Rule 497(b)
Registration No: 333-01811
10,000 Units
Dated: April 23, 1996
EMPIRE STATE MUNICIPAL EXEMPT TRUST, GUARANTEED SERIES 127
The Empire State Municipal Exempt Trust, Guaranteed Series 127 (the "Trust")
is a unit investment trust formed for the purpose of obtaining tax-exempt
interest income through investment in a fixed insured portfolio of long-term
bonds, including contracts and funds for the purchase thereof, issued by or on
behalf of the State of New York and counties, municipalities, authorities or
political subdivisions thereof or issued by certain United States territories
or possessions, including Puerto Rico, and their public authorities (the
"Bonds" or the "Securities"). The Sponsors of the Trust are Glickenhaus & Co.,
and Lebenthal & Co., Inc. Units of the Trust will be offered to residents of
New York, Connecticut, Pennsylvania and Florida. On the Date of Deposit, all
of the Units and the Bonds while in the Trust will be rated AAA by Standard &
Poor's Corporation and Moody's Investors Service will assign a rating of "Aaa"
to all of the Bonds in the Trust, as insured. The value of the Units of the
Trust will fluctuate with the value of the underlying Bonds. Minimum purchase:
1 Unit.
In the opinion of counsel, under existing law, interest income to the Trust,
and, with certain exceptions, to Unit Holders is exempt from all regular
federal, New York State and New York City income taxes, but may be subject to
state and local taxes in other jurisdictions. Capital gains, if any, are
subject to tax. Interest on the Bonds will not be subject to the federal
alternative minimum tax. See "The Trust--Tax Status" in Part B of this
Prospectus.
This Prospectus consists of two parts. Part A contains the Summary of
Essential Information including descriptive material relating to the Trust,
the Statement of Condition of the Trust and the Portfolio. Part B contains
general information about the Trust. Part A may not be distributed unless
accompanied by Part B. Please read and retain both parts of this Prospectus
for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS PART A DATED APRIL 23, 1996
358834.1
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EMPIRE STATE MUNICIPAL EXEMPT TRUST,
GUARANTEED SERIES 127
SUMMARY OF ESSENTIAL FINANCIAL INFORMATION
AT APRIL 22, 1996 (1):
SPONSORS: GLICKENHAUS & CO.
LEBENTHAL & CO., INC.
AGENT FOR SPONSORS: GLICKENHAUS & CO. TRUSTEE: THE BANK OF NEW YORK
EVALUATOR: MULLER DATA CORPORATION
DATE OF DEPOSIT: April 23, 1996
<TABLE>
<S> <C>
Aggregate Principal Amount of Bonds in Trust: $ 10,000,000.00(2)
Number of Units: 10,000
Fractional Undivided Interest in Trust Per Unit: 1/10,000
Total Value of Securities in Portfolio (Based on Offering Side Valuations of Securities): $ 9,509,012.50
====================
Sponsors' Initial Repurchase Price Per Unit (Total Value of Securities divided by 10,000 Units): $ 950.90(3)
Plus Sales Charge of 4.9% (on sales of fewer than 250 Units) of Public Offering Price (4): 48.99
--------------------
Public Offering Price Per Unit: $ 999.89(5)
=====================
Redemption Price Per Unit: $ 945.94(6)
Excess of Public Offering Price Over Redemption Price Per Unit: $ 53.95
Excess of Public Offering Price Over Sponsors' Initial Repurchase Price Per Unit: $ 48.99
Weighted Average Maturity of Bonds in the Trust: 28.52 years
</TABLE>
<TABLE>
<S> <C>
Evaluation Time: 12:00 P.M. New York Time on the initial Date of Deposit and 2:00 P.M. New York
Time thereafter.
Annual Insurance Premium (7): $2,717.50
Evaluator's Fee: $.55 per Bond for each valuation.
Trustee's Annual Fee: For each $1,000 principal amount of Bonds in the Trust, $1.42 under the monthly and
$1.02 under the semi-annual distribution plan.
Sponsors' Annual Fee: Maximum of $0.25 per $1,000 principal amount of underlying Securities. See "The
Trust--Expenses and Charges."
Sponsors' Profit (Loss) on Deposit: $87,365.10
Mandatory Termination Date: December 31, 2045
First Settlement Date: April 26, 1996
Minimum Principal Distribution: $1.00 per Unit
Minimum Value of the Trust under which Trust
Agreement May be Terminated: $2,000,000 or 20% of the principal amount of the Bonds
deposited in Trust, whichever is lower.
</TABLE>
<TABLE>
<S> <C> <C>
Monthly Semi-Annual
Estimated Annual Interest Income (includes cash income accrued only): $55.73 $55.73
P Less Annual Premium on Portfolio Insurance: .27 .27
E Less Organizational Expenses (8): .42 .42
R Less Estimated Annual Expenses (9): 2.16 1.66
------- -------
Estimated Net Annual Interest Income: $52.88 $53.38
====== ======
U Estimated Interest Distribution (10): $ 4.40 $26.69
N Estimated Current R turn Based on Public Offering Price (includes cash
I income accrual only) (11): 5.29% 5.34%
T Estimated Long-Term Return (12): 5.36% 5.41%
Estimated Daily Rate of Net Interest Accrual: $.14691 $.14830
Record Dates: 15th Day of Month 15th Day of
May and November
Payment Dates: 1st Day of Month 1st Day of
June and December
</TABLE>
(continued on following page)
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NOTES TO SUMMARY OF ESSENTIAL INFORMATION
(1) The business day prior to the date of this Prospectus. The
date of this Prospectus is the date on which the Trust Agreement was signed
and the deposit with the Trustee was made.
(2) If a Replacement Bond is not acquired when a contract for the
purchase of Bonds fails, the aggregate principal amount of the Bonds may be
reduced. See "The Trust--Portfolio--General Considerations" in Part B.
(3) Based, during the initial offering period, solely upon the
offering prices of the Securities and thereafter on the bid prices of such
Securities. See "The Trust--Market for Units" in this Part A.
(4) After the initial offering period, Units may be available for
purchase from the Sponsors at a price based upon the aggregate bid price of
the Bonds in the Trust (as determined by the Evaluator) plus a sales charge
determined in accordance with the schedule set forth in "Public
Offering--Offering Price" in Part B of this Prospectus, which is based upon
the maturities of each Bond in the Trust.
(5) No accrued interest will be added to the Public Offering Price
in connection with purchases of Units contracted for on April 23, 1996. With
respect to purchases contracted for after such date, accrued interest from
April 26, 1996 to, but not including, the date of settlement (normally three
business days after order) will be added to the Public Offering Price.
(6) Based solely upon the bid prices of the Securities. Upon
tender for redemption, the price to be paid will include accrued interest as
described in "Rights of Unit Holders--Redemption--Computation of Redemption
Price per Unit" in Part B.
(7) Based upon the aggregate principal amount of the Bonds in the
Trust. If the Trustee had exercised its right to obtain Permanent Insurance on
all of the Bonds in the Trust as of the Date of Deposit, the total cost of the
Permanent Insurance premiums for such insurance would have been $31,426.00.
(8) Although historically the sponsors of unit investment trusts
("UITs") have paid all the costs of establishing such UITs, this Trust (and
therefore the Unit holders) will bear all or a portion of its organizational
costs. Such organizational costs include: the cost of preparing and printing
the registration statement, the trust indenture and other closing documents;
and the initial audit of the Trust. Total organizational expenses will be
amortized over a five year period. See "Rights of Unit Holders--Expenses and
Charges--Initial Expenses" in Part B.
(9) Excluding insurance costs.
(notes continued on next page)
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(notes continued from preceding pages)
(10) The first monthly interest distribution of $2.79 per Unit
will be made on June 1, 1996 (the "First Distribution Date") to all monthly
certificateholders of record on May 15, 1996 (the "First Record Date"). The
regular monthly payment will be $4.40 on July 1, 1996 and thereafter. The
first semi-annual interest distribution of $2.81 per Unit will be made on June
1, 1996 to all semi-annual certificateholders of record on May 15, 1996. The
regular semi-annual payment will be $26.69 on December 1, 1996 and thereafter.
In order to reduce the amount of accrued interest investors have to pay in
addition to the Public Offering Price, the Trustee has agreed to advance to
the Trust the amount of accrued interest due on Securities through and
including April 26, 1996. This accrued interest will be paid to the Sponsors
as the holders of record of all Units on such date. Consequently, when the
Sponsors sell Units, 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 April 26, 1996 to but not including the date of settlement of
the investor's purchase (normally three business days after the purchase
contract), less any distributions from the Interest Account. Since a person
who contracts to purchase Units on April 23, 1996 will settle his purchase on
April 26, 1996, no accrued interest will be added to the Public Offering Price
of Units settled on that date. The Trustee will recover its advancements
(without interest or other cost to the Trust) from interest received on the
Securities deposited in the Trust. See "Rights of Unit
Holders--Redemption--Computation at Redemption Price per Unit in Part B."
(11) Calculated after payment of insurance premiums payable by the
Trust. The Estimated Current Return on such date on an identical portfolio
without such insurance would have been 5.37% based on the semi-annual payment
plan and 5.32% based on the monthly payment plan. Estimated Current Return is
calculated by dividing the estimated net annual interest income received in
cash per Unit by the Public Offering Price. Interest income per Unit will vary
with changes in fees and expenses of the Trust and the Evaluator, and with the
redemption, maturity, exchange or sale of Securities. This calculation, which
includes cash income accrual only, does not include discount accretion on
original issue discount bonds or on zero coupon bonds or premium amortization
on bonds purchased at a premium. See "The Trust--Tax Status" in Part B of this
Prospectus and "The Trust--Estimated Current Return and Estimated Long-Term
Return to Unit Holders" in this Part A.
(12) Calculated after payment of insurance premiums payable by the
Trust. The Estimated Long-Term Return on such date on an identical portfolio
without such insurance would have been 5.44% based on the semi-annual payment
plan and 5.39% based on the monthly payment plan. Estimated Long-Term Return
is calculated by using a formula that takes into account the yields (including
accretion of discounts and amortization of premiums) of the individual Bonds
in the Trust's portfolio, weighted to reflect the market value and time to
maturity (or, in certain cases, to earlier call date) of such Bonds, adjusted
to reflect the Public Offering Price (including sales charge and expenses) per
Unit. This calculation does not take into account delays in payment to Unit
holders for the first few months of the Trust's operations, which reduces the
Long-Term Return number. See "The Trust--Estimated Current Return and
Estimated Long-Term Return to Unit Holders" in this Part A.
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358834.1
<PAGE>
The Trust
Empire State Municipal Exempt Trust (the "Fund"), Guaranteed
Series 127 (the "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* (the "Trust Agreement"), dated the Date of Deposit,
among Glickenhaus & Co. and Lebenthal & Co., Inc. as sponsors (the
"Sponsors"), The Bank of New York, as trustee (the "Trustee"), and Muller Data
Corporation, as evaluator (the "Evaluator"). The objective of the Trust is to
obtain tax-exempt interest income through an investment in a fixed insured
portfolio consisting primarily of various long-term municipal bonds with
average maturities of over 10 years. Insurance does not protect against the
risk of market fluctuations on the underlying bonds in the Trust's portfolio
and of the units of the Trust. No assurance can be given that the Trust's
objectives will be achieved as these objectives are subject to the continuing
ability of the respective issuers of the bonds to meet their obligations or of
the insurer to meet its obligations under the insurance. In addition, an
investment in such portfolio can be affected by fluctuations in interest
rates.
