<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 1996
REGISTRATION NOS. 33-63597
33-59181
333-00267
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
A. EXACT NAME OF TRUST:
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 215
MINNESOTA TRUST 116
MARYLAND TRUST 97
B. NAME OF DEPOSITOR:
SMITH BARNEY INC.
C. COMPLETE ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES:
SMITH BARNEY INC.
388 Greenwich Street, 23rd floor
New York, New York 10013
D. NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE:
LAURIE A. HESSLEIN
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
COPY TO:
PIERRE DE SAINT PHALLE, ESQ.
Davis Polk & Wardwell
450 Lexington Ave.
New York, New York 10017
E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
AN INDEFINITE NUMBER OF UNITS OF BENEFICIAL INTEREST PURSUANT TO RULE 24f-2
PROMULGATED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED.
F. PROPOSED MAXIMUM AGGREGATE OFFERING PRICE TO THE PUBLIC OF THE SECURITIES
BEING REGISTERED:
INDEFINITE
G. AMOUNT OF FILING FEE:
$500 (AS REQUIRED BY RULE 24f-2)
H. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT.
[X] Check box if it is proposed that this filing will become effective
immediately upon filing pursuant to Rule 487.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
---------------------------------------------------------
TAX EXEMPT
SECURITIES
TRUST National Trust 215 Maryland Trust 97
Minnesota Trust 116
- ---------------------- ---------------------------------------------------
19,000 UNITS
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
IN THE OPINION OF COUNSEL UNDER EXISTING LAW, INTEREST INCOME TO THE TRUSTS AND
TO UNIT HOLDERS (EXCEPT IN CERTAIN INSTANCES DEPENDING UPON THE UNIT HOLDERS)
IS EXEMPT FROM REGULAR FEDERAL INCOME TAX AND FROM CERTAIN STATE AND LOCAL
PERSONAL INCOME TAXES, TO THE EXTENT INDICATED, IN THE STATE FOR WHICH A STATE
TRUST IS NAMED. CAPITAL GAINS, IF ANY, ARE SUBJECT TO TAX.
THE TAX EXEMPT SECURITIES TRUST consists of separate underlying unit investment
trusts designated as National Trust 215, Maryland Trust 97 and Minnesota Trust
116 (the "National Trust," the "Maryland Trust" and the "Minnesota Trust",
respectively) (the "Trusts" or the "Trust" as the context requires and in the
case of a Trust designated by a state name, the "State Trust" or the "State
Trusts," as the context requires). Each Trust was formed to obtain for its Unit
holders tax-exempt interest income and conservation of capital through
investment in a professionally selected, fixed portfolio of municipal bonds
rated at the time of deposit in the category A or better by Standard & Poor's
Ratings Group, a division of McGraw-Hill, Inc. ("Standard & Poor's"), Moody's
Investors Service, Inc. ("Moody's") or Fitch Investors Service, Inc. ("Fitch").
(See "Portfolio of Securities".) Each State Trust comprises a fixed portfolio
of interest-bearing obligations issued primarily by or on behalf of the state
for which such State Trust is named and counties, municipalities, authorities
or political subdivisions thereof. Interest on all bonds in each Trust is in
the opinion of counsel under existing law, with certain exceptions, exempt from
regular Federal income taxes (see Part B, "Taxes") and from certain state and
local personal income taxes in the state for which a State Trust is named, but
may be subject to other state and local taxes. (See discussions of State and
local taxes in Part C.)
THE PUBLIC OFFERING PRICE of the Units of each Trust during the initial public
offering period is equal to the aggregate offering price of the underlying
bonds in the Trust's portfolio divided by the number of Units outstanding in
such Trust, plus a sales charge. The Public Offering Price of the Units of each
Trust following the initial public offering period is equal to the aggregate
bid price of the underlying bonds in the Trust's portfolio divided by the
number of Units outstanding in such Trust, plus a sales charge. During the
initial public offering period the sales charge is equal to 4.70% of the Public
Offering Price (4.932% of the aggregate offering price of the bonds per Unit)
for each Trust, and following the initial public offering period this charge
will be equal to 5.00% of the Public Offering Price (5.263% of the aggregate
bid price of the bonds per Unit) for each Trust. See Part B, "Public Offering--
Distribution of Units" for a description of the initial public offering period.
If the Units had been available for sale on January 23, 1996, the Public
Offering Price per Unit (including the sales charge) would have been $1,040.09,
$1,045.56 and $1,046.20 for the National Trust, Maryland Trust and Minnesota
Trust, respectively. In addition, there will be added an amount equal to
accrued interest commencing on the day after the Date of Deposit through the
date of settlement (normally three business days after purchase).
THE SPONSOR, although not obligated to do so, intends to maintain a market for
the Units of the Trusts at prices based upon the aggregate bid price of the
underlying bonds, as more fully described under "Public Offering--Market for
Units" in Part B. If such a market is not maintained, a Unit holder will be
able to dispose of his Units through redemption, at prices that are also based
upon the aggregate bid price of the underlying bonds. Units can be sold at any
time without fee or penalty.
MONTHLY DISTRIBUTIONS of principal and interest received by each Trust will be
made on or shortly after the fifteenth day of each month to holders of record
on the first day of that month. For further information regarding the
distributions by each Trust, see "Summary of Essential Information".
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
The date of this Prospectus is January 24, 1996
<PAGE>
TAX EXEMPT SECURITIES TRUST
SUMMARY OF ESSENTIAL INFORMATION
AS OF JANUARY 23, 1996
SPONSOR RECORD DATES
Smith Barney Inc.
The first day of each month,
commencing February 1, 1996
TRUSTEE
The Chase Manhattan Bank DISTRIBUTION DATES**
(National Association)
The fifteenth day of each
month, commencing February 15,
1996
EVALUATOR
Kenny S & P Evaluation
Services, EVALUATION TIME
a division of J.J. Kenny Co.,
Inc. As of 1:00 P.M. on the Date of
Deposit. Thereafter, as of
4:00 P.M. New York Time.
DATE OF DEPOSIT AND OF TRUST
AGREEMENT
EVALUATOR'S FEE
January 23, 1996
The Evaluator will receive a
fee of $.29 per bond per
evaluation. (See Part B,
"Evaluator--Responsibility"
and "Public Offering--Offering
Price".)
MANDATORY TERMINATION DATE*
Each Trust will terminate on the
date of maturity, redemption,
sale or other disposition of the
last Bond held in the Trust.
SPONSOR'S ANNUAL PORTFOLIO
SUPERVISION FEE***
Maximum of $.25 per $1,000
face amount of the underlying
Bonds.
- -------
The Date of Deposit. The Date of Deposit is the date on which the Trust
Agreement was signed and the deposit with the Trustee was made.
* The actual date of termination of each trust may be considerably earlier
(see Part B, "Amendment and Termination of the Trust Agreement--
Termination").
** The first monthly income distribution of $1.23, $1.20 and $1.19 for the
National Trust, Maryland Trust and Minnesota Trust, respectively, will be
made on February 15, 1996.
*** In addition to this amount, the Sponsor may be reimbursed for bookkeeping
and other administrative expenses not exceeding its actual costs.
A-2
<PAGE>
<TABLE>
<CAPTION>
NATIONAL MARYLAND MINNESOTA
TRUST 215 TRUST 97 TRUST 116
----------- ---------- ----------
<S> <C> <C> <C>
Principal Amount of Bonds in Trust........ $14,000,000 $2,500,000 $2,500,000
Number of Units........................... 14,000 2,500 2,500
Principal Amount of Bonds in Trust per
Unit..................................... $ 1,000 $ 1,000 $ 1,000
Fractional Undivided Interest in Trust per
Unit..................................... 1/14,000 1/2,500 1/2,500
Minimum Value of Trust:
Trust Agreement may be Terminated if
Principal Amount is less than.......... $ 7,000,000 $1,250,000 $1,250,000
Calculation of Public Offering Price per
Unit*:
Aggregate Offering Price of Bonds in
Trust.................................. $13,876,959 $2,491,041 $2,492,567
=========== ========== ==========
Divided by Number of Units.............. $ 991.21 $ 996.42 $ 997.03
Plus: Sales Charge (4.70% of the Public
Offering Price)........................ $ 48.88 $ 49.14 $ 49.17
----------- ---------- ----------
Public Offering Price per Unit.......... $ 1,040.09 $ 1,045.56 $ 1,046.20
Plus: Accrued Interest*................. $ .92 $ .90 $ .89
----------- ---------- ----------
Total................................. $ 1,041.01 $ 1,046.46 $ 1,047.09
=========== ========== ==========
Sponsor's Initial Repurchase Price per
Unit (per Unit Offering
Price of Bonds)*........................ $ 991.21 $ 996.42 $ 997.03
Approximate Redemption Price per Unit (per
Unit Bid Price of Bonds)**............. $ 987.21 $ 992.42 $ 993.03
----------- ---------- ----------
Difference Between per Unit Offering and
Bid Prices of Bonds...................... $ 4.00 $ 4.00 $ 4.00
=========== ========== ==========
Calculation of Estimated Net Annual Income
per Unit:
Estimated Annual Income per Unit........ $ 57.89 $ 56.47 $ 56.20
Less: Estimated Trustee's Annual Fee***. $ 1.27 $ 1.26 $ 1.26
Less: Organizational Expenses****....... $ .40 $ .40 $ .40
Less: Other Estimated Annual Expenses... $ .78 $ .69 $ .78
----------- ---------- ----------
Estimated Net Annual Income per Unit.... $ 55.44 $ 54.12 $ 53.76
=========== ========== ==========
Calculation of Monthly Income Distribution
per Unit:
Estimated Net Annual Income per Unit... $ 55.44 $ 54.12 $ 53.76
Divided by 12........................... $ 4.62 $ 4.51 $ 4.48
Accrued interest from the day after the
Date of Deposit to the first record
date**................................. $ 1.23 $ 1.20 $ 1.19
First distribution per unit............... $ 1.23 $ 1.20 $ 1.19
Daily Rate (360-day basis) of Income Ac-
crual per Unit........................... $ .1540 $ .1503 $ .1493
Estimated Current Return based on Public
Offering Price*****...................... 5.33% 5.18% 5.14%
Estimated Long-Term Return*****........... 5.17% 5.12% 4.97%
</TABLE>
- -------
* Accrued interest will be commencing on the day after the Date of Deposit
through the date of settlement (normally three business days after
purchase).
** This figure will also include accrued interest from the day after the
Date of Deposit to the date of settlement (normally three business days
after purchase) and the net of cash on hand in the relevant Trust,
accrued expenses of such Trust and amounts distributable to holders of
record of Units of such Trust as of a date prior to the computation date,
on a pro rata share basis. (See Part B, "Redemption of Units--Computation
of Redemption Price per Unit.")
*** Per $1,000 principal amount of Bonds, plus expenses. (See Part B, "Rights
of Unit Holders--Distribution of Interest and Principal.")
**** Each Trust (and therefore the investors) will bear all or a portion of
its organizational costs--including costs of preparing the registration
statement, the trust indenture and other closing documents, and the
initial audit of the Trust--as is common for mutual funds. Historically,
the Sponsors of unit investment trusts have paid all the costs of
establishing those trusts. Advertising and selling expenses will be paid
by the Underwriters at no cost to a Trust.
***** The Estimated Current Return is calculated by dividing the Estimated Net
Annual Interest Income per Unit by the Public Offering Price per Unit.
The Estimated Net Annual Interest Income per Unit will vary with changes
in fees and expenses of the Trustee and the Evaluator and with the
principal prepayment, redemption, maturity, exchange or sale of Bonds
while the Public Offering Price will vary with changes in the offering
price of the underlying Bonds; therefore, there is no assurance that the
present Estimated Current Return indicated above will be realized in the
future. The Estimated Long-Term Return is calculated using a formula
which (1) takes into consideration, and factors in the relative
weightings of, the market values, yields (which takes into account the
amortization of premiums and the accretion of discounts) and estimated
retirements of all of the Bonds in the Trust and (2) takes into account
the expenses and sales charge associated with each Unit. Since the market
values and estimated retirements of the Bonds and the expenses of the
Trust will change, there is no assurance that the present Estimated Long-
Term Return as indicated above will be realized in the future. The
Estimated Current Return and Estimated Long-Term Return are expected to
differ because the calculation of the Estimated Long-Term Return reflects
the estimated date and amount of principal returned while the Estimated
Current Return calculations include only Net Annual Interest Income and
Public Offering Price as of the Date of Deposit. The effect of the delay
in the payment to Unit holders for the first few months of Trust
operations, which results in a lower true return to Unit holders, is not
reflected in either calculation (a projected cash flow statement as of
the Date of Deposit is available upon request from the Trustee).
A-3
<PAGE>
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT
NATIONAL TRUST 215
The Portfolio of the National Trust contains 27 issues of Bonds of issuers
located in 16 States. All of the issues are payable from the income of
specific projects or authorities and are not supported by the issuer's power
to levy taxes. Although income to pay such Bonds may be derived from more than
one source, the primary sources of such income and the percentage of the Bonds
in this Trust deriving income from such sources are as follows: hospital and
health care facilities: 33.2%*; housing facilities: 24.5%; power facilities:
9.1%; industrial development facilities: 3.6%; pollution control facilities:
1.9%; educational facilities: 0.9%; water and sewer facilities: 13.1%; tax
allocation: 7.2%; resource recovery facilities: 6.5%. The Trust is considered
to be concentrated in hospital and health care facilities issues.+ (See Part
B, "Tax Exempt Securities Trust--Risk Factors" for a brief summary of
additional considerations relating to certain of these issues.) 4.1% of the
Bonds in this Trust are insured as to timely payment of principal and interest
by certain insurance companies (MBIA, 4.1%) (see Part B, "Tax Exempt
Securities Trust--Risk Factors--Insurance"). Eighteen Bonds in this Trust have
been issued with an "original issue discount." (See Part B, "Taxes.") The
average life to maturity of the Bonds in the National Trust is 26.6 years.
As of the Date of Deposit, 90.1% of the Bonds in this Trust are rated by
Standard & Poor's (5.5% rated AAA, 21.4% rated AA and 63.2% rated A); 8.4% are
rated by Moody's (4.8% rated Aaa and 3.6% rated A) and 1.5% are rated A by
Fitch. For a description of the meaning of the applicable rating symbols as
published by the rating agencies, see Part B, "Bond Ratings." It should be
emphasized, however, that the ratings of the rating agencies represent their
opinions as to the quality of the Bonds which they undertake to rate, and that
these ratings are general and are not absolute standards of quality and may
change from time to time.
23.9% of the Bonds in the National Trust were acquired from the Sponsor as
sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's and Underwriters' Profits.")
MARYLAND TRUST 97
The Portfolio of the Maryland Trust contains 7 issues of Bonds of issuers
located in the State of Maryland and the Commonwealth of Puerto Rico. Of the
Bonds in this Trust, one was issued by an issuer in the Commonwealth of Puerto
Rico (representing 11.2%* of the Bonds in the Trust) and was issued to finance
highway facilities. All of the issues are payable from the income of specific
projects or authorities and are not supported by the issuer's power to levy
taxes. Although income to pay such Bonds may be derived from more than one
source, the primary sources of such income and the percentage of the Bonds in
this Trust deriving income from such sources are as follows: hospital and
health care facilities: 32.9%; housing facilities: 55.9%. The Trust is
considered to be concentrated in hospital and health care facilities and
housing facilities issues.+ (See Part B, "Tax Exempt Securities Trust--Risk
Factors" for a brief summary of additional considerations relating to certain
of these issues.) 4.2% of the Bonds in this Trust are insured as to timely
payment of principal and interest by certain insurance companies (FGIC, 4.2%)
(see Part B, "Tax Exempt Securities Trust--Risk Factors--Insurance"). Four
Bonds in this Trust have been issued with an "original issue discount." (See
Part B, "Taxes.") The average life to maturity of the Bonds in the Maryland
Trust is 28.0 years.
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-4
<PAGE>
As of the Date of Deposit, 56.5% of the Bonds in this Trust are rated by
Standard & Poor's (24.9% rated AAA, and 31.6% rated A); 43.5% are rated by
Moody's (20.3% rated Aa and 23.2% rated A). For a description of the meaning
of the applicable rating symbols as published by the rating agencies, see Part
B, "Bond Ratings." It should be emphasized, however, that the ratings of the
rating agencies represent their opinions as to the quality of the Bonds which
they undertake to rate, and that these ratings are general and are not
absolute standards of quality and may change from time to time.
None of the Bonds in the Maryland Trust were acquired from the Sponsor as
sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's and Underwriters' Profits.")
MINNESOTA TRUST 116
The Portfolio of the Minnesota Trust contains 7 issues of Bonds of issuers
located in the State of Minnesota. All of the issues are payable from the
income of specific projects or authorities and are not supported by the
issuer's power to levy taxes. Although income to pay such Bonds may be derived
from more than one source, the primary sources of such income and the
percentage of the Bonds in this Trust deriving income from such sources are as
follows: hospital and health care facilities: 26.8%*; housing facilities:
59.6%; power facilities: 13.6%. The Trust is considered to be concentrated in
hospital and health care facilities and housing facilities issues.+ (See Part
B, "Tax Exempt Securities Trust--Risk Factors" for a brief summary of
additional considerations relating to certain of these issues.) In addition,
13.6% of the Bonds in this Trust are subject to redemption or sinking fund
provisions early in the life of the Trust. (See "Redemption Provisions" under
"Portfolio of Securities".) 39.2% of the Bonds in this Trust are insured as to
timely payment of principal and interest by certain insurance companies
(AMBAC, 18.6%; and MBIA, 20.6%) (see Part B, "Tax Exempt Securities Trust--
Risk Factors--Insurance"). Four Bonds in this Trust have been issued with an
"original issue discount." (See Part B, "Taxes.") The average life to maturity
of the Bonds in the Minnesota Trust is 26.2 years.
As of the Date of Deposit, 81.4% of the Bonds in this Trust are rated by
Standard & Poor's (59.6% rated AAA, and 21.8% rated A), 18.6% are rated Aaa by
Moody's. For a description of the meaning of the applicable rating symbols as
published by the rating agencies, see Part B, "Bond Ratings." It should be
emphasized, however, that the ratings of the rating agencies represent their
opinions as to the quality of the Bonds which they undertake to rate, and that
these ratings are general and are not absolute standards of quality and may
change from time to time.
None of the Bonds in the Minnesota Trust were acquired from the Sponsor as
sole underwriter or from an underwriting syndicate in which the Sponsor
participated, or otherwise from the Sponsor's own organization. (See Part B,
"Public Offering--Sponsor's and Underwriters' Profits.")
- -------
* Percentages computed on the basis of the aggregate offering price of the
Bonds in the Trust on the Date of Deposit.
+ A Trust is considered to be "concentrated" in a particular category when the
Bonds in that category constitute 25% or more of the aggregate offering price
of the Bonds in the Trust.
A-5
<PAGE>
UNDERWRITING
The names and addresses of the Underwriters and the number of Units to be
sold by them are as follows:
<TABLE>
<CAPTION>
UNITS
--------------------------------------------------------
NATIONAL TRUST 215 MARYLAND TRUST 97 MINNESOTA TRUST 116
------------------ ----------------- -------------------
<S> <C> <C> <C>
Smith Barney Inc. ...... 12,100 1,950 1,550
1345 Avenue of the Amer-
icas
New York, New York 10105
Roosevelt & Cross,
Inc. .................. 250 100 100
20 Exchange Place
New York, New York 10005
Gruntal & Co. Incorpo-
rated.................. 250 100 --
14 Wall Street
New York, New York 10005
Legg Mason Wood Walker,
Inc. .................. 100 250 --
111 South Calvert Street
Baltimore, Maryland
21202
Piper Jaffray, Inc. .... 100 -- 250
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota
55440
William R. Hough........ 300 -- --
100 Second Avenue
Suite 800
St. Petersburg, Florida
33701
Fidelity Capital Mar-
kets................... 250 -- --
164 Northern Avenue
Boston, MA 02210
Raymond James & Associ-
ates................... 250 -- --
880 Carillon Parkway
P.O. Box 12749
St. Petersburg, Florida
33733
Advest Inc. ............ 100 -- --
One Commercial Plaza
280 Trumbull Street
Hartford, Connecticut
06103
Dain Bosworth Incorpo-
rated.................. -- -- 100
Dain Bosworth Place
60 S. 6th Street
Mailstop Plsc
Minneapolis, Minnesota
55402
First Miami Securities,
Inc. .................. 100 -- --
301 Yamato Road
Suite 2100
Boca Raton, Florida
33431
John G. Kinnard & Co.,
Inc. .................. -- -- 100
920 Second Ave. South
Minneapolis, MN 55402
Juran & Moody, Inc. .... -- -- 100
Minnesota Mutual Life
Center
400 North Robert Street
St. Paul, Minnesota
55101
Miller Johnson & Keuhn
Incorporated........... -- -- 100
1660 South Highway 100
Minneapolis, Minnesota
55416
</TABLE>
A-6
<PAGE>
<TABLE>
<CAPTION>
UNITS
--------------------------------------------------------
NATIONAL TRUST 215 MARYLAND TRUST 97 MINNESOTA TRUST 116
------------------ ----------------- -------------------
<S> <C> <C> <C>
Miller & Schroeder Fi-
nancial, Inc. ......... -- -- 100
220 South Sixth Street
P.O. Box 789
Minneapolis, Minnesota
55440
Oppenheimer & Co.,
Inc. .................. 100 -- --
Oppenheimer Tower
One World Financial Cen-
ter
New York, New York 10281
Rauscher Pierce Refsnes,
Inc. .................. 100 -- --
2500 RPR Tower
Plaza of the Americas
Dallas, Texas 75201
Robert W. Baird & Co.
Incorporated........... -- -- 100
777 East Wisconsin Ave-
nue
Milwaukee, Wisconsin
53202
Wheat First Securities,
Inc. .................. -- 100 --
901 East Byrd Street
Richmond, Virginia 23219
------ ----- -----
Total................... 14,000 2,500 2,500
====== ===== =====
</TABLE>
A-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Sponsor, Trustee and Unit Holders of Tax Exempt Securities Trust,
National Trust 215, Maryland Trust 97 and Minnesota Trust 116:
We have audited the accompanying statements of financial condition, including
the portfolios of securities, of each of the respective trusts constituting Tax
Exempt Securities Trust, National Trust 215, Maryland Trust 97 and Minnesota
Trust 116 as of January 23, 1996. These financial statements are the
responsibility of the Trustee (see note 6 to the statements of financial
condition). Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of financial condition are
free of material misstatement. An audit of a statement of financial condition
includes examining, on a test basis, evidence supporting the amounts and
disclosures in that statement of financial condition. Our procedures included
confirmation with the Trustee of an irrevocable letter of credit deposited on
January 23, 1996 for the purchase of securities, as shown in the statements of
financial condition and portfolios of securities. An audit of a statement of
financial condition also includes assessing the accounting principles used and
significant estimates made by the Trustee, as well as evaluating the overall
statement of financial condition presentation. We believe that our audits of
the statements of financial condition provide a reasonable basis for our
opinion.
In our opinion, the statements of financial condition referred to above
present fairly, in all material respects, the financial position of each of the
respective trusts constituting Tax Exempt Securities Trust, National Trust 215,
Maryland Trust 97 and Minnesota Trust 116 as of January 23, 1996, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
January 23, 1996
A-8
<PAGE>
TAX EXEMPT SECURITIES TRUST
STATEMENTS OF FINANCIAL CONDITION
AS OF DATE OF DEPOSIT, JANUARY 23, 1996
<TABLE>
<CAPTION>
TRUST PROPERTY
---------------------------------
NATIONAL MARYLAND MINNESOTA
TRUST 215 TRUST 97 TRUST 116
----------- ---------- ----------
<S> <C> <C> <C>
Investment in Tax-Exempt Securities:
Bonds represented by purchase contracts
backed by
letter of credit (1).................. $13,876,959 $2,491,041 $2,492,567
Accrued interest through the Date of De-
posit on underlying
bonds (1)(2)............................ 157,819 21,961 23,926
Organizational costs (3)................. 28,000 5,000 5,000
----------- ---------- ----------
Total................................ $14,062,778 $2,518,002 $2,521,493
=========== ========== ==========
<CAPTION>
LIABILITIES AND INTEREST OF UNIT
HOLDERS
---------------------------------
<S> <C> <C> <C>
Liabilities:
Accrued interest through the Date of
Deposit on
underlying bonds (1)(2)............... $ 157,819 $ 21,961 $ 23,926
Accrued expenses (3)................... 28,000 5,000 5,000
----------- ---------- ----------
Interest of Unit Holders:
Units of fractional undivided interest
outstanding (National Trust 215:
14,000; Maryland Trust 97: 2,500; Min-
nesota Trust 116: 2,500)
Cost to investors (4)................. 14,561,371 2,613,899 2,615,500
Less--Gross underwriting commission
(5).................................. 684,412 122,858 122,933
----------- ---------- ----------
Net amount applicable to investors.... 13,876,959 2,491,041 2,492,567
----------- ---------- ----------
Total................................ $14,062,778 $2,518,002 $2,521,493
=========== ========== ==========
</TABLE>
(1) Aggregate cost to each Trust of the Bonds listed under the Portfolios of
Securities on the immediately following pages is based on offering prices
as of 1:00 P.M. on January 23, 1996, the Date of Deposit, determined by the
Evaluator on the basis set forth in Part B, "Public Offering--Offering
Price." Morgan Guaranty Trust Company of New York issued an irrevocable
letter of credit in the aggregate principal amount of $20,000,000 which was
deposited with the Trustee for the purchase of $19,000,000 principal amount
of Bonds pursuant to contracts to purchase such Bonds at the Sponsor's
aggregate cost of $18,860,567 plus $203,706 representing accrued interest
thereon through the Date of Deposit.
