associations. The signatures must be guaranteed by a participant in the STAMP or
such other guarantee program
<PAGE>
in addition to, or in substitution for, STAMP, as may be accepted by the
Trustee. A certificate should only be sent by registered or certified mail for
the protection of the Unitholder. Since tender of the certificate is required
for redemption when one has been issued, Units represented by a certificate
cannot be redeemed until the certificate representing such Units has been
received by the purchasers. The Trustee's toll-free number for customer
assistance is 800-428-8890, available 9:00 a.m. to 5:00 p.m. EST any business
day.
Redemption shall be made by the Trustee on the third business day
following the day on which a tender for redemption is received (the "Redemption
Date"). Such redemption shall be made by payment of cash, equivalent to the
Redemption Price for such Trust, determined as set forth below as of the
evaluation time stated under "Summary of Essential Financial Information," next
following such tender, multiplied by the number of Units being redeemed. Any
Units redeemed shall be cancelled and any undivided fractional interest in the
Fund extinguished. The price received upon redemption might be more or less than
the amount paid by the Unitholder depending on the value of the Bonds in the
Trust involved at the time of redemption.
Under regulations issued by the Internal Revenue Service, the Trustee
will be required to withhold a specified percentage of the principal amount of a
Unit redemption if the Trustee has not been furnished the redeeming Unitholder's
tax identification number in the manner required by such regulations. Any amount
so withheld is transmitted to the Internal Revenue Service and may be recovered
by the Unitholder only when filing a return. Under normal circumstances the
Trustee obtains the Unitholder's tax identification number from the selling
broker. However, at any time a Unitholder elects to tender Units for redemption,
such Unitholder should provide a tax identification number to the Trustee in
order to avoid this possible "back-up withholding" in the event the Trustee has
not been previously provided such number.
Accrued interest paid on redemption shall be withdrawn from the
Interest Account or, if the balance therein is insufficient, from the Principal
Account. All other amounts will be withdrawn from the Principal Account. The
Trustee is empowered to sell underlying Bonds in order to make funds available
for redemption. Units so redeemed shall be cancelled.
The Redemption Price per Unit (as well as the secondary market Public
Offering Price) will be determined on the basis of the bid price of the Bonds in
each Trust, as of 4:00 P.M. Eastern time on days of trading on the New York
Stock Exchange on the date any such determination is made. While the Trustee has
the power to determine the Redemption Price per Unit when Units are tendered for
redemption, such authority has been delegated to the Evaluator which determines
the price per Unit on a daily basis. The Redemption Price per Unit is the pro
rata share of each Unit in a Trust determined on the basis of (i) the cash on
hand in such Trust or monies in the process of being collected, (ii) the value
of the Bonds in such Trust based on the bid prices of the Bonds (including "when
issued" contracts, if any) and (iii) interest accrued thereon, less (a) amounts
representing taxes or other governmental charges payable out of such Trust and
(b) the accrued expenses of such Trust. The Evaluator may determine the value of
the Bonds in a Trust by employing any of the methods set forth in "Public
Offering--Offering Price."
<PAGE>
The price at which Units may be redeemed could be less than the price
paid by the Unitholder and may be less than the par value of the Bonds
represented by the Units so redeemed. As stated above, the Trustee may sell
Bonds to cover redemptions. When Bonds are sold, the size of the affected Trust
will be, and the diversity may be, reduced. Such sales may be required at a time
when Bonds would not otherwise be sold and might result in lower prices than
might otherwise be realized.
The right of redemption may be suspended and payment postponed for any
period during which the New York Stock Exchange is closed, other than for
customary weekend and holiday closings, or during which the Securities and
Exchange Commission determines that trading on that Exchange is restricted or an
emergency exists, as a result of which disposal or evaluation of the Bonds in a
Trust is not reasonably practicable, or for such other periods as the Securities
and Exchange Commission may by order permit. The Trustee is not liable to any
person in any way for any loss or damage which may result from any such
suspension or postponement.
TRUST ADMINISTRATION
DISTRIBUTOR PURCHASES OF UNITS. The Trustee shall notify the
Distributor of any tender of Units for redemption. If the Distributor's bid in
the secondary market at that time equals or exceeds the Redemption Price per
Unit, it may purchase such Units by notifying the Trustee before the close of
business on the date of such notification and by making payment therefor to the
Unitholder not later than the day on which the Units would otherwise have been
redeemed by the Trustee. Units held by the Sponsor or Distributor may be
tendered to the Trustee for redemption as any other Units.