Certain of the Bonds in the Trust may be purchased at prices which
result in the portfolio as a whole being purchased at a discount due to
original issue discount, market discount or the inclusion of zero coupon
bonds. Bonds selling at market discount tend to increase in market value as
they approach maturity when the principal amount is payable, thus increasing
the potential for gain (all or a portion of which may be taxable as ordinary
income). Any income other than any earned original issue discount will be
taxable and will not be realized until maturity, redemption or sale of the
underlying Bonds or Units of the Trust. In the case of Bonds acquired at a
market discount, gain will be treated as ordinary income to the extent of
accrued market discount. At the time of the original issuance of the Bonds
held by the Trust, opinions relating to the validity of the Bonds and the
exemption of interest thereon from Federal income tax and New York State and
City personal income tax were (or with respect to "when-issued" Bonds will be)
rendered by bond counsel to the issuing governmental authority. The continued
tax-exempt status will depend upon the issuer's ability to comply with the
provisions of the Internal Revenue Code of 1986, as amended. See "The
Trust--Tax Status" in Part B of this Prospectus. On the Date of Deposit, the
Sponsors, acting for the Underwriting Account (see "Underwriting Account" in
this Part A), deposited with the Trustee delivery statements relating to
contracts for the purchase of $10,000,000 aggregate principal amount for the
interest-bearing obligations, including funds (represented by cash, cash
equivalents and/or an irrevocable letter of credit issued by a major financial
institution) for the purchase of certain such obligations (the "Bonds" or the
"Securities"). The Trustee thereafter delivered to the Sponsors a registered
certificate of 10,000 Units, representing the entire ownership of the Trust,
which Units are being offered hereby.
In view of the Fund's objectives, the following factors, among
others, were considered in selecting the Bonds: (1) all the Bonds are
obligations of the State of New York and counties, municipalities, authorities
or political subdivisions thereof or issued by certain United States
territories or possessions, including Puerto Rico, and their public
authorities so that the interest on them will be exempt from Federal, New York
State and New York City income tax under existing law; (2) the Bonds are
varied as to purpose of issue; (3) in the opinion of the Sponsors, the Bonds
are fairly valued relative to other bonds of comparable quality and maturity;
and (4) MBIA Insurance Corporation insurance for the payment of principal and
interest on the Securities is available. Subsequent to the Date of Deposit, a
Bond may
- --------
* References in this Prospectus to the Trust Agreement are qualified in
their entirety by the Trust Agreement which is incorporated herein by
reference.
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358834.1
<PAGE>
cease to be rated or its rating may be reduced. In the event a Bond's rating
is downgraded to below investment grade (i.e., "high yield" or "junk bond"
status), such a Bond, as compared to an investment grade bond, is subject to
greater risk of downward price volatility in periods of economic uncertainty.
If a Bond in the Trust is downgraded to high yield bond status, a decrease in
the net asset value of the Trust may result. If such a decrease in net asset
value occurs and Units of the Trust are tendered for redemption, the Trust may
be forced to liquidate some of the Bonds at a loss. If such redemptions are
substantial enough, this could trigger a complete and unexpected liquidation
of the Trust before maturity, resulting in unanticipated losses for investors.
Notwithstanding such risk, neither the downgrading of a Bond to below
investment grade nor a Bond's ceasing to be rated, requires an elimination of
such Bond from the portfolio of the Trust, but such an event may be considered
in the Sponsors' determination to direct the Trustee to dispose of the Bonds.
See "Sponsors--Responsibility" in Part B.
Public Offering Price
The Public Offering Price of the Units of the Trust during the
initial offering period is equal to the aggregate offering price of the
Securities in the respective Trust's portfolio divided by the number of Units
outstanding, plus a sales charge equal to 4.9% of the Public Offering Price of
the Trust on sales of fewer than 250 Units. In addition, for Units ordered
after the date hereof, accrued interest will be payable from the First
Settlement Date for Units of the Trust (three business days from the date
hereof) to the expected date of settlement (three business days after order).
For additional information regarding the Public Offering Price, the
descriptions of interest and principal distributions, repurchase and
redemption of Units and other essential information regarding the Trust, see
the "Summary of Essential Information" in this Part A. During the initial
public offering period, sales of at least 250 Units will be entitled to a
volume discount from the Public Offering Price. See "Public Offering--Offering
Price" in Part B. If the Units of the Trust had been available for sale on
April 22, 1996, the Public Offering Price per Unit would have been $999.89.
Market for Units
The Sponsors, although they are not obligated to do so, currently
intend to maintain a secondary market for the Units in the Trust at prices
based upon the aggregate bid price of the Securities plus accrued interest, if
any, and a sales charge of 4.9% of the Public Offering Price of the Trust at
the time. If such a market is not maintained, a Unit holder may be able to
dispose of his Units only through redemption at prices based upon the
aggregate bid price of the Securities. The purchase price of the Securities,
if they were available for direct purchase by investors, would not include the
sales charge included in the Public Offering Price of the Units. Neither the
bid nor the offering side valuations of the underlying Securities or of the
Units of the Trust, absent situations in which Securities are in default in
payment of principal or interest or in significant risk of such default,
include value, if any, attributable to the insurance obtained by the Trust.
See "Public Offering--Market for Units" in Part B of this Prospectus.
Estimated Current Return and Estimated Long-Term Return
Units of the Trust are offered to investors on a "dollar price"
basis (using the computation method previously described under "Public
Offering Price") as distinguished from a "yield price" basis often used in
offerings of tax exempt bonds (involving the lesser of the yield as computed
to maturity of bonds or to an earlier redemption date). Since they are offered
on a dollar price basis, the rate of return on an investment in Units of the
Trust is measured in terms of "Estimated Current Return" and "Estimated Long
Term Return."
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Estimated Long Term Return is calculated by: (1) computing the
yield to maturity or to an earlier call date (whichever results in a lower
yield) for each Bond in the Trust portfolio in accordance with accepted
practices, which practices take into account not only the interest payable on
the Bonds but also the amortization of premiums or accretion of discounts, if
any; (2) calculating the average of the yields for the Bonds in the Trust
portfolio by weighing each Bond's yield by the market value of the Bond and by
the amount of time remaining to the date to which the Bond is priced (thus
creating an average yield for the portfolio of the Trust); and (3) reducing
the average yield for the portfolio of the Trust in order to reflect estimated
fees and expenses of the Trust and the maximum sales charge paid by Unit
holders. The resulting Estimated Long Term Return represents a measure of the
return to Unit holders earned over the estimated life of the Trust. The
Estimated Long Term Return as of the day prior to the Date of Deposit is
stated for the Trust under "Summary of Essential Information" in Part A.
Estimated Current Return is computed by dividing the Estimated Net
Annual Interest Income per Unit by the Public Offering Price per Unit. In
contrast to the Estimated Long Term Return, the Estimated Current Return does
not take into account the amortization of premium or accretion of discount, if
any, on the Bonds in the portfolio of the Trust. Moreover, because interest
rates on Bonds purchased at a premium are generally higher than current
interest rates on newly issued bonds of a similar type with comparable rating,
the Estimated Current Return per Unit may be affected adversely if such
Securities are redeemed prior to their maturity. On the day prior to the Date
of Deposit, the Estimated Net Annual Interest Income per Unit divided by the
Public Offering Price resulted in the Estimated Current Return stated for the
Trust under "Summary of Essential Information" in Part A.
The Estimated Net Annual Interest Income per Unit of the Trust
will vary with changes in the fees and expenses of the Trustee and the
Evaluator applicable to the Trust and with the redemption, maturity, sale or
other disposition of the Bonds in the Trust. The Public Offering Price will
vary with changes in the offering prices (bid prices in the case of the
secondary market) of the Bonds. Therefore, there is no assurance that the
present Estimated Current Return or Estimated Long Term Return will be
realized in the future. A schedule of cash flow projections is available from
the Sponsor upon request.
Distributions
Distributions of interest received by the Trust, pro rated on an
annual basis, will be made semi-annually unless the Unit holder elects to
receive them monthly. The first monthly distribution will be $2.79 for Units
of the Trust and will be made on June 1, 1996, to monthly Unit holders of
record on May 15, 1996, and $4.40 thereafter. The first semi-annual
distribution will be $2.81 for Units of the Trust and will be made on June 1,
1996, to semi-annual Unit holders of record on May 15, 1996, and $26.69
thereafter. See "Rights of Unit Holders--Distribution of Interest and
Principal" in Part B of this Prospectus.
Each Unit of the Trust at the Date of Deposit represents 1/10,000
fractional undivided interest in the $10,000,000 face amount of underlying
Bonds and net income of the Trust in the ratio of 1 Unit for each $1,000
principal amount of underlying Bonds (including contracts and funds for the
purchase thereof) in the Trust.
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Automatic Accumulation Account
Distributions from the Trust are made semi-annually unless the
Unit holder elects to receive them monthly. Unit holders of the Trust have the
option, however, of either receiving their interest check, together with any
principal payments, from the Trustee or participating in the Automatic
Accumulation Account reinvestment program offered by the Sponsors (the
"Plan"). Under the Plan, a Unit holder may elect to have distributions from
Units in the Trust automatically reinvested in shares of an open-end mutual
fund. For a description of the fund involved see "Automatic Accumulation
Account" in Part B. Participation in the Plan is conditioned on the
participating fund's lawful qualification for sale in the state in which the
Unit holder is a resident. The Plan is not designed to be a complete
investment program. See "Automatic Accumulation Account" in Part B for details
on how to enroll in the Plan and how to obtain a prospectus.
Insurance
Insurance guaranteeing the payment of all principal (either at
stated maturity or by advancement of maturity pursuant to a mandatory sinking
fund payment) and interest on each of the Bonds in the Trust as such payments
shall become due but shall not be paid has been obtained by the Trust from
MBIA Insurance Corporation (sometimes referred to hereinafter as the
"Insurer"). Insurance obtained by the Trust applies only while Bonds are
retained in the Trust. Pursuant to an irrevocable commitment of the Insurer,
in the event of a sale of a Bond from the Trust, the Trustee has the right to
obtain permanent insurance for such Bond upon the payment of a single
predetermined insurance premium from the proceeds of the sale of such Bond.
Insurance obtained by the Trust relates only to the payment of principal and
interest on the Bonds in the Trust but neither covers the nonpayment of any
redemption premium on the Bonds nor guarantees the market value of the Units.
With respect to small-issue industrial development Bonds and pollution control
revenue Bonds covered by the insurance, the Insurer also guarantees any
accelerated payments required to be made by or on behalf of an issuer of such
Bonds if there occurs an event which results in the loss of the tax-exempt
status of interest on such Bonds, including principal, interest or premium
payments payable thereon, if any, as and when thereby required. The insurance
does not otherwise guarantee any accelerated payments required to be made by
or on behalf of an issuer of other than small-issue industrial development
Bonds or pollution control revenue Bonds if there occurs an event which
results in the loss of the tax-exempt status of such Bonds nor will the
insurance cover accelerated payments of principal or penalty interest or
premiums unrelated to taxability of interest on any of the Bonds. In the event
of such an acceleration, the payments guaranteed by the Insurer shall be made
in such amounts and at such times as such payments would have been made absent
such acceleration. As a result of the MBIA Insurance Corporation insurance,
Moody's Investors Service has assigned a rating of "Aaa" to all of the Bonds
in the Trust, as insured, and Standard & Poor's Corporation has assigned a
rating of "AAA" to the Units and Bonds while in the Trust. See "The
Trust--Insurance on the Bonds"in Part B. No representation is made as to any
insurer's ability to meet its commitments.
Some of the Bonds in the Trust may also have been previously
insured by insurance obtained by the issuers of such Bonds or by persons other
than the Trust ("Pre-insured Bonds"). Six of the issues (96.00%) initially
deposited in the Trust were Pre-insured Bonds. Insurance obtained by the Trust
from the Insurer is effective only while the Bonds thus insured are held in
such Trust; however, insurance previously obtained by the issuer or by persons
other than the Trust, for which a single premium has been paid, is effective
so long as the Pre-insured Bonds are outstanding.
No representation is made as to the ability of any insurer to meet its
commitments.
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Neither the Public Offering Price nor any evaluation of Units of
the Trust for purposes of repurchases or redemptions reflects any element of
value for the insurance obtained by the Trust unless Securities are in default
in payment of principal or interest or, in the Sponsors' opinion, is in
significant risk of such default. See "Public Offering--Offering Price" in
Part B of this Prospectus. On the other hand, the value, if any, of insurance
obtained by the issuer of the Securities or by parties other than the Trust is
reflected and included in the market value of such Securities.