(2) The Indenture provides that the Trustee will advance amounts equal to the
accrued interest on the underlying securities of each Trust (net of accrued
expenses) through the Date of Deposit and that such amounts will be
distributed to the Sponsor as Unit holder of record on such date, as set
forth in Part B, "Rights of Unit Holders--Distribution of Interest and
Principal."
(3) Organizational costs to be paid by the Trusts have been deferred and will
be amortized over five years.
(4) Aggregate public offering price (exclusive of interest) computed on 14,000,
2,500 and 2,500 Units of National Trust, Maryland Trust and Minnesota
Trust, respectively, on the basis set forth in Part B, "Public Offering--
Offering Price."
(5) Sales charge of 4.70% computed on 14,000, 2,500 and 2,500 Units of National
Trust, Maryland Trust and Minnesota Trust, respectively, on the basis set
forth in Part B, "Public Offering--Offering Price."
(6) The Trustee has custody of and responsibility for all accounting and
financial books, records, financial statements and related data of each
Trust and is responsible for establishing and maintaining a system of
internal controls directly related to, and designed to provide reasonable
assurance as to the integrity and reliability of, financial reporting of
each Trust. The Trustee is also responsible for all estimates and accruals
reflected in each Trust's financial statements. The Evaluator determines
the price for each underlying Bond included in each Trust's Portfolio of
Securities on the basis set forth in Part B, "Public Offering--Offering
Price."
A-9
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 215--PORTFOLIO OF SECURITIES
AS OF JANUARY 23, 1996
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 500,000 Valdez, Alaska, Marine AA- 12/1/03 @ 102 $ 500,000 5.649% $28,250
Terminal Revenue
Refunding Bonds, BP
Pipelines Inc. Project,
5.65% Due 12/1/2028
2. 1,000,000 City of Phoenix, A 7/1/04 @ 102 907,490 5.400 47,500
Arizona, Civic SF 7/1/19 @ 100
Improvement Corporation,
Waste System Lease
Revenue Refunding Bonds,
4.75% Due 7/1/2023
3. 130,000 State Public Works Board A- 6/1/03 @ 100 119,989 5.550 6,500
of the State of SF 6/1/22 @ 100
California, Lease
Revenue Refunding Bonds,
The Regents of the
University of
California, Various
University of California
Projects, 5.00% Due
6/1/2023
4. 1,000,000 Garden Grove Agency for A 10/1/03 @ 102 1,000,000 5.874 58,750
Community Development, SF 10/1/14 @ 100
California, Garden Grove
Community Project, Tax
Allocation Refunding
Bonds, 5.875% Due
10/1/2023
5. 500,000 San Bernardino County, A- 8/1/04 @ 102 411,055 6.000 23,750
California, Certificates SF 8/1/27 @ 100
of Participation,
Medical Center Financing
Project, 4.75% Due
8/1/2028
6. 200,000 Fulco Hospital A** 9/1/02 @ 102 200,968 6.300 12,750
Authority, Georgia, SF 9/1/14 @ 100
Refunding Revenue
Anticipation
Certificates, Georgia
Baptist Health Care
System Project, 6.375%
Due 9/1/2022
7. 750,000 Illinois Health AA- 4/15/02 @ 102 771,750 5.800 46,875
Facilities Authority SF 4/15/18 @ 100
Revenue Bonds and
Revenue Refunding Bonds,
Evangelical Hospitals
Corporation, 6.25% Due
4/15/2022
8. 100,000 Indiana Health Facility AAA 7/1/02 @ 102 107,061 5.780 6,850
Financing Authority, SF 7/1/08 @ 100
Hospital Revenue Bonds,
Community Hospitals
Projects, MBIA Insured,
6.85% Due 7/1/2022
9. 160,000 County of Jefferson, A- 5/1/05 @ 102 171,062 5.900 10,800
Kentucky, Multi-Family SF 5/1/16 @ 100
Housing Revenue Bonds,
Big Stone Gap Project,
6.75% Due 5/1/2025
10. 500,000 Massachusets Health and A 2/3/02 @ 102 526,955 5.800 33,250
Educational Facilities SF 12/1/07 @ 100
Authority Revenue Bonds,
Dana-Farber Cancer
Institute Issue, 6.65%
Due 12/1/2015
11. 500,000 Massachusets Health and A- 10/1/02 @ 102 534,465 5.850 34,375
Educational Facilities SF 10/1/03 @ 100
Authority Revenue Bonds,
Jordan Hospital Issue,
6.875% Due 10/1/2022
12. 1,000,000 Massachusetts Water A 12/1/04 @ 100 913,550 5.350 47,500
Resources Authority, SF 12/1/21 @ 100
General Revenue Bonds,
4.75% Due 12/1/2023
13. 250,000 Michigan State Hospital A1* 9/1/06 @ 101 246,742 5.850 14,375
Finance Authority, SF 9/1/16 @ 100
Hospital Revenue Bonds,
Clinton Memorial
Hospital, St. Johns,
Michigan, 5.75% Due
9/1/2020
14. 450,000 Indianola, Mississippi, AAA 7/1/05 @ 102 457,425 5.800 27,000
Housing Development
Corporation, Mortgage
Revenue Refunding Bonds,
FHA Insured Mortgage
Loan, Eastover
Apartments, Section 8
Assisted Project, MBIA
Insured, 6.00% Due
7/1/2022
15. 100,000 North Carolina Eastern Aaa* 1/1/22 @ 100 87,743 5.382 4,500
Municipal Power Agency, SF 1/1/21 @ 100
Power System Revenue
Refunding Bonds, 4.50%
Due 1/1/2024
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-10
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 215--PORTFOLIO OF SECURITIES
AS OF JANUARY 23, 1996
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ----------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
16. $ 750,000 North Carolina Eastern AA 1/1/03 @ 100 $ 709,125 5.400% $37,500
Municipal Power Agency, SF 1/1/14 @ 100
Power System Refunding
Revenue Bonds, 5.00% Due
1/1/2021
17. 250,000 The Hospitals and Higher A* 6/1/03 @ 102 250,000 5.999 15,000
Education Facilities SF 6/1/15 @ 100
Authority of
Philadelphia,
Pennsylvania, Hospital
Revenue Bonds, Frankford
Hospital, 6.00% Due
6/1/2023
18. 1,000,000 The Hospitals and Higher A- 11/15/03 @ 102 1,060,950 5.800 66,250
Education Facilities SF 11/15/09 @ 100
Authority of
Philadelphia,
Pennsylvania, Hospital
Revenue Bonds, Temple
University Hospital,
6.625% Due 11/15/2023
19. 900,000 The Harrisburg A 9/1/03 @ 102 908,145 5.750 52,875
Authority, Pennsylvania, SF 9/1/14 @ 100
Guaranteed Resource
Recovery Facility
Revenue Bonds, 5.875%
Due 9/1/2021
20. 500,000 South Carolina State AA- 12/1/05 @ 102 519,100 5.750 31,000
Housing Finance and
Development Authority,
Multifamily Housing
Revenue Refunding Bonds,
Runaway Bay Apartments
Project, 6.20% Due
12/1/2020
21. 500,000 Tennessee Housing A+ 7/1/03 @ 102 501,765 5.900 29,750
Development Agency, SF 1/1/19 @ 100
Mortgage Finance Program
Bonds, 5.95% Due
7/1/2028
22. 970,000 The Health, Educational A 4/15/04 @ 100 970,000 5.999 58,200
and Housing Facility SF 10/15/18 @ 100
Board of the County of
Shelby, Tennessee,
Multifamily Housing
Revenue Refunding Bonds,
Harbour Apartments
Affordable Housing
Project, 6.00% Due
4/15/2024
23. 550,000 The Health, Educational Aaa* 10/1/04 @ 102 573,909 5.700 34,375
& Housing Facility Board SF 10/1/09 @ 100
of the City of Memphis,
Tennessee, Multifamily
Mortgage Revenue
Refunding Bonds, FHA
Insured Mortgage Loan,
River Trace Apartments,
6.25% Due 10/1/2013
24. 200,000 Industrial Development AAA 9/1/05 @ 102 202,494 5.800 11,900
Board of the County of SF 9/1/15 @ 100
Knox, Tennessee,
Multifamily Mortgage
Revenue Refunding Bonds,
FHA Insured Mortgage
Loan Waterford Village
Apartments Project,
5.95% Due 3/1/2028
25. 240,000 The Industrial A- 9/1/04 @ 102 257,081 5.600 15,600
Development Board of
Maury County, Tennessee,
Pollution Control
Refunding Revenue Bonds,
Saturn Corporation
Project, 6.50% Due
9/1/2024
</TABLE>
A-11
<PAGE>
TAX EXEMPT SECURITIES TRUST
NATIONAL TRUST 215--PORTFOLIO OF SECURITIES
AS OF JANUARY 23, 1996
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- --------------- ----------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
26. $ 500,000 Brazos County, Texas, A- 1/1/04 @ 102 $ 500,000 6.000% $ 30,000
Health Facilities SF 1/1/04 @ 100
Development Corporation,
Franciscan Services
Corporation, Revenue
Refunding Bonds, St.
Joseph Hospital and
Health Center of Bryan,
Texas, 6.00% Due
1/1/2013
27. 500,000 Intermountain Power AA- 7/1/03 @ 100 468,135 5.450 25,000
Agency, Utah, Power SF 7/1/22 @ 100
Supply Revenue Refunding
Bonds, 5.00% Due
7/1/2023
----------- ----------- --------
$14,000,000 $13,876,959 $810,475
=========== =========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-12
<PAGE>
TAX EXEMPT SECURITIES TRUST
MARYLAND TRUST 97--PORTFOLIO OF SECURITIES
AS OF JANUARY 23, 1996
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS REDEMPTION TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) PROVISIONS (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ---------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 110,000 Maryland Health & Higher AAA 7/1/03 @ 102 $ 105,695 5.300% $ 5,500
Educational Facilities SF 7/1/14 @ 100
Authority Revenue Bonds,
Frederick Memorial
Hospital, FGIC Insured,
5.00% Due 7/1/2018
2. 500,000 Maryland Health and A 7/1/03 @ 102 507,245 5.550 28,750
Higher Educational SF 7/1/14 @ 100
Facilities Authority
Revenue Bonds, Good
Samaritan Hospital
Issue, 5.75% Due
7/1/2019
3. 500,000 Community Development Aa* 5/15/05 @ 102 506,155 5.650 29,000
Administration, SF 5/15/16 @ 100
Department of Housing
and Community
Development, State of
Maryland, Multi-Family
Housing Revenue Bonds,
5.80% Due 5/15/2026
4. 500,000 Baltimore County, AAA 8/20/03 @ 102 515,060 5.589 30,000
Maryland, Mortgage SF 2/20/14 @ 100
Revenue Refunding Bonds,
GNMA Collateralized,
Liberty Crossing
Apartments Project,
6.00% Due 8/20/2020
5. 370,000 Housing Opportunities A* 7/1/03 @ 102 370,000 5.750 21,275
Commission of Montgomery SF 7/1/14 @ 100
County, Maryland,
Multifamily Mortgage
Revenue Bonds, 5.75% Due
7/1/2034
6. 220,000 Prince George's County, A* 7/1/04 @ 102 207,673 5.700 11,660
Maryland, Project and SF 7/1/15 @ 100
Refunding Revenue Bonds,
Dimensions Health
Corporation Issue, 5.30%
Due 7/1/2024
7. 300,000 Puerto Rico Highway and A 7/1/03 @ 101.5 279,213 5.500 15,000
Transportation
Authority, Highway
Revenue Refunding Bonds,
5.00% Due 7/1/2022
---------- ---------- --------
$2,500,000 $2,491,041 $141,185
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-13
<PAGE>
TAX EXEMPT SECURITIES TRUST
MINNESOTA TRUST 116--PORTFOLIO OF SECURITIES
AS OF JANUARY 23, 1996
<TABLE>
<CAPTION>
COST OF YIELD ON ANNUAL
REDEMPTION SECURITIES DATE OF INTEREST
AGGREGATE SECURITIES REPRESENTED RATINGS PROVISIONS TO TRUST DEPOSIT INCOME
PRINCIPAL BY PURCHASE CONTRACTS (1) (2) (3)(4) (4) TO TRUST
--------- ------------------------ ------- ----------------- ---------- -------- --------
<C> <C> <S> <C> <C> <C> <C> <C>
1. $ 500,000 Minnesota Housing AAA 2/1/05 @ 102 $ 512,140 5.700% $ 30,000
Finance Agency, Rental SF 8/1/18 @ 100
Housing Bonds, MBIA
Insured, 6.00% Due
2/1/2022
2. 195,000 City of Bemidji, A 9/1/05 @ 100 202,905 5.500 11,797
Minnesota, Hospital SF 9/1/17 @ 100
Facilities First
Mortgage Revenue Bonds,
North County Health
Services Project, 6.05%
Due 9/1/2024
3. 500,000 City of Burnsville, AAA 7/1/03 @ 102 510,810 5.700 30,000
Minnesota, Multifamily SF 7/1/19 @ 100
Housing Revenue
Refunding Bonds, FHA
Insured Mortgage Loan,
Summit Park Apartments
Project, 6.00% Due
7/1/2033
4. 500,000 City of Minneapolis, AAA 11/15/03 @ 102 463,810 5.300 23,750
Minnesota, Housing and SF 11/15/14 @ 100
Redevelopment Authority
of the City of Saint
Paul, Minnesota, Health
Care System Revenue
Bonds, HealthSpan, AMBAC
Insured, 4.75% Due
11/15/2018
5. 450,000 City of New Hope, Aaa* 1/1/06 @ 102 463,482 5.700 27,225
Minnesota, Multifamily SF 7/1/05 @ 100
Housing Development
Refunding Revenue Bonds,
GNMA Collateralized,
North Ridge Care Center,
Inc. Project, 6.05% Due
1/1/2017
6. 195,000 Southern Minnesota A+ Currently @ 100 186,241 5.350 9,750
Municipal Power Agency, SF 1/1/17 @ 100
Power Supply System
Revenue Bonds, 5.00% Due
1/1/2018
7. 160,000 Southern Minnesota A+ Currently @ 100 153,179 5.350 8,000
Municipal Power Agency, SF 1/1/14 @ 100
Power Supply System
Revenue Bonds, 5.00% Due
1/1/2016
---------- ---------- --------
$2,500,000 $2,492,567 $140,522
========== ========== ========
</TABLE>
The Notes following the Portfolios are an integral part of each Portfolio of
Securities.
A-14
<PAGE>
NOTES TO PORTFOLIOS OF SECURITIES
(1)For a description of the meaning of the applicable rating symbols as
published by Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc., Moody's Investors Service(*) and Fitch Investor Services, Inc.(**),
see Part B, "Bond Ratings".
(2) There is shown under this heading the year in which each issue of Bonds
initially is redeemable and the redemption price for that year; unless
otherwise indicated, each issue continues to be redeemable at declining
prices thereafter, but not below par. "SF" indicates a sinking fund has been
or will be established with respect to an issue of Bonds. The prices at
which Bonds may be redeemed or called prior to maturity may or may not
include a premium and, in certain cases, may be less than the cost of the
Bonds to a Trust. Certain Bonds in a Portfolio, including Bonds listed as
not being subject to redemption provisions, may be redeemed in whole or in
part other than by operation of the stated redemption or sinking fund
provision under certain unusual or extraordinary circumstances specified in
the instruments setting forth the terms and provisions of such Bonds. For
example, see discussion of obligations of housing authorities in Part B,
"Tax Exempt Securities Trust--Portfolio."
(3) Contracts to purchase Bonds were entered into during the period August 16,
1995, through January 23, 1996, with the final settlement date on January
26, 1996. The Profit to the Sponsor on Deposit totals $141,669, $26,371 and
$20,383 for the National Trust, Maryland Trust and Minnesota Trust,
respectively.
(4) Evaluation of the Bonds by the Evaluator is made on the basis of current
offering prices for the Bonds. The current offering prices of the Bonds are
greater than the current bid prices of the Bonds. The Redemption Price per
Unit and the public offering price of the Units in the secondary market are
determined on the basis of the current bid prices of the Bonds. (See Part B,
"Public Offering--Offering Price" and "Rights of Unit Holders--Redemption of
Units.") Yield of Bonds was computed on the basis of offering prices on the
date of deposit. The aggregate bid price of the Bonds in the National Trust,
Maryland Trust and Minnesota Trust on January 23, 1996, was $13,820,959,
$2,481,041 and $2,482,567, respectively.
A-15
<PAGE>
PROSPECTUS--PART B:
- --------------------------------------------------------------------------------
NOTE THAT PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED
BY PART A.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST
THE TRUSTS
For over 20 years, Tax Exempt Securities Trust has specialized in quality
municipal bond investments designed to meet a variety of investment objectives
and Tax situations. Tax Exempt Securities Trust is a convenient and cost
effective alternative to individual bond purchases. Each Trust is one of a
series of similar but separate unit investment trusts created under the laws of
the State of New York by a Trust Indenture and Agreement and related Reference
Trust Agreement dated the Date of Deposit (collectively, the "Trust
Agreement"), of Smith Barney Inc., as Sponsor, The Chase Manhattan Bank
(National Association), as Trustee, and J.J. Kenny Co., Inc., as Evaluator.
Each Trust containing Bonds of a State for which such Trust is named (a "State
Trust") and each National Trust, Selected Term Trust, Long-Intermediate Term
Trust, Intermediate Term Trust, Short-Intermediate Term Trust and Short Term
Trust are referred to herein as the "Trust" or "Trusts," unless the context
requires otherwise. On the Date of Deposit, the Sponsor deposited contracts and
funds (represented by a certified check or checks and/or an irrevocable letter
or letters of credit, issued by a major commercial bank) for the purchase of
certain interest-bearing obligations (the "Bonds") and/or Units of preceding
Series of Tax Exempt Securities Trust (such Bonds and Units of preceding Series
of Tax Exempt Securities Trust, if any, (the "Deposited Units") being referred
to herein collectively as the "Securities"). The Trustee thereafter delivered
to the Sponsor registered certificates of beneficial interest (the
"Certificates") representing the units (the "Units") comprising the entire
ownership of each Trust, which Units are being offered hereby. References to
multiple Trusts in Part B herein should be read as references to a single Trust
if Part A indicates the creation of only one Trust.
Notwithstanding the availability of the above-mentioned certified check or
checks and/or irrevocable letter or letters of credit, it is expected that the
Sponsor will pay for the Bonds as the contracts for their purchase become due.
A substantial portion of such contracts have not become due by the date of this
Prospectus. To the extent Units are sold prior to the settlement of such
contracts, the Sponsor will receive the purchase price on such Units prior to
the time at which they pay for Bonds pursuant to such contracts and have the
use of such funds during this period.
OBJECTIVES
A tax-exempt unit investment trust provides many of the same benefits as
individual bond purchases, while the Unit holder avoids the complexity of
analyzing, selecting and monitoring a multi-bond portfolio. The objectives of a
Trust are tax-exempt income and conservation of capital through an investment
in a diversified portfolio of municipal bonds. There is, of course, no
guarantee that a Trust's objectives will be achieved since the payment of
interest and the preservation of principal are dependent upon the continued
ability of the issuers of the bonds to meet such obligations. Subsequent to the
Date of Deposit, the ratings of the Bonds set forth in Part A--"Portfolio of
Securities" may decline due to, among other factors, a decline in
creditworthiness of the issuer of said Bonds.
PORTFOLIO
The Sponsor's investment professionals select Bonds for the Trust portfolios
from among the 200,000 municipal bond issues that vary according to bond
purpose, credit quality and years to maturity. The following factors, among
others, were considered in selecting the Bonds for each Trust: (1) the Bonds
are obligations of the states, counties, territories or municipalities of the
United States and authorities or political subdivisions thereof, so that the
interest on them will, in the opinion of recognized bond counsel to the issuing
governmental authorities, be exempt from Federal tax (including alternative
minimum tax) under existing law to the extent described in "Taxes", (2) all the
Bonds deposited in a State Trust are obligations of the State for which such
Trust is named or of the counties, territories or municipalities of such State,
and authorities or political subdivisions thereof, or of the Territory of Guam
or the Commonwealth of Puerto Rico, so that the interest on them will, in the
opinion of recognized bond counsel to the issuing governmental authorities, be
exempt from Federal income tax under existing law to the extent described in
"Taxes" and from state income taxes in the state for which such State Trust is
named to the extent described in Part C, (3) the Bonds are rated A or better by
a major bond rating agency, (4) the Bonds were chosen in part on the basis of
their respective maturity dates and offer a degree of call protection, (5) the
Bonds are diversified as to purpose of issue and location of issuer, except in
the case of a State Trust where the Bonds are diversified only as to purpose of
issue, and (6) in the opinion of the Sponsor, the Bonds are fairly valued
relative to other bonds of comparable quality and maturity.
B-1
<PAGE>
The Bonds in the Portfolio of a Trust were chosen in part on the basis of
their respective maturity dates. The Bonds in each Trust will have a dollar-
weighted average portfolio maturity as designated in Part A--"Portfolio Summary
as of Date of Deposit." For the actual maturity date of each of the Bonds
contained in a Trust, which date may be earlier or later than the dollar-
weighted average portfolio maturity of the Trust, see Part A, "Portfolio of
Securities." A sale or other disposition of a Bond by the Trust prior to the
maturity of such Bond may be at a price which results in a loss to the Trust.
The inability of an issuer to pay the principal amount due upon the maturity of
a Bond would result in a loss to the Trust.
In the event that any contract for the purchase of any Bond fails, the
Sponsor is authorized under the Trust Agreement, subject to the conditions set
forth below, to instruct the Trustee to acquire other securities (the
"Replacement Bonds") for inclusion in the Portfolio of the affected Trust. Any
Replacement Bonds must be deposited not later than the earlier of (i) the first
monthly Distribution Date of the Trust and (ii) 90 days after such Trust was
established. The cost and aggregate principal amount of a Replacement Bond may
not exceed the cost and aggregate principal amount of the Bond which it
replaces. In addition, a Replacement Bond must (1) be a tax-exempt bond; (2)
have a fixed maturity or disposition date comparable to the Bond it replaces;
(3) be purchased at a price that results in a yield to maturity and in a
current return, in each case as of the execution and delivery of the Trust
Agreement, which is approximately equivalent to the yield to maturity and
current return of the Bond which it replaces; (4) be purchased within twenty
days after delivery of notice of the failed contracts; and (5) be rated in a
category A or better by Standard & Poor's, Moody's, Fitch, or Duff & Phelps.
Whenever a Replacement Bond has been acquired for a Trust, the Trustee shall,
within five days thereafter, notify all Unit holders of such Trust of the
acquisition of the Replacement Bond.
In the event that a contract to purchase Bonds fails and Replacement Bonds
are not acquired, the Trustee will, not later than the second monthly
Distribution Date, distribute to Unit holders the funds attributable to the
failed contract. The Sponsor will, in such a case, refund the sales charge
applicable to the failed contract. If less than all the funds attributable to a
failed contract are applied to purchase Replacement Bonds, the remaining moneys
will be distributed to Unit holders not later than the second monthly
Distribution Date. Moreover, the failed contract will reduce the Estimated Net
Annual Income per Unit, and may lower the Estimated Current Return and
Estimated Long-Term Return.
RISK FACTORS
Certain Bonds in a Trust may have been purchased by the Sponsor on a "when,
as and if issued" basis; that is, they had not yet been issued by their
governmental entity on the Date of Deposit (although such governmental entity
had committed to issue such Bonds). Contracts relating to such "when, as and if
issued" Bonds are not expected to be settled by the first settlement date for
Units. In the case of these and/or certain other Bonds, the delivery of the
Bonds may be delayed ("delayed delivery") or may not occur. Unit holders who
purchased their Units of a Trust prior to the date such Bonds are actually
delivered to the Trustee may have to make a downward adjustment in the tax
basis of their Units for interest accruing on such "when, as and if issued" or
"delayed delivery" Bonds during the interval between their purchase of Units
and delivery of such Bonds, since the Trust and the Unit holders will not be
reimbursing the Sponsor for interest accruing on such "when, as and if issued"
or "delayed delivery" Bonds during the period between the settlement date for
the Units and the delivery of such Bonds into the Trust. (See "Taxes.") Such
adjustment has been taken into account in computing the Estimated Current
Return and Estimated Long-Term Return set forth herein, which is slightly lower
than Unit holders may receive after the first year. (See Part A, "Summary of
Essential Information.") To the extent that the delivery of such Bonds is
delayed beyond their respective expected delivery dates, the Estimated Current
Return and Estimated Long-Term Return for the first year may be lower than
indicated in the "Summary of Essential Information" in Part A.