The offering price of any Units acquired by the Distributor will be in
accord with the Public Offering Price described in the then currently effective
prospectus describing such Units. Any profit resulting from the resale of such
Units will belong to the Distributor which likewise will bear any loss resulting
from a lower offering or redemption price subsequent to its acquisition of such
Units.
PORTFOLIO ADMINISTRATION. The Trustee is empowered to sell, for the
purpose of redeeming Units tendered by any Unitholder, and for the payment of
expenses for which funds may not be available, such of the Bonds designated by
the Sponsor as the Trustee in its sole discretion may deem necessary. The
Sponsor, in designating such Bonds, will consider a variety of factors,
including (i) interest rates, (ii) market value and (iii) marketability. The
Sponsor may direct the Trustee to dispose of Bonds in the event there is a
decline in price or the occurrence of other market or credit factors, including
advance refunding (i.e., the issuance of refunding securities and the deposit of
the proceeds thereof in trust or escrow to retire the refunded securities on
their respective redemption dates), so that in the opinion of the Sponsor the
retention of such Securities would be detrimental to the interest of the
Unitholders.
The Sponsor is required to instruct the Trustee to reject any offer
made by an issuer of any of the Bonds to issue new obligations in exchange or
substitution for any Bond pursuant to a refunding or refinancing plan, except
that the Sponsor may instruct the Trustee to accept or reject such an offer or
to take any other action with respect thereto as the Sponsor may deem proper if
(i) the issuer is in default with respect to such Bond or (ii) in the written
opinion of the Sponsor the issuer will probably default with respect to such
Bond in the reasonably foreseeable future. Any
<PAGE>
obligation so received in exchange or substitution will be held by the Trustee
subject to the terms and conditions of the Trust Agreement to the same extent as
Bonds originally deposited thereunder. Within five days after the deposit of
obligations in exchange or substitution for underlying Bonds, the Trustee is
required to give notice thereof to each Unitholder, identifying the Bonds
eliminated and the Bonds substituted therefor. Except as stated herein and under
"The Fund--Replacement Bonds" regarding the substitution of Replacement Bonds
for Failed Bonds, the acquisition by the Trust of any obligations other than the
Bonds initially deposited is not permitted.
If any default in the payment of principal or interest on any Bond
occurs and no provision for payment is made therefor within 30 days, the Trustee
is required to notify the Sponsor thereof. If the Sponsor fails to instruct the
Trustee to sell or to hold such Bond within 30 days after notification by the
Trustee to the Sponsor of such default, the Trustee may in its discretion sell
the defaulted Bond and not be liable for any depreciation or loss thereby
incurred.
AMENDMENT OR TERMINATION. The Sponsor and the Trustee have the power to
amend the Trust Agreement without the consent of any of the Unitholders when
such an amendment is (i) to cure an ambiguity or to correct or supplement any
provision of the Trust Agreement which may be defective or inconsistent with any
other provision contained therein or (ii) to make such other provisions as shall
not adversely affect the interest of the Unitholders (as determined in good
faith by the Sponsor and the Trustee), provided that the Trust Agreement may not
be amended to increase the number of Units issuable thereunder or to permit the
deposit or acquisition of obligations either in addition to or in substitution
for any of the Bonds initially deposited in a Trust, except for the substitution
of certain refunding obligations for such Bonds, for Replacement Bonds and for
subsequent deposits (see "The Fund"). In the event of any amendment requiring
the consent of Unitholders, the Trustee is obligated to notify promptly all
Unitholders of the substance of such amendment.
A Trust may be terminated at any time by consent of Unitholders
representing 66-2/3% of the Units of such Trust then outstanding or by the
Trustee when the value of such Trust, as shown by any semi-annual evaluation, is
less than the minimum value indicated under "Summary of Essential Financial
Information." A Trust will be liquidated by the Trustee in the event that a
sufficient number of Units not yet sold are tendered for redemption by the
Underwriters, including the Sponsor, so that the net worth of such Trust would
be reduced to less than 40% of the initial principal amount of such Trust. If a
Trust is liquidated because of the redemption of unsold Units by the
Underwriters, the Sponsor will refund to each purchaser of Units the entire
sales charge paid by such purchaser.