Insurance is not a substitute for the basic credit of an issuer,
but supplements the existing credit and provides additional security therefor.
If an issue is accepted for MBIA Insurance Corporation insurance, a
non-cancelable policy for the payment of interest on and principal of the
bonds is issued by the Insurer. A single or annual premium is paid by the
issuer or any other party for its insurance on Pre-insured Bonds, and a
monthly premium is paid by the Trust for the insurance it obtains from the
Insurer on the Bonds in the Trust that are not also MBIA Insurance Corporation
Pre-insured Bonds or Municipal Bond Insurance Association Pre-insured Bonds.
No premium will be paid by the Trust for the insurance it obtains from the
Insurer on Bonds that are also MBIA Insurance Corporation Pre-insured Bonds or
Municipal Bond Insurance Association Pre-insured Bonds. Pursuant to an
irrevocable commitment of the Insurer, upon the sale of a Bond from the Trust,
the Trustee has the right to obtain permanent insurance with respect to such
Bond upon the payment of a single predetermined insurance premium from the
proceeds of the sale of such Bond. It is expected that the Trustee will
exercise the right to obtain permanent insurance for a Bond in the Trust upon
instruction from the Sponsors whenever the value of that Bond insured to its
maturity less the applicable permanent insurance premium and the related
custodial fee exceeds the value of the Bond without such insurance. See "The
Trust-- Insurance on the Bonds" in Part B of this Prospectus.
The Portfolio
The portfolio of the Trust contains contracts to purchase 7 issues
of Bonds issued by entities located in New York. All such contracts are
expected to be settled by April 26, 1996. The following information is being
supplied to inform Unit holders of circumstances affecting the Trust. 19.00%
of the aggregate principal amount of the Bonds in the portfolio are general
obligations of the governmental entity issuing them which are backed by the
taxing power thereof. None of the aggregate principal amount of the Bonds in
the portfolio are payable from appropriations. 81.00% of the aggregate
principal amount of the Bonds in the portfolio are payable from the income of
specific projects or authorities and are not supported by the issuers' power
to levy taxes. Although income to pay such Bonds may be derived from more than
one source, the primary sources of such income, the number of issues (and the
related dollar weighted percentage of such issues) deriving income from such
sources and purpose of issue are as follow: General Obligation, 2 (19.00%),
Healthcare, 3 (38.00%); and Transportation, 2 (43.00%). The Trust is deemed to
be concentrated in the Health Care and Transportation categories.* Prior to
their deposit in the Trust, 6 of the issues (96.00%) were rated AAA by
Standard and Poor's Corporation and 1 issue (4.00%) was rated Baa1 by Moody's
Investors Service.** Bonds rated Baa have adequate capacity to pay interest
and to repay principal, however, such
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* A Trust is considered to be "concentrated" in a particular category or
issuer when the Bonds in that category or of that issuer constitute 25%
or more of the aggregate face amount of the portfolio. See "The
Trust--General Considerations" in Part B of this Prospectus.
** For the meanings of ratings, including the symbols "p" and "Con. (. .
.)," see "Description of Bond Ratings" in Part B of this Prospectus.
Security letter ratings may be modified by the addition of a plus or
minus sign, when appropriate, to show relative standing within the major
rating categories. There can be no assurance that the economic and
political conditions on which the ratings of the Bonds in any Trust are
based will continue or that particular Bond issues may not be adversely
affected by changes in economic, political or other conditions that do
not affect the above ratings. See "The Trust--Special Factors Affecting
New York" and "The Trust--General Considerations" in Part B of this
Prospectus.
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Bonds may have certain speculative characteristics as well. Furthermore, Bonds
rated Baa are more sensitive to adverse economic changes or individual
corporate developments. See "Description of Bond Ratings" in Part B of this
Prospectus. For a more detailed discussion, it is recommended that Unit
holders consult the official statements for each security in the portfolio of
the Trust.
None of the Bonds initially deposited in the Trust have been
purchased on a "when issued" basis and none of the Bonds initially deposited
in the Trust has been purchased on a delayed settlement basis. Normally,
delivery of "when issued" Bonds and delayed settlement Bonds is expected to
take place within 30 days after the First Settlement Date. Accordingly,
delivery may be delayed or may not occur. Interest on such Bonds begins
accruing to the benefit of Unit holders on the date of delivery. Holders of
Units will be "at risk" with respect to such Bonds (i.e., may derive either
gain or loss from fluctuations in the offering side valuation of such Bonds)
from the date they commit for Units. Moreover, the insurance on the Bonds in
the portfolio obtained by the Trust does not cover such Bonds until they are
delivered to the Trust. See "The Trust--Portfolio--General Considerations" in
Part B.
24.00% of the aggregate principal amount of the Bonds in the Trust
are original issue discount bonds that have mandatory sinking fund installment
provisions at redemption prices equal to the compound accreted value on the
date of redemption. Of these original issue discount bonds, 4.00% are zero
coupon bonds. 4.00% of the aggregate principal amount of the Bonds in the
Trust are zero coupon bonds that do not have mandatory sinking fund
installment provisions. Zero coupon bonds do not provide for the payment of
any current interest and provide for payment and maturity at par value unless
sooner sold or redeemed. The market for zero coupon bonds is subject to
greater fluctuations than coupon bonds in response to changes in interest
rates. (See "Original Issue Discount and Zero Coupon Bonds" in Part B of this
Prospectus). On the Date of Deposit, 20.00% of the Bonds in the Trust were
purchased at a premium and are subject to retirement or refunding within ten
years of the Date of Deposit. On the Date of Deposit, based on the offering
side valuation, none of the aggregate principal amount of the Bonds were at
par, 80.00% of the aggregate principal amount of the Bonds were at a discount
from par and 20.00% of the aggregate principal amount of the Bonds were at a
premium.
An investment in Units of the Trust should be made with an
understanding of the risks entailed in investments in fixed-rate bonds,
including the risk that the value of such bonds (and, therefore, of the Units)
will decline with increases in interest rates or a decrease in the federal or
New York State income tax rate. Inflation and recession, as well as measures
implemented to address these and other economic problems, contribute to
fluctuations in interest rates and the values of fixed-rate bonds generally.
Additionally, changes in the tax treatment of bonds may have an adverse impact
on the value of the Units. The Sponsors cannot predict future economic
policies or their consequences, nor can they predict the course or extent of
such fluctuations in the future.
A-10
358834.1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Sponsors, Trustee, and Unit Holders of Empire State Municipal Exempt Trust,
Guaranteed Series 127
We have audited the Statement of Condition of Empire State
Municipal Exempt Trust, Guaranteed Series 127, including the Portfolio as of
April 23, 1996. This financial statement is the responsibility of the
Sponsors. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by the Sponsors, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. An irrevocable letter of credit deposited on
April 23, 1996 in the amount required to purchase securities, as described in
the Statement of Condition, was confirmed to us by Bankers Trust.
In our opinion, the Statement of Condition referred to above
presents fairly, in all material respects, the financial position of Empire
State Municipal Exempt Trust, Guaranteed Series 127 at April 23, 1996 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
New York, New York
April 23, 1996
A-11
358834.1
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
Guaranteed Series 127
STATEMENT OF CONDITION AS OF DATE OF DEPOSIT
April 23, 1996
TRUST PROPERTY
<TABLE>
<S> <C>
Investment in Securities:
Contracts to purchase underlying Securities (1)(2)............... $ 9,509,012.50
Accrued interest receivable (2)........................................ 107,815.84
Organizational costs (3)............................................... 21,000.00
-----------------------
Total.................................................. $ 9,637,828.34
=======================
LIABILITIES AND INTEREST OF UNIT HOLDERS
Liabilities:
Accrued interest receivable (2).................................. $ 107,815.84
Accrued liability (3)............................................ 21,000.00
-----------------------
128,815.84
Interest of Unit holders:
Units of fractional undivided interest outstanding (10,000):
Cost to investors (4)............................................ $ 9,998,912.50
Less--gross underwriting commission (5).......................... 489,900.00
-----------------------
Net interest of Unit holders........................................... 9,509,012.50
-----------------------
Total.................................................. $ 9,637,828.34
=======================
</TABLE>
(1) Aggregate cost to the Trust of the Securities listed under
"Portfolio" is based on offering side valuation determined by the Evaluator on
the basis set forth under "Public Offering--Offering Price" in Part B. The
aggregate bid side evaluation of the Securities in the portfolio, as
determined by the Evaluator, as of the Date of Deposit was $9,459,412.50. An
irrevocable letter of credit issued by Bankers Trust, in an aggregate amount
equal to or in excess of $9,616,166.91, has been deposited with the Trustee.
The amount of such letter of credit includes: $9,509,012.50, the amount
required to purchase the tax-exempt securities listed in the related
portfolio, plus $107,154.41 covering accrued interest through expected dates
of delivery.
(2) On the basis set forth under "Rights of Unit
Holders--Distribution of Interest and Principal" in Part B the Trustee will
advance an amount equal to the accrued interest on the Securities as of April
26, 1996 (the "First Settlement Date") plus any cash received by the Trustee
with respect to interest on the Securities prior to such date, and the same
will be distributed to the Sponsors on the First Settlement Date.
Consequently, the amount of interest accrued on a Unit to be added to the
public offering price thereof will include only such accrued interest from the
First Settlement Date to the date of settlement, less all withdrawals and
deductions from the Interest Account subsequent to the First Settlement Date
made with respect to the Unit.
(3) Organizational costs incurred by the Trust have been deferred
and will be amortized over a five year period. The Trust will reimburse the
Sponsors for actual organizational costs incurred.
(4) Aggregate public offering price (exclusive of interest) is
computed on 10,000 Units on the basis set forth above under "Public Offering--
Offering Price" in Part B.
(5) A sales charge of 4.9% computed on 10,000 Units. See "Public
Offering--Offering Price" in Part B for volume discounts on sales of 250 Units
or more.
A-12
358834.1
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
Guaranteed Series 127
Portfolio as of Date of Deposit, April 23, 1996
<TABLE>
<CAPTION>
Redemption Features
Port- Coupon Ant.--Anticipated
folio Rating Principal Represented by Contracts to Rate and S.F.--Sinking Fund
No. (1)(2) Amount (3) Purchase Securities (4) Maturity Opt.--Optional (5)
- ---------- ----------------------------------- ---------------------------------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
1 AAA/Aaa $2,000,000 New York State Thruway Authority 6.000% 01/01/16 @100 Ant.
General Revenue Bonds Series C 01/01/25 01/01/05 @102 Opt.
(FGIC Insured)
2 AAA/Aaa 1,835,000 New York State Medical Care 5.900 02/15/14 @100 S.F.
Facility Finance Agency Mental 08/15/22 08/15/02 @102 Opt.
Health Service Facilities
Improvement Revenue Bonds
Series D (AMBAC Insured)
3 AAA/Aaa 2,300,000 The Port Authority of New York 5.875 10/15/24 @100 S.F.
and New Jersey Consolidated Bonds, 10/15/27 10/15/02 @101 Opt.
One Hundred Second Series (MBIA
Insured)
4 AAA/Aaa 1,500,000 The City of New York General 5.750 02/01/15 @100 S.F.
Obligation Bonds, Fiscal 1996 02/01/17 02/01/06 @101.5 Opt.
Series G (MBIA Insured)
5 AAA/Aaa 810,000 Dormitory Authority of the State of 5.600 02/01/13 @100 S.F.
New York Ellis Hospital FHA- 08/01/25 08/01/05 @102 Opt.