Most of the Bonds in the Portfolio of a Trust are subject to redemption prior
to their stated maturity date pursuant to sinking fund or call provisions. (See
Part A--"Portfolio Summary as of Date of Deposit" for information relating to
the particular Trust described therein.) In general, a call or redemption
provision is more likely to be exercised when the offering price valuation of a
bond is higher than its call or redemption price, as it might be in periods of
declining interest rates, than when such price valuation is less than the
bond's call or redemption price. To the extent that a Bond was deposited in a
Trust at a price higher than the price at which it is redeemable, redemption
will result in a loss of capital when compared with the original public
offering price of the Units. Conversely, to the extent that a Bond was acquired
at a price lower than the redemption price, redemption will result in an
increase in capital when compared with the original public offering price of
the Units. Monthly distributions will generally be reduced by the amount of the
income which would otherwise have been paid with respect to redeemed bonds. The
Estimated Current Return and Estimated Long-Term Return of the Units may be
affected by such redemptions. Each Portfolio of Securities in Part A contains a
listing of the sinking fund and call provisions, if any, with respect to each
of the Bonds in a Trust. Because certain of the Bonds may from time to time
under certain circumstances be sold or redeemed or will mature in accordance
with their terms and the proceeds from such events will be distributed to Unit
holders and will not be reinvested, no assurance can be given that a Trust will
retain for any length of time its present size and composition. NEITHER THE
SPONSOR NOR THE TRUSTEE SHALL BE LIABLE IN ANY WAY FOR ANY DEFAULT, FAILURE OR
DEFECT IN ANY BOND.
B-2
<PAGE>
The Portfolio of the Trust may consist of some Bonds whose current market
values were below face value on the Date of Deposit. A primary reason for the
market value of such Bonds being less than face value at maturity is that the
interest coupons of such Bonds are at lower rates than the current market
interest rate for comparably rated Bonds, even though at the time of the
issuance of such Bonds the interest coupons thereon represented then prevailing
interest rates on comparably rated Bonds then newly issued. Bonds selling at
market discounts tend to increase in market value as they approach maturity
when the principal amount is payable. A market discount tax-exempt Bond held to
maturity will have a larger portion of its total return in the form of taxable
ordinary income and less in the form of tax-exempt income than a comparable
Bond bearing interest at current market rates. Under the provisions of the
Internal Revenue Code in effect on the date of this Prospectus any ordinary
income attributable to market discount will be taxable but will not be realized
until maturity, redemption or sale of the Bonds or Units.
As set forth under "Portfolio Summary as of Date of Deposit", the Trust may
contain or be concentrated in one or more of the classifications of Bonds
referred to below. A Trust is considered to be "concentrated" in a particular
category when the Bonds in that category constitute 25% or more of the
aggregate value of the Portfolio. (See Part A--"Portfolio Summary as of Date of
Deposit" for information relating to the particular Trust described therein.)
An investment in Units of the Trust should be made with an understanding of the
risks that these investments may entail, certain of which are described below.
GENERAL OBLIGATION BONDS. Certain of the Bonds in the Portfolio may be
general obligations of a governmental entity that are secured by the taxing
power of the entity. General obligation bonds are backed by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. However, the taxing power of any governmental entity may be limited
by provisions of state constitutions or laws and an entity's credit will depend
on many factors, including an erosion of the tax base due to population
declines, natural disasters, declines in the state's industrial base or
inability to attract new industries, economic limits on the ability to tax
without eroding the tax base and the extent to which the entity relies on
Federal or state aid, access to capital markets or other factors beyond the
entity's control.
As a result of the recent recession's adverse impact upon both their revenues
and expenditures, as well as other factors, many state and local governments
are confronting deficits and potential deficits which are the most severe in
recent years. Many issuers are facing highly difficult choices about
significant tax increases and/or spending reductions in order to restore
budgetary balance. Failure to implement these actions on a timely basis could
force the issuers to depend upon market access to finance deficits or cash flow
needs.
In addition, certain of the Bonds in the Trust may be obligations of issuers
(including California issuers) who rely in whole or in part on ad valorem real
property taxes as a source of revenue. Certain proposals, in the form of state
legislative proposals or voter initiatives, to limit ad valorem real property
taxes have been introduced in various states, and an amendment to the
constitution of the State of California, providing for strict limitations on ad
valorem real property taxes, has had a significant impact on the taxing powers
of local governments and on the financial conditions of school districts and
local governments in California. It is not possible at this time to predict the
final impact of such measures, or of similar future legislative or
constitutional measures, on school districts and local governments or on their
abilities to make future payments on their outstanding debt obligations.
INDUSTRIAL DEVELOPMENT REVENUE BONDS ("IDRS"). IDRs, including pollution
control revenue bonds, are tax-exempt securities issued by states,
municipalities, public authorities or similar entities ("issuers") to finance
the cost of acquiring, constructing or improving various projects, including
pollution control facilities and certain industrial development facilities.
These projects are usually operated by corporate entities. IDRs are not general
obligations of governmental entities backed by their taxing power. Issuers are
only obligated to pay amounts due on the IDRs to the extent that funds are
available from the unexpended proceeds of the IDRs or receipts or revenues of
the issuer under arrangements between the issuer and the corporate operator of
a project. These arrangements may be in the form of a lease, installment sale
agreement, conditional sale agreement or loan agreement, but in each case the
payments to the issuer are designed to be sufficient to meet the payments of
amounts due on the IDRs.
IDRs are generally issued under bond resolutions, agreements or trust
indentures pursuant to which the revenues and receipts payable under the
issuer's arrangements with the corporate operator of a particular project have
been assigned and pledged to the holders of the IDRs or a trustee for the
benefit of the holders of the IDRs. In certain cases, a mortgage on the
underlying project has been assigned to the holders of the IDRs or a trustee as
additional security for the IDRs. In addition, IDRs are frequently directly
guaranteed by the corporate operator of the project or by another affiliated
company. Regardless of the structure, payment of IDRs is solely dependent upon
the creditworthiness of the corporate operator of the project or corporate
guarantor. Corporate operators or guarantors that are industrial companies may
be affected by many factors which may have an adverse impact on the credit
quality of the particular company or industry. These include cyclicality of
revenues and earnings, regulatory and environmental restrictions, litigation
resulting from accidents or environmentally-caused illnesses, extensive
competition (including that of low-cost foreign companies), unfunded pension
fund liabilities or off-balance sheet items, and financial deterioration
resulting from leveraged buy-outs or takeovers. However, certain of the IDRs in
the Portfolio may be additionally insured or secured by letters of credit
issued by banks or otherwise guaranteed or secured to cover amounts due on the
IDRs in the event of default in payment by an issuer.
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HOSPITAL AND HEALTH CARE FACILITY BONDS. The ability of hospitals and other
health care facilities to meet their obligations with respect to revenue bonds
issued on their behalf is dependent on various factors, including the level of
payments received from private third-party payors and government programs and
the cost of providing health care services.
A significant portion of the revenues of hospitals and other health care
facilities is derived from private third-party payors and government programs,
including the Medicare and Medicaid programs. Both private third-party payors
and government programs have undertaken cost containment measures designed to
limit payments made to health care facilities. Furthermore, government programs
are subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which may
materially decrease the rate of program payments for health care facilities.
Certain special revenue obligations (i.e., Medicare or Medicaid revenues) may
be payable subject to appropriations by state legislatures. There can be no
assurance that payments under governmental programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients participating in such programs. In addition, there
can be no assurance that a particular hospital or other health care facility
will continue to meet the requirements for participation in such programs.
The costs of providing health care services are subject to increase as a
result of, among other factors, changes in medical technology and increased
labor costs. In addition, health care facility construction and operation is
subject to federal, state and local regulation relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures, rate-
setting, and compliance with building codes and environmental laws. Facilities
are subject to periodic inspection by governmental and other authorities to
assure continued compliance with the various standards necessary for licensing
and accreditation. These regulatory requirements are subject to change and, to
comply, it may be necessary for a hospital or other health care facility to
incur substantial capital expenditures or increased operating expenses to
effect changes in its facilities, equipment, personnel and services.
Hospitals and other health care facilities are subject to claims and legal
actions by patients and others in the ordinary course of business. Although
these claims are generally covered by insurance, there can be no assurance that
a claim will not exceed the insurance coverage of a health care facility or
that insurance coverage will be available to a facility. In addition, a
substantial increase in the cost of insurance could adversely affect the
results of operations of a hospital or other health care facility. The Clinton
Administration may impose regulations which could limit price increases for
hospitals or the level of reimbursements for third-party payors or other
measures to reduce health care costs and make health care available to more
individuals, which would reduce profits for hospitals. Some states, such as New
Jersey, have significantly changed their reimbursement systems. If a hospital
cannot adjust to the new system by reducing expenses or raising rates,
financial difficulties may arise. Also, Blue Cross has denied reimbursement for
some hospitals for services other than emergency room services. The lost volume
would reduce revenues unless replacement patients were found.
Certain hospital bonds may provide for redemption at par at any time upon the
sale by the issuer of the hospital facilities to a non-affiliated entity, if
the hospital becomes subject to ad valorem taxation, or in various other
circumstances. For example, certain hospitals may have the right to call bonds
at par if the hospital may be legally required because of the bonds to perform
procedures against specified religious principles or to disclose information
that is considered confidential or privileged. Certain FHA-insured bonds may
provide that all or a portion of these bonds, otherwise callable at a premium,
can be called at par in certain circumstances. If a hospital defaults upon a
bond obligation, the realization of Medicare and Medicaid receivables may be
uncertain and, if the bond obligation is secured by the hospital facilities,
legal restrictions on the ability to foreclose upon the facilities and the
limited alternative uses to which a hospital can be put may severely reduce its
collateral value.
The Internal Revenue Service is currently engaged in a program of intensive
audits of certain large tax-exempt hospital and health care facility
organizations. Although these audits have not yet been completed, it has been
reported that the tax-exempt status of some of these organizations may be
revoked. At this time, it is uncertain whether any of the hospital and health
care facility bonds held by the Trust will be affected by such audit
proceedings.
SINGLE FAMILY AND MULTI-FAMILY HOUSING BONDS. Multi-family housing revenue
bonds and single family mortgage revenue bonds are state and local housing
issues that have been issued to provide financing for various housing projects.
Multi-family housing revenue bonds are payable primarily from the revenues
derived from mortgage loans to housing projects for low to moderate income
families. Single-family mortgage revenue bonds are issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages on
residences.
Housing obligations are not general obligations of the issuer although
certain obligations may be supported to some degree by Federal, state or local
housing subsidy programs. Budgetary constraints experienced by these programs
as well as the failure by a state or local housing issuer to satisfy the
qualifications required for coverage under these programs or any legal or
administrative determinations that the coverage of these programs is not
available to a housing issuer, probably will result in a decrease or
elimination of subsidies available for payment of amounts due on the issuer's
obligations. The ability of housing issuers to make debt service payments on
their obligations will also be affected by various economic and non-economic
developments including, among other things, the achievement and maintenance of
sufficient occupancy levels and adequate rental income in multi-family
projects, the rate of default
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on mortgage loans underlying single family issues and the ability of mortgage
insurers to pay claims, employment and income conditions prevailing in local
markets, increases in construction costs, taxes, utility costs and other
operating expenses, the managerial ability of project managers, changes in laws
and governmental regulations and economic trends generally in the localities in
which the projects are situated. Occupancy of multi-family housing projects may
also be adversely affected by high rent levels and income limitations imposed
under Federal, state or local programs.
All single family mortgage revenue bonds and certain multi-family housing
revenue bonds are prepayable over the life of the underlying mortgage or
mortgage pool, and therefore the average life of housing obligations cannot be
determined. However, the average life of these obligations will ordinarily be
less than their stated maturities. Single-family issues are subject to
mandatory redemption in whole or in part from prepayments on underlying
mortgage loans; mortgage loans are frequently partially or completely prepaid
prior to their final stated maturities as a result of events such as declining
interest rates, sale of the mortgaged premises, default, condemnation or
casualty loss. Multi-family issues are characterized by mandatory redemption at
par upon the occurrence of monetary defaults or breaches of covenants by the
project operator. Additionally, housing obligations are generally subject to
mandatory partial redemption at par to the extent that proceeds from the sale
of the obligations are not allocated within a stated period (which may be
within a year of the date of issue). To the extent that these obligations were
valued at a premium when a Holder purchased Units, any prepayment at par would
result in a loss of capital to the Holder and, in any event, reduce the amount
of income that would otherwise have been paid to Holders.
The tax exemption for certain housing revenue bonds depends on qualification
under Section 143 of the Internal Revenue Code of 1986, as amended (the
"Code"), in the case of single family mortgage revenue bonds or Section
142(a)(7) of the Code or other provisions of Federal law in the case of certain
multi-family housing revenue bonds (including Section 8 assisted bonds). These
sections of the Code or other provisions of Federal law contain certain ongoing
requirements, including requirements relating to the cost and location of the
residences financed with the proceeds of the single family mortgage revenue
bonds and the income levels of tenants of the rental projects financed with the
proceeds of the multi-family housing revenue bonds. While the issuers of the
bonds and other parties, including the originators and servicers of the single-
family mortgages and the owners of the rental projects financed with the multi-
family housing revenue bonds, generally covenant to meet these ongoing
requirements and generally agree to institute procedures designed to ensure
that these requirements are met, there can be no assurance that these ongoing
requirements will be consistently met. The failure to meet these requirements
could cause the interest on the bonds to become taxable, possibly retroactively
to the date of issuance, thereby reducing the value of the bonds, subjecting
the Holders to unanticipated tax liabilities and possibly requiring the Trustee
to sell the bonds at reduced values. Furthermore, any failure to meet these
ongoing requirements might not constitute an event of default under the
applicable mortgage or permit the holder to accelerate payment of the bond or
require the issuer to redeem the bond. In any event, where the mortgage is
insured by the Federal Housing Administration, its consent may be required
before insurance proceeds would become payable to redeem the mortgage bonds.
POWER FACILITY BONDS. The ability of utilities to meet their obligations with
respect to revenue bonds issued on their behalf is dependent on various
factors, including the rates they may charge their customers, the demand for a
utility's services and the cost of providing those services. Utilities, in
particular investor-owned utilities, are subject to extensive regulations
relating to the rates which they may charge customers. Utilities can experience
regulatory, political and consumer resistance to rate increases. Utilities
engaged in long-term capital projects are especially sensitive to regulatory
lags in granting rate increases. Any difficulty in obtaining timely and
adequate rate increases could adversely affect a utility's results of
operations.
The demand for a utility's services is influenced by, among other factors,
competition, weather conditions and economic conditions. Electric utilities,
for example, have experienced increased competition as a result of the
availability of other energy sources, the effects of conservation on the use of
electricity, self-generation by industrial customers and the generation of
electricity by co-generators and other independent power producers. Also,
increased competition will result if federal regulators determine that
utilities must open their transmission lines to competitors. Utilities which
distribute natural gas also are subject to competition from alternative fuels,
including fuel oil, propane and coal.
The utility industry is an increasing cost business making the cost of
generating electricity more expensive and heightening its sensitivity to
regulation. A utility's costs are influenced by the utility's cost of capital,
the availability and cost of fuel and other factors. In addition, natural gas
pipeline and distribution companies have incurred increased costs as a result
of long-term natural gas purchase contracts containing "take or pay" provisions
which require that they pay for natural gas even if natural gas is not taken by
them. There can be no assurance that a utility will be able to pass on these
increased costs to customers through increased rates. Utilities incur
substantial capital expenditures for plant and equipment. In the future they
will also incur increasing capital and operating expenses to comply with
environmental legislation such as the Clean Air Act of 1990, and other energy,
licensing and other laws and regulations relating to, among other things, air
emissions, the quality of drinking water, waste water discharge, solid and
hazardous substance handling and disposal, and siting and licensing of
facilities. Environmental legislation and regulations are changing rapidly and
are the subject of current public policy debate and legislative proposals. It
is increasingly likely that some or many utilities will be subject to
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more stringent environmental standards in the future that could result in
significant capital expenditures. Future legislation and regulation could
include, among other things, regulation of so-called electromagnetic fields
associated with electric transmission and distribution lines as well as
emissions of carbon dioxide and other so-called greenhouse gases associated
with the burning of fossil fuels. Compliance with these requirements may limit
a utility's operations or require substantial investments in new equipment and,
as a result, may adversely affect a utility's results of operations.
The electric utility industry in general is subject to various external
factors including (a) the effects of inflation upon the costs of operation and
construction, (b) substantially increased capital outlays and longer
construction periods for larger and more complex new generating units, (c)
uncertainties in predicting future load requirements, (d) increased financing
requirements coupled with limited availability of capital, (e) exposure to
cancellation and penalty charges on new generating units under construction,
(f) problems of cost and availability of fuel, (g) compliance with rapidly
changing and complex environmental, safety and licensing requirements, (h)
litigation and proposed legislation designed to delay or prevent construction
of generating and other facilities, (i) the uncertain effects of conservation
on the use of electric energy, (j) uncertainties associated with the
development of a national energy policy, (k) regulatory, political and consumer
resistance to rate increases and (l) increased competition as a result of the
availability of other energy sources. These factors may delay the construction
and increase the cost of new facilities, limit the use of, or necessitate
costly modifications to, existing facilities, impair the access of electric
utilities to credit markets, or substantially increase the cost of credit for
electric generating facilities. The Sponsor cannot predict at this time the
ultimate effect of such factors on the ability of any issuers to meet their
obligations with respect to Bonds.
The National Energy Policy Act ("NEPA"), which became law in October, 1992,
makes it mandatory for a utility to permit non-utility generators of
electricity access to its transmission system for wholesale customers, thereby
increasing competition for electric utilities. NEPA also mandated demand-side
management policies to be considered by utilities. NEPA prohibits the Federal
Energy Regulatory Commission from mandating electric utilities to engage in
retail wheeling, which is competition among suppliers of electric generation to
provide electricity to retail customers (particularly industrial retail
customers) of a utility. However, under NEPA, a state can mandate retail
wheeling under certain conditions.
There is concern by the public, the scientific community, and the U.S.
Congress regarding environmental damage resulting from the use of fossil fuels.
Congressional support for the increased regulation of air, water, and soil
contaminants is building and there are a number of pending or recently enacted
legislative proposals which may affect the electric utility industry. In
particular, on November 15, 1990, legislation was signed into law that
substantially revises the Clean Air Act (the "1990 Amendments"). The 1990
Amendments seek to improve the ambient air quality throughout the United States
by the year 2000. A main feature of the 1990 Amendments is the reduction of
sulphur dioxide and nitrogen oxide emissions caused by electric utility power
plants, particularly those fueled by coal. Under the 1990 Amendments the U.S.
Environmental Protection Agency ("EPA") must develop limits for nitrogen oxide
emissions by 1993. The sulphur dioxide reduction will be achieved in two
phases. Phase I addresses specific generating units named in the 1990
Amendments. In Phase II the total U.S. emissions will be capped at 8.9 million
tons by the year 2000. The 1990 Amendments contain provisions for allocating
allowances to power plants based on historical or calculated levels. An
allowance is defined as the authorization to emit one ton of sulphur dioxide.
The 1990 Amendments also provide for possible further regulation of toxic air
emissions from electric generating units pending the results of several federal
government studies to be conducted over the next three to four years with
respect to anticipated hazards to public health, available corrective
technologies, and mercury toxicity.
Electric utilities which own or operate nuclear power plants are exposed to
risks inherent in the nuclear industry. These risks include exposure to new
requirements resulting from extensive federal and state regulatory oversight,
public controversy, decommissioning costs, and spent fuel and radioactive waste
disposal issues. While nuclear power construction risks are no longer of
paramount concern, the emerging issue is radioactive waste disposal. In
addition, nuclear plants typically require substantial capital additions and
modifications throughout their operating lives to meet safety, environmental,
operational and regulatory requirements and to replace and upgrade various
plant systems. The high degree of regulatory monitoring and controls imposed on
nuclear plants could cause a plant to be out of service or on limited service
for long periods. When a nuclear facility owned by an investor-owned utility or
a state or local municipality is out of service or operating on a limited
service basis, the utility operator or its owners may be liable for the
recovery of replacement power costs. Risks of substantial liability also arise
from the operation of nuclear facilities and from the use, handling, and
possible radioactive emissions associated with nuclear fuel. Insurance may not
cover all types or amounts of loss which may be experienced in connection with
the ownership and operation of a nuclear plant and severe financial
consequences could result from a significant accident or occurrence. The
Nuclear Regulatory Commission has promulgated regulations mandating the
establishment of funded reserves to assure financial capability for the
eventual decommissioning of licensed nuclear facilities. These funds are to be
accrued from revenues in amounts currently estimated to be sufficient to pay
for decommissioning costs.
The ability of state and local joint action power agencies to make payments
on bonds they have issued is dependent in large part on payments made to them
pursuant to power supply or similar agreements. Courts in Washington, Oregon
and Idaho have held that
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certain agreements between the Washington Public Power Supply System ("WPPSS")
and the WPPSS participants are unenforceable because the participants did not
have the authority to enter into the agreements. While these decisions are not
specifically applicable to agreements entered into by public entities in other
states, they may cause a reexamination of the legal structure and economic
viability of certain projects financed by joint power agencies, which might
exacerbate some of the problems referred to above and possibly lead to legal
proceedings questioning the enforceability of agreements upon which payment of
these bonds may depend.
WATER AND SEWER REVENUE BONDS. Water and sewer bonds are generally payable
from user fees. The ability of state and local water and sewer authorities to
meet their obligations may be affected by failure of municipalities to utilize
fully the facilities constructed by these authorities, economic or population
decline and resulting decline in revenue from user charges, rising construction
and maintenance costs and delays in construction of facilities, impact of
environmental requirements, failure or inability to raise user charges in
response to increased costs, the difficulty of obtaining or discovering new
supplies of fresh water, the effect of conservation programs and the impact of
"no growth" zoning ordinances. In some cases this ability may be affected by
the continued availability of Federal and state financial assistance and of
municipal bond insurance for future bond issues.
UNIVERSITY AND COLLEGE BONDS. The ability of universities and colleges to
meet their obligations is dependent upon various factors, including the size
and diversity of their sources of revenues, enrollment, reputation, management
expertise, the availability and restrictions on the use of endowments and other
funds, the quality and maintenance costs of campus facilities, and, in the case
of public institutions, the financial condition of the relevant state or other
governmental entity and its policies with respect to education. The
institution's ability to maintain enrollment levels will depend on such factors
as tuition costs, demographic trends, geographic location, geographic diversity
and quality of the student body, quality of the faculty and the diversity of
program offerings.
Legislative or regulatory action in the future at the Federal, state or local
level may directly or indirectly affect eligibility standards or reduce or
eliminate the availability of funds for certain types of student loans or grant
programs, including student aid, research grants and work-study programs, and
may affect indirect assistance for education.
LEASE RENTAL BONDS. Lease rental bonds are issued for the most part by
governmental authorities that have no taxing power or other means of directly
raising revenues. Rather, the authorities are financing vehicles created solely
for the construction of buildings (administrative offices, convention centers
and prisons, for example) or the purchase of equipment (police cars and
computer systems, for example) that will be used by a state or local government
(the "lessee"). Thus, the bonds are subject to the ability and willingness of
the lessee government to meet its lease rental payments which include debt
service on the bonds. Willingness to pay may be subject to changes in the views
of citizens and government officials as to the essential nature of the finance
project. Lease rental bonds are subject, in almost all cases, to the annual
appropriation risk, i.e., the lessee government is not legally obligated to
budget and appropriate for the rental payments beyond the current fiscal year.
These bonds are also subject to the risk of abatement in many states--rental
bonds cease in the event that damage, destruction or condemnation of the
project prevents its use by the lessee. (In these cases, insurance provisions
and reserve funds designed to alleviate this risk become important credit
factors). In the event of default by the lessee government, there may be
significant legal and/or practical difficulties involved in the reletting or
sale of the project. Some of these issues, particularly those for equipment
purchase, contain the so-called "substitution safeguard", which bars the lessee
government, in the event it defaults on its rental payments, from the purchase
or use of similar equipment for a certain period of time. This safeguard is
designed to insure that the lessee government will appropriate the necessary
funds even though it is not legally obligated to do so, but its legality
remains untested in most, if not all, states.