The Trust Agreement provides that a Trust shall terminate upon the
redemption, sale or other disposition of the last Bond held in such Trust, but
in no event shall it continue beyond the end of the year preceding the fiftieth
anniversary of the Trust Agreement. In the event of termination of a Trust,
written notice thereof will be sent by the Trustee to each Unitholder of such
Trust at his address appearing on the registration books of the Trust maintained
by the Trustee, such notice specifying the time or times at which the Unitholder
may surrender his certificate or certificates, if any were issued, for
cancellation. Within a reasonable time thereafter, the Trustee shall liquidate
any
<PAGE>
Bonds then held in such Trust and shall deduct from the funds of such Trust any
accrued costs, expenses or indemnities provided by the Trust Agreement,
including estimated compensation of the Trustee and costs of liquidation and any
amounts required as a reserve to provide for payment of any applicable taxes or
other governmental charges. The sale of Bonds in a Trust upon termination may
result in a lower amount than might otherwise be realized if such sale were not
required at such time. For this reason, among others, the amount realized by a
Unitholder upon termination may be less than the principal amount or par amount
of Bonds represented by the Units held by such Unitholder. The Trustee shall
then distribute to each Unitholder his or her share of the balance of the
Interest and Principal Accounts. With such distribution, the Unitholders shall
be furnished a final distribution statement of the amount distributable. At such
time as the Trustee in its sole discretion shall determine that any amounts held
in reserve are no longer necessary, it shall make distribution thereof to
Unitholders in the same manner.
LIMITATION ON LIABILITIES. The Sponsor, the Evaluator, the Distributor
and the Trustee shall be under no liability to Unitholders for taking any action
or for refraining from taking any action in good faith pursuant to the Trust
Agreement, or for errors in judgment, but shall be liable only for their own
willful misfeasance, bad faith or gross negligence in the performance of their
duties or by reason of their reckless disregard of their obligations and duties
thereunder. The Trustee shall not be liable for depreciation or loss incurred by
reason of the sale by the Trustee of any of the Bonds. In the event of the
failure of the Sponsor to act under the Trust Agreement, the Trustee may act
thereunder and shall not be liable for any action taken by it in good faith
under the Trust Agreement.
The Trustee shall not be liable for any taxes or other governmental
charges imposed upon or in respect of the Bonds or upon the interest thereon or
upon it as Trustee under the Trust Agreement or upon or in respect of the Fund
which the Trustee may be required to pay under any present or future law of the
United States of America or of any other taxing authority having jurisdiction.
In addition, the Trust Agreement contains other customary provisions limiting
the liability of the Trustee.
The Trustee, Sponsor, Distributor and Unitholders may rely on any
evaluation furnished by the Evaluator and shall have no responsibility for the
accuracy thereof. Determinations by the Evaluator under the Trust Agreement
shall be made in good faith upon the basis of the best information available to
it, provided, however, that the Evaluator shall be under no liability to the
Trustee, Sponsor, Distributor or Unitholders for errors in judgment. This
provision shall not protect the Evaluator in any case of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations and duties.
SPONSOR. Delaware Management Company, Inc. is the Sponsor of the Fund
and Delaware Distributors, L.P. is the primary Distributor of Fund Units. Both
the Sponsor and Distributor are indirect, wholly owned subsidiaries of Lincoln
National Corporation ("LNC"). LNC, headquartered in Fort Wayne, Indiana, owns
and operates insurance and investment management businesses, including Delaware
Management Holdings, Inc. ("DMH"). Affiliates of DMH serve as adviser,
distributor and transfer agent for the Delaware Group of Mutual Funds, including
the Delaware- Voyageur Funds.
<PAGE>
As of May 1, 1997, affiliates of DMH, including the Sponsor, had assets
under management of over $34 billion in mutual fund and institutional accounts,
and served as investment adviser to more than 60 mutual fund portfolios. The
principal business address for the Sponsor is One Commerce Square, Philadelphia,
Pennsylvania 19103; the principal business address for the Distributor is 1818
Market Street, Philadelphia, Pennsylvania 19103. (The paragraph relates only to
the Sponsor and not to the Fund or to any Series thereof. The information is
included herein only for the purpose of informing investors as to the financial
responsibility of the Sponsor and its ability to carry out its contractual
obligations. More detailed information will be made available by the Sponsor
upon request.)