Insured Mortgage Hospital Revenue
Bonds, Series 1995 (MBIA Insured)
6 AAA/Aaa 1,155,000 New York State Medical Care 5.400 08/15/09 @100 S.F.
Facilities Finance Agency, Hospital 08/15/33 08/15/03 @102 Opt.
and Nursing Home Insured
Mortgage Revenue Bonds, 1993
Series D (MBIA Insured)
7 Baa1*/Aaa 400,000 The City of New York General 0.000 No Sinking Fund
Obligation Bonds, Fiscal 1993 05/15/19 No Optional Call
Series E
$10,000,000
===========
</TABLE>
<TABLE>
<CAPTION>
Port- Yield Cost of
folio to Securities
No. Maturity to Trust(6)(7)
- ---------- - --------------- --------------
<S> <C> <C>
1 5.903% $2,015,000.00
2 6.033 1,802,887.50
3 5.937 2,279,875.00
4 5.896 1,473,750.00
5 5.944 771,525.00
6 5.899 1,068,375.00
7 6.213 97,600.00
$9,509,012.50
=============
</TABLE>
A-13
358834.1
<PAGE>
Notes to Portfolio
The symbol "NR" denotes a non-rated issue of Bonds.
(1) All ratings except those identified by an asterisk (*) are by
Standard & Poor's Corporation. A Standard & Poor's corporate or municipal bond
rating is a current assessment of the creditworthiness of an obligor with
respect to a specific 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, sell or hold a security, inasmuch
as it does not comment as to market price or suitability for a particular
investor. A brief description of the rating symbols and their meanings is set
forth under "Description of Bond Ratings" in Part B.
(2) Ratings in the right hand column are after deposit of these issues in
the Trust and their insurance by MBIA. Moody's Investors Service has assigned
its "Aaa" investment rating to all of the Bonds while in the Trust, as insured
by MBIA Insurance Corporation.
(3) All Bonds are represented by contracts to purchase.
(4) All contracts to purchase the Bonds were entered into from April 16,
1996 to April 19, 1996. All contracts are expected to be settled prior to or
on the First Settlement Date of the Trust which is expected to be April 26,
1996. These bonds are expected to be settled (and interest begins accruing on
these bonds to the benefit of Unit holders of the Trust) within 30 days after
the First Settlement Date.
(5) Unless otherwise indicated, there is shown under this heading the
year in which each issue of bonds initially is redeemable and the redemption
price for that year. Each such issue continues to be redeemable at declining
prices thereafter, but not below par. "S.F." indicates a sinking fund has been
or will be established with respect to an issue of Bonds. In addition, certain
Bonds in the Trust may be redeemed in whole or in part other than by operation
of the stated optional call or sinking fund provisions under certain unusual
or extraordinary circumstances specified in the instruments setting forth the
terms and provisions of such Bonds. A sinking fund is a reserve fund
accumulated over a period of time for retirement of debt. "Ant." indicates the
existence of anticipated redemptions at a price of 100%. Under certain
circumstances, these anticipated redemptions can be altered. A callable bond
is one which is subject to redemption or refunding prior to maturity at the
option of the issuer. A refunding is a method by which a bond issue is
redeemed before maturity by the proceeds of a new bond issue.
Redemption pursuant to call provisions generally will, and redemption
pursuant to sinking fund provisions may, occur at times when the redeemed
Bonds have an offering side valuation which represents a premium over par. To
the extent that the Bonds were deposited in the Trust at a price higher than
the price at which they are redeemed, this will represent a loss of capital
when generally be reduced by the amount of the income which would otherwise
have been paid with respect to redeemed Bonds and there will be distributed to
Unit holders the principal amount and any premium received on such redemption.
The estimated current return in this event may be affected by such
redemptions. The Federal tax effect on Unit holders of such redemptions and
resultant distributions is described in the section entitled "The Trust--Tax
Status" in Part B.
(6) See Note (1) to "Statement of Condition as of Date of Deposit"
regarding cost of Bonds. The offering prices are greater than the current bid
prices of the Bonds which is the basis on which Redemption Price per Unit is
determined for purposes of redemption of Units (see the first paragraphs under
"Public Offering--Offering Price" and "Rights of Unit
Holders--Redemption--Computation of Redemption Price Per Unit" in Part B). On
the business day prior to the Date of Deposit the aggregate bid side valuation
of the Securities in the Trust was lower than the aggregate offering side
valuation by .522%. Yield of Bonds was computed on the basis of offering
prices on the Date of Deposit.
Bonds identified as escrowed to maturity under "Portfolio" for the Trust
in this Part A are priced to the maturity date not the call date.
(7) Annual interest income to the Trust is $557,370.00.
(8) Yield calculated based on a call date prior to stated maturity.
A-14
358834.1
<PAGE>
UNDERWRITING ACCOUNT
The names and addresses of the Underwriters and the number of
Units of the Trust each has agreed to purchase from the Underwriting Account
are:
<TABLE>
<CAPTION>
Units
Name Address Series 127
<S> <C> <C>
Glickenhaus & Co............................................................. 6 East 43rd Street
New York, New York 10017 3,125
Lebenthal & Co., Inc......................................................... 120 Broadway
New York, New York 10271 3,125
Gruntal & Co., Inc........................................................... 14 Wall Street
New York, New York 10005 1,200
Advest Incorporated.......................................................... 90 State House Square
Hartford, Connecticut 06103 250
Josephthal Lyon & Ross Incorporated.......................................... 6 East 43rd Street
New York, New York 10017 250
Pershing (Division of Donaldson, Lufkin &
Jenrette Securities Corporation)........................................... One Pershing Plaza
Jersey City, New Jersey 07399 250
Redstone Securities, Inc..................................................... 101 Fairchild Avenue
Plainview, New York 11803 250
David Lerner Associates, Inc................................................. 477 Jericho Turnpike
Syosset, New York 11791 150
Cadaret, Grant & Co., Inc.................................................... 108 W. Jefferson Street
Syracuse, New York 13202 100
Cowen & Company.............................................................. Financial Square
New York, New York 10005 100
Everen Securities, Inc....................................................... 77 West Wacker Drive
Chicago, Illinois 60601 100
First Albany Corporation..................................................... 41 State Street
Albany, New York 12207 100
Kirlin Securities, Inc....................................................... 6901 Jericho Turnpike
Syosset, New York 11791 100
Nathan & Lewis Securities Inc................................................ 1140 Avenue of the Americas
New York, New York 10036 100
Oppenheimer & Company........................................................ World Financial Center
New York, New York 10281 100
Roosevelt & Cross, Inc. ..................................................... 20 Exchange Place
New York, New York 10005 100
Sage Rutty & Co., Inc........................................................ 183 E. Main Street
Rochester, New York 14604 100
</TABLE>
A-15
358834.1
<PAGE>
<TABLE>
<S> <C> <C>
Samuel A. Ramirez & Co., Inc................................................. 61 Broadway
New York, New York 10006 100
Smith Barney Inc............................................................. 388 Greenwich Street
New York, New York 10013 100
Stuart, Coleman & Co., Inc................................................... 11 West 42nd Street
New York, New York 10036 100
W.H. Newbolds, a division of Fahnestock & Co................................. 1500 Walnut Street
Philadelphia, Pennsylvania 19102 100
William R. Hough & Co........................................................ 100 Second Avenue South
St. Petersburg, Florida 33701 100
-------
10,000
</TABLE>
A-16
358834.1
<PAGE>
TAX EQUIVALENT YIELDS
The following tables indicate the approximate yield resident individuals in
various income brackets must earn on a security subject to Federal, New York
State and New York City income taxes to receive an after-tax yield equivalent
to that provided by a tax-exempt bond yielding from 4.5% to 8.5%, based on
anticipated 1996 Federal, New York State and New York City marginal tax rates.
New York City taxpayers should refer to Table I. New York State taxpayers
outside of New York City should refer to Table II.
<TABLE>
TABLE I. COMBINED EFFECT OF FEDERAL, NEW YORK STATE AND NEW YORK CITY INCOME TAXES
<CAPTION>
Approx.
1996 To equal a tax-exempt yield of:
----------------------------------------------------------------------
Federal,
NYS 4.50% 5.00% 5.50% 6.00% 6.25% 6.50% 6.75% 7.00% 7.25%
----------------------------------------------------------------------
If your net taxable income1
is approximately2 Marginal
Joint ReturnSingle Return Tax Rates4 A taxable investment would have to pay you:3
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$22,001-$40,100 $11,001-$24,000 24.79% 6.0% 6.7% 7.3% 8.0% 8.3% 8.6% 9.0% 9.3% 9.6%
- ------------------------------------------------------------------------------------------------------------------------------------
$40,101-$96,900 $24,001-$58,150 36.30% 7.1% 7.9% 8.6% 9.4% 9.8% 10.2% 10.6% 11.0% 11.4%
- ------------------------------------------------------------------------------------------------------------------------------------
$96,901-$147,700 $58,151-$121,300 38.99% 7.4% 8.2% 9.0% 9.8% 10.2% 10.7% 11.0% 11.5% 11.9%
- ------------------------------------------------------------------------------------------------------------------------------------
$147,701-$263,750 $121,301-$263,750 43.41% 8.0% 8.8% 9.7% 10.6% 11.0% 11.5% 11.9% 12.4% 12.8%
- ------------------------------------------------------------------------------------------------------------------------------------
$263,751+ $263,751+ 46.60% 8.4% 9.4% 10.3% 11.2% 11.7% 12.2% 12.6% 13.1% 13.6%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
TABLE I. COMBINED EFFECT OF FEDERAL, NEW YORK STATE AND NEW YORK CITY INCOME TAXES
<CAPTION>
------------------------------------
7.50% 7.75% 8.00% 8.50%
------------------------------------
If your net taxable income1
is approximately2
Joint ReturnSingle Return
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
$22,001-$40,100 10.0% 10.3% 10.6% 11.3%
- ------------------------------------------------------------
$40,101-$96,900 11.8% 12.2% 12.6% 13.3%
- ------------------------------------------------------------
$96,901-$147,700 12.3% 12.7% 13.1% 13.9%
- ------------------------------------------------------------
$147,701-$263,750 13.3% 13.7% 14.1% 15.0%
- ------------------------------------------------------------
$263,751+ 14.0% 14.5% 15.0% 15.9%
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TABLE II. COMBINED EFFECT OF FEDERAL AND NEW YORK STATE INCOME TAXES
Approx.
1996 To equal a tax-exempt yield of:
-------------------------------------------------------------------------
Federal,
NYS 4.50% 5.00% 5.50% 6.00% 6.25% 6.50% 6.75% 7.00% 7.25%
-------------------------------------------------------------------------
If your net taxable income1
is approximately2 Marginal
Joint ReturnSingle Return Tax Rates5 A taxable investment would have to pay you:3
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$22,001-$40,100 $11,001-$24,000 21.06% 5.7% 6.3% 7.0% 7.6% 7.9% 8.2% 8.6% 8.8% 9.2%
- ------------------------------------------------------------------------------------------------------------------------------------
$40,101-$96,900 $24,001-$58,150 33.13% 6.7% 7.5% 8.2% 9.0% 9.4% 9.7% 10.1% 10.5% 10.8%
- ------------------------------------------------------------------------------------------------------------------------------------
$96,901-$147,700 $58,151-$121,300 35.92% 7.0% 7.8% 8.6% 9.4% 9.8% 10.1% 10.5% 11.0% 11.3%
- ------------------------------------------------------------------------------------------------------------------------------------
$147,701-$263,750 $121,301-$263,750 40.56% 7.6% 8.4% 9.3% 10.1% 10.5% 11.0% 11.4% 11.8% 12.2%
- ------------------------------------------------------------------------------------------------------------------------------------
$263,751+ $263,751+ 43.90% 8.0% 8.9% 9.8% 10.7% 11.1% 11.6% 12.0% 12.5% 12.9%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TABLE II. COMBINED EFFECT OF FEDERAL AND NEW YORK STATE INCOME TAXES
---------------------------------
7.50% 7.75% 8.00% 8.50%
---------------------------------
If your net taxable income1
is approximately2
Joint ReturnSingle Return
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
$22,001-$40,100 9.5% 9.8% 10.1% 10.8%
- -------------------------------------------------------------
$40,101-$96,900 11.2% 11.6% 12.0% 12.7%
- -------------------------------------------------------------
$96,901-$147,700 11.7% 12.1% 12.5% 13.3%
- -------------------------------------------------------------
$147,701-$263,750 12.6% 13.0% 13.5% 14.3%
- -------------------------------------------------------------
$263,751+ 13.4% 13.8% 14.3% 15.2%
- -------------------------------------------------------------
</TABLE>
1 After exemptions and deductions other than state and local tax
deductions.