CAPITAL IMPROVEMENT FACILITY BONDS. The Portfolio of a Trust may contain
Bonds which are in the capital improvement facilities category. Capital
improvement bonds are bonds issued to provide funds to assist political
subdivisions or agencies of a state through acquisition of the underlying debt
of a state or local political subdivision or agency which bonds are secured by
the proceeds of the sale of the bonds, proceeds from investments and the
indebtedness of a local political subdivision or agency. The risks of an
investment in such bonds include the risk of possible prepayment or failure of
payment of proceeds on and default of the underlying debt.
SOLID WASTE DISPOSAL BONDS. Bonds issued for solid waste disposal facilities
are generally payable from tipping fees and from revenues that may be earned by
the facility on the sale of electrical energy generated in the combustion of
waste products. The ability of solid waste disposal facilities to meet their
obligations depends upon the continued use of the facility, the successful and
efficient operation of the facility and, in the case of waste-to-energy
facilities, the continued ability of the facility to generate electricity on a
commercial basis. All of these factors may be affected by a failure of
municipalities to fully utilize the facilities, an insufficient supply of waste
for disposal due to economic or population decline, rising construction and
maintenance costs, any delays in construction of facilities, lower-cost
alternative modes of waste processing and changes in environmental regulations.
Because of the relatively short history of this type of financing, there may be
technological risks involved in the satisfactory construction or operation of
the projects exceeding those associated with most municipal enterprise
projects. Increasing environmental regulation on the federal, state and local
level has a significant impact on waste disposal facilities. While regulation
requires more waste producers to use waste disposal facilities, it also imposes
significant costs on the facilities. These costs include compliance with
frequently changing and complex regulatory requirements, the cost of obtaining
construction and operating permits, the cost of conforming to prescribed and
changing equipment
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standards and required methods of operation and, for incinerators or waste-to-
energy facilities, the cost of disposing of the waste residue that remains
after the disposal process in an environmentally safe manner. In addition,
waste disposal facilities frequently face substantial opposition by
environmental groups and officials to their location and operation, to the
possible adverse effects upon the public health and the environment that may be
caused by wastes disposed of at the facilities and to alleged improper
operating procedures. Waste disposal facilities benefit from laws which require
waste to be disposed of in a certain manner but any relaxation of these laws
could cause a decline in demand for the facilities' services. Finally, waste-
to-energy facilities are concerned with many of the same issues facing
utilities insofar as they derive revenues from the sale of energy to local
power utilities (see Power Facility Bonds above).
MORAL OBLIGATION BONDS. The Trust may also include "moral obligation" bonds.
If an issuer of moral obligation bonds is unable to meet its obligations, the
repayment of the bonds becomes a moral commitment but not a legal obligation of
the state or municipality in question. Even though the state may be called on
to restore any deficits in capital reserve funds of the agencies or authorities
which issued the bonds, any restoration generally requires appropriation by the
state legislature and accordingly does not constitute a legally enforceable
obligation or debt of the state. The agencies or authorities generally have no
taxing power.
REFUNDED BONDS. Refunded Bonds are typically secured by direct obligations of
the U.S. Government, or in some cases obligations guaranteed by the U.S.
Government, placed in an escrow account maintained by an independent trustee
until maturity or a predetermined redemption date. These obligations are
generally noncallable prior to maturity or the predetermined redemption date.
In a few isolated instances to date, however, bonds which were thought to be
escrowed to maturity have been called for redemption prior to maturity.
AIRPORT, PORT AND HIGHWAY REVENUE BONDS. Certain facility revenue bonds are
payable from and secured by the revenues from the ownership and operation of
particular facilities, such as airports (including airport terminals and
maintenance facilities), bridges, marine terminals, turnpikes and port
authorities. For example, the major portion of gross airport operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, facilities, service fees, concessions and leases.
Airport operating income may therefore be affected by the ability of the
airlines to meet their obligations under the use agreements. The air transport
industry is experiencing significant variations in earnings and traffic, due to
increased competition, excess capacity, increased aviation fuel costs,
deregulation, traffic constraints, the recent recession and other factors. As a
result, several airlines are experiencing severe financial difficulties.
Several airlines including America West Airlines have sought protection from
their creditors under Chapter 11 of the Bankruptcy Code. In addition, other
airlines such as Midway Airlines Inc., Eastern Airlines, Inc. and Pan American
Corporation have been liquidated. However, Continental Airlines and Trans World
Airlines have emerged from bankruptcy. The Sponsor cannot predict what effect
these industry conditions may have on airport revenues which are dependent for
payment on the financial condition of the airlines and their usage of the
particular airport facility. Furthermore, proposed Legislation would provide
the U.S. Secretary of Transportation with the temporary authority to freeze
airport fees upon the occurrence of disputes between a particular airport
facility and the airlines utilizing that facility.
Similarly, payment on bonds related to other facilities is dependent on
revenues from the projects, such as use fees from ports, tolls on turnpikes and
bridges and rents from buildings. Therefore, payment may be adversely affected
by reduction in revenues due to such factors and increased cost of maintenance
or decreased use of a facility, lower cost of alternative modes of
transportation or scarcity of fuel and reduction or loss of rents.
SPECIAL TAX BONDS. Special tax bonds are payable from and secured by the
revenues derived by a municipality from a particular tax such as a tax on the
rental of a hotel room, on the purchase of food and beverages, on the rental of
automobiles or on the consumption of liquor. Special tax bonds are not secured
by the general tax revenues of the municipality, and they do not represent
general obligations of the municipality. Therefore, payment on special tax
bonds may be adversely affected by a reduction in revenues realized from the
underlying special tax due to a general decline in the local economy or
population or due to a decline in the consumption, use or cost of the goods and
services that are subject to taxation. Also, should spending on the particular
goods or services that are subject to the special tax decline, the municipality
may be under no obligation to increase the rate of the special tax to ensure
that sufficient revenues are raised from the shrinking taxable base.
TAX ALLOCATION BONDS. Tax allocation bonds are typically secured by
incremental tax revenues collected on property within the areas where
redevelopment projects, financed by bond proceeds are located ("project
areas"). Such payments are expected to be made from projected increases in tax
revenues derived from higher assessed values of property resulting from
development in the particular project area and not from an increase in tax
rates. Special risk considerations include: reduction of, or a less than
anticipated increase in, taxable values of property in the project area, caused
either by economic factors beyond the Issuer's control (such as a relocation
out of the project area by one or more major property owners) or by destruction
of property due to natural or other disasters; successful appeals by property
owners of assessed valuations; substantial delinquencies in the payment of
property taxes; or imposition of any constitutional or legislative property tax
rate decrease.
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TRANSIT AUTHORITY BONDS. Mass transit is generally not self-supporting from
fare revenues. Therefore, additional financial resources must be made available
to ensure operation of mass transit systems as well as the timely payment of
debt service. Often such financial resources include Federal and state
subsidies, lease rentals paid by funds of the state or local government or a
pledge of a special tax such as a sales tax or a property tax. If fare revenues
or the additional financial resources do not increase appropriately to pay for
rising operating expenses, the ability of the issuer to adequately service the
debt may be adversely affected.
CONVENTION FACILITY BONDS. The Portfolio of a Trust may contain Bonds of
issuers in the convention facilities category. Bonds in the convention
facilities category include special limited obligation securities issued to
finance convention and sports facilities payable from rental payments and
annual governmental appropriations. The governmental agency is not obligated to
make payments in any year in which the monies have not been appropriated to
make such payments. In addition, these facilities are limited use facilities
that may not be used for purposes other than as convention centers or sports
facilities.
PUERTO RICO. The Portfolio may contain bonds of issuers which will be
affected by general economic conditions in Puerto Rico. Puerto Rico's
unemployment rate remains significantly higher than the U.S. unemployment rate.
Furthermore, the economy is largely dependent for its development upon U.S.
policies and programs that are being reviewed and may be eliminated.
The Puerto Rican economy is affected by a number of Commonwealth and Federal
investment incentive programs. For example, Section 936 of the Internal Revenue
Code (the "Code") provides for a credit against Federal income taxes for U.S.
companies operating on the island if certain requirements are met. The Omnibus
Budget Reconciliation Act of 1993 imposes limits on such credit, effective for
tax years beginning after 1993. In addition, from time to time proposals are
introduced in Congress which, if enacted into law, would eliminate some or all
of the benefits of Section 936. Although no assessment can be made at this time
of the precise effect of such limitation, it is expected that the limitation of
Section 936 credits would have a negative impact on Puerto Rico's economy.
Aid for Puerto Rico's economy has traditionally depended heavily on Federal
programs, and current Federal budgetary policies suggest that an expansion of
aid to Puerto Rico is unlikely. An adverse effect on the Puerto Rican economy
could result from other U.S. policies, including a reduction of tax benefits
for distilled products, further reduction in transfer payment programs such as
food stamps, curtailment of military spending and policies which could lead to
a stronger dollar.
In a plebiscite held in November, 1993, the Puerto Rican electorate chose to
continue Puerto Rico's Commonwealth status. Previously proposed legislation,
which was not enacted, would have preserved the federal tax exempt status of
the outstanding debts of Puerto Rico and its public corporations regardless of
the outcome of the referendum, to the extent that similar obligations issued by
states are so treated and subject to the provisions of the Code currently in
effect. There can be no assurance that any pending or future legislation
finally enacted will include the same or similar protection against loss of tax
exemption. The November 1993 plebiscite can be expected to have both direct and
indirect consequences on such matters as the basic characteristics of future
Puerto Rico debt obligations, the markets for these obligations, and the types,
levels and quality of revenue sources pledged for the payment of existing and
future debt obligations. Such possible consequences include, without
limitation, legislative proposals seeking restoration of the status of Section
936 benefits otherwise subject to the limitations discussed above. However, no
assessment can be made at this time of the economic and other effects of a
change in federal laws affecting Puerto Rico as a result of the November 1993
plebiscite.
INSURANCE. Certain Bonds (the "Insured Bonds") may be insured or guaranteed
by AMBAC Indemnity Corporation ("AMBAC"), Asset Guaranty Reinsurance Company
("Asset Guaranty"), Capital Guaranty Insurance Company ("CGIC"), Capital
Markets Assurance Corp. ("CAPMAC"), Connie Lee Insurance Company ("Connie
Lee"), Financial Guaranty Insurance Company "Financial Guaranty"), Financial
Security Assurance Inc. ("FSA"), or MBIA Insurance Corporation ("MBIA")
(collectively, the "Insurance Companies"). The claims-paying ability of each of
these companies, unless otherwise indicated, is rated AAA by Standard & Poor's
or another acceptable national rating service. The ratings are subject to
change at any time at the discretion of the rating agencies. In determining
whether to insure bonds, the Insurance Companies severally apply their own
standards. The cost of this insurance is borne either by the issuers or
previous owners of the bonds or by the Sponsor. The insurance policies are non-
cancellable and will continue in force so long as the Insured Bonds are
outstanding and the insurers remain in business. The insurance policies
guarantee the timely payment of principal and interest on but do not guarantee
the market value of the Insured Bonds or the value of the Units. The insurance
policies generally do not provide for accelerated payments of principal or,
except in the case of any portfolio insurance policies, cover redemptions
resulting from events of taxability. If the issuer of any Insured Bond should
fail to make an interest or principal payment, the insurance policies generally
provide that the Trustee or its agent shall give notice of nonpayment to the
Insurance Company or its agent and provide evidence of the Trustee's right to
receive payment. The Insurance Company is then required to disburse the amount
of the failed payment to the Trustee or its agent and is thereafter subrogated
to the Trustee's right to receive payment from the issuer.
The following are brief descriptions of certain of the insurance companies
that may insure or guarantee certain Bonds. The financial information presented
for each company has been determined on a statutory basis and is unaudited.
AMBAC is a Wisconsin-domiciled stock insurance company, regulated by the
Insurance Department of the State of Wisconsin, and licensed to do business in
various states, with admitted assets of approximately $2,204,000,000 and
policyholders' surplus of
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approximately $792,000,000 as of March 31, 1995. AMBAC is a wholly-owned
subsidiary of AMBAC Inc., a financial holding company which is publicly owned
following a complete divestiture by Citibank during the first quarter of 1992.
Asset Guaranty is a New York State insurance company licensed to write
financial guarantee, credit, residual value and surety insurance. Asset
Guaranty commenced operations in mid-1988 by providing reinsurance to several
major monoline insurers. Asset Guaranty also issued limited amounts of primary
financial guaranty insurance, but not in direct competition with the primary
mono-line companies for which it acts as a reinsurer. The parent holding
company of Asset Guaranty, Asset Guarantee Inc. (AGI), merged with Enhance
Financial Services (EFS) in June, 1990 to form Enhance Financial Services Group
Inc. (EFSG). The two main, 100%-owned subsidiaries of EFSG, Asset Guaranty and
Enhance Reinsurance Company (ERC), share common management and physical
resources. After an initial public offering completed in February 1992 and the
sale by Merrill Lynch & Co. of its stake, EFSG is 49.8%-owned by the public,
29.9% by US West Financial Services, 14.1% by Manufacturers Life Insurance Co.
and 6.2% by senior management. Both ERC and Asset Guaranty are rated "AAA" for
claims paying ability by Duff & Phelps. ERC is rated triple-A for claims-paying
ability by both S&P and Moody's. Asset Guaranty received a "AA" claims-paying-
ability rating from S&P during August 1993, but remains unrated by Moody's. As
of March 31, 1995 Asset Guaranty had admitted assets of approximately
$166,000,000 and policyholders' surplus of approximately $77,000,000.
CAPMAC commenced operations in December, 1987 as the second monoline
financial guaranty insurance company (after FSA) organized solely to insure
non-municipal obligations. CAPMAC, a New York corporation, is a wholly-owned
subsidiary of CAPMAC Holdings, Inc. (CHI), which was sold in 1992 by Citibank
(New York State) to a group of 12 investors led by the following: Dillon Read's
Saratoga Partners II; L.P. (Saratoga), an acquisition fund; Caprock Management,
Inc., representing Rockefeller family interests; Citigrowth Fund, a Citicorp
venture capital group; and CAPMAC senior management and staff. These groups
control approximately 70% of the stock of CHI. CAPMAC had traditionally
specialized in guaranteeing consumer loan and trade receivable asset-backed
securities. Under the new ownership group CAPMAC intends to become involved in
the municipal bond insurance business, as well as their traditional non-
municipal business. As of March 31, 1995 CAPMAC's admitted assets were
approximately $210,000,000 and its policyholders' surplus was approximately
$138,000,000.
CGIC, a monoline bond insuror headquartered in San Francisco, California, was
established in November 1986 to assume the financial guaranty business of
United States Fidelity and Guaranty Company ("USF&G"). It is a wholly-owned
subsidiary of Capital Guaranty Corporation ("CGC") whose stock is owned by:
Constellation Investments, Inc., an affiliate of Baltimore Gas & Electric,
Fleet/Norstar Financial Group, Inc., Safeco Corporation, Sibag Finance
Corporation, an affiliate of Siemens AG, and USF&G, the 8th largest
property/casualty company in the U.S. as measured by net premiums written, and
CGC management. As of March 31, 1995, CGIC had total admitted assets of
approximately $309,000,000 and policyholders' surplus of approximately
$171,000,000.
Connie Lee is a wholly owned subsidiary of College Construction Loan
Insurance Association ("CCLIA"), a government-sponsored enterprise established
by Congress to provide American academic institutions with greater access to
low-cost capital through enhancement. Connie Lee, the operating insurance
company, was incorporated in 1987 and began business as a reinsurer of tax-
exempt bonds of colleges, universities, and teaching hospitals with a
concentration on the hospital sector. During the fourth quarter of 1991 Connie
Lee began underwriting primary bond insurance which will focus largely on the
college and university sector. CCLIA's founding shareholders are the U.S.
Department of Education, which owns 36% of CCLIA, and the Student Loan
Marketing Association ("Sallie Mae"), which owns 14%. The other principal
owners are: Pennsylvania Public School Employees' Retirement System,
Metropolitan Life Insurance Company, Kemper Financial Services, Johnson family
funds and trusts, Northwestern University, Rockefeller & Co., Inc. administered
trusts and funds, and Stanford University. Connie Lee is domiciled in the state
of Wisconsin and has licenses to do business in 47 states and the District of
Columbia. As of March 31, 1995, its total admitted assets were approximately
$195,000,000 and policyholders' surplus was approximately $108,000,000.
Financial Guaranty, a New York stock insurance company, is a wholly-owned
subsidiary of FGIC Corporation which is wholly-owned by General Electric
Capital Corporation. The investors in the FGIC Corporation are not obligated to
pay the debts of or the claims against Financial Guaranty. Financial Guaranty
commenced its business of providing insurance and financial guarantees for a
variety of investment instruments in January 1984 and is currently authorized
to provide insurance in 49 states and the District of Columbia. It files
reports with state regulatory agencies and is subject to audit and review by
those authorities. As of March 31, 1995, its total admitted assets were
approximately $2,172,000,000 and its policyholders' surplus was approximately
$963,000,000.
FSA is a monoline property and casualty insurance company incorporated in New
York in 1984. It is a wholly-owned subsidiary of Financial Security Assurance
Holdings Ltd., which was acquired in December 1989 by US West, Inc., the
regional Bell Telephone Company serving the Rocky Mountain and Pacific
Northwestern states. U.S. West is currently seeking to sell FSA. FSA is
licensed to engage in the surety business in 42 states and the District of
Columbia. FSA is engaged exclusively in the business of writing financial
guaranty insurance on both tax-exempt and non-municipal securities. As of March
31, 1995, FSA had policyholders' surplus of approximately $341,000,000 and
total admitted assets of approximately $806,000,000.
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MBIA is the principal operating subsidiary of MBIA Inc. The principal
shareholders of MBIA Inc. were originally Aetna Casualty and Surety Company,
The Fund American Companies, Inc., subsidiaries of CIGNA Corporation and Credit
Local de France, CAECL, S.A. These principal shareholders now own approximately
13% of the outstanding common stock of MBIA Inc., following a series of four
public equity offerings over a five-year period. As of March 31, 1995, MBIA had
admitted assets of approximately $3,504,000,000 and policyholders' surplus of
approximately $1,132,000,000.
Insurance companies are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. This regulation, supervision and administration relate, among
other things, to: the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; deposits of securities for the benefit of policyholders; approval
of policy forms and premium rates; periodic examinations of the affairs of
insurance companies; annual and other reports required to be filed on the
financial condition of insurers or for other purposes; and requirements
regarding reserves for unearned premiums, losses and other matters. Regulatory
agencies require that premium rates not be excessive, inadequate or unfairly
discriminatory. Insurance regulation in many states also includes "assigned
risk" plans, reinsurance facilities, and joint underwriting associations, under
which all insurers writing particular lines of insurance within the
jurisdiction must accept, for one or more of those lines, risks unable to
secure coverage in voluntary markets. A significant portion of the assets of
insurance companies is required by law to be held in reserve against potential
claims on policies and is not available to general creditors.
Although the Federal government does not regulate the business of insurance,
Federal initiatives can significantly impact the insurance business. Current
and proposed Federal measures which may significantly affect the insurance
business include pension regulation (ERISA), controls on medical care costs,
minimum standards for no-fault automobile insurance, national health insurance,
personal privacy protection, tax law changes affecting life insurance companies
or the relative desirability of various personal investment vehicles and repeal
of the current antitrust exemption for the insurance business. (If this
exemption is eliminated, it will substantially affect the way premium rates are
set by all property-liability insurers.) In addition, the Federal government
operates in some cases as a co-insurer with the private sector insurance
companies.
Insurance companies are also affected by a variety of state and Federal
regulatory measures and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These include judicial
redefinitions of risk exposure in areas such as products liability and state
and Federal extension and protection of employee benefits, including pension,
workers' compensation, and disability benefits. These developments may result
in short-term adverse effects on the profitability of various lines of
insurance. Longer-term adverse effects can often be minimized through prompt
repricing of coverages and revision of policy terms. In some instances, these
developments may create new opportunities for business growth. All insurance
companies write policies and set premiums based on actuarial assumptions about
mortality, injury, the occurrence of accidents and other insured events. These
assumptions, while well supported by past experience, necessarily do not take
account of future events. The occurrence in the future of unforeseen
circumstances could affect the financial condition of one or more insurance
companies. The insurance business is highly competitive and with the
deregulation of financial service businesses, it should become more
competitive. In addition, insurance companies may expand into non-traditional
lines of business which may involve different types of risks.
The above financial information relating to the Insurance Companies has been
obtained from publicly available information. No representation is made as to
the accuracy or adequacy of the information or as to the absence of material
adverse changes since the information was made available to the public.
LITIGATION AND LEGISLATION. To the best knowledge of the Sponsor, there is no
litigation pending as of the Initial Date in respect of any Bonds which might
reasonably be expected to have a material adverse effect upon the Trust. At any
time after the Initial Date of Deposit, litigation may be initiated on a
variety of grounds, or legislation may be enacted, with respect to Bonds in the
Trust. Litigation, for example, challenging the issuance of pollution control
revenue bonds under environmental protection statutes may affect the validity
of Bonds or the tax-free nature of their interest. While the outcome of
litigation of this nature can never be entirely predicted, opinions of bond
counsel are delivered on the date of issuance of each Bond to the effect that
the Bond has been validly issued and that the interest thereon is exempt from
Federal income tax. In addition, other factors may arise from time to time
which potentially may impair the ability of issuers to make payments due on the
Bonds.
Under the Federal Bankruptcy Act, a political subdivision or public agency or
instrumentality of any state, including municipalities, may proceed to
restructure or otherwise alter the terms of its obligations, including those of
the type comprising the Trust's Portfolio. The Sponsor is unable to predict
what effect, if any, this legislation might have on the Trust.
From time to time Congress considers proposals to tax the interest on state
and local obligations, such as the Bonds. The Supreme Court clarified in South
Carolina v. Baker (decided April 20, 1988) that the U.S. Constitution does not
prohibit Congress from passing a nondiscriminatory tax on interest on state and
local obligations. This type of legislation, if enacted into law, could
adversely affect an investment in Units. Holders are urged to consult their own
tax advisers.
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TAX EXEMPTION. In the opinion of bond counsel rendered on the date of
issuance of each Bond, the interest on each Bond is excludable from gross
income under existing law for regular Federal income tax purposes (except in
certain circumstances depending on the Holder) but may be subject to state and
local taxes. As discussed under Taxes below, interest on some or all of the
Bonds may become subject to regular Federal income tax, perhaps retroactively
to their date of issuance, as a result of changes in Federal law or as a result
of the failure of issuers (or other users of the proceeds of the Bonds) to
comply with certain ongoing requirements.
Moreover, the Internal Revenue Service is expanding its examination program
with respect to tax-exempt bonds. The expanded examination program will consist
of, among other measures, increased enforcement against abusive transactions,
broader audit coverage (including the expected issuance of audit guidelines)
and expanded compliance achieved by means of expected revisions to the tax-
exempt bond information return forms. At this time, it is uncertain whether the
tax exempt status of any of the Bonds would be affected by such proceedings, or
whether such effect, if any, would be retroactive.
In certain cases, a Bond may provide that if the interest on the Bond should
ultimately be determined to be taxable, the Bond would become due and payable
by its issuer, and, in addition, may provide that any related letter of credit
or other security could be called upon if the issuer failed to satisfy all or
part of its obligation. In other cases, however, a Bond may not provide for the
acceleration or redemption of the Bond or a call upon the related letter of
credit or other security upon a determination of taxability. In those cases in
which a Bond does not provide for acceleration or redemption or in which both
the issuer and the bank or other entity issuing the letter of credit or other
security are unable to meet their obligations to pay the amounts due on the
Bond as a result of a determination of taxability, the Trustee would be
obligated to sell the Bond and, since it would be sold as a taxable security,
it is expected that it would have to be sold at a substantial discount from
current market price. In addition, as mentioned above, under certain
circumstances Holders could be required to pay income tax on interest received
prior to the date on which the interest is determined to be taxable.
THE UNITS
On the Date of Deposit, each Unit in a Trust represented a fractional
undivided interest in the principal and net income of such Trust as is set
forth in Part A, "Summary of Essential Information."
If any Units are redeemed after the date of this Prospectus by the Trustee,
the principal amount of Bonds in the affected Trust will be reduced by an
amount allocable to redeemed Units and the fractional undivided interest in the
affected Trust represented by each unredeemed Unit will be increased. Units
will remain outstanding until redeemed upon tender to the Trustee by any Unit
holder, which may include the Sponsor, or until the termination of the Trust
Agreement. (See "Amendment and Termination of the Trust Agreement--
Termination.")
TAXES
The following discussion addresses only the tax consequences of Units held as
capital assets and does not address the tax consequences of Units held by
dealers, financial institutions or insurance companies.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsor,
under existing law:
The Trusts are not associations taxable as corporations for Federal
income tax purposes, and income received by the Trusts will be treated as
the income of the Unit holders ("Holders") in the manner set forth below.