If the Sponsor shall fail to perform any of its duties under the Trust
Agreement or become incapable of acting or become bankrupt or its affairs are
taken over by public authorities, then the Trustee may (i) appoint a successor
Sponsor at rates of compensation deemed by the Trustee to be reasonable and not
exceeding amounts prescribed by the Securities and Exchange Commission, (ii)
terminate the Trust Agreement and liquidate the Fund as provided therein or
(iii) continue to act as Trustee without terminating the Trust Agreement.
EVALUATOR. Muller Data Corporation serves as Evaluator. The Evaluator
may resign or be removed by the Sponsor in which event the Sponsor is to use its
best efforts to appoint a satisfactory successor. Such resignation or removal
shall become effective upon acceptance of appointment by the successor
evaluation. If upon resignation of the Evaluator no successor has accepted
appointment within 30 days after notice of resignation, the Evaluator may apply
to a court of competent jurisdiction for the appointment of a successor. Notice
of such resignation or removal and appointment shall be mailed by the Trustee to
each Unitholder.
TRUSTEE. The Trustee is The Chase Manhattan Bank, with its principal
executive office located at 270 Park Avenue, New York, New York 10017 and its
unit investment trust office at 4 New York Plaza, New York, New York 10004-2413.
The Trustee is subject to supervision by the Superintendent of Banks of the
State of New York, the Federal Deposit Insurance Corporation and the Board of
Governors of the Federal Reserve System.
The duties of the Trustee are primarily ministerial in nature. It did
not participate in the selection of Bonds for the portfolio of any Trust.
In accordance with the Trust Agreement, the Trustee shall keep proper
books of record and account of all transactions at its office for the Fund. Such
records shall include the name and address of, and the certificates issued by
each Trust to, every Unitholder of each Trust. Such books and records shall be
open to inspection by any Unitholder at all reasonable times during usual
business hours. The Trustee shall make such annual or other reports as may from
time to time be required under any applicable state or Federal statute, rule or
regulation (see "Rights of Unitholders--Reports Provided"). The Trustee is
required to keep a certified copy or duplicate original of the Trust Agreement
on file in its office available for inspection at all reasonable times during
the usual business hours by any Unitholder, together with a current list of the
Bonds held in the Trusts.
<PAGE>
Under the Trust Agreement, the Trustee or any successor trustee may
resign and be discharged of the Trusts created by the Trust Agreement by
executing an instrument in writing and filing the same with the Sponsor. The
Trustee or successor trustee must mail a copy of the notice of resignation to
all Unitholders then of record, not less than 60 days before the date specified
in such notice when such resignation is to take effect. The Sponsor upon
receiving notice of such resignation is obligated to appoint a successor trustee
promptly. If, upon such resignation, no successor trustee has been appointed and
has accepted the appointment within 30 days after notification, the retiring
Trustee may apply to a court of competent jurisdiction for the appointment of a
successor. The Sponsor may remove the Trustee and appoint a successor trustee as
provided in the Trust Agreement. Notice of such removal and appointment shall be
mailed to each Unitholder by the Sponsor. Upon execution of a written acceptance
of such appointment by such successor trustee, all the rights, powers, duties
and obligations of the original trustee shall vest in the successor. The
resignation or removal of a Trustee becomes effective only when the successor
trustee accepts its appointment as such or when a court of competent
jurisdiction appoints a successor trustee.
Any corporation into which a Trustee may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which a Trustee shall be a party, shall be the successor trustee. The Trustee
must be a corporation organized under the laws of the United States or any
State, be authorized to exercise trust powers and have at all times an aggregate
capital, surplus and undivided profits of not less than $5,000,000.
OTHER MATTERS
LEGAL OPINIONS. The legality of the Units offered hereby and certain
matters relating to Federal and state tax law have been passed upon by Chapman
and Cutler, 111 West Monroe Street, Chicago, Illinois 60603, as counsel for the
Sponsor. Carter, Ledyard & Milburn will act as counsel for the Trustee and as
special New York tax counsel for the Trusts.