2 The tables cover only a representative range of incomes, and income
brackets have been rounded off to facilitate illustration. Actual
Federal, New York State and New York City income brackets may differ
slightly from those in the table.
3 Yields on taxable investments have been rounded off to facilitate
illustration.
4 This rate is calculated by using the highest New York State and New
York City marginal tax rates that apply to the bracket.
5 This rate is calculated by using the highest New York State marginal
tax rate that applies to the bracket.
A-17
358834.1
<PAGE>
[This page intentionally left blank]
A-18
358834.1
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
Prospectus Part B
Part B of this Prospectus may not be Distributed Unless Accompanied by Part A
THE TRUST
Organization
Empire State Municipal Exempt Trust (the "Fund"), Guaranteed Series
127 (the "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* (the "Trust Agreement"), dated the Date of Deposit, among
Glickenhaus & Co. and Lebenthal & Co., Inc. as sponsors (the "Sponsors"), The
Bank of New York, as trustee (the "Trustee"), and Muller Data Corporation, as
evaluator (the "Evaluator").
On the date of this Prospectus each Unit represented the fractional
undivided interest in the Trust set forth under "Summary of Essential
Financial Information" in Part A. Thereafter, if any Units of the Trust are
redeemed by the Trustee, the fractional undivided interest in the Trust
represented by each unredeemed Unit will increase, although the actual
interest in the Trust represented by each such Unit will remain essentially
the same. Units will remain outstanding until redeemed upon tender to the
Trustee by any Unit holder, which may include the Sponsors, or until the
termination of the Trust Agreement for the related Trust. See "Rights of Unit
Holders--Redemption" in this Part B.
Objectives
The objective of the Fund is to obtain tax-exempt interest income
through an investment in a fixed insured portfolio consisting primarily of
various long-term municipal bonds with average maturities of over 10 years. No
assurance can be given that the Fund's objectives will be achieved as these
objectives are subject to the continuing ability of the respective issuers of
the bonds to meet their obligations and, of the Insurer to meet its
obligations under the insurance. In addition, an investment in such portfolio
can be affected by fluctuations in interest rates.
Portfolio
The portfolio of the Trust consists of the Bonds described in "The
Portfolio" in Part A and are represented by the Sponsors' contracts to
purchase, which are expected to be settled by the date set forth in Part A.
The Trust may contain Bonds which have been purchased on a when, as, and if
issued basis. Accordingly, the delivery of such Bonds may be delayed or may
not occur. (See "The Portfolio" in Part A.) Interest on these Bonds begins
accruing to the benefit of Unit holders on their respective dates of delivery.
Unit holders will be "at risk" with respect to these Bonds (i.e., may derive
either gain or loss from fluctuations in the offering side evaluation of the
Bonds) from the date they
- --------
* References in this Prospectus to the Trust Agreement are qualified in
their entirety by the Trust Agreement which is incorporated herein by
reference.
358841.1
<PAGE>
commit for Units. (See "The Portfolio" in Part A.) For a discussion of the
Sponsors' obligations in the event of the failure of any contract for the
purchase of any of the Bonds and limited right to substitute other bonds to
replace any failed contract, see "Substitution of Bonds" in this Part B. As a
result of the MBIA Insurance Corporation insurance, Moody's Investors Service
("Moody's") has assigned a rating of "Aaa" to all of the Bonds in the Trust,
as insured and Standard & Poor's Corporation ("Standard & Poor's") has
assigned a rating of "AAA" to the Units and Bonds while in the Trust. (See
"Insurance on the Bonds" in this Part B).
In view of the Fund's objectives, the following factors, among
others, were considered in selecting the Bonds: (1) All the Bonds are
obligations of the State of New York and counties, municipalities, authorities
or political subdivisions thereof or issued by certain United States
territories or possessions, including Puerto Rico, and their public
authorities so that the interest on them will be exempt from Federal, New York
State and New York City income tax under existing law; (2) the Bonds are
varied as to purpose of issue; (3) in the opinion of the Sponsors, the Bonds
are fairly valued relative to other bonds of comparable quality and maturity;
and (4) MBIA Insurance Corporation insurance for the payment of principal and
interest on the Securities is available. Subsequent to the Date of Deposit, a
Bond may cease to be rated or its rating may be reduced. Neither event
requires an elimination of such Bond from the portfolio, but such an event may
be considered in the Sponsors' determination to direct the Trustee to dispose
of the Bonds. See "Sponsors-Responsibility" in Part B. The insurance on the
Bonds in the portfolio obtained by the Trust does not cover such Bonds until
they are delivered to the Trust. See "The Trust--Portfolio--General
Considerations" in this Part B.
Special Factors Affecting New York
The information set forth below is derived from the official
statements and/or preliminary drafts of official statements prepared in
connection with the issuance of New York State and New York City municipal
bonds. The Sponsors have not independently verified this information.
State Economic Trends. Over the long term, the State of New York (the
"State") and the City of New York (the "City") face serious potential economic
problems. The City accounts for approximately 41% of the State's population
and personal income, and the City's financial health affects the State in
numerous ways. The State historically has been one of the wealthiest states in
the nation. For decades, however, the State has grown more slowly than the
nation as a whole, gradually eroding its relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City. In recent years the
State's economic position has improved in a manner consistent with that for
the Northeast as a whole.
The State has for many years had a very high State and local tax
burden relative to other states. The State and its localities have used these
taxes to develop and maintain their transportation networks, public schools
and colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside, or not locate within, the State.
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Notwithstanding the numerous initiatives that the State and its
localities may take to encourage economic growth and achieve balanced budgets,
reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.3
million, is an international center of business and culture. Its
non-manufacturing economy is broadly based, with the banking and securities,
life insurance, communications, publishing, fashion design, retailing and
construction industries accounting for a significant portion of the City's
total employment earnings. Additionally, the City is the nation's leading
tourist destination. The City's manufacturing activity is conducted primarily
in apparel and publishing.
The national economic downturn which began in July 1990 adversely
affected the local economy, which had been declining since late 1989. As a
result, the City experienced job losses in 1990 and 1991 and real Gross City
Product (GCP) fell in those two years. For the 1992 fiscal year, the City
closed a projected budget gap of $3.3 billion in order to achieve a balanced
budget as required by the laws of the State. Beginning in calendar year 1992,
the improvement in the national economy helped stabilize conditions in the
City. Employment losses moderated toward year-end and real GCP increased,
boosted by strong wage gains. The City's current four-year financial plan
assumes that, after noticeable improvements in the City's economy during
calendar year 1994, economic growth will slow in calendar years 1995 and 1996
with local employment increasing modestly. During the 1995 fiscal year, the
City experienced substantial shortfalls in payments of non-property tax
revenues from those forecasted.
For each of the 1981 through 1994 fiscal years, the City achieved
balanced operating results as reported in accordance with generally accepted
accounting principles ("GAAP"), and the City's 1995 fiscal year results are
projected to be balanced in accordance with GAAP. The City was required to
close substantial budget gaps in recent years in order to maintain balanced
operating results. For fiscal year 1995, the City has adopted a budget which
has halted the trend in recent years of substantial increases in City spending
from one year to the next. There can be no assurance that the City will
continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or reductions in City services,
which could adversely affect the City's economic base.
Pursuant to the laws of the State, the City prepares an annual
four-year financial plan, which is reviewed and revised on a quarterly basis
and which includes the City's capital, revenue and expense projections and
outlines proposed gap-closing programs for years with projected budget gaps.
The City is required to submit its financial plans to review bodies, including
the New York State Financial Control Board ("Control Board"). If the City were
to experience certain adverse financial circumstances, including the
occurrence or the substantial likelihood and imminence of the occurrence of an
annual operating deficit of more than $100 million or the loss of access to
the public credit markets to satisfy the City's capital and seasonal financing
requirements, the Control Board would be required by State law to exercise
powers, among others, of prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City
to balance its budget and to meet its cash requirements. There can be no
assurance that there will not be reductions in State aid to the City from
amounts currently projected or that State budgets in future fiscal years will
be adopted by the April 1 statutory deadline and that such reductions or
delays will not have adverse effects on the City's cash flow or expenditures.
The Mayor is responsible for preparing the City's four-year financial
plan, including the City's current financial plan for the 1996 through 1999
fiscal years (the "1996-1999 Financial Plan" or "Financial Plan"). The City's
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projections set forth in the Financial Plan are based on various assumptions
and contingencies which are uncertain and which may not materialize. Changes
in major assumptions could significantly affect the City's ability to balance
its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the
condition of the regional and local economies, the impact on real estate tax
revenues of the real estate market, wage increases for City employees
consistent with those assumed in the Financial Plan, employment growth, the
results of a pending actuarial audit of the City's pension system which is
expected to significantly increase the City's annual pension costs, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, which may require in certain cases the cooperation of
the City's municipal unions, revenue generating transactions and provision of
State and Federal aid and mandate relief.
Implementation of the Financial Plan is also dependent upon the
City's ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1996 through 1999
contemplates the issuance of $9.7 billion of general obligation bonds
primarily to reconstruct and rehabilitate the City's infrastructure and
physical assets and to make other capital investments. In addition, the City
issues revenue and tax anticipation notes to finance its seasonal working
capital requirements. The success of projected public sales of City bonds and
notes will be subject to prevailing market conditions, and no assurance can be
given that such sales will be completed. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned capital and operating expenditures.
The City submitted to the Control Board on July 21, 1995 a fourth
quarter modification to the City's financial plan for the 1995 fiscal year,
which projects a balanced budget in accordance with GAAP for the 1995 fiscal
year, after taking into account a discretionary transfer of $75 million. On
July 11, 1995, the City submitted to the Control Board the Financial Plan for
the 1996 through 1999 fiscal years, which relates to the City, the Board of
Education ("BOE") and the City University of New York ("CUNY"). The Financial
Plan is based on the City's expense and capital budgets for the City's 1996
fiscal year, which were adopted on June 14, 1995, and sets forth proposed
actions by the City for the 1996 fiscal year to close substantial projected
budget gaps resulting from lower than projected tax receipts and other
revenues and greater than projected expenditures. In addition to substantial
proposed agency expenditure reductions and productivity, efficiency and labor
initiatives negotiated with the City's labor unions, the Financial Plan
reflects a strategy to substantially reduce spending for entitlements for the
1996 and subsequent fiscal years.
The 1996-1999 Financial Plan projects revenues and expenditures for
the 1996 fiscal year balanced in accordance with GAAP. The projections for the
1996 fiscal year reflect proposed actions to close a previously projected gap
of approximately $3.1 billion for the 1996 fiscal year. The proposed actions
in the Financial Plan for the 1996 fiscal year include (i) a reduction in
spending of $400 million, primarily affecting public assistance and Medicaid
payments by the City; (ii) expenditure reductions in agencies, totalling $1.2
billion; (iii) transitional labor savings, totalling $600 million; and (iv)
the phase-in of the increased annual pension funding cost due to revisions
resulting from an actuarial audit of the City pension systems, which would
reduce such costs in the 1996 fiscal year. Other proposed actions include (i)
welfare savings of $100 million from increased fraud detection; (ii) $170
million of additional expenditure reductions in agencies and HHC; (iii) a
delay in the proposed reduction in the commercial rent tax, which would
increase projected revenues by $62 million in the 1996 fiscal year; (iv) an
increase of $75 million in projected tax collections for the 1996 fiscal year;
(v) $50 million of proposed additional State aid not included in the adopted
State budget and $75 million of proposed additional Federal aid; (vi) certain
revenue initiatives, including the proposed sale of delinquent tax liens and
the U.N. Plaza Hotel for $104 million; and (vii) savings from the proposed
refunding of outstanding debt, totalling $50 million.