Each Holder of Units of a Trust will be considered the owner of a pro
rata portion of each Bond in the Trust under the grantor trust rules of
Sections 671-679 of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to determine the face amount of a Holder's pro rata
portion of each Bond on the Date of Deposit, see "Aggregate Principal"
under "Portfolio of Securities". The total cost to a Holder of his Units,
including sales charges, is allocated to his pro rata portion of each Bond,
in proportion to the fair market values thereof on the date the Holder
purchases his Units, in order to determine his tax cost for his pro rata
portion of each Bond. In order for a Holder who purchases his Units on the
Date of Deposit to determine the fair market value of his pro rata portion
of each Bond on such date, see "Cost of Securities to Trust" under
"Portfolio of Securities".
Each Holder of Units of a Trust will be considered to have received the
interest on his pro rata portion of each Bond when interest on the Bond is
received by the Trust. In the opinion of bond counsel (delivered on the
date of issuance of each Bond), such interest will be excludable from gross
income for regular Federal income tax purposes (except in certain limited
circumstances referred to below). Amounts received by a Trust pursuant to a
bank letter of credit, guarantee or insurance policy with respect to
payments of principal, premium or interest on a Bond in the Trust will be
treated for Federal income tax purposes in the same manner as if such
amounts were paid by the issuer of the Bond.
The Trusts may contain Bonds which were originally issued at a discount
("original issue discount"). The following principles will apply to each
Holder's pro rata portion of any Bond originally issued at a discount. In
general, original issue discount is defined as the difference between the
price at which a debt obligation was issued and its stated redemption price
at maturity. Original
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issue discount on a tax-exempt obligation issued after September 3, 1982,
is deemed to accrue as tax-exempt interest over the life of the obligation
under a formula based on the compounding of interest. Original issue
discount on a tax-exempt obligation issued before July 2, 1982 is deemed to
accrue as tax-exempt interest ratably over the life of the obligation.
Original issue discount on any tax-exempt obligation issued during the
period beginning July 2, 1982 and ending September 3, 1982 is also deemed
to accrue as tax-exempt interest over the life of the obligation, although
it is not clear whether such accrual is ratable or is determined under a
formula based on the compounding of interest. If a Holder's tax cost for
his pro rata portion of a Bond issued with original issue discount is
greater than its "adjusted issue price" but less than its stated redemption
price at maturity (as may be adjusted for certain payments), the Holder
will be considered to have purchased his pro rata portion of the Bond at an
"acquisition premium." A Holder's adjusted tax basis for his pro rata
portion of a Bond issued with original issue discount will include original
issue discount accrued during the period such Holder held his Units. Such
increases to the Holder's tax basis in his pro rata portion of the Bond
resulting from the accrual of original issue discount, however, will be
reduced by the amortization of any such acquisition premium.
If a Holder's tax basis for his pro rata portion of a Bond in the
Holder's Trust exceeds the redemption price at maturity thereof (subject to
certain adjustments), the Holder will be considered to have purchased his
pro rata portion of the Bond with "amortizable bond premium". The Holder is
required to amortize such bond premium over the term of the Bond. Such
amortization is only a reduction of basis for his pro rata portion of the
Bond and does not result in any deduction against the Holder's income.
Therefore, under some circumstances, a Holder may recognize taxable gain
when his pro rata portion of a Bond is disposed of for an amount equal to
or less than his original tax basis therefor.
A Holder will recognize taxable gain or loss when all or part of his pro
rata portion of a Bond in his Trust is disposed of by the Trust for an
amount greater or less than his adjusted tax basis. Any such taxable gain
or loss will be capital gain or loss, except that any gain from the
disposition of a Holder's pro rata portion of a Bond acquired by the Holder
at a "market discount" (i.e., where the Holder's original basis for his pro
rata portion of the Bond (plus any original issue discount which will
accrue thereon until its maturity) is less than its stated redemption price
at maturity) would be treated as ordinary income to the extent the gain
does not exceed the accrued market discount. Capital gains are generally
taxed at the same rate as ordinary income. However, the excess of net long-
term capital gains over net short-term capital losses may be taxed at a
lower rate than ordinary income for certain noncorporate taxpayers. A
capital gain or loss is long-term if the asset is held for more than one
year and short-term if held for one year or less. The deduction of capital
losses is subject to limitations. A Holder will also be considered to have
disposed of all or part of his pro rata portion of each Bond when he sells
or redeems all or some of his Units.
Under the income tax laws of the State and City of New York, the Trust is
not an association taxable as a corporation and income received by each
Trust will be treated as the income of the Holders in the same manner as
for Federal income tax purposes, but will not necessarily be tax-exempt.
Under Section 265 of the Code, a Holder (except a corporate Holder) is
not entitled to a deduction for his pro rata share of fees and expenses of
a Trust because the fees and expenses are incurred in connection with the
production of tax-exempt income. Further, if borrowed funds are used by a
Holder to purchase or carry Units of any Trust, interest on such
indebtedness will not be deductible for Federal income tax purposes. In
addition, under rules used by the Internal Revenue Service, the purchase of
Units may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of Units.
Similar rules may be applicable for state tax purposes.
From time to time proposals are introduced in Congress and state
legislatures which, if enacted into law, could have an adverse impact on
the tax-exempt status of the Bonds. It is impossible to predict whether any
legislation in respect of the tax status of interest on such obligations
may be proposed and eventually enacted at the Federal or state level.
The foregoing discussion relates only to Federal and certain aspects of
New York State and City income taxes. Depending on their state of
residence, Holders may be subject to state and local taxation and should
consult their own tax advisers in this regard.
* * * * *
Interest on certain tax-exempt bonds issued after August 7, 1986 will be a
preference item for purposes of the alternative minimum tax ("AMT"). The
Sponsor believes that interest (including any original issue discount) on the
Bonds should not be subject to the AMT for individuals or corporations under
this rule. A corporate Holder should be aware, however, that the accrual or
receipt of tax-exempt interest not subject to the AMT may give rise to an
alternative minimum tax liability (or increase an existing liability) because
the interest income will be included in the corporation's "adjusted current
earnings" for purposes of the adjustment to alternative minimum taxable income
required by Section 56(g) of the Code and will be taken into account for
purposes of the environmental tax on corporations under Section 59A of the
Code, which is based on an alternative minimum taxable income.
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In addition, interest on the Bonds must be taken into consideration in
computing the portion, if any, of social security benefits that will be
included in an individual's gross income and subject to Federal income tax.
Holders are urged to consult their own tax advisers concerning an investment in
Units.
At the time of issuance of each Bond, an opinion relating to the validity of
the Bond and to the exemption of interest thereon from regular Federal income
taxes was or will be rendered by bond counsel. Neither the Sponsor nor Davis
Polk & Wardwell have made or will make any review of the proceedings relating
to the issuance of the Bonds or the basis for these opinions. The tax exemption
is dependent upon the issuer's (and other users') compliance with certain
ongoing requirements, and the opinion of bond counsel assumes that these
requirements will be complied with. However, there can be no assurance that the
issuer (and other users) will comply with these requirements, in which event
the interest on the Bond could be determined to be taxable retroactively to the
date of issuance.
In the case of certain of the Bonds, the opinions of bond counsel indicate
that interest on such Bonds received by a "substantial user" of the facilities
being financed with the proceeds of such Bonds, or persons related thereto, for
periods while such Bonds are held by such a user or related person, will not be
exempt from regular Federal income taxes, although interest on such Bonds
received by others would be exempt from regular Federal income taxes.
"Substantial user" is defined under U.S. Treasury Regulations to include only a
person whose gross revenue derived with respect to the facilities financed by
the issuance of bonds is more than 5% of the total revenue derived by all users
of such facilities, or who occupies more than 5% of the usable area of such
facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" are defined to
include certain related natural persons, affiliated corporations, partners and
partnerships. Similar rules may be applicable for state tax purposes.
After the end of each calendar year, the Trustee will furnish to each Holder
an annual statement containing information relating to the interest received by
the Trust on the Bonds, the gross proceeds received by the Trust from the
disposition of any Bond (resulting from redemption or payment at maturity of
any Bond or the sale by the Trust of any Bond), and the fees and expenses paid
by the Trust. The Trustee will also furnish annual information returns to each
Holder and to the Internal Revenue Service. Holders are required to report to
the Internal Revenue Service the amount of tax-exempt interest received during
the year.
EXPENSES AND CHARGES
INITIAL EXPENSES
All or some portion of the expenses incurred in establishing each Trust,
including the cost of the initial preparation of documents relating to a Trust,
Federal and State registration fees, the initial fees and expenses of the
Trustee, legal expenses and any other out-of-pocket expenses will be paid by
the Trust, and amortized over five years. Any balance of the expenses incurred
in establishing a Trust, as well as advertising and selling expenses and other
out-of-pocket expenses will be paid at no cost to the Trusts.
TRUSTEE'S, SPONSOR'S AND EVALUATOR'S FEES
The Trustee will receive for its ordinary recurring services to a Trust an
annual fee in the amount set forth under Part A, "Summary of Essential
Information." For a discussion of the services performed by the Trustee
pursuant to its obligations under the Trust Agreement, see "Rights of Unit
Holders." The Trustee will receive the benefit of any reasonable cash balances
in the Income and Principal Accounts.
There are no management fees and the Sponsor earns only a nominal Portfolio
Supervision fee (the "Supervision Fee"), which is earned for Portfolio
supervisory services. This fee is based upon the greatest face amount of Bonds
in the Trust at any time during the calendar year with respect to which the fee
is being computed.
The Supervision Fee, which is not to exceed the amount set forth in Part A--
"Summary of Essential Information", may exceed the actual costs of providing
Portfolio supervisory services for such Trust, but at no time will the total
amount the Sponsor receives for Portfolio supervisory services rendered to all
series of Tax Exempt Securities Trust in any calendar year exceed the aggregate
cost to them of supplying such services in such year. In addition, the Sponsor
may also be reimbursed for bookkeeping and other administrative services
provided to the Trust in amounts not exceeding their costs of providing these
services.
The Evaluator will receive a fee in the amount set forth under Part A,
"Summary of Essential Information," for each evaluation of the Bonds in a
Trust. For a discussion of the services performed by the Evaluator pursuant to
its obligations under the Trust Agreement, see "Evaluator--Responsibility" and
"Public Offering--Offering Price."
Any of such fees may be increased without approval of the Unit holders by
amounts not exceeding proportionate increases in consumer prices for services
as measured by the United States Department of Labor's Consumer Price Index
entitled "All Services Less Rent" or, if such Index is no longer published, in
a similar Index to be determined by the Trustee and the Sponsor.
B-14
<PAGE>
OTHER CHARGES
The following additional charges are or may be incurred by a Trust: all
expenses of the Trustee (including fees and expenses of counsel and auditors)
incurred in connection with its activities under the Trust Agreement, including
reports and communications to Unit holders; expenses and costs of any action
undertaken by the Trustee to protect a Trust and the rights and interests of
the Unit holders; fees of the Trustee for any extraordinary services performed
under the Trust Agreement; indemnification of the Trustee for any loss or
liability accruing to it without gross negligence, bad faith or willful
misconduct on its part, arising out of or in connection with its acceptance or
administration of a Trust; to the extent lawful, expenses (including legal,
accounting and printing expenses) of maintaining registration or qualification
of the Units and/or a Trust under Federal or state securities laws subsequent
to initial registration so long as the Sponsor maintains a market for the Units
and all taxes and other governmental charges imposed upon the Bonds or any part
of a Trust (no such taxes or charges are being levied or made or, to the
knowledge of the Sponsor, contemplated). The above expenses, including the
Trustee's fee, when paid by or owing to the Trustee, are secured by a lien on
the Trust. In addition, the Trustee is empowered to sell Bonds in order to make
funds available to pay all expenses.
PUBLIC OFFERING
OFFERING PRICE
During the initial public offering period, the Public Offering Price of the
Units of a Trust is determined by adding to the Evaluator's determination of
the aggregate OFFERING price of the Bonds per Unit a sales charge equal to a
percentage of the Public Offering Price of the Units of the Trust, as set forth
in the table below. After the initial public offering period, the Public
Offering Price of the Units of a Trust will be determined by adding to the
Evaluator's determination of the aggregate BID price of the Bonds per Unit a
sales charge equal to 5.00% of the Public Offering Price (5.263% of the
aggregate bid price of the Bonds per Unit). A proportionate share of accrued
and undistributed interest on the Bonds in a Trust at the date of delivery of
the Units of such Trust to the purchaser is also added to the Public Offering
Price. (See "Rights of Unit Holders--Distribution of Interest and Principal.")
During the initial public offering period, the sales charge and dealer
concession for the Trusts will be reduced as follows:
<TABLE>
<CAPTION>
STATE TRUSTS
------------
PERCENT OF PERCENT OF
PUBLIC NET AMOUNT DEALER
UNITS PURCHASED+ OFFERING PRICE INVESTED CONCESSION
- ---------------- -------------- ---------- --------------
<S> <C> <C> <C>
1- 99.............................. 4.70% 4.932% $33.00
100-249.............................. 4.25% 4.439% $32.00
250-499.............................. 4.00% 4.167% $30.00
500-999.............................. 3.50% 3.627% $25.00
1,000 or more.......................... 3.00% 3.093% $20.00
<CAPTION>
NATIONAL TRUST
--------------
DEALER
CONCESSION
PERCENT OF PERCENT OF AS PERCENT OF
PUBLIC NET AMOUNT PUBLIC
UNITS PURCHASED+ OFFERING PRICE INVESTED OFFERING PRICE
- ---------------- -------------- ---------- --------------
<S> <C> <C> <C>
1- 99................................ 4.70% 4.932% 3.29%
100-249................................ 4.25% 4.439% 2.97
250-499................................ 4.00% 4.167% 2.80
500-999................................ 3.50% 3.627% 2.45
1,000 or more.......................... 3.00% 3.093% 2.10
</TABLE>
The Sponsor may at any time change the amount by which the sales charge is
reduced, or discontinue the discount completely.
- -------
+ The reduced sales charge is also applied on a dollar basis utilizing a
breakpoint equivalent in the above table of $1,000 for one Unit, etc.
Pursuant to employee benefit plans, Units of a Trust are available to
employees of the Sponsor, during the initial public offering period, at a
Public Offering Price equal to the Evaluator's determination of the aggregate
offering price of the Bonds of a Trust per Unit plus a sales charge of 1.25% of
the Public Offering Price and after the initial public offering period, at a
Public Offering Price equal to the Evaluator's determination of the aggregate
bid price of the Bonds of a Trust per Unit plus a sales charge of 1.25% of the
Public Offering Price. Sales through such plans to employees of the Sponsor
result in less selling effort and selling expenses than sales to the general
public.
B-15
<PAGE>
METHOD OF EVALUATION
During the initial public offering period, the aggregate offering price of
the Bonds is determined by the Evaluator (1) on the basis of current offering
prices for the Bonds*, (2) if offering prices are not available for any Bonds,
on the basis of current offering prices for comparable securities, (3) by
appraisal, or (4) by any combination of the above. Such determinations are made
each business day as of the Evaluation Time set forth in the "Summary of
Essential Information," in Part A, effective for all sales made subsequent to
the last preceding determination. Following the initial public offering period,
the aggregate bid price of the Bonds (which is used to calculate the price at
which the Sponsor repurchases and sells Units in the secondary market and the
Redemption Price at which Units may be redeemed) will be determined by the
Evaluator (1) on the basis of the current bid prices for the Bonds*, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices of
comparable securities, (3) by appraisal, or (4) by any combination of the
above. Such determinations will be made each business day as of the Evaluation
Time set forth in the "Summary of Essential Information," in Part A, effective
for all sales made subsequent to the last preceding determination. The term
"business day," as used herein shall exclude Saturdays, Sundays and any day on
which the New York Stock Exchange is closed. The difference between the bid and
offering prices of the Bonds may be expected to average approximately 1 1/2% of
principal amount. In the case of actively traded securities, the difference may
be as little as 1/2 of 1%, and in the case of inactively traded securities such
difference will usually not exceed 3%. The price at which Units may be
repurchased by the Sponsor in the secondary market could be less than the price
paid by the Unit holder. On the Date of Deposit for each Trust the aggregate
current offering price of such Bonds per Unit exceeded the bid price of such
Bonds per Unit by the amounts set forth under "Summary of Essential
Information" in Part A. For information relating to the calculation of the
Redemption Price per Unit, which is also based upon the aggregate bid price of
the underlying Bonds and which may be expected to be less than the Public
Offering Price per Unit, see "Rights of Unit Holders--Redemption of Units."
DISTRIBUTION OF UNITS
During the initial public offering period Units of a Trust will be
distributed to the public at the Public Offering Price determined in the manner
provided above (see "Public Offering--Offering Price") through the Underwriters
and dealers. The initial public offering period is 30 days unless all Units of
a Trust are sold prior thereto, in which case the initial public offering
period terminates with the sale of all Units. So long as all Units initially
offered have not been sold, the Sponsor may extend the initial public offering
period for up to four additional successive 30-day periods. Upon completion of
the initial public offering, Units which remain unsold or which may be acquired
in the secondary market (see "Public Offering--Market for Units") may be
offered by this Prospectus at the Public Offering Price determined in the
manner provided above (see "Public Offering--Offering Price").
It is the Sponsor's intention to qualify Units of a Trust for sale through
the Underwriters and dealers who are members of the National Association of
Securities Dealers, Inc. Units of a State Trust will be offered for sale only
in the State for which the Trust is named, except that Units of a New York
Trust will also be offered for sale to residents of the State of Connecticut,
the State of Florida and the Commonwealth of Puerto Rico. Units will initially
be sold to dealers at prices which represent a concession equal to the amount
designated in the tables under "Public Offering--Offering Price" herein, for a
Trust with an unreduced sales charge as specified in Part A--"The Public
Offering Price." The Sponsor reserves the right to change the amount of the
concession to dealers from time to time. After the initial offering period the
dealer concession is negotiated on a case-by-case basis.
Sales will be made only with respect to whole Units, and the Sponsor reserves
the right to reject, in whole or in part, any order for the purchase of Units.
A purchaser does not become a Unit holder (Certificate holder) or become
entitled to exercise the rights of a Unit holder (including the right to redeem
his Units) until he has paid for his Units. Generally, such payment must be
made within five business days after an order for the purchase of Units has
been placed. The price paid by a Unit holder is the Public Offering Price in
effect at the time his order is received, plus accrued interest (see "Public
Offering--Method of Evaluation"). This price may be different from the Public
Offering Price in effect on any other day, including the day on which he made
payment for the Units.
MARKET FOR UNITS
Following the initial public offering period the Sponsor, although not
obligated to do so, presently intends to maintain a market for the Units of a
Trust and continuously to offer to purchase such Units at prices based upon the
aggregate bid price of the underlying Bonds. For information relating to the
method and frequency of the Evaluator's determination of the aggregate bid
price of the underlying Bonds, see "Public Offering--Method of Evaluation." The
Sponsor may cease to maintain such a market at any time and from time to time
without notice if the supply of Units of a Trust of this Series exceeds demand
or for any other reason. In this event the Sponsor may nonetheless purchase
Units, as a service to Unit holders, at prices based on the current Redemption
Price of those Units. In the event that a market is not maintained for the
Units of a Trust, a Unit holder of such Trust desiring to dispose of his Units
may be able to
- -------
* Current offering or bid prices of the Deposited Units, if any, are based on
prevailing weekly evaluations of the obligations underlying such Deposited
Units.
B-16
<PAGE>
do so only by tendering such Units to the Trustee for redemption at the
Redemption Price, which is based upon the aggregate bid price of the underlying
Bonds. The aggregate bid price of the underlying Bonds of a Trust may be
expected to be less than the aggregate offering price.
EXCHANGE OPTION
Unit holders may elect to exchange any or all of their Units of this series
for units of one or more of any series of Tax Exempt Securities Trust (the
"Exchange Trust") available for sale in the state in which the Unit holder
resides at a Public Offering Price for the units of the Exchange Trust to be
acquired based on a fixed sales charge of $25 per unit. The Sponsor reserves
the right to modify, suspend or terminate this plan at any time without further
notice to Unit holders. Therefore, there is no assurance that a market for
units will in fact exist on any given date on which a Unit holder wishes to
sell his Units of this series and thus there is no assurance that the Exchange
Option will be available to a Unit holder. Exchanges will be effected in whole
units ONLY. If the proceeds from the Units being surrendered are less than the
cost of a whole number of units being acquired, the exchanging Holder will be
permitted to add cash in an amount to round up to the next highest number of
whole units.
An exchange of Units pursuant to the Exchange Option for units of an Exchange
Trust will generally constitute a "taxable event" under the Code, i.e., a
Holder will recognize a gain or loss at the time of exchange. However, an
exchange of Units of this Trust for units of any other series of the Tax Exempt
Securities Trust which are grantor trusts for U.S. Federal income tax purposes
will not constitute a taxable event to the extent that the underlying
securities in each trust do not differ materially either in kind or in extent.
Unit holders are urged to consult their own tax advisors as to the tax
consequences to them of exchanging Units in particular cases.
Units of the Exchange Trust will be sold under the Exchange Option at the bid
prices of the underlying securities in the particular portfolio involved per
unit plus a fixed charge of $25 per unit. As an example, assume that a Unit
holder, who has three units of a trust with a current price of $1,020 per unit
based on the bid prices of the underlying securities, desires to exchange his
Units for units of a series of an Exchange Trust with a current price of $880
per unit based on the bid prices of the underlying securities. In this example,
the proceeds from the Unit holder's units will aggregate $3,060. Since only
whole units of an Exchange Trust may be purchased under the Exchange Option,
the Unit holder would be able to acquire four units in the Exchange Trust for a
total cost of $3,620 ($3,520 for the units and $100 for the sales charge).
REINVESTMENT PROGRAMS
Distributions of interest and principal, if any, are made to Unit holders
monthly. The Unit holder will have the option of either receiving his monthly
income check from the Trustee or participating in one of the reinvestment
programs offered by the Sponsor provided such Unit holder meets the minimum
qualifications of the reinvestment program and such program lawfully qualifies
for sale in the jurisdiction in which the Unit holder resides. Upon enrollment
in a reinvestment program, the Trustee will direct monthly interest
distributions and principal distributions, if any, to the reinvestment program
selected by the Unit holder. Since the Sponsor has arranged for different
reinvestment alternatives, Unit holders should contact the Sponsor for more
complete information, including charges and expenses. The appropriate
prospectus will be sent to the Unit holder. The Unit holder should read the
prospectus for a reinvestment program carefully before deciding to participate.
Participation in the reinvestment program will apply to all Units of a Trust
owned by a Unit holder and may be terminated at any time by the Unit holder, or
the program may be modified or terminated by the Trustee or the program's
Sponsor.
SPONSOR'S AND UNDERWRITERS' PROFITS
For their services the Underwriters (see Part A, "Underwriting") receive a
commission based on the sales charge of a particular Trust (see "Public
Offering--Offering Price") as adjusted pursuant to the Agreement Among
Underwriters. The Sponsor receives a gross commission equal to the applicable
sales charge for any Units they have underwritten, and receive the difference
between the applicable sales charge and the Underwriter's commission for the
remainder of the Units. In addition, the Sponsor may realize profits or sustain
losses, as the case may be, in the amount of any difference between the cost of
the Bonds to a Trust (which is based on the aggregate offering price of the
underlying Bonds on the Date of Deposit) and the purchase price of such Bonds
to the Sponsor (which is the cost of the Bonds at the time they were acquired
for the account of a Trust and the cost of the Deposited Units at the time they
were acquired by the Sponsor). (See Part A, "Portfolio of Securities"--Note
(3).) Under certain circumstances, an Underwriter may be entitled to share in
such profits, if any, realized by the Sponsor. The Sponsor may also realize
profits or sustain losses with respect to Bonds deposited in a Trust which were
acquired from its own organization or from underwriting syndicates of which it
was a member. During the initial public offering period the Underwriters also
may realize profits or sustain losses as a result of fluctuations after the
Date of Deposit in the offering prices of the Bonds and hence in the Public
Offering Price received by the Underwriters for Units. Cash, if any,
B-17
<PAGE>
made available to the Sponsor prior to the anticipated first settlement date
for the purchase of Units may be used in the Sponsor's businesses to the extent
permitted by applicable regulations and may be of use to the Sponsor.
In maintaining a market for the Units of a Trust (see "Public Offering--
Market for Units"), the Sponsor will also realize profits or sustain losses in
the amount of any difference between the price at which they buy such Units and
the price at which they resell or redeem such Units (see "Public Offering--
Offering Price").
RIGHTS OF UNIT HOLDERS
CERTIFICATES
Ownership of Units of a Trust is evidenced by registered certificates
executed by the Trustee and the Sponsor. Certificates are transferable by
presentation and surrender to the Trustee properly endorsed or accompanied by a
written instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or any multiple
thereof. A Unit holder may be required to pay $2.00 per certificate reissued or
transferred, and to pay any governmental charge that may be imposed in
connection with each such transfer or interchange. For new certificates issued
to replace destroyed, stolen or lost certificates, the Unit holder must furnish
indemnity satisfactory to the Trustee and must pay such expenses as the Trustee
may incur. Mutilated certificates must be surrendered to the Trustee for
replacement.