INDEPENDENT AUDITORS. The financial statements of each Trust as of the
date presented in Part One of this Prospectus have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
DESCRIPTION OF BOND RATINGS*
STANDARD & POOR'S. A brief description of the applicable Standard &
Poor's ratings symbols and their meanings follows:
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific debt
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
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* As published by the ratings companies.
<PAGE>
The bond rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default--capacity and willingness of the obligor
as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other
arrangements under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.**
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
Plus (+) or Minus (-): The ratings from "AA" to "BBB" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality
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** Bonds insured by Financial Guaranty Insurance Company, AMBAC
Indemnity Corporation, Municipal Bond Investors Assurance Corporation, Connie
Lee Insurance Company, Financial Security Assurance and Capital Guaranty
Insurance Company are automatically rated "AAA" by Standard & Poor's.
<PAGE>
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his/her own judgment with respect to such likelihood and risk.
Credit Watch: Credit Watch highlights potential changes in ratings of
bonds and other fixed income securities. It focuses on events and trends which
place companies and government units under special surveillance by S&P's
180-member analytical staff. These may include merges, voter referendums,
actions by regulatory authorities, or developments gleaned from analytical
reviews. Unless otherwise noted, a rating decision will be made within 90 days.
Issues appear on Credit Watch where an event, situation, or deviation from
trends occurred and needs to be evaluated as to its impact on credit ratings. A
listing, however, does not mean a rating change is inevitable. Since S&P
continuously monitors all of its ratings, Credit Watch is not intended to
include all issues under review. Thus, rating changes will occur without issues
appearing on Credit Watch.
MOODY'S INVESTORS SERVICE, INC. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues. Their
safety is so absolute that with the occasional exception of oversupply in a few
specific instances, characteristically, their market value is affected solely by
money market fluctuations.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Their market value is virtually immune to all but money market influences, with
the occasional exception of oversupply in a few specific instances.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. The market value of A-rated bonds may be influenced to some degree by
economic performance during a sustained period of depressed business conditions,
but, during periods of normalcy, A-rated bonds frequently move in parallel with
Aaa and Aa obligations, with the occasional exception of oversupply in a few
specific instances.
A 1 and Baa 1 - Bonds which are rated A 1 and Baa 1 offer the maximum
in security within their quality group, can be bought for possible upgrading in
quality, and additionally, afford the investor an opportunity to gauge more
precisely the relative attractiveness of offerings in the market place.
<PAGE>
Baa - Bonds which are rated Baa are considered as medium grade
obligation; i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well. The market value of
Baa-rated bonds is more sensitive to changes in economic circumstances, and
aside form occasional speculative factors applying to some bonds of this class,
Baa market valuations will move in parallel with Aaa, Aa, and A obligations
during periods of economic normalcy, except in instances of oversupply.
Moody's bond rating symbols may contain numerical modifiers of a
generic rating classification. The modifier 1 indicates that the bond ranks at
the high end of its category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Con.(--) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
<PAGE>
No person is authorized to give any information or to make any representations
not contained in this Prospectus; and any information or representation not
contained herein must not be relied upon as having been authorized by the Fund,
the Sponsor or the Underwriters. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, securities in any state to any
person to whom it is not lawful to make such offer in such state.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
TITLE PAGE
THE FUND.................................... 3
INVESTMENT OBJECTIVES AND
PORTFOLIO SELECTION.................. 4
THE TRUSTS.................................. 5
EQUIVALENT TAXABLE ESTIMATED
CURRENT RETURNS...................... 38
RISK FACTORS................................ 41
ESTIMATED CURRENT RETURN AND
ESTIMATED LONG-TERM RETURN........... 47
TRUST OPERATING EXPENSES.................... 48
INSURANCE ON THE BONDS
IN THE INSURED TRUSTS................ 49
TAX STATUS.................................. 50
PUBLIC OFFERING............................. 55
RIGHTS OF UNITHOLDERS....................... 57
TRUST ADMINISTRATION........................ 62
OTHER MATTERS............................... 66
DESCRIPTION OF BOND RATINGS................. 66
- -------------------------------------------------------------------------------
This Prospectus contains information concerning the Fund and the Sponsor, but
does not contain all of the information set forth in the registration statements
and exhibits relating thereto, which the Fund has filed with the Securities and
Exchange Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, and to which reference is hereby made.