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The proposed agency spending reductions include the reduction of City
personnel through attrition, government efficiency initiatives, procurement
initiatives and labor productivity initiatives. The substantial agency
expenditure reductions proposed in the Financial Plan may be difficult to
implement, and the Financial Plan is subject to the ability of the City to
implement proposed reductions in City personnel and other cost reduction
initiatives. In addition, certain initiatives are subject to negotiation with
the City's municipal unions, and various actions, including proposed
anticipated State aid totalling $50 million are subject to approval by the
Governor and State Legislature.
The City annually prepares a modification to its financial plan in
October or November which amends the financial plan to accommodate any
revisions to forecast revenues and expenditures and to specify any additional
gap- closing initiatives to the extent required to offset decreases in
projected revenues or increases in projected expenditures (the "First Quarter
Modification"). Subsequent to the preparation of the Financial Plan, the City
has agreed to pay for a portion of the cost of student transit passes, which
will result in a $45 million increase in expenditures for the 1996 fiscal
year. In addition, the City is in the process of identifying any additional
spending requirements or revenue losses affecting the 1996 fiscal year. In
October or November, 1995, the Mayor is expected to publish the First Quarter
Modification for the 1996 fiscal year.
The Financial Plan also sets forth projections for the 1997 through
1999 fiscal years and outlines a proposed gap-closing program to eliminate
projected gaps of $888 million, $1.5 billion and $1.4 billion for the 1997,
1998 and 1999 fiscal years, respectively, after successful implementation of
the $3.1 billion gap-closing program for the 1996 fiscal year.
The projections for the 1996 through 1999 fiscal years assume (i)
agreement with the City's unions with respect to approximately $100 million of
savings to be derived from efficiencies in management of employee health
insurance programs and other health benefit related savings for each of the
1996 through 1999 fiscal years to be negotiated with the City's unions; (ii)
$200 million of additional anticipated State aid and $75 million of additional
anticipated Federal aid in each of the 1997 through 1999 fiscal years; (iii)
that HHC and BOE will each be able to identify actions to offset substantial
revenue shortfalls reflected in the Financial Plan, including approximately
$254 million annual reduction in revenues for HHC, which results from the
reduction in Medicaid payments proposed by the State and the City, without any
increase in City subsidy payments to HHC; (iv) the continuation of the current
assumption of no wage increases after fiscal year 1995 for City employees
unless offset by productivity increases; (v) $130 million of additional
revenues as a result of increased rent payments for the City's airports
proposed by the City, which is subject to further discussion with the Port
Authority; and (vi) savings of $45 million in each of the 1997 through 1999
fiscal years which would result from the State Legislature's enactment of
proposed tort reform legislation. In addition, the 1996-1999 Financial Plan
anticipates the receipt of substantial amounts of Federal aid. Certain Federal
legislative proposals contemplate significant reductions in Federal spending,
including proposed Federal welfare reform, which could result in caps on, or
block grants of, Federal programs.
The proposed gap-closing actions, a substantial number of which are
not specified in detail, include additional agency expenditure reductions,
primarily resulting from a partial hiring freeze, totalling between $388
million and $684 million in each of the 1997 through 1999 fiscal years;
reductions in expenditures resulting from proposed procurement initiatives
totalling between $50 million and $100 million in each of the 1997 through
1999 fiscal years; revenue initiatives totalling between $100 million and $200
million in each of the 1997 through 1999 fiscal years; the availability in
each of the 1997, 1998 and 1999 fiscal years of $100 million of the general
reserve appropriated in the prior year; and additional reduced expenditures
resulting from further revisions in entitlement programs to reduce City
expenditures by $250 million, $400 million and $400 million in the 1997, 1998
and 1999 fiscal years, respectively, which may be subject to State or Federal
approval.
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On July 10, 1995, Standard & Poor's revised downward its rating on
City general obligation bonds from A- to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's stated that "structural budgetary balance
remains elusive because of persistent softness in the City's economy,
highlighted by weak job growth and a growing dependence on the historically
volatile financial services sector". Other factors identified by Standard &
Poor's in lowering its rating on City bonds included a trend of using one-time
measures, including debt refinancings, to close projected budget gaps,
dependence on unratified labor savings to help balance the Financial Plan,
optimistic projections of additional federal and State aid or mandate relief,
a history of cash flow difficulties caused by State budget delays and
continued high debt levels. Fitch Investors Service, Inc. continues to rate
the City general obligation bonds A-. Moody's rating for City general
obligation bonds is Baa1.
In January 1993, the City announced a settlement with a coalition of
19 municipal unions for a 39-month period that extends into fiscal year 1995.
The settlement resulted in a total net expenditure increase of 8.25% of
covered employee payroll over a 39-month period, ending March 31, 1995, for
most of these employees. Subsequently, the City reached agreement with all of
its major bargaining units on terms which are generally consistent with the
coalition agreement.
Contracts with all of the City's municipal unions either expired in
the 1995 fiscal year or will expire in the 1996 fiscal year. The Financial
Plan provides no additional wage increases for City employees after the 1995
fiscal year. Each 1% wage increase for all union contracts commencing in the
1995 or 1996 fiscal year would cost the City an additional $141 million for
the 1996 fiscal year and $161 million each year thereafter above the amounts
provided for in the Financial Plan. The terms of wage settlements could be
determined through the impasse procedure in the New York City Collective
Bargaining Law, which can impose a binding settlement.
The projections and assumptions contained in the 1996-1999 Financial
Plan are subject to revision which may involve substantial change, and no
assurance can be given that these estimates and projections, which include
actions which the City expects will be taken but which are not within the
City's control, will be realized.
From time to time, the Control Board staff, the Municipal Assistance
Corporation for the City of New York ("MAC"), Office of the State Deputy
Comptroller ("OSDC"), the City Comptroller and others issue reports and make
public statements regarding the City's financial condition, commenting on,
among other matters, the City's financial plans, projected revenues and
expenditures and actions by the City to eliminate projected operating
deficits. Some of these reports and statements have warned that the City may
have underestimated certain expenditures and overestimated certain revenues
and have suggested that the City may not have adequately provided for future
contingencies. Certain of these reports have analyzed the City's future
economic and social conditions and have questioned whether the City has the
capacity to generate sufficient revenues in the future to meet the costs of
its expenditure increases and to provide necessary services. It is reasonable
to expect that such reports and statements will continue to be issued and to
engender public comment.
On July 24, 1995, the City Comptroller issued a report on the
Financial Plan. The report concluded that the Financial Plan includes total
risks of $749 million to $1.034 billion for the 1996 fiscal year. These risks
include (i) possible tax revenue shortfalls of $53 million; (ii) a possible
$20 million to $60 million shortfall in savings resulting from unspecified
improvements in the City's health benefits system; (iii) a potential shortfall
of up to $40 million in projected savings from an early retirement program;
(iv) the receipt of $125 million of unspecified additional Federal and State
assistance; (v) up to $203 million of projected savings from the public
assistance eligibility review and electronic signature program for public
assistance recipients; (vi) $93 million of greater than projected expenditures
for overtime; (vii) $284 million of greater than projected expenditures and
lower than projected revenues at BOE; and
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(viii) the receipt of $130 million of lease payments from the Port Authority.
Other potential uncertainties identified in the report include the projected
$253.6 million deficit for the Health and Hospitals Corporation ("HHC"), $160
million of the $600 million in labor savings for the 1996 fiscal year which
are yet to be identified, and the impact on the City of a possible reduction
in Federal entitlement programs. Subsequently, the City Comptroller stated
that an additional $129 million of anticipated State and Federal assistance
for BOE might not be received by BOE.
With respect to the 1997 through 1999 fiscal years, the report noted
that the gap-closing program in the Financial Plan does not include
information about how the City will implement the various gap-closing
programs, and that the entitlement cost containment and revenue initiates will
require approval of the State legislature. Taking into account the same
categories of risks for the 1997 through 1999 fiscal years as the report
identified for the 1996 fiscal year and the uncertainty concerning the
gap-closing program, the report estimated that the Financial Plan includes
total risks of $2.0 billion to $2.5 billion in the 1997 fiscal year, $2.8
billion to $3.3 billion in the 1998 fiscal year and $2.9 billion to $3.4
billion in the 1999 fiscal year. The report further noted that the City
Comptroller continues to oppose the proposed sale of the water system,
primarily because of the unwillingness of the City to guarantee that $1
billion from the $2.3 billion in proceeds of the sale will be used only to
fund capital and not operating expenses, and concerns about the jurisdiction
and composition of the Water Board once title to the Water Board has been
transferred.
In early December, 1994, the City Comptroller issued a report which
noted that the City is currently seeking to develop and implement plans which
will satisfy the Federal Environmental Protection Agency that the water
supplied by the City watershed areas does not need to be filtered. The City
Comptroller noted that, if the City is ordered to build filtration plants,
they could cost as much as $4.57 billion to construct, with annual debt
service and operating costs of more than $500 million, leading to a water rate
increase of 45%.
On December 16, 1994, the City Comptroller issued a report noting
that the capacity of the City to issue general obligation debt could be
greatly reduced in future years due to the decline in value of taxable real
property. The report noted that, under the State constitution, the City is
permitted to issue debt in an amount not greater than 10% of the average full
value of taxable real estate for the current year and preceding four years,
that the latest estimates produced by the State Board of Equalization and
Assessment relating to the full value of real property, using data from a 1992
survey, indicate a 19% decline in the market value of taxable real property
from the previous survey in 1990, and that the State Board has decided to use
a projected annual growth rate of 8.84%, as compared to its previous
projection of 14% for estimating full value after 1992. The report concludes
that the City will be within the projected legal debt incurring limit in the
1996 fiscal year. However, the report concluded that, based on the most likely
forecast of full value of real property, the debt incurring power of the City
would be curtailed in the 1997 and 1998 fiscal years substantially. The City
Comptroller recommended, among other things, prioritization of capital
projects to determine which can be delayed or cancelled, and better
maintenance of the City's physical plant and infrastructure, which would
result in less capital spending for repair and replacement of capital
structures.
On July 21, 1995, the staff of the Control Board issued a report on
the Financial Plan which identified risks of $873 million, $2.1 billion, $2.8
billion and $2.8 billion for the 1996 through 1999 fiscal years, respectively.
With respect to the 1996 fiscal year, the principal risks included (i)
possible shortfalls in projected tax revenues totaling $50 million, (ii) the
possibility that revenue actions and expenditure reduction initiatives for BOE
totaling $266 million might not be successfully implemented, (iii) possible
shortfalls totaling $172 million in proposed welfare savings from increased
fraud detection, and (iv) uncertainty concerning the $50 million of proposed
additional State aid and $75 million of proposed additional Federal aid, the
proposed receipt of $130 million of increased rent payments for the City's
airports and the $100 million of savings to be derived from health
benefit-related savings, which are subject to negotiations with or approvals
by other parties. Additional risks identified for the 1997 through 1999 fiscal
years
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include the possibility of additional tax revenue shortfalls, uncertainty
concerning the ability of the City to implement the gap-closing actions for
such years and uncertainty concerning the projected receipt of additional
anticipated State aid. Other areas of concern identified in the report
included the projected deficit at HHC of approximately $400 million,
reflecting the impact on HHC of the entitlement reductions contained in the
State budget and the City's reduction in the subsidy provided to HHC, and the
assumption in the Financial Plan that the City will realize the full $400
million of projected savings in public assistance and Medicaid payments
enacted at the State level. The report noted that substantially more
information is needed concerning the proposed gap-closing actions for the
1997-1999 fiscal years.