DISTRIBUTION OF INTEREST AND PRINCIPAL
Interest and principal received by a Trust will be distributed on each
monthly Distribution Date on a pro rata basis to Unit holders in such Trust of
record as of the preceding Record Date. All distributions will be net of
applicable expenses and funds required for the redemption of Units and, if
applicable, reimbursements to the Trustee for interest payments advanced to
Unit holders on previous Monthly Distribution Dates. (See Part A, "Summary of
Essential Information," "Tax Exempt Securities Trust--Expenses and Charges" and
"Rights of Unit Holders--Redemption of Units.")
The Trustee will credit to the Interest Account of a Trust all interest
received by such Trust, including that part of the proceeds of any disposition
of Bonds of such Trust which represents accrued interest. Other receipts will
be credited to the Principal Account of a Trust. The pro rata share of the
Interest Account and the pro rata share of cash in the Principal Account
represented by each Unit of a Trust will be computed by the Trustee each month
as of the Record Date. (See Part A, "Summary of Essential Information.")
Proceeds received from the disposition of any of the Bonds subsequent to a
Record Date and prior to the next succeeding Distribution Date will be held in
the Principal Account and will not be distributed until the following
Distribution Date. The distribution to the Unit holders as of each Record Date
will be made on the following Distribution Date or shortly thereafter and shall
consist of an amount substantially equal to one-twelfth of such holders' pro
rata share of the estimated annual income to the Interest Account after
deducting estimated expenses (the "Monthly Income Distribution") plus such
holders' pro rata share of the cash balance in the Principal Account computed
as of the close of business on the preceding Record Date. Persons who purchase
Units between a Record Date and a Distribution Date will receive their first
distribution on the second Distribution Date following their purchase of Units.
No distribution need be made from the Principal Account if the balance therein
is less than an amount sufficient to distribute $1.00 per Unit. The Monthly
Income Distribution per Unit initially will be in the amount shown under Part
A, "Summary of Essential Information" for a Trust and will change as the income
and expenses of such Trust change and as Bonds are exchanged, redeemed, paid or
sold.
Normally, interest on the Bonds in the Portfolio of a Trust is paid on a
semi-annual basis. Because Bond interest is not received by a Trust at a
constant rate throughout the year, any Monthly Income Distribution may be more
or less than the amount credited to the Interest Account as of the Record Date.
In order to eliminate fluctuations in Monthly Income Distributions resulting
from such variances, the Trustee is required by the Trust Agreement to advance
such amounts as may be necessary to provide Monthly Income Distributions of
approximately equal amounts. The Trustee will be reimbursed, without interest,
for any such advances from funds available from the Interest Account on the
next ensuing Record Date or Record Dates, as the case may be. If all or a
portion of the Bonds for which advances have been made subsequently fail to pay
interest when due, the Trustee may recoup advances made by it in anticipation
of receipt of interest payments on such Bonds by reducing the amount
distributed per Unit in one or more Monthly Interest Distributions. If units
are redeemed subsequent to such advances by the Trustee, but prior to receipt
by the Trustee of actual notice of such failure to pay interest, the amount of
which was so advanced by the Trustee, each remaining Unit holder will be
subject to a greater pro rata reduction in his Monthly Interest Distribution
than would have occurred absent such redemptions. Funds which are available for
future distributions, payments of expenses and redemptions are in accounts
which are non-interest bearing to Unit holders and are available for use by The
Chase Manhattan Bank (National Association), pursuant to normal banking
procedures. The Trustee is entitled to the benefit of any reasonable cash
balances in the Income and Principal Accounts. Because of the varying interest
payment dates of the Bonds comprising a Trust Portfolio, accrued interest at
any point in time will be greater than the amount of interest actually received
by a Trust and
B-18
<PAGE>
distributed to Unit holders. This excess accrued but undistributed interest
amount will be added to the value of the units on any purchase made after the
Date of Deposit. If a Unit holder sells all or a portion of his Units a portion
of his sale proceeds will be allocable to his proportionate share of the
accrued interest. Similarly, if a Unit holder redeems all or a portion of his
Units, the Redemption Price per Unit which he is entitled to receive from the
Trustee will also include his accrued interest on the Bonds. (See "Rights of
Unit Holders--Redemption of Units--Computation of Redemption Price per Unit.")
The Trustee is also entitled to withdraw from the Interest Account, and to the
extent funds are not sufficient therein, from the Principal Account, on one or
more Record Dates as may be appropriate, amounts sufficient to recoup advances
which it has made in anticipation of the receipt by the Trust of interest in
respect of Bonds which subsequently fail to pay interest when due.
As of the first day of each month the Trustee will deduct from the Interest
Account of a Trust and, to the extent funds are not sufficient therein, from
the Principal Account of such Trust, amounts necessary to pay the expenses of
such Trust. (See "Tax Exempt Securities Trust--Expenses and Charges.") The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out of a
Trust. Amounts so withdrawn shall not be considered a part of the Trust's
assets until such time as the Trustee shall return all or any part of such
amounts to the appropriate account. In addition, the Trustee may withdraw from
the Interest Account and the Principal Account such amounts as may be necessary
to cover redemption of Units by the Trustee. (See "Rights of Unit Holders--
Redemption of Units.")
The Trustee has agreed to advance to a Trust the amount of accrued interest
due on the Bonds of such Trust from their respective issue dates or previous
interest payment dates through the Date of Deposit. This accrued interest
amount will be paid to the Sponsor as the holder of record of all Units on the
first settlement date for the Units. Consequently, when the Sponsor sells Units
of a Trust, the amount of accrued interest to be added to the Public Offering
Price of the Units purchased by an investor will include only accrued interest
from the day after the Date of Deposit through the date of settlement of the
investor's purchase (normally three business days after purchase), less any
distributions from the Interest Account. The Trustee will recover its
advancements to a Trust (without interest or other cost to such Trust) from
interest received on the Bonds deposited in such Trust.
REPORTS AND RECORDS
The Trustee shall furnish Unit holders in connection with each distribution a
statement of the amount of interest, if any, and the amount of other receipts,
if any, which are being distributed, expressed in each case as a dollar amount
per Unit. In the event that the issuer of any of the Bonds fails to make
payment when due of any interest or principal and such failure results in a
change in the amount which would otherwise be distributed as a monthly
distribution, the Trustee will, with the first such distribution following such
failure, set forth in an accompanying statement, the issuer and the Bond, the
amount of the reduction in the distribution per Unit resulting from such
failure, the percentage of the aggregate principal amount of Bonds which such
Bond represents and, to the extent then determined, information regarding any
disposition or legal action with respect to such Bond. Within a reasonable time
after the end of each calendar year, the Trustee will furnish to each person
who at any time during the calendar year was a Unit holder of record, a
statement (1) as to the Interest Account: interest received (including amounts
representing interest received upon any disposition of Bonds), deductions for
payment of applicable taxes and for fees and expenses of a Trust, redemptions
of Units and the balance remaining after such distributions and deductions,
expressed both as a total dollar amount and as a dollar amount representing the
pro rata share of each Unit outstanding on the last business day of such
calendar year; (2) as to the Principal Account: the dates of disposition of any
Bonds and the net proceeds received therefrom (excluding any portion
representing interest), deductions for payments of applicable taxes and for
fees and expenses of a Trust, redemptions of Units, and the balance remaining
after such distributions and deductions, expressed both as a total dollar
amount and as a dollar amount representing the pro rata share of each Unit
outstanding on the last business day of such calendar year; (3) a list of the
Bonds held and the number of Units outstanding on the last business day of such
calendar year; (4) the Redemption Price per Unit based upon the last
computation thereof made during such calendar year; and (5) amounts actually
distributed during such calendar year from the Interest Account and from the
Principal Account, separately stated, expressed both as total dollar amounts
and as dollar amounts representing the pro rata share of each Unit outstanding.
The accounts of a Trust shall be audited not less frequently than annually by
independent auditors designated by the Sponsor, and the report of such auditors
shall be furnished by the Trustee to Unit holders upon request.
The Trustee shall keep available for inspection by Unit holders at all
reasonable times during usual business hours, books of record and account of
its transactions as Trustee including records of the names and addresses of
Unit holders, certificates issued or held, a current list of Bonds in the
Portfolio of a Trust and a copy of the Trust Agreement.
REDEMPTION OF UNITS
Units may be tendered to the Trustee for redemption at its unit investment
trust office at 770 Broadway, New York, New York 10003, upon payment of any
relevant tax. At the present time there are no specific taxes related to the
redemption of the Units. No redemption fee will be charged by the Sponsor or
the Trustee. Units redeemed by the Trustee will be cancelled.
B-19
<PAGE>
Certificates for Units to be redeemed must be properly endorsed or
accompanied by a written instrument of transfer. Unit holders must sign exactly
as their name appears on the face of the certificate with the signature
guaranteed by an officer of a national bank or trust company or by a member of
either the New York, Midwest or Pacific Stock Exchange. In certain instances
the Trustee may require additional documents such as, but not limited to, trust
instruments, certificates of death, appointments as executor or administrator
or certificates of corporate authority.
Within seven calendar days following such tender, the Unit holder will be
entitled to receive in cash an amount for each Unit tendered equal to the
Redemption Price per Unit computed as of the Evaluation Time set forth in the
"Summary of Essential Information" in Part A on the date of tender. (See
"Redemption of Units--Computation of Redemption Price per Unit.") The "date of
tender" is deemed to be the date on which Units are received by the Trustee,
except as regards Units received after the close of trading on the New York
Stock Exchange, the date of tender is the next day on which such Exchange is
open for trading, and such Units will be deemed to have been tendered to the
Trustee on such day for redemption at the Redemption Price computed on that
day. For information relating to the purchase by the Sponsor of Units tendered
to the Trustee for redemption at prices in excess of the Redemption Price, see
"Redemption of Units--Purchase by the Sponsor of Units Tendered for
Redemption."
Accrued interest paid on redemption shall be withdrawn from the Interest
Account, or, if the balance therein is insufficient, from the Principal
Account. All other amounts paid on redemption shall be withdrawn from the
Principal Account. The Trustee is empowered to sell Bonds in order to make
funds available for redemption. Such sales, if required, could result in a sale
of Bonds by the Trustee at a loss. To the extent Bonds are sold, the size and
diversity of a Trust will be reduced.
The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than weekend and
holiday closings, or trading on that Exchange is restricted or during which (as
determined by the Securities and Exchange Commission) an emergency exists as a
result of which disposal or evaluation of the underlying Bonds is not
reasonably practicable, or for such other periods as the Securities and
Exchange Commission has by order permitted.
COMPUTATION OF REDEMPTION PRICE PER UNIT--The Redemption Price per Unit of a
Trust is determined by the Trustee on the basis of the bid prices of the Bonds
in such Trust as of the Evaluation Time on the date any such determination is
made. The Redemption Price per Unit of a Trust is each Unit's pro rata share,
determined by the Trustee, of: (1) the aggregate value of the Bonds in such
Trust on the bid side of the market (determined by the Evaluator as set forth
below), (2) cash on hand in such Trust (other than funds covering contracts to
purchase Bonds), and accrued and unpaid interest on the Bonds as of the date of
computation, less (a) amounts representing taxes or governmental charges
payable out of such Trust, (b) the accrued expenses of such Trust, and (c) cash
held for distribution to Unit holders of such Trust of record as of a date
prior to the evaluation. The Evaluator may determine the value of the Bonds in
the Trust (1) on the basis of current bid prices for the Bonds, (2) if bid
prices are not available for any Bonds, on the basis of current bid prices for
comparable securities, (3) by appraisal, or (4) by any combination of the
above.
The difference between the bid and offering prices of the Bonds may be
expected to average approximately 1 1/2% of principal amount. In the case of
actively traded securities, the difference may be as little as 1/2 of 1%, and
in the case of inactively traded securities such difference usually will not
exceed 3%. The price at which Units may be redeemed could be less than the
price paid by the Unit holder. On the Date of Deposit for each Trust the
aggregate current offering price of such Bonds per Unit exceeded the bid price
of such Bonds per Unit by the amounts set forth under Part A, "Summary of
Essential Information."
PURCHASE BY THE SPONSOR OF UNITS TENDERED FOR REDEMPTION--The Trust Agreement
requires that the Trustee notify the Sponsor of any tender of Units for
redemption. So long as the Sponsor maintains a bid in the secondary market, the
Sponsor, prior to the close of business on the second succeeding business day,
will purchase any Units tendered to the Trustee for redemption at the price so
bid by making payment therefor to the Unit holder in an amount not less than
the Redemption Price not later than the day on which the Units would otherwise
have been redeemed by the Trustee. (See "Public Offering--Market for Units.")
The offering price of any Units resold by the Sponsor will be the Public
Offering Price determined in the manner provided in this Prospectus. (See
"Public Offering--Offering Price.") Any profit resulting from the resale of
such Units will belong to the Sponsor which likewise will bear any loss
resulting from a lower offering or redemption price subsequent to their
acquisition of such Units. (See "Public Offering--Sponsor's and Underwriters'
Profits.")
B-20
<PAGE>
SPONSOR
Smith Barney Inc., 1345 Avenue of the Americas, New York, New York 10105
("Smith Barney"), was incorporated in Delaware in 1960 and traces its history
through predecessor partnerships to 1873. Smith Barney, an investment banking
and securities broker-dealer firm, is a member of the New York Stock Exchange,
Inc. and other major securities and commodities exchanges, the National
Association of Securities Dealers, Inc. and the Securities Industry
Association. Smith Barney is an indirect wholly-owned subsidiary of The
Travelers Inc.
Smith Barney or an affiliate is investment adviser, principal underwriter or
distributor of 60 open-end investment companies and investment manager of 12
closed-end investment companies. Smith Barney also sponsors all Series of
Corporate Securities Trust, Government Securities Trust, Harris, Upham Tax-
Exempt Fund and Tax Exempt Securities Trust, and acts as sponsor of most Series
of Defined Assets Funds. The Sponsor has acted previously as managing
underwriter of other investment companies. In addition to participating as a
member of various underwriting and selling groups or as agent of other
investment companies, the Sponsor also executes orders for the purchase and
sale of securities of investment companies and sells securities to such
companies in its capacity as broker or dealer in securities.
LIMITATIONS ON LIABILITY
The Sponsor is liable for the performance of its obligations arising from its
responsibilities under the Trust Agreement, but will be under no liability to
Unit holders for taking any action or refraining from any action in good faith
or for errors in judgment or responsible in any way for depreciation or loss
incurred by reason of the sale of any Bonds, except in cases of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties. (See "Sponsor--Responsibility" below.)
RESPONSIBILITY
Although the Trusts are not actively managed as mutual funds are, the
portfolios are reviewed periodically on a regular cycle. The Sponsor is
empowered to direct the Trustee to dispose of Bonds when certain events occur
that adversely affect the value of the Bonds, including default in payment of
interest or principal, default in payment of interest or principal on other
obligations of the same issuer, institution of legal proceedings, default under
other documents adversely affecting debt service, decline in price or the
occurrence of other market or credit factors, or decline in projected income
pledged for debt service on revenue Bonds and advanced refunding that, in the
opinion of the Sponsor, may be detrimental to the interests of the Unit
holders.
The Sponsor intends to provide portfolio services for each Trust in order to
determine whether the Trustee should be directed to dispose of any such Bonds.
It is the responsibility of the Sponsor to instruct the Trustee to reject any
offer made by an issuer of any of the Bonds to issue new obligations in
exchange and substitution for any Bonds pursuant to a refunding or refinancing
plan, except that the Sponsor may instruct the Trustee to accept such an offer
or to take any other action with respect thereto as the Sponsor may deem proper
if the issuer is in default with respect to such Bonds or in the judgment of
the Sponsor the issuer will probably default in respect to such Bonds in the
foreseeable future.
Any obligations so received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the Trust Agreement to the same
extent as Bonds originally deposited thereunder. Within five days after the
deposit of obligations in exchange or substitution for underlying Bonds, the
Trustee is required to give notice thereof to each Unit holder, identifying the
Bonds eliminated and the Bonds substituted therefor. Except as stated in this
and the preceding paragraph, the acquisition by a Trust of any securities other
than the Bonds initially deposited in the Trust is prohibited.
RESIGNATION
If the Sponsor resigns or otherwise fails or becomes unable to perform its
duties under the Trust Agreement, and no express provision is made for action
by the Trustee in such event, the Trustee may appoint a successor sponsor or
terminate the Trust Agreement and liquidate the Trusts.
B-21
<PAGE>
TRUSTEE
The Trustee is The Chase Manhattan Bank (National Association), a national
banking association with its principal executive officer located at 1 Chase
Manhattan Plaza, New York, New York 10081 and its unit investment trust office
at 770 Broadway, New York, New York 10003. The Trustee is subject to
supervision by the Comptroller of the Currency, the Federal Deposit Insurance
Corporation and the Board of Governors of the Federal Reserve System. In
connection with the storage and handling of certain bonds deposited in the
Trust, the Trustee may use the services of The Depository Trust Company. These
services may include safekeeping of the Bonds and coupon-clipping, computer
book-entry transfer and institutional delivery services. The Depository Trust
Company is a limited purpose trust company organized under the Banking Law of
the State of New York, a member of the Federal Reserve System and a clearing
agency registered under the Securities Exchange Act of 1934.
LIMITATIONS ON LIABILITY
The Trustee shall not be liable or responsible in any way for depreciation or
loss incurred by reason of the disposition of any moneys, securities or
certificates or in respect of any evaluation or for any action taken in good
faith reliance on prima facie properly executed documents except in cases of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties. In addition, the Trustee shall not be personally liable
for any taxes or other governmental charges imposed upon or in respect of a
Trust which the Trustee may be required to pay under current or future law of
the United States or any other taxing authority having jurisdiction. (See "Tax
Exempt Securities Trust-- Portfolio.") For information relating to the
responsibilities and indemnification of the Trustee under the Trust Agreement,
reference is made to the material set forth under "Rights of Unit Holders",
"Sponsor--Resignation" and "Other Charges."
RESIGNATION
By executing an instrument in writing and filing the same with the Sponsor,
the Trustee and any successor may resign. In such an event the Sponsor is
obligated to appoint a successor trustee as soon as possible. If the Trustee
becomes incapable of acting or becomes bankrupt or its affairs are taken over
by public authorities, the Sponsor may remove the Trustee and appoint a
successor as provided in the Trust Agreement. Such resignation or removal shall
become effective upon the acceptance of appointment by the successor trustee.
If no successor has accepted the appointment within thirty days after notice of
resignation, the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The resignation or removal of
a trustee becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor trustee.
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a division of J.J. Kenny Co.,
Inc., with main offices located at 65 Broadway, New York, New York 10006.
LIMITATIONS ON LIABILITY
The Trustee, Sponsor and Unit holders may rely on any evaluation furnished by
the Evaluator and shall have no responsibility for the accuracy thereof.
Determination by the Evaluator under the Trust Agreement shall be made in good
faith upon the basis of the best information available to it; provided,
however, that the Evaluator shall be under no liability to the Trustee, the
Sponsor, or Unit holders for errors in judgment. But this provision shall not
protect the Evaluator in cases of willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
RESPONSIBILITY
The Trust Agreement requires the Evaluator to evaluate the Bonds of a Trust
on the basis of their bid prices on the last business day of June and December
in each year, on the day on which any Unit of such Trust is tendered for
redemption and on any other day such evaluation is desired by the Trustee or is
requested by the Sponsor. For information relating to the responsibility of the
Evaluator to evaluate the Bonds on the basis of their offering prices, see
"Public Offering--Offering Price."
RESIGNATION
The Evaluator may resign or may be removed by the joint action of the Sponsor
and the Trustee, and in such event, the Sponsor and the Trustee are to use
their best efforts to appoint a satisfactory successor. Such resignation or
removal shall become effective upon the acceptance of appointment by a
successor evaluator. If upon resignation of the Evaluator no successor has
accepted appointment within thirty days after notice of resignation, the
Evaluator may apply to a court of competent jurisdiction for the appointment of
a successor.
B-22
<PAGE>
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
AMENDMENT
The Sponsor and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unit holders when such an amendment is (1) to
cure any ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein, or (2) to make such other provisions as shall not adversely
affect the interests of the Unit holders; provided, that the Trust Agreement is
not amended to increase the number of Units issuable thereunder or to permit
the deposit or acquisition of securities either in addition to or in
substitution for any of the Bonds initially deposited in a Trust, except for
the substitution of certain refunding securities for such Bonds, or to permit
the Trustee to engage in business or investment activities not specifically
authorized in the Trust Agreement as originally adopted. In the event of any
amendment, the Trustee is obligated to notify promptly all Unit holders of the
substance of such amendment.
TERMINATION
The Trust Agreement provides that if the principal amount of Bonds held in
Trust is less than 50% of the principal amount of the Bonds originally
deposited in such Trust, the Trustee may in its discretion and will, when
directed by the Sponsor, terminate such Trust. A Trust may be terminated at any
time by 100% of the Unit holders. However, in no event may a Trust continue
beyond the Mandatory Termination Date set forth under Part A, "Summary of
Essential Information." In the event of termination, written notice thereof
will be sent by the Trustee to all Unit holders. Within a reasonable period
after termination, the Trustee will sell any Bonds remaining in the affected
Trust, and, after paying all expenses and charges incurred by such Trust, will
distribute to each Unit holder, upon surrender for cancellation of his
certificate for Units, his pro rata share of the balances remaining in the
Interest and Principal Account of such Trust.
LEGAL OPINION
The legality of the Units has been passed upon by Davis Polk & Wardwell, 450
Lexington Avenue, New York, New York 10017, as special counsel for the Sponsor.
AUDITORS
The statements of financial condition and the portfolios of securities
included in this Prospectus have been audited by KPMG Peat Marwick LLP,
independent auditors, as indicated in their report with respect thereto, and is
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
BOND RATINGS+
All ratings shown under Part A, "Portfolio of Securities", except those
identified otherwise, are by Standard & Poor's.
STANDARD & POOR'S
A Standard & Poor's corporate or municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
debt obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers, or lessees.
The bond rating is not a recommendation to purchase or sell a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished to Standard & Poor's
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
- -------
+As described by the rating agencies.
B-23
<PAGE>
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and in the majority of instances they differ from AAA issues only in
small degrees.
A--Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than bonds in higher-rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher-rated categories.
Plus (+) or Minus (-): To provide more detailed indications of credit
quality, the ratings from "AA" to "BB" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings: The letter "p" following a rating indicates the rating
is provisional. A provisional rating assumes the successful completion of the
project being financed by the issuance of the bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to such
likelihood and risk.
Conditional rating(s), indicated by "Con" are given to bonds for which the
continuance of the security rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows and/or the security rating is conditional upon the
issuance of insurance by the respective insurance company.
MOODY'S
A brief description of the applicable Moody's rating symbols and their
meanings is as follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. Aa bonds are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations:
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Rating symbols may include numerical modifiers "1," "2," or "3." The
numerical modifier "1" indicates that the security ranks at the high end, "2"
in the mid-range, and "3" nearer the low end of the generic category. These
modifiers of rating symbols "Aa," "A" and "Baa" are to give investors a more
precise indication of relative debt quality in each of the historically defined
categories.
FITCH
AAA--These bonds are considered to be investment grade and of the highest
quality. The obligor has an extraordinary ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality.
The obligor's ability to pay interest and repay principal, while very strong,
is somewhat less than for AAA rated securities or more subject to possible
change over the term of the issue.
B-24
<PAGE>
A--These bonds are considered to be investment grade and of good quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however are more likely to weaken this ability than bonds with
higher ratings.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
DUFF & PHELPS
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A--Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
A "+" or a "-" sign after a rating symbol indicates relative standing in its
rating.
FEDERAL TAX FREE VS. TAXABLE INCOME
This table shows the approximate yields which taxable securities must earn in
various income brackets to produce, after Federal income tax, returns
equivalent to specified tax-exempt bond yields. The table is computed on the
theory that the taxpayer's highest bracket tax rate is applicable to the entire
amount of any increase or decrease in his or her taxable income resulting from
a switch from taxable to tax-exempt securities or vice versa. The table
reflects projected Federal income tax rates and the tax brackets for the 1996
taxable year. Because the Federal rate brackets are subject to adjustment based
on changes in the Consumer Price Index, the taxable equivalent yields for
subsequent years may vary somewhat from those indicated in the table. Use this
table to find your tax bracket. Read across to determine the approximate
taxable yield you would need to equal a return free of Federal income tax.