P R O S P E C T U S
- -------------------------------------------------------------------------------
June 13, 1997
PROSPECTUS PART TWO
DELAWARE-VOYAGEUR TAX-EXEMPT
TRUST SERIES
<PAGE>
CONTENTS OF POST-EFFECTIVE AMENDMENT
TO REGISTRATION STATEMENT
This Post-Effective Amendment to the Registration Statement comprises
the following papers and documents:
The facing sheet
The prospectus
The signatures
The Consent of Independent Accountants
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Delaware-Voyageur Tax-Exempt Trust, Series 2, certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, and its seal to be hereunto
affixed and attested, all in the City of Philadelphia and State of Pennsylvania
on the 26th day of June, 1997.
Delaware-Voyageur Tax-Exempt Trust, Series 2
(Registrant)
By Delaware Management Company, Inc.
(Depositor)
By /s/George M. Chamberlain, Jr.
Senior Vice President and Secretary
(Seal)
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities on June 26, 1997:
Wayne A. Stork
- --------------------------
Wayne A. Stork President, Chief Executive Officer and
Chief Investment Officer
David K. Downes
- --------------------------
David K. Downes Executive Vice President, Chief Operating
Officer, Chief Financial Officer, Treasurer
and Director
George M. Chamberlain, Jr.
- --------------------------
George M. Chamberlain, Jr. Senior Vice President, Secretary and Director
Richard J. Flanery
- --------------------------
Richard J. Flanery Director
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 11, 1997 accompanying the financial
statements of Delaware-Voyageur Tax-Exempt Trust, Series 2 as of February 28,
1997 and for the period then ended, contained in this Post-Effective Amendment
No. 2 to Form S-6.
We consent to the use of the aforementioned report in the Post-Effective
Amendment and to the use of our name as it appears under the caption
"INDEPENDENT AUDITORS".
KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 26, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT
OF ASSETS AND LIABILITIES, STATEMENT OF OPERATIONS, STATEMENT OF CHANGES IN NET
ASSETS AND THE FINANCIAL HIGHLIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000941135
<NAME> DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
<SERIES>
<NUMBER> 1
<NAME> COLORADO INSURED SERIES 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 2,881,482
<INVESTMENTS-AT-VALUE> 2,988,970
<RECEIVABLES> 57,246
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,046,216
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 57,246
<TOTAL-LIABILITIES> 57,246
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,881,482
<SHARES-COMMON-STOCK> 302,995
<SHARES-COMMON-PRIOR> 302,995
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 107,488
<NET-ASSETS> 2,988,970
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 168,650
<OTHER-INCOME> 0
<EXPENSES-NET> 7,760
<NET-INVESTMENT-INCOME> 160,890
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 3,128
<NET-CHANGE-FROM-OPS> 164,018
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 160,890
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3,128
<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> 7,760
<AVERAGE-NET-ASSETS> 2,987,406
<PER-SHARE-NAV-BEGIN> 9.85
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> 0.53
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.86
<EXPENSE-RATIO> 0.000
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT
OF ASSETS AND LIABILITIES, STATEMENT OF OPERATIONS, STATEMENT OF CHANGES IN NET
ASSETS AND THE FINANCIAL HIGHLIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000941135
<NAME> DELAWARE-VOYAGEUR TAX-EXEMPT TRUST, SERIES 2
<SERIES>
<NUMBER> 2
<NAME> OREGON INSURED SERIES 2
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 2,446,999
<INVESTMENTS-AT-VALUE> 2,543,319
<RECEIVABLES> 39,894
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,583,213
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 39,894
<TOTAL-LIABILITIES> 39,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,446,999
<SHARES-COMMON-STOCK> 257,308
<SHARES-COMMON-PRIOR> 257,308
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 96,320
<NET-ASSETS> 2,543,319
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 141,325
<OTHER-INCOME> 0
<EXPENSES-NET> 7,090
<NET-INVESTMENT-INCOME> 134,235
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (747)
<NET-CHANGE-FROM-OPS> 133,488
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 134,235
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (747)
<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> 7,090
<AVERAGE-NET-ASSETS> 2,543,693
<PER-SHARE-NAV-BEGIN> 9.89
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> 0.52
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.88
<EXPENSE-RATIO> 0.000
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