On June 14, 1995, the staff of the OSDC issued a report on the
Financial Plan with respect to the 1995 fiscal year. The report noted that,
during the 1995 fiscal year, the City faced adverse financial developments
totaling over $2 billion resulting from the inability to initiate
approximately 35% of the City's gap-closing program, as well as
newly-identified spending needs and revenue shortfalls resulting from the
adverse impact on the City's personal income, general corporation and other
tax revenues of the policy of the Federal Reserve of increasing short-term
interest rates and the related downturn in the bond market and profits and
bonus income on Wall Street. The report noted that the City relied heavily on
one-time actions to offset these adverse developments, using $2 billion in
one-time resources in the 1995 fiscal year, or nearly double the 1994 amount.
On July 24, 1995, the staff of the OSDC issued a report on the
Financial Plan. The report concluded that there remains a budget gap for the
1996 fiscal year of $392 million, largely because the City and its unions have
yet to reach an agreement on how to achieve $160 million in unspecified labor
savings and the remaining $100 million in recurring health insurance savings
from last year's agreement. The report also identified a number of issues that
present a net potential risk of $409 million to the City's revenue and
expenditure forecasts for the 1996 fiscal year, including risks of (i) $160
million associated with anticipated increases in Federal and State assistance,
(ii) $130 million relating to projected Port Authority airport lease payments,
and (iii) $100 million with respect to unfunded BOE mandates. The report also
identified several other concerns regarding the 1996 fiscal year, including
concerns that (i) detailed programs have not yet been fully developed to meet
the $564 million and $400 million cost-reduction targets established for BOE
and HHC, respectively, (ii) State and City initiatives to reduce public
assistance and Medicaid costs, which are expected to reduce City costs by $745
million in the 1996 fiscal year, will require close monitoring to ensure that
financial targets are met; (iii) the City has not provided sufficient
assurances that the bond proceeds from its proposed sale of the water and
sewer system would be used strictly for capital spending purposes; and (iv)
the Financial Plan makes no provision for wage increases in the collective
bargaining agreements between the City and its unions, which generally will
expire by October, 1995. The report further noted that growth in City revenues
is being constrained by the weak economy in the City, which is likely to be
compounded by the slowing national economy, and that there is a likelihood of
a national recession during the course of the Financial Plan. Moreover, the
report noted that State and Federal budgets are undergoing tumultuous changes,
and that the potential for far-reaching reductions in intergovernmental
assistance is clearly on the horizon, with greater uncertainty about the
impact on City finances and services.
A substantial portion of the capital improvements in the City are
financed by indebtedness issued by MAC. MAC was organized in 1975 to provide
financing assistance for the City and also to exercise certain review
functions with respect to the City's finances. MAC bonds are payable out of
certain State sales and compensating use taxes imposed within the City, State
stock transfer taxes and per capita State aid to the City. Any balance from
these sources after meeting MAC debt service and reserve fund requirements and
paying MAC's operating expenses is remitted to the City or, in the case of the
stock transfer taxes, rebated to the taxpayers. The State is not, however,
obligated to continue the imposition of such taxes or to continue
appropriation of the revenues therefrom to MAC, nor is the State
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obligated to continue to appropriate the State per capita aid to the City
which would be required to pay the debt service on certain MAC obligations.
MAC has no taxing power and MAC bonds do not create an enforceable obligation
of either the State or the City. As of June 30, 1995, MAC had outstanding an
aggregate of approximately $4.882 billion of its bonds.
New York State and its Authorities. The State's current fiscal year
commenced on April 1, 1995, and ends on March 31, 1996, and is referred to
herein as the State's 1995-96 fiscal year. The prior fiscal year, which ended
on March 31, 1995, is referred to herein as the State's 1994-95 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the Legislature
on June 7, 1995, more than two months after the start of the fiscal year.
Prior to adoption of the budget, the Legislature enacted appropriations for
disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year was formulated on June 20, 1995 and
is based on the State's budget as enacted by the Legislature and signed into
law by the Governor.
The 1995-96 budget is the first to be enacted in the administration
of the Governor, who assumed office on January 1. It is the first budget in
over half a century which proposed and, as enacted, projects an absolute
year-over- year decline in General Fund disbursements. Spending for State
operations is projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (i.e., excluding Federal aid) is
proposed to increase by only 2.5 percent from the prior fiscal year, in
contrast to the prior decade when such spending growth averaged more than 6.0
percent annually.
In his Executive Budget, the Governor indicated that in the 1995-96
fiscal year, the State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing
disparity between sluggish growth in receipts, the effect of prior-year tax
changes, and the rapid acceleration of spending growth; the impact of unfunded
1994-95 initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts, to
spur economic growth and provide relief for low and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million
to the then projected imbalance or budget gap, bringing the total to
approximately $5 billion.
This gap is projected to be closed in the 1995-96 State Financial
Plan based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care program; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, State University of New York ("SUNY") and
City University of New York ("CUNY"), mental hygiene programs, capital
projects, the prison system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting school aid and
revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in
revenue measures, primarily a new Quick Draw Lottery game, changes to tax
payment schedules, and the sale of assets; and (v) $300 million from
reestimates in receipts.
There are risks and uncertainties concerning the future-year impact
of tax reductions and other measures in 1995-96 budget.
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The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can
be very complex, may vary from fiscal year to fiscal year, and are frequently
the result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State. For example, various proposals
relating to Federal tax and spending policies that are currently being
publicly discussed and debated could, if enacted, have a significant impact on
the State's financial condition in the current and future fiscal years.
Because of the uncertainty and unpredictability of the changes, their impact
cannot, as a practical matter, be included in the assumptions underlying the
State's projections at this time.
The State Financial Plan is based upon forecasts of national and
State economic activity. Economic forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and the State
economies. Many uncertainties exist in forecasts of both the national and
State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, Federal fiscal and monetary
policies, the level of interest rates, and the condition of the world economy,
which could have an adverse effect on the State. There can be no assurance
that the State economy will not experience results in the current fiscal year
that are worse than predicted, with corresponding material and adverse effects
on the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are
based on the State tax structure in effect during the fiscal year and on
assumptions relating to basic economic factors and their historical
relationships to State tax receipts. In preparing projections of State
receipts, economic forecasts relating to personal income, wages and employment
have been particularly important. The projection of receipts from most tax or
revenue sources is generally made by estimating the change in yield of such
tax or revenue source caused by economic and other factors, rather than by
estimating the total yield of such tax or revenue source from its estimated
tax base. The forecasting methodology, however, ensures that State fiscal year
estimates for taxes that are based on a computation of annual liability, such
as the business and personal income taxes, are consistent with estimates of
total liability under such taxes.
Projections of total State disbursements are based on assumptions
relating to economic and demographic factors, levels of disbursements for
various services provided by local governments (where the cost is partially
reimbursed by the State), and the results of various administrative and
statutory mechanisms in controlling disbursements for State operations.
Factors that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the
policies of the Federal government, and changes in the demand for and use of
State services.
The State Division of the Budget ("DOB") believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth below, and those projections may be changed materially
and adversely from time to time.
The national economy began the current expansion in 1991 and has
added over 7 million jobs since early 1992. However, the recession lasted
longer in the State and the State's economic recovery has lagged behind the
nation's. Although the State has added approximately 185,000 jobs since
November 1992, employment growth in the State has been hindered during recent
years by significant cutbacks in the computer and instrument manufacturing,
utility, defense, and banking industries.
The State Financial Plan is based on a projection by DOB of national
and State economic activity. DOB forecasted that national economic growth
would weaken, but not turn negative, during the course of 1995 before
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beginning to rebound by the end of the year. This dynamic is often described
as a "soft landing". The national economy achieved the desired "soft landing"
in 1995, as growth slowed from 6.2 percent in 1994 to a rate sufficiently slow
to inhibit the buildup of inflationary pressures. This was achieved without
any material pause in the economic expansion, although recession worries
flared in the late spring and early summer. Growth in the national economy is
expected to moderate during 1996, with the nation's gross domestic product
projected to expand by 4.6 percent in 1996 versus 5.0 percent in 1995.
Declining short-term interest rates, slowing employment growth and continued
moderate inflation also characterize the projected path for the nation's
economy in the year ahead.
The annual growth rates of most economic indicators for the State
improved from 1994 to 1995, as the pace of private sector employment expansion
and personal income and wage growth all accelerated. Government employment
fell as workforce reductions were implemented at federal, State and local
levels. Similar to the nation, some moderation of growth is expected in the
year ahead. Private sector employment is expected to continue to rise,
although somewhat more slowly than in 1995, while public employment should
continue to fall, reflecting government budget cutbacks. Anticipated continued
restraint in wage settlements, a lower rate of employment growth and falling
interest rates are expected to slow personal income growth significantly.
As noted above, the financial condition of the State is affected by
several factors, including the strength of the State and regional economy and
actions of the Federal government, as well as State actions affecting the
level of receipts and disbursements. Owing to these and other factors, the
State may, in future years, face substantial potential budget gaps resulting
from a significant disparity between tax revenues projected from a lower
recurring receipts base and the future costs of maintaining State programs at
current levels. Any such recurring imbalance would be exacerbated if the State
were to use a significant amount of nonrecurring resources to balance the
budget in a particular fiscal year. To address a potential imbalance for a
given fiscal year, the State would be required to take actions to increase
receipts and/or reduce disbursements as it enacts the budget for that year,
and under the State Constitution the Governor is required to propose a
balanced budget each year. To correct recurring budgetary imbalances, the
State would need to take significant actions to align recurring receipts and
disbursements in future fiscal years. There can be no assurance, however, that
the State's actions will be sufficient to preserve budgetary balance in a
given fiscal year or to align recurring receipts and disbursements in future
fiscal years.
The General Fund is the general operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1995-96 fiscal year, the General Fund is expected to
account for approximately 49 percent of total governmental-fund receipts and
51 percent of total governmental-fund disbursements. General Fund moneys are
also transferred to other funds, primarily to support certain capital projects
and debt service payments in other fund types.
In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors have created
structural budget gaps for the State. These gaps resulted from a significant
disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. The 1995-96 enacted budget
combines significant tax and program reductions which will, in the current and
future years, lower both the recurring receipts base (before the effect of any
economic stimulus from such tax reductions) and the historical annual growth
in State program spending. The three-year plan to reduce State personal income
taxes will decrease State tax receipts by an estimated $1.7 billion in State
fiscal year 1996-97 in addition to the amount of reduction in State fiscal
year 1995-96. Further significant reductions in the personal income tax are
scheduled for the 1997-98 State fiscal year. Other tax reductions enacted in
1994 and 1995 are estimated to cause an additional reduction in receipts of
over $500 million in 1996-97,
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as compared to the level of receipts in 1995-96. Similarly, many actions taken
to reduce disbursements in the State's 1995-96 fiscal year are expected to
provide greater reductions in State fiscal year 1996-97. These include actions
to reduce the State workforce, reduce Medicaid and welfare expenditures and
slow community mental hygiene program development. The net impact of these and
other factors is expected to produce a potential imbalance in receipts and
disbursements in State fiscal year 1996-97. The Governor has indicated that in
the 1996-97 Executive Budget he will propose to close this potential imbalance
primarily through General Fund expenditure reductions and without increases in
taxes or deferrals of scheduled tax reductions. On October 2, 1995, the State
Comptroller released a report in which he reaffirmed his estimate that the
State will face a budget gap of at least $2.7 billion for the 1996-97 fiscal
year and a projected gap of at least $3.9 billion for the 1997-98 fiscal year.
The State is required to issue three quarterly updates to the
cash-basis State Financial Plan in July, October and January, respectively.
These updates reflect analysis of actual receipts and disbursements on a cash
basis for each respective period, and contain revised estimates of receipts
and disbursements for the then current fiscal year. As part of the early
release of the 1996-97 Executive Budget, the State updated its 1995-96 cash
basis State Financial Plan (the "Financial Plan Update") on December 15, 1995,
as a part of the Governor's Executive Budget presentation. The State revised
the cash-basis 1995-96 State Financial Plan on December 15, 1995, in
conjunction with the release of the Executive Budget for the 1996-97 fiscal
year.