1996 TAX YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE INCOME BRACKET* TAX EXEMPT YIELD
FEDERAL
JOINT RETURN SINGLE RETURN TAX RATE 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
TAXABLE EQUIVALENT YIELD
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-
40,100 $ 0- 24,000 15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 40,101-
96,900 $ 24,001- 58,150 28.00% 5.56 6.25 6.94 7.64 8.33 9.03
$ 96,901-
117,950 $ 58,151-117,950 31.00% 5.80 6.52 7.25 7.97 8.70 9.42
$117,951-
147,700 $117,951-121,300 31.93% 5.88 6.61 7.35 8.08 8.81 9.55
$147,701-
263,750 $121,301-263,750 37.08% 6.36 7.15 7.95 8.74 9.54 10.33
OVER
$263,750 OVER $263,750 40.79% 6.76 7.60 8.44 9.29 10.13 10.98
- -----------------------------------------------------------------------------------------
</TABLE>
Note: This table reflects the following:
1 Taxable income, as reflected in the above table, equals Federal adjusted
gross income (AGI), less personal exemptions and itemized deductions.
However, certain itemized deductions are reduced by the lesser of (i)
three percent of the amount of the taxpayer's AGI over $117,950, or (ii)
80 percent of the amount of such itemized deductions otherwise allowable.
The effect of the three percent phase out on all itemized deductions and
not just those deductions subject to the phase out is reflected above in
the combined Federal and state tax rates through the use of higher
effective Federal tax rates. In addition, the effect of the 80 percent
cap on overall itemized deductions is not reflected on this table.
Federal income tax rules also provide that personal exemptions are phased
out at a rate of two percent for each $2,550 (or fraction thereof) of AGI
in excess of $176,950 for married taxpayers filing a joint tax return and
$117,950 for single taxpayers. The effect of the phase out of personal
exemptions is not reflected in the above table.
2 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. This provision is not incorporated into the
table.
3 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest marginal tax rates applicable to the income levels
indicated within each bracket.
4 Interest earned on all municipal obligations may cause certain investors
to be subject to tax on a portion of their Social Security and/or
railroad retirement benefits. The effect of this provision is not
included in the above table.
PERFORMANCE INFORMATION
Sales material may compare tax-equivalent yields of long-term municipal bonds
to long-term U.S. Treasury bonds and to the Bond Buyer Revenue Bond Index. Such
information is based on past performance and is not indicative of future
results. Yields on taxable investment are generally higher than those of tax-
exempt securities of comparable maturity. While income from municipal bonds is
exempt from federal income taxes, income from Treasuries is exempt from state
and local taxes. Since Treasuries are considered to have the highest possible
credit quality, the difference in yields is somewhat narrower than if compared
to corporate bonds with similar ratings and maturities.
B-25
<PAGE>
PROSPECTUS--PART C:
- --------------------------------------------------------------------------------
NOTE: PART C OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY
PARTS A AND B.
- --------------------------------------------------------------------------------
TAX EXEMPT SECURITIES TRUST--THE STATE TRUSTS
Potential purchasers of the Units of a State Trust should consider the fact
that the Trust's Portfolio consists primarily of Bonds issued by the state for
which such State Trust is named or its municipalities or authorities and
realize the substantial risks associated with an investment in such Bonds. Each
State Trust is subject to certain additional risk factors. The Sponsor believes
the discussions of risk factors summarized below describe some of the more
significant aspects of the State Trusts. The sources of such information are
the official statements of issuers as well as other publicly available
documents. While the Sponsor has not independently verified this information,
it has no reason to believe that such information is not correct in all
material respects. Investment in a State Trust should be made with an
understanding that the value of the underlying Portfolio may decline with
increases in interest rates.
MARYLAND TRUST
RISK FACTORS--The Public indebtedness of the State of Maryland (the "State")
and its instrumentalities is divided into three general types. The State issues
general obligation bonds for capital improvements and for various State
projects to the payment of which the State ad valorem property tax is
exclusively pledged. In addition, the Maryland Department of Transportation
issues for transportation purposes its limited, special obligation bonds
payable primarily from specific, fixed-rate excise taxes and other revenues
related mainly to highway use. Certain authorities issue obligations payable
solely from specific non-tax, enterprise fund revenues and for which the State
has no liability and has given no moral obligation assurance.
General obligation bonds of the State are authorized and issued primarily to
provide funds for State-owned capital improvements, including institutions of
higher learning, and the construction of locally owned public schools. Bonds
have also been issued for local government improvements, including grants and
loans for water quality improvement projects and correctional facilities, to
provide funds for repayable loans or outright grants to private, non-profit
cultural or educational institutions, and to fund certain loan and grant
programs.
The Maryland Constitution prohibits the contracting of State debt unless it
is authorized by a law levying an annual tax or taxes sufficient to pay the
debt service within 15 years and prohibiting the repeal of the tax or taxes or
their use for another purpose until the debt is paid. As a uniform practice,
each separate enabling act which authorizes the issuance of general obligation
bonds for a given object or purpose has specifically levied and directed the
collection of an ad valorem property tax on all taxable property in the State.
The Board of Public Works is directed by law to fix by May 1 of each year the
precise rate of such tax necessary to produce revenue sufficient for debt
service requirements of the next fiscal year, which begins July 1. However, the
taxes levied need not be collected if or to the extent that funds sufficient
for debt service requirements in the next fiscal year have been appropriated in
the annual State budget. Accordingly, the Board, in annually fixing the rate of
property tax after the end of the regular legislative session in April, takes
account of appropriations of general funds for debt service.
In the opinion of counsel, the courts of Maryland have jurisdiction to
entertain proceedings and power to grant mandatory injunctive relief to (i)
require the Governor to include in the annual budget a sufficient appropriation
to pay all general obligation bond debt service for the ensuing fiscal year;
(ii) prohibit the General Assembly from taking action to reduce any such
appropriation below the level required for that debt service; (iii) require the
Board of Public Works to fix and collect a tax on all property in the State
subject to assessment for State tax purposes at a rate and in an amount
sufficient to make such payments to the extent that adequate funds are not
provided in the annual budget; and (iv) provide such other relief as might be
necessary to enforce the collection of such taxes and payment of the proceeds
of the tax collection to the holders of general obligation bonds, pari passu,
subject to the inherent constitutional limitations referred to below.
It is also the opinion of counsel that, while the mandatory injunctive
remedies would be available and while the general obligation bonds of the State
are entitled to constitutional protection against the impairment of the
obligation of contracts, such constitutional protection and the enforcement of
such remedies would not be absolute. Enforcement of a claim for payment of the
principal of or interest on the bonds could be subject to the provisions of any
statutes that may be constitutionally enacted by the United States Congress or
the Maryland General Assembly extending the time for payment or imposing other
constraints upon enforcement.
C-1
<PAGE>
There is no general debt limit imposed by the Maryland Constitution or public
general laws, but a special committee created by statute annually submits to
the Governor an estimate of the maximum amount of new general obligation debt
that prudently may be authorized. Although the committee's responsibilities are
advisory only, the Governor is required to give due consideration to the
committee's findings in preparing a preliminary allocation of new general debt
authorization for the next ensuing fiscal year.
Consolidated Transportation Bonds are limited obligations issued by the
Maryland Department of Transportation, the principal of which must be paid
within 15 years from the date of issue, for highway, port, transit, rail or
aviation facilities or any combination of such facilities. Debt service on
Consolidated Transportation Bonds is payable from those portions of the excise
tax on each gallon of motor vehicle fuel and the motor vehicle titling tax, all
mandatory motor vehicle registration fees, motor carrier fees, and the
corporate income tax as are credited to the Maryland Department of
Transportation, plus all departmental operating revenues and receipts. Holders
of such bonds are not entitled to look to other sources for payment.
The Maryland Department of Transportation also issues its bonds to provide
financing of local road construction and various other county transportation
projects and facilities. Debt service on these bonds is payable from the
subdivisions' share of highway user revenues held to their credit in a special
State fund.
The Maryland Transportation Authority operates certain highway, bridge and
tunnel toll facilities in the State. The tolls and other revenues received from
these facilities are pledged as security for revenue bonds of the Authority
issued under and secured by a trust agreement between the Authority and a
corporate trustee.
Certain other instrumentalities of the State government are authorized to
borrow money under legislation which expressly provides that the loan
obligations shall not be deemed to constitute a debt or a pledge of the faith
and credit of the State. The Community Development Administration of the
Department of Housing and Community Development, the Board of Trustees of St.
Mary's College of Maryland, the Maryland Environmental Service, the Board of
Regents of the University of Maryland System, the Board of Regents of Morgan
State University, and the Maryland Food Center Authority have issued and have
outstanding bonds of this type. The principal of and interest on bonds issued
by these bodies are payable solely from various sources, principally fees
generated from use of the facilities or enterprises financed by the bonds.
Under a Comprehensive Plan of Financing, as amended, of the Maryland Stadium
Authority, the Authority is authorized to finance the acquisition and
construction of sports facilities at a site within the City of Baltimore.
Currently, the Stadium Authority operates Oriole Park at Camden Yards which
opened in 1992, and, if a lease agreement is executed between the Authority and
a professional football franchise, proposes to finance the construction of a
football stadium.
The Authority's financings as well as any future financings for a football
stadium are lease-backed revenue obligations, payment of which is secured by,
among other things, an assignment of revenues to be received under a lease of
the sports facilities from the Authority to the State of Maryland; rental
payments due from the State under that lease will be subject to annual
appropriation by the Maryland General Assembly. The State anticipates that
revenues to fund the lease payments will be generated from a variety of
sources, including in each year sports lottery revenues, the net operating
revenues of the Authority and funds from the City of Baltimore.
The Water Quality Revolving Loan Fund is administered by the Water Quality
Financing Administration in the Department of the Environment. The Fund may be
used to provide loans, subsidies and other forms of financial assistance to
local government units for wastewater treatment projects as contemplated by the
1987 amendments to the federal Water Pollution Control Act. The Administration
is authorized to issue bonds secured by revenues of the Fund, including loan
repayments, federal capitalization grants, and matching State grants.
The University of Maryland System, Morgan State University, and St. Mary's
College of Maryland are authorized to issue revenue bonds for the purpose of
financing academic and auxiliary facilities. Auxiliary facilities are any
facilities that furnish a service to students, faculty, or staff, and that
generate income. Auxiliary facilities include housing, eating, recreational,
campus, infirmary, parking, athletic, student union or activity, research
laboratory, testing, and any related facilities.
On August 7, 1989, the Governor issued an Executive Order assigning to the
Department of Budget and Fiscal Planning responsibility to review certain
proposed issuances of revenue and enterprise debt other than private activity
bonds. The Executive Order also provides that the Governor may establish a
ceiling of such debt to be issued during the fiscal year, which ceiling may be
amended by the Governor.
Although the State has authority to make short-term borrowings in
anticipation of taxes and other receipts up to a maximum of $100 million, in
the past it has not issued short-term tax anticipation and bond anticipation
notes or made any other similar short-term borrowings. However, the State has
issued certain obligations in the nature of bond anticipation notes for the
purpose of assisting several
C-2
<PAGE>
savings and loan associations in qualifying for Federal insurance and in
connection with the assumption by a bank of the deposit liabilities of an
insolvent savings and loan association.
The State has financed the construction and acquisition of various facilities
through conditional purchase, sale-leaseback, and similar transactions. All of
the lease payments under these arrangements are subject to annual appropriation
by the Maryland General Assembly. In the event that appropriations are not
made, the State may not be held contractually liable for the payments.
LOCAL SUBDIVISION DEBT. The counties and incorporated municipalities in
Maryland issue general obligation debt for general governmental purposes. The
general obligation debt of the counties and incorporated municipalities is
generally supported by ad valorem taxes on real estate, tangible personal
property and intangible personal property subject to taxation. The issuer
typically pledges its full faith and credit and unlimited taxing power to the
prompt payment of the maturing principal and interest on the general obligation
debt and to the levy and collection of the ad valorem taxes as and when such
taxes become necessary in order to provide sufficient funds to meet the debt
service requirements. The amount of debt which may be authorized may in some
cases be limited by the requirement that it not exceed a stated percentage of
the assessable base upon which such taxes are levied.
In the opinion of counsel, the issuer may be sued in the event that it fails
to perform its obligations under the general obligation debt to the holders of
the debt, and any judgments resulting from such suits would be enforceable
against the issuer. Nevertheless, a holder of the debt who has obtained any
such judgment may be required to seek additional relief to compel the issuer to
levy and collect such taxes as may be necessary to provide the funds from which
a judgment may be paid. Although there is no Maryland law on this point, it is
the opinion of counsel that the appropriate courts of Maryland have
jurisdiction to entertain proceedings and power to grant additional relief,
such as a mandatory injunction, if necessary, to enforce the levy and
collection of such taxes and payment of the proceeds of the collection of the
taxes to the holders of general obligation debt, pari passu, subject to the
same constitutional limitations on enforcement, as described above, as apply to
the enforcement of judgments against the State.
Local subdivisions, including counties and municipal corporations, are also
authorized by law to issue special and limited obligation debt for certain
purposes other than general governmental purposes. The source of payment of
that debt is limited to certain revenues of the issuer derived from commercial
activities operated by the issuer, payments made with respect to certain
facilities or loans, and any funds pledged for the benefit of the holders of
the debt. That special and limited obligation debt does not constitute a debt
of the State, the issuer or any other political subdivision of either within
the meaning of any constitutional or statutory limitation. Neither the State
nor the issuer or any other political subdivision of either is obligated to pay
the debt or the interest on the debt except from the revenues of the issuer
specifically pledged to the payment of the debt. Neither the faith and credit
nor the taxing power of the State, the issuer or any other political
subdivision of either is pledged to the payment of the debt. The issuance of
the debt is not directly or indirectly or contingently an obligation, moral or
other, of the State, the issuer or any other political subdivision of either to
levy any tax for its payment.
WASHINGTON SUBURBAN SANITARY DISTRICT DEBT. The Washington Suburban Sanitary
District operates as a public corporation of the State to provide, as
authorized, water, sewerage and drainage systems, including water supply,
sewage disposal, and storm water drainage facilities for Montgomery County,
Maryland and Prince George's County, Maryland. For the purpose of paying the
principal of and interest on bonds of the District, Maryland law provides for
the levy, annually, against all the assessable property within the District by
the County Council of Montgomery County and the County Council of Prince
George's County of ad valorem taxes sufficient to pay such principal and
interest when due and payable.
Storm water drainage bonds for specific projects are payable from an ad
valorem tax upon all of the property assessed for county tax purposes within
the portion of the District situated in the county in which the storm water
project was, or is to be, constructed. Storm water drainage bonds of the
District are also guaranteed by such county, which guaranty operates as a
pledge of the full faith and credit of the county to the payment of the bonds
and obligates the county council, to the extent that the tax revenues referred
to above and any other money available or to become available are inadequate to
provide the funds necessary to pay the principal of and the interest on the
bonds, to levy upon all property subject to taxation within the county ad
valorem taxes in rate and in amount sufficient to make up any such deficiency.
Substantially all of the debt service on the bonds, except storm water
drainage bonds, is being paid from revenues derived by the District from water
consumption charges, front foot benefit charges, and sewage usage charges.
Notwithstanding the payment of principal of and interest on those bonds from
those charges, the underlying security of all bonds of the District is the levy
of ad valorem taxes on the assessable property as stated above.
SPECIAL AUTHORITY DEBT. The State and local governments have created several
special authorities with the power to issue debt on behalf of the State or
local government for specific purposes, such as providing facilities for non-
profit health care and higher educational
C-3
<PAGE>
institutions, facilities for the disposal of solid waste, funds to finance
single family and low-to-moderate income housing, and similar purposes. The
Maryland Health and Higher Educational Facilities Authority, the Northeast
Maryland Waste Disposal Authority, the Housing Opportunities Commission of
Montgomery County, and the Housing Authority of Prince George's County are some
of the special authorities which have issued and have outstanding debt of this
type.
The debts of the authorities issuing debt on behalf of the State and the
local governments are limited obligations of the authorities payable solely
from and secured by a pledge of the revenues derived from the facilities or
loans financed with the proceeds of the debt and from any other funds and
receipts pledged under an indenture with a corporate trustee. The debt does not
constitute a debt, liability or pledge of the faith and credit of the State or
of any political subdivision or of the authorities. Neither the State nor any
political subdivision thereof nor the authorities shall be obligated to pay the
debt or the interest on the debt except from such revenues, funds and receipts.
Neither the faith and credit nor the taxing power of the State or of any
political subdivision of the State or the authorities is pledged to the payment
of the principal of or the interest on such debt. The issuance of the debt is
not directly or indirectly an obligation, moral or other, of the State or of
any political subdivision of the State or of the authority to levy or to pledge
any form of taxation whatsoever, or to make any appropriation, for their
payment. The authorities have no taxing power.
HOSPITAL BONDS. The rates charged by non-governmental Maryland hospitals are
subject to review and approval by the Maryland Health Services Cost Review
Commission. Maryland hospitals subject to regulation by the Commission are not
permitted to charge for services at rates other than those established by the
Commission. In addition, the Commission is required to permit any nonprofit
institution subject to its jurisdiction to charge reasonable rates which will
permit the institution to provide, on a solvent basis, effective and efficient
service in the public interest.
Under an agreement between Medicare and the Commission, Medicare agrees to
pay Maryland hospitals on the basis of Commission-approved rates, less a 6%
differential. Under this so-called "Medicare Waiver", Maryland hospitals are
exempt from the Medicare Prospective Payment System which pays hospitals fixed
amounts for specific services based upon patient diagnosis. No assurance can be
given that Maryland will continue to meet any current or future tests for the
continuation of the Medicare Waiver.
In setting hospital rates, the Commission takes into account each hospital's
budgeted volume of services and cash financial requirements for the succeeding
year. It then establishes the rates of the hospital for the succeeding year
based upon the projected volume and those financial requirements of the
institution which the Commission has deemed to be reasonable. Financial
requirements allowable for inclusion in rates generally include budgeted
operating costs, a "capital facilities allowance", other financial
considerations (such as charity care and bad debts) and discounts allowed
certain payors for prompt payment. Variations from projected volumes of
services are reflected in the rates for the succeeding year. The Commission, on
a selective basis by the application of established review criteria, grants
Maryland hospitals increases in rates to compensate for inflation experienced
by hospitals and for other factors beyond the hospitals' control.
Regulations of the Commission provide that overcharges will in certain
circumstances be deducted from prospective rates. Similarly, undercharges will
in certain circumstances not be recoverable through prospective rates.
The Commission has entered into agreements with certain hospitals to adjust
rates in accordance with a prospectively approved, guaranteed inpatient revenue
per admission program. Those agreements are in addition to the rate adjustment
methodology discussed above. Under the program, a hospital's revenue per
admission is compared to the revenue per admission, as adjusted, for a base
year. Variations from the adjusted base year revenues per admission are added
or deducted, as the case may be, from the hospital's gross revenue and rates
for the following year.
There can be no assurance that the Commission will continue to utilize its
present rate-setting methodology or approve rates which will be sufficient to
ensure payment on an individual hospital's obligations. Future actions by the
Commission or the loss of the Medicare Waiver may adversely affect the
operations of individual hospitals.
MARYLAND TAXES
In the opinion of Messrs. Weinberg & Green LLC, special Maryland counsel on
Maryland tax matters, under existing law applicable to individuals who are
Maryland residents:
The Maryland Trust will not be treated as an association taxable as a
corporation, and the income of the Maryland Trust will be treated as the
income of the Holders. The Maryland Trust is not a "financial institution"
subject to the Maryland Franchise Tax measured by net earnings. The
Maryland Trust is not subject to Maryland property taxes imposed on the
intangible personal property of certain corporations.
C-4
<PAGE>
Except as described below in the case of interest paid on private
activity bonds constituting a tax preference for Federal income tax
purposes, a Holder will not be required to include such Holder's pro-rata
share of the earnings of, or distributions from, the Maryland Trust in such
Holder's Maryland taxable income to the extent that such earnings or
distributions represent interest excludable from gross income for Federal
income tax purposes received by the Maryland Trust on obligations of the
State of Maryland, the Government of Puerto Rico, or the Government of Guam
and their respective political subdivisions and authorities. Subject to a
three year phase in period interests on Bonds is not subject to the
Maryland Franchise Tax imposed on "financial institutions" and measured by
net earnings.
In the case of taxpayers who are individuals, Maryland presently imposes
an income tax on items of tax preference with reference to such items as
defined in the Internal Revenue Code, as amended, for purposes of
calculating the Federal alternative minimum tax. Interest paid on certain
private activity bonds is a preference item for purposes of calculating the
Federal alternative minimum tax. Accordingly, if the Maryland Trust holds
such bonds, 50% of the interest on such bonds in excess of a threshold
amount is taxable by Maryland.
A Holder will recognize taxable gain or loss, except in the case of an
individual Holder who is not a Maryland resident, when the Holder disposes
of all or part of such Holder's pro rata portion of the Bonds in the
Maryland Trust. A Holder will be considered to have disposed of all or part
of such Holder's pro rata portion of each Bond when the Holder sells or
redeems all or some of such Holder's Units. A Holder will also be
considered to have disposed of all or part of such Holder's pro rata
portion of a Bond when all or part of the Bond is disposed of by the
Maryland Trust or is redeemed or paid at maturity. Gain included in the
gross income of Holders for federal income tax purposes is, however,
subtracted from income for Maryland income tax purposes to the extent that
the gain is derived from the disposition of Bonds issued by the State of
Maryland and its political subdivisions. Subject to a three year phase in
period, profits realized on the sale or exchange of Bonds are not subject
to the Maryland Franchise Tax imposed on "financial institutions" and
measured by net earnings.
Units of the Maryland Trust will be subject to Maryland inheritance and
estate tax only if held by Maryland residents.
Neither the Bonds nor the Units will be subject to Maryland personal
property tax.
The sales of Units in Maryland or the holding of Units in Maryland will
not be subject to Maryland Sales or Use Tax.
MINNESOTA TRUST
RISK FACTORS--Diversity and a significant natural resource base are two
important characteristics of the Minnesota economy. Generally, the structure of
the State's economy parallels the structure of the United States economy as a
whole. There are, however, employment concentrations in durable goods and non-
durable goods manufacturing, particularly industrial machinery, instruments and
miscellaneous, food, paper and related industries, and printing and publishing.
During the period from 1980 to 1990, overall employment growth in Minnesota
lagged behind national employment growth, in large part due to declining
agricultural employment. The rate of non-farm employment growth in Minnesota
exceeded the rate of national growth, however, in the period of 1990 to 1994.
Since 1980, Minnesota per capita income generally has remained above the
national average, but tightness in local labor markets may reduce the rate of
personal income growth below that of the national average for 1995 and
subsequent years. During 1993, 1994, and 1995, the State's monthly unemployment
rate generally has been less than the national unemployment rate.
The State relies heavily on a progressive individual income tax and a retail
sales tax for revenue, which results in a fiscal system that is sensitive to
economic conditions. Frequently in recent years, legislation has been required
to eliminate projected budget deficits by raising additional revenue, reducing
expenditures, including aids to political subdivisions and higher education,
reducing the State's budget reserve, imposing a sales tax on purchases by local
governmental units, and making other budgetary adjustments. The Minnesota
Department of Finance November 1995 Forecast has projected that, under current
laws, the State will complete its current biennium June 30, 1997 with a $15
million surplus, plus a $350 million cash flow account balance, plus a $220
million budget reserve. Total General Fund expenditures and transfers for the
biennium are projected to be $18.7 billion. State expenditures for education
finance (K-12), post-secondary education, and human services in the biennium
ending June 30, 1997 are not anticipated to be sufficient to maintain program
levels of the previous biennium. Although it is not possible to anticipate
economic performance four years into the future, planning estimates
(extrapolations) for the biennium ending June 30, 1999 show a General Fund
deficit of $28 million, after funding a $350 million cash flow account plus a
$220 million budget reserve, if current law is not changed. Accordingly, there
may be additional revenue increases or spending cuts relative to current law.
The State is party to a variety of civil actions that could adversely affect
the State's General Fund. In addition, substantial portions of State and local
revenues are derived from federal expenditures, and reductions in federal aid
to the State and its political subdivisions and other federal spending cuts may
have substantial adverse effects on the economic and fiscal condition of the
State and its local governmental units. The November 1995 Forecast states that
pending federal legislation could reduce federal aid to Minnesota's State and
local governments by a total of $3.2 billion over seven years. Risks are
inherent in making revenue and expenditure forecasts. Economic or fiscal
conditions less favorable than those reflected in State budget forecasts and
planning estimates may create additional budgetary pressures.
C-5
<PAGE>
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota, but generally the
State has no obligation to make payments on local obligations in the event of a
default. Even with respect to revenue obligations, no assurance can be given
that economic or other fiscal difficulties and the resultant impact on State
and local government finances will not adversely affect the ability of the
respective obligors to make timely payment of the principal and interest on the
Bonds or the value or marketability of such Bonds.
Recent Minnesota tax legislation and possible future changes in federal and
State income tax laws, including rate reductions, could adversely affect the
value and marketability of the Bond. See "Minnesota Taxes."
MINNESOTA TAXES
In the opinion of Dorsey & Whitney P.L.L.P., Minneapolis, Minnesota, special
counsel on Minnesota tax matters, under existing law:
The Minnesota Trust is not an association taxable as a corporation for
purposes of Minnesota income taxation. Minnesota taxable net income is, with
certain modifications, determined with reference to federal taxable income.
Each Unit holder of the Minnesota Trust will be treated as the owner of a pro
rata portion of the Minnesota Trust for purposes of Minnesota income taxation,
and the income of the Minnesota Trust will be treated as the income of the Unit
holders under Minnesota law. Interest on Bonds that would be excluded from
Minnesota taxable net income when paid directly to an individual, estate or
trust will be excluded from Minnesota taxable net income of Unit holders that
are individuals, estates or trusts when received by the Minnesota Trust and
when distributed to such Unit holders. Interest on Bonds that would be included
in Minnesota "alternative minimum taxable income" when paid directly to a
noncorporate taxpayer will be included in Minnesota "alternative minimum
taxable income" of Unit holders that are individuals, estates or trusts for
purposes of the Minnesota alternative minimum tax.
Any such Unit holder that is subject to Minnesota income taxation will
realize taxable gain or loss when the Minnesota Trust disposes of a Bond
(whether by sale, exchange, redemption or payment at maturity) or when the Unit
holder redeems or sells Units at a price that differs from original cost, as
adjusted for amortization of bond premium and other basis adjustments
(including any adjustment that may be required to reflect a Unit holder's share
of interest, if any, accruing on Bonds during the interval between the purchase
of the Units and delivery of the Bonds). The total tax cost of each Unit to a
Unit holder is allocated proportionally (by value) among each of the Bonds held
in the Minnesota Trust. Tax cost reduction requirements relating to
amortization of bond premium may, under some circumstances, result in the
realization of taxable gain by Unit holders when their Units (or underlying
Bonds) are sold or redeemed for an amount equal to or less than their original
cost. Minnesota has repealed the favorable treatment of capital gains, but
preserved limitations on the deductibility of capital losses.
Interest income attributable to Bonds that are "industrial development bonds"
or "private activity bonds," as such terms are defined in the Internal Revenue
Code, will be taxable under Minnesota law to a Unit holder that is a
"substantial user" of the facilities financed by the proceeds of such Bonds (or
a "related person" to such a "substantial user") to the same extent as if such
Bonds were held directly by such Unit holder.
Minnesota law does not permit a deduction for interest on indebtedness
incurred or continued by individuals, estates and trusts to purchase or carry
Units. Minnesota law also restricts the deductibility of other expenses
allocable to Units.
Interest on Bonds in the Minnesota Trust will be included in taxable income
for purposes of the Minnesota franchise tax on corporations and financial
institutions. No opinion is expressed as to other Minnesota tax effects on Unit
holders that are corporations or financial institutions.
The 1995 Minnesota Legislature has enacted a statement of intent that
interest on obligations of Minnesota governmental units and Indian tribes be
included in net income of individuals, estates and trusts for Minnesota income
tax purposes if a court determines that Minnesota's exemption of such interest
unlawfully discriminates against interstate commerce because interest on
obligations of governmental issuers located in other states is so included.
This provision applies to taxable years that begin during or after the calendar
year in which any such court decision becomes final, irrespective of the date
on which the obligations were issued. We are not aware of any judicial decision
holding that a state's exemption of interest on its own bonds or those of its
political subdivisions or Indian tribes, but not of interest on the bonds of
other states or their political subdivisions or Indian tribes, unlawfully
discriminates against interstate commerce or otherwise contravenes the United
States Constitution. Nevertheless, we cannot predict, and we express no opinion
concerning, the likelihood that interest on the Minnesota Bonds held by the
Minnesota Trust would become taxable under this Minnesota statutory provision.
C-6
<PAGE>
TAX FREE VS. TAXABLE INCOME
The following tables show the approximate yields which taxable securities
must earn in various income brackets to equal tax exempt yields under combined
Federal and state individual income tax rates. This table reflects projected
Federal income tax rates and tax brackets for the 1996 taxable year and state
income tax rates that were available on the date of the Prospectus. Because
the Federal rate brackets are subject to adjustment based on changes in the
Consumer Price Index, the taxable equivalent yields for subsequent years may
be lower than indicated. A table is computed on the theory that the taxpayer's
highest bracket tax rate is applicable to the entire amount of any increase or
decrease in taxable income (after allowance for any resulting change in state
income tax) resulting from a switch from taxable to tax-free securities or
vice versa. Variations between state and Federal allowable deductions and
exemptions are generally ignored. The state tax is thus computed by applying
to the Federal taxable income bracket amounts shown in the table the
appropriate state rate for those same dollar amounts. For example, a married
couple living in the State of California and filing a Joint Return with
$53,000 in taxable income for the 1996 tax year would need a taxable
investment yielding 9.06% in order to equal a tax-free return of 6.00%. Use
the appropriate table to find your tax bracket. Read across to determine the
approximate taxable yield you would need to equal a return free of Federal
income tax and state income tax.
TAXABLE EQUIVALENT YIELD TABLE FOR MARYLAND*
1996 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED
FEDERAL, STATE TAX FREE YIELD
TAXABLE AND LOCAL 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
INCOME BRACKET TAX RATE
TAXABLE EQUIVALENT YIELD
JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0- 1,000 16.70% 4.80% 5.40% 6.00% 6.60% 7.20% 7.80%
$ 1,001- 2,000 17.55 4.85 5.46 6.06 6.67 7.28 7.88
$ 2,001- 3,000 18.40 4.90 5.51 6.13 6.74 7.35 7.97
$ 3,001- 40,100 19.25 4.95 5.57 6.19 6.81 7.43 8.05
$ 40,101- 96,900 31.60 5.85 6.58 7.31 8.04 8.77 9.50
$ 96,901-117,950 34.45 6.10 6.86 7.63 8.39 9.15 9.92
$117,951-147,700 35.33 6.19 6.96 7.73 8.51 9.28 10.05
$147,701-150,000 40.23 6.69 7.53 8.36 9.20 10.04 10.87
$150,001-263,750 40.86 6.76 7.61 8.45 9.30 10.14 10.99
Over $263,750 44.34 7.19 8.09 8.98 9.88 10.78 11.68
SINGLE RETURN
$ 0- 1,000 16.70% 4.80% 5.40% 6.00% 6.60% 7.20% 7.80%
$ 1,001- 2,000 17.55 4.85 5.46 6.06 6.67 7.28 7.88
$ 2,001- 3,000 18.40 4.90 5.51 6.13 6.74 7.35 7.97
$ 3,001- 24,000 19.25 4.95 5.57 6.19 6.81 7.43 8.05
$ 24,001- 58,150 31.60 5.85 6.58 7.31 8.04 8.77 9.50
$ 58,151-100,000 34.45 6.10 6.86 7.63 8.39 9.15 9.92
$100,001-117,950 35.14 6.17 6.94 7.71 8.48 9.25 10.02
$117,951-121,300 36.01 6.25 7.03 7.81 8.60 9.38 10.16
$121,301-263,750 40.86 6.76 7.61 8.45 9.30 10.14 10.99
Over $263,750 44.34 7.19 8.09 8.98 9.88 10.78 11.68
</TABLE>
- -------
Note: This table reflects the following:
1 The above tax rates represent 1996 Federal income tax rates and 1995
Maryland income tax rates. Maryland has not yet published its 1996
personal income tax rates.
2 Taxable income, as reflected in the above table, equals Federal adjusted
gross income (AGI), less personal exemptions and itemized deductions
(including the deduction for state income tax). However, certain itemized
deductions are reduced by the lesser of (i) three percent of the amount of
the taxpayer's AGI over $117,950, or (ii) 80 percent of the amount of such
itemized deductions otherwise allowable. The effect of the three percent
phase out on all itemized deductions and not just those deductions subject
to the phase out is reflected above in the combined Federal and state tax
rates through the use of higher effective Federal tax rates. In addition,
the effect of the 80 percent cap on overall itemized deductions is not
reflected on this table. Federal income tax rates also provide that
personal exemptions are phased out at a rate of two percent for each
$2,550 (or fraction thereof) of AGI in excess of $176,950 for married
taxpayers filing a joint tax return and $117,950 for single taxpayers. The
effect of this phase out is not reflected in the above table.
3 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. The effect of this provision is not incorporated
into the table.
4 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest rates applicable to the income levels indicated
within each bracket.
5 Interest earned on all municipal obligations may cause certain investors
to be subject to tax on a portion of their Social Security and/or railroad
retirement benefits. The effect of this provision is not included in the
above table.
C-7
<PAGE>
TAXABLE EQUIVALENT YIELD TABLE FOR MINNESOTA
1996 TAX YEAR
<TABLE>
<CAPTION>
APPROX. COMBINED
FEDERAL FEDERAL, STATE TAX EXEMPT YIELD
TAXABLE AND LOCAL 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
INCOME TAX RATE
TAXABLE EQUIVALENT YIELD
MARRIED
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 23,490 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
$ 23,491 to 40,100 21.80 5.12 5.75 6.39 7.03 7.67 8.31
$ 40,101 to 93,340 33.76 6.04 6.79 7.55 8.30 9.06 9.81
$ 93,341 to 96,900 34.12 6.07 6.83 7.59 8.35 9.11 9.87
$ 96,901 to 117,950 36.87 6.34 7.13 7.92 8.71 9.50 10.30
$117,951 to 147,700 37.72 6.42 7.22 8.03 8.83 9.63 10.44
$147,701 to 263,750 42.43 6.95 7.82 8.68 9.55 10.42 11.29
Over $263,750 45.82 7.38 8.31 9.23 10.15 11.07 12.00
<CAPTION>
SINGLE
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 to 16,070 20.10 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
$ 16,071 to 24,000 21.80 5.12 5.75 6.39 7.03 7.67 8.31
$ 24,001 to 52,790 33.76 6.04 6.79 7.55 8.30 9.06 9.81
$ 52,791 to 58,150 34.12 6.07 6.83 7.59 8.35 9.11 9.87
$ 58,151 to 117,950 36.87 6.34 7.13 7.92 8.71 9.50 10.30
$117,951 to 121,300 37.72 6.42 7.22 8.03 8.83 9.63 10.44
$121,301 to 263,750 42.43 6.95 7.82 8.68 9.55 10.42 11.29
Over $263,750 45.82 7.38 8.31 9.23 10.15 11.07 12.00
</TABLE>
- -------
Note: This table reflects the following:
1 Taxable income, as reflected in the above table, equals Federal adjusted
gross income (AGI), less personal exemptions and itemized deductions
(including the deduction for state income tax). However, certain itemized
deductions are reduced by the lesser of (i) three percent of the amount of
the taxpayer's AGI over $117,950, or (ii) 80 percent of the amount of such
itemized deductions otherwise allowable. The effect of the three percent
phase out on all itemized deductions and not just those deductions subject
to the phase out is reflected above in the combined Federal and state tax
rates through the use of higher effective Federal tax rates. In addition,
the effect of the 80 percent cap on overall itemized deductions is not
reflected on this table. Federal income tax rules also provide that
personal exemptions are phased out at a rate of two percent for each
$2,550 (or fraction thereof) of AGi in excess of $176,950 for married
taxpayers filing a joint tax return and $117,950 for single taxpayers. The
effect of this phase out is not reflected in the above table.
2 Interest earned on municipal obligations may be subject to the federal
alternative minimum tax. The effect of this provision is not incorporated
into the table.
3 The taxable equivalent yield table does not incorporate the effect of
graduated rate structures in determining yields. Instead, the tax rates
used are the highest rates applicable to the income levels indicated
within each bracket.
4 Interest earned on all municipal obligations may cause certain investors
to be subject to tax on a portion of their Social Security and/or railroad
retirement benefits. The effect of this provision is not included in the
above table.
C-8
<PAGE>
PROSPECTUS
THIS PROSPECTUS CONTAINS INFORMATION CONCERNING THE TRUST AND THE SPONSOR, BUT
DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE REGISTRATION STATEMENTS
AND EXHIBITS RELATING THERETO, WHICH THE TRUST HAS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, WASHINGTON, D.C., UNDER THE SECURITIES ACT OF 1933 AND
THE INVESTMENT COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS HEREBY MADE.
INDEX:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF ESSENTIAL INFORMATION........................................... A-2
PORTFOLIO SUMMARY AS OF DATE OF DEPOSIT.................................... A-4
UNDERWRITING............................................................... A-6
INDEPENDENT AUDITORS' REPORT............................................... A-8
STATEMENTS OF FINANCIAL CONDITION OF THE TAX EXEMPT SECURITIES TRUST....... A-9
PORTFOLIOS OF SECURITIES................................................... A-10
TAX EXEMPT SECURITIES TRUST................................................ B-1
THE TRUSTS................................................................ B-1
OBJECTIVES................................................................ B-1
PORTFOLIO................................................................. B-1
RISK FACTORS.............................................................. B-2
THE UNITS................................................................. B-12
TAXES..................................................................... B-13
EXPENSES AND CHARGES...................................................... B-14
PUBLIC OFFERING............................................................ B-15
OFFERING PRICE............................................................ B-15
METHOD OF EVALUATION...................................................... B-16
DISTRIBUTION OF UNITS..................................................... B-16
MARKET FOR UNITS.......................................................... B-16
EXCHANGE OPTION........................................................... B-17
REINVESTMENT PROGRAMS..................................................... B-17
SPONSOR'S AND UNDERWRITERS' PROFITS....................................... B-17
RIGHTS OF UNIT HOLDERS..................................................... B-18
CERTIFICATES.............................................................. B-18
DISTRIBUTION OF INTEREST AND PRINCIPAL.................................... B-18
REPORTS AND RECORDS....................................................... B-19
REDEMPTION OF UNITS....................................................... B-19
SPONSOR.................................................................... B-21
LIMITATIONS ON LIABILITY.................................................. B-21
RESPONSIBILITY............................................................ B-21
RESIGNATION............................................................... B-21
TRUSTEE.................................................................... B-22
LIMITATIONS ON LIABILITY.................................................. B-22
RESIGNATION............................................................... B-22
EVALUATOR.................................................................. B-22
LIMITATIONS ON LIABILITY.................................................. B-22
RESPONSIBILITY............................................................ B-22
RESIGNATION............................................................... B-22
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT........................... B-23
AMENDMENT................................................................. B-23
TERMINATION............................................................... B-23
LEGAL OPINION.............................................................. B-23
AUDITORS................................................................... B-23
BOND RATINGS............................................................... B-23
FEDERAL TAX FREE VS. TAXABLE INCOME........................................ B-25
THE STATE TRUSTS........................................................... C-1
TAX FREE VS. TAXABLE INCOME................................................ C-7
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH OFFER IN SUCH STATE.
TAX EXEMPT
SECURITIES
TRUST
------------
19,000 UNITS
------------
Prospectus
Dated January 24, 1996
------------
SPONSOR
SMITH BARNEY INC.
388 GREENWICH STREET
23RD FLOOR
NEW YORK, NEW YORK 10013
(800) 223-2532
<PAGE>
PART II. ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
A. The following information relating to the Depositor is incorporated by
reference to the SEC filings indicated and made a part of this Registration
Statement.
SEC FILE OR
IDENTIFICATION NO.
------------------
I. Bonding Arrangements and Date of Organization of the Depositor
filed pursuant to Items A and B of Part II of the Registration
Statement on Form S-6 under the Securities Act of 1993:
Smith Barney Inc. 2-55436
II. Information as to Officers and Directors of the Depositor filed
pursuant to Schedules A and D of Form BD under Rules 15b1-1 and
15b3-1 of the Securities Exchange Act of 1934:
Smith Barney Inc. 8-8177
III. Charter documents of the Depositor filed as Exhibits to the Reg-
istration Statement on Form S-6 under the Securities Act of 1933
(Charter, By-Laws):
Smith Barney Inc. 33-65332, 33-36037
B. The Internal Revenue Service Employer Identification Numbers of the
Sponsor and Trustee are as follows:
Smith Barney Inc. 13-1912900
The Chase Manhattan Bank (National Association) 13-2633612
UNDERTAKING
The Sponsor undertakes that it will not instruct the Trustee to accept from
(i) any insurance company affiliated with the Sponsor, in settlement of any
claim, less than an amount sufficient to pay any principal or interest (and, in
the case of a taxability redemption, premium) then due on any Security in
accordance with the municipal bond guaranty insurance policy attached to that
Security or (ii) any affiliate of the Sponsor who has any obligation with
respect to any Security, less than the full amount due pursuant to the
obligation, unless those instructions have been approved by the Securities and
Exchange Commission pursuant to Rule 17d-1 under the Investment Company Act of
1940.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
THE REGISTRATION STATEMENT ON FORM S-6 COMPRISES THE FOLLOWING PAPERS AND
DOCUMENTS:
The facing sheet of Form S-6.
The Cross-Reference Sheet (incorporated by reference to the Cross-Reference
Sheet to the Registration Statement of Tax Exempt Securities Trust, Series
384, 1933 Act File No. 33-50915).
The Prospectus.
Additional Information not included in the Prospectus (Part II).
Consent of Independent Auditors.
The following exhibits:
<TABLE>
<C> <S>
1.1 --Form of Trust Indenture and Agreement (incorporated by reference to
Exhibit 4.a to the Registration Statement of Tax Exempt Securities
Trust, Series 265, 1933 Act File No. 33-15123).
1.1.1 --Form of Reference Trust Agreement (incorporated by reference to
Exhibit 1.1.1 of Tax Exempt Securities Trust, National Trust 208, 1933
Act File No. 33-58591).
1.2 --Form of Agreement Among Underwriters (incorporated by reference to
Exhibit 99 to the Registration Statement of Tax Exempt Securities
Trust, Series 384, 1933 Act File No. 33-50915).
2.1 --Form of Certificate of Beneficial Interest (included in Exhibit 1.1).
3.1 --Opinion of counsel as to the legality of the securities being issued
including their consent to the use of their name under the headings
"Taxes", "Legal Opinion" and "New York Taxes" in the Prospectus.
4.1 --Consent of the Evaluator.
5.1 --Consent of KPMG Peat Marwick LLP to the use of their name under the
heading "Auditors" in the Prospectus.
</TABLE>
II-2
<PAGE>
SIGNATURES
The registrant, Tax Exempt Securities Trust, National Trust 215, Maryland
Trust 97 and Minnesota Trust 116, hereby identifies Series 1, Series 357 and
National Trust 208 of the Tax Exempt Securities Trust for purposes of the
representations required by Rule 487 and represents the following:
(1) That the portfolio securities deposited in the series as to the
securities of which this Registration Statement is being filed do not
differ materially in type or quality from those deposited in such previous
series;
(2) That, except to the extent necessary to identify the specific
portfolio securities deposited in, and to provide essential financial
information for, the series with respect to the securities of which this
Registration Statement is being filed, this Registration Statement does not
contain disclosures that differ in any material respect from those
contained in the registration statements for such previous series as to
which the effective date was determined by the Commission or the staff; and
(3) That is has complied with Rule 460 under the Securities Act of 1933.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT THERETO TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW
YORK, AND STATE OF NEW YORK, ON THE 24TH DAY OF JANUARY, 1996.
Signatures appear on page II-4.
A majority of the members of the Board of Directors of Smith Barney Inc. has
signed this Registration Statement or Amendment to the Registration Statement
pursuant to Powers of Attorney authorizing the person signing this Registration
Statement or Amendment to the Registration Statement to do so on behalf of such
members.
II-3
<PAGE>
Smith Barney Inc., Depositor
/s/ George S. Michinard, Jr.
By .................................
(GEORGE S. MICHINARD, JR.)
By the following persons*, who
constitute a majority of the
directors of Smith Barney Inc.:
Steven D. Black
James S. Boshart III
Robert A. Case
James Dimon
Robert Druskin
Jeffrey B. Lane
Robert H. Lessin
/s/ George S. Michinard, Jr.
By ..................................
(GEORGE S. MICHINARD, JR.,
ATTORNEY-IN-FACT)
- --------
* Pursuant to Powers of Attorney filed under the 1933 Act file Numbers 33-
56722 and 33-51999.
II-4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Statements
of Financial Conditions and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000943235
<NAME> NATIONAL TRUST 215
<SERIES>
<NUMBER> 1
<NAME> NATIONAL TRUST 215
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-23-1996
<PERIOD-END> JAN-23-1996
<INVESTMENTS-AT-COST> 13876959
<INVESTMENTS-AT-VALUE> 13876959
<RECEIVABLES> 157819
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 28000
<TOTAL-ASSETS> 14062778
<PAYABLE-FOR-SECURITIES> 157819
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28000
<TOTAL-LIABILITIES> 185819
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14561371
<SHARES-COMMON-STOCK> 14000
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 13876959
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 13876959
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Statements
of Financial Conditions and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000943219
<NAME> MARYLAND TRUST 97
<SERIES>
<NUMBER> 2
<NAME> MARYLAND TRUST 97
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-23-1996
<PERIOD-END> JAN-23-1996
<INVESTMENTS-AT-COST> 2491041
<INVESTMENTS-AT-VALUE> 2491041
<RECEIVABLES> 21961
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5000
<TOTAL-ASSETS> 2518002
<PAYABLE-FOR-SECURITIES> 21961
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5000
<TOTAL-LIABILITIES> 26961
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2613899
<SHARES-COMMON-STOCK> 2500
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2491041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2500
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2491041
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from Statements
of Financial Conditions and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000943237
<NAME> MINNESOTA TRUST 116
<SERIES>
<NUMBER> 3
<NAME> MINNESOTA TRUST 116
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-23-1996
<PERIOD-END> JAN-23-1996
<INVESTMENTS-AT-COST> 2492567
<INVESTMENTS-AT-VALUE> 2492567
<RECEIVABLES> 23926
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 5000
<TOTAL-ASSETS> 2521493
<PAYABLE-FOR-SECURITIES> 23926
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5000
<TOTAL-LIABILITIES> 28926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2615500
<SHARES-COMMON-STOCK> 2500
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2492567
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2500
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2492567
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 3.1
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
January 23, 1996
Tax Exempt Securities Trust
National Trust 215
Maryland Trust 97
Minnesota Trust 116
Smith Barney Inc.
Unit Trust Department
388 Greenwich Street
23rd Floor
New York, NY 10013
Dear Sirs:
We have acted as special counsel for you, as sponsor (the "Sponsor") of the
National Trust 215, the Maryland Trust 97 and the Minnesota Trust 116 of Tax
Exempt Securities Trust (the "Trusts"), in connection with the issuance of
units of fractional undivided interest in the Trusts (the "Units") in
accordance with the Trust Indenture and Agreement and related Reference Trust
Agreement relating to the Trusts (the "Indenture").
We have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of such documents and instruments as
we have deemed necessary or advisable for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that (i) the execution and
delivery of the Indenture and the issuance of the Units have been duly
authorized by the Sponsor and (ii) the Units, when duly issued and delivered by
the Sponsor and the Trustee in accordance with the Indenture, will be legally
issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 3.1 to the
Registration Statement relating to the Units filed under the Securities Act of
1933 and to the use of our name in such Registration Statement and in the
related prospectus under the headings "Taxes", "New York Taxes" and "Legal
Opinion".
Very truly yours,
Davis Polk & Wardwell
<PAGE>
EXHIBIT 4.1
KENNY S&P EVALUATION SERVICES
A Division of J.J. Kenny Co., Inc.
65 Broadway
New York, New York 10006-2511
Telephone: 212/770-4900
Frank A. Ciccotto, Jr.
Vice President
January 23, 1996
Smith Barney Inc.
388 Greenwich St., 23rd Floor
New York, N.Y. 10013
The Chase Manhattan Bank (National Association)
Unit Trust Division
770 Broadway, 6th Floor
New York, N.Y. 10003
Re: Tax-Exempt Securities Trust
National Trust 215
Maryland Trust 97
Minnesota Trust 116
Gentlemen:
We have examined Registration Statement File Nos. 33-63597, 33-59181 and 333-
00267 (respectively) for the above-captioned trusts. We hereby acknowledge that
Kenny S&P Evaluation Services, a division of J.J. Kenny Co., Inc. is currently
acting as the evaluator for the trusts. We hereby consent to the use in the
Registration Statement of the reference to Kenny S&P Evaluation Services, a
division of J.J. Kenny Co., Inc. as evaluator.
In addition, we hereby confirm that the ratings indicated in the Registration
Statement for the respective bonds comprising the trust portfolios are the
ratings indicated in our KENNYBASE database.
You are hereby authorized to file a copy of this letter with the Securities
and Exchange Commission.
Sincerely,
Frank A. Ciccotto, Jr.
Vice President
<PAGE>
EXHIBIT 5.1
CONSENT OF INDEPENDENT AUDITORS
To the Sponsor, Trustee and Unit Holders of
Tax Exempt Securities Trust, National Trust 215, Maryland Trust 97 and
Minnesota Trust 116:
We consent to the use of our report dated January 23, 1996 included herein
and to the reference to our firm under the heading "Auditors" in the
Prospectus.
KPMG PEAT MARWICK LLP
New York, New York
January 23, 1996