Modest changes were made to the cash-basis 1995-96 State Financial
Plan (the "Mid-Year Update"), reflecting two more months of actual results,
deficiency requests by State agencies (the larger of which is for school aid
resulting from revisions to data submitted by school districts), and
administrative efficiencies achieved by State agencies. Total General Fund
receipts are expected to be approximately $73 million lower than estimated at
the time of the second quarterly update to the Mid-Year Update. Tax receipts
are now projected to be $29.57 billion, $8 million less than in the earlier
plan. Miscellaneous receipts and transfers from other funds are estimated at
$3.15 billion, $65 million lower than in the Mid-Year Update. The largest
single change in these estimates is attributable to the lag in achieving $50
million in proceeds from sales of State assets, which are unlikely to be
completed prior to the end of the fiscal year.
Projected General Fund disbursements are reduced by a total of $73
million, with changes made in most major categories of the 1995-96 State
Financial Plan. The reduction in overall spending masks the impact of
deficiency requests totaling more than $140 million, primarily for school aid
and tuition assistance to college students. Offsetting reductions in spending
are attributable to the continued maintenance of strict controls on spending
through the fiscal year by State agencies, yielding savings of $50 million.
Reductions of $49 million in support for capital projects reflect a stringent
review of all capital spending. Reductions of $30 million in debt service
costs reflect savings from refundings undertaken in the current fiscal year,
as well as savings from lower interest rates in the financial market. Finally,
the 1995-96 Financial Plan reflects reestimates based on actual results
through November, the larger of which is a reduction of $70 million in
projected costs for income maintenance. This reduction is consistent with
declining caseload projections.
The balance in the General Fund at the close of the 1995-96 fiscal
year is expected to be $172 million, entirely attributable to monies in the
Tax Stabilization Reserve Fund following the required $15 million payment into
that Fund. A $40 million deposit to the Contingency Reserve Fund included as
part of the enacted 1995-96 budget will not be made, and the minor balance of
$1 million currently in the Fund will be transferred to the General Fund.
These Contingency Reserve Fund monies are expected to support payments from
the General Fund for litigation related to the State's Medicaid program, and
for federal disallowances.
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Changes in federal aid programs currently pending in Congress are not
expected to have a material impact on the State's 1995-96 Financial Plan,
although prolonged interruptions in the receipt of federal grants could create
adverse developments, the scope of which cannot be estimated at this time. The
major remaining uncertainties in the 1995-96 State Financial Plan continue to
be those related to the economy and tax collections, which could produce
either favorable or unfavorable variances during the balance of the year.
On January 13, 1992, Standard & Poor's reduced its ratings on the
State's general obligation bonds from A to A-and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. Standard & Poor's also continued its negative
rating outlook assessment on State general obligation debt. On April 26, 1993,
Standard & Poor's revised the rating outlook assessment to stable. On February
14, 1994, Standard & Poor's raised its outlook to positive and, on July 13,
1995, confirmed its A- rating. On January 6, 1992, Moody's reduced its ratings
on outstanding limited-liability State lease purchase and contractual
obligations from A to Baa1. On July 3, 1995, Moody's reconfirmed its A rating
on the State's general obligation long-term indebtedness.
The fiscal stability of the State is related to the fiscal stability
of its authorities, which generally have responsibility for financing,
constructing and operating revenue-producing public benefit facilities. The
authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. As of September 30, 1994, there were 18 authorities that had
outstanding debt of $100 million or more, and the aggregate outstanding debt,
including refunding bonds, of these 18 authorities was $70.3 billion. As of
March 31, 1995, aggregate public authority debt outstanding as State-supported
debt was $27.9 billion and as State-related debt was $36.1 billion.
There are statutory arrangements providing for State local assistance
payments, otherwise payable to localities, to be made under certain
circumstances to public authorities. Although the State has no obligation to
provide additional assistance to localities whose local assistance payments
have been paid to public authorities under these arrangements if local
assistance payments are so diverted, the affected localities could seek
additional State assistance.
The Metropolitan Transit Authority ("MTA"), a State agency, oversees
the operation of the City's subway and bus system by its affiliates, the New
York City Transit Authority and Bronx Surface Transit Operating Authority (the
"Transit Authority" or "TA") and commuter rail and bus lines serving the New
York metropolitan area. Fare revenues from such operations have been
insufficient to meet expenditures, and the MTA depends heavily upon a system
of State, local, Triborough Bridge and Tunnel Authority ("TBTA") and, to the
extent available, Federal support. Over the past several years, the State has
enacted several taxes, including a surcharge on the profits of banks,
insurance corporations and general business corporations doing business in the
12 county region served by the MTA and a special one-quarter of 1% regional
sales and use tax, that provide additional revenues for mass transit purposes
including assistance to the MTA. For the 1995-96 State fiscal year, total
State assistance to the MTA is estimated at approximately $1.1 billion.
In 1993, State legislation authorized the funding of a five-year
$9.56 billion MTA capital plan for the five-year period, 1992 through 1996
(the "1992-96 Capital Program"). The MTA has received approval of the 1992-96
Capital Program based on this legislation from the MTA Capital Program Review
Board, as State law requires. This is the third five-year plan since the
Legislature authorized procedures for the adoption, approval and amendment of
a five-year plan for 1981 for a capital program designed to upgrade the
performance of the MTA's transportation systems and to supplement, replace and
rehabilitate facilities and equipment. The MTA, the TBTA and the TA are
collectively authorized to issue an aggregate of $3.1 billion of bonds (net of
certain statutory exclusions) to finance a portion of the 1992-96 Capital
Program. The 1992-96 Capital Program was expected to be financed in
significant part through
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dedication of the State petroleum business tax receipts. However, in December
1994 the proposed bond resolution based on such tax receipts was not approved
by the MTA Capital Program Review Board. Further consideration of the
resolution was deferred until 1995.
There can be no assurance that all the necessary governmental actions
for the MTA 1992-96 Capital Program or future capital programs will be taken,
that funding sources currently identified will not be decreased or eliminated,
or that the MTA 1992-96 Capital Program, or parts thereof, will not be delayed
or reduced. If the MTA Capital Program is delayed or reduced, ridership and
far revenues may decline, which could, among other things, impair the MTA's
ability to meet its operating expenses without additional assistance.
Litigation. A number of court actions have been brought involving
State finances. The court actions in which the State is a defendant generally
involve state programs and miscellaneous tort, real property, and contract
claims. Adverse developments in these proceedings or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
1995-96 State Financial Plan. The State believes that the 1995-96 State
Financial Plan includes sufficient reserves for the payment of judgments that
may be required during the 1995-96 fiscal year. There can be no assurance,
however, that an adverse decision in any of these proceedings would not exceed
the amount of the 1995- 96 State Financial Plan reserves for the payment of
judgments and, therefore, could affect the ability of the State to maintain a
balanced 1995-96 State Financial Plan.
General Considerations
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 the Trust will
retain for any length of time its present size and composition. Except as
described in footnotes to "Summary of Essential Financial Information" for the
Trust interest accrues to the benefit of Unit holders commencing with the
expected date of settlement for purchase of the Units. If a Replacement Bond
is not acquired, accrued interest (at the coupon rate of the Failed Bonds or
earned original issue discount in the case of original issue discount and zero
coupon Bonds) will be paid to Unit holders (from the Deposit Date to the date
the Trustee is notified of the failure of the Sponsors to purchase a
Replacement Bond). All such interest paid to Unit holders which accrued after
the date of settlement for a purchase of Units will be paid by the Sponsors
and accordingly will not be treated as tax-exempt income. In the event a
Replacement Bond is not acquired by the Trust, the net annual interest income
per Unit for the Trust would be reduced and the estimated current return might
be lowered.
Neither the Sponsors nor the Trustee shall be liable in any way for
any default, failure or defect in any Security. In the event that any contract
for the purchase of Securities in the Trust fails and no Replacement Bond as
hereinafter defined is acquired, the Sponsors shall refund to all Unit holders
the sales charge attributable to such failed contract, and the principal and
accrued interest (at the coupon rate of the relevant Security or earned
original issue discount in the case of original issue discount and zero coupon
Bonds to the date the Sponsors are notified of the failure) which are
attributable to such failed contract, shall be distributed at the next Monthly
Payment Date which is more than 30 days after the failure to purchase
Replacement Bonds. The portion of such interest paid to a Unit holder which
accrued after the expected date of settlement for purchase of his Units will
be paid by the Sponsors and accordingly will not be treated as tax-exempt
income.
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The following paragraphs discuss the characteristics of the Bonds in
the Trust and of certain types of issuers of the Bonds in the Trust. These
paragraphs discuss, among other things, certain circumstances which may
adversely affect the ability of such issuers to make payment of principal of
and interest on Bonds held in the portfolio of the Trust or which may
adversely affect the ratings of such Bonds. Because of the insurance obtained
by the Sponsors or by the issuers for the Trust, however, such changes should
not adversely affect the Trust's ultimate receipt of principal and interest,
the Standard & Poor's or Moody's ratings of the Bonds in the portfolio, or the
Standard & Poor's rating of the Units of the Trust. An investment in Units of
the Trust should be made with an understanding of the risks that such an
investment may entail, certain of which are described below. Unit holders may
obtain additional information concerning a particular Bond by requesting an
official statement from the issuer of such Bond.
General Obligation Bonds
General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest. The
taxing power of any governmental entity may be limited, however, by provisions
of state constitutions or laws, and an entity's credit will depend on many
factors, including potential 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; state legislative proposals or voter initiatives
to limit ad valorem real property taxes; and the extent to which the entity
relies on Federal or state aid, access to capital markets or other factors
beyond the state or entity's control.
Appropriations Bonds
Many state or local governmental entities enter into lease purchase
obligations as a means for financing the acquisition of capital projects
(e.g., buildings or equipment, among other things). Such obligations are often
made subject to annual appropriations. Certain Bonds in the Trust may be Bonds
that are, in whole or in part, subject to and dependent upon (i) the
governmental entity making appropriations from time to time or (ii) the
continued existence of special temporary taxes which require legislative
action for their reimposition. The availability of any appropriation is
subject to the willingness of the governmental entity to continue to make such
special appropriations or to reimpose such special taxes. The obligation to
make lease payments exists only to the extent of the monies available to the
governmental entity therefor, and no liability is incurred by the governmental
entity beyond the monies so appropriated. Subject to the foregoing, once an
annual appropriation is made, the governmental entity's obligation to make
lease rental payments is absolute and unconditional without setoff or
counterclaim, regardless of contingencies, whether or not a given project is
completed or used by the governmental entity and notwithstanding any
circumstances or occurrences which might arise. In the event of
non-appropriation, certificateholders' or bondowners' sole remedy (absent
credit enhancement) generally is limited to repossession of the collateral for
resale or releasing, and the obligation of the governmental lessee is not
backed by a pledge of the general credit of the governmental lessee. In the
event of non-appropriation, the Sponsors may instruct the Trustee to sell such
Bonds.
Moral Obligation Bonds. Certain of the Bonds in the Trust may be
secured by pledged revenues and additionally by the so-called "moral
obligations" of the State or a local governmental body. Should the pledged
revenues prove insufficient, the payment of such Bonds is not a legal
obligation of the State or local government, and is subject to its willingness
to appropriate funds therefor.
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Revenue Bonds
Mortgage Revenue Bonds. Certain Bonds may be "mortgage revenue
bonds." Under the Internal Revenue Code of 1986, as amended (the "Code"), (and
under similar provisions of the prior tax law) "mortgage revenue bonds" are
obligations the proceeds of which are used to finance owner-occupied
residences under programs which meet numerous statutory requirements relating
to residency, ownership, purchase price and target area requirements, ceiling
amounts for state and local issuers, arbitrage restrictions, and certain
information reporting, certification, and public hearing requirements. There
can be no assurance that additional federal legislation will not be introduced
or that existing legislation will not be further amended, revised, or enacted
after delivery of these Bonds or that certain required future actions will be
taken by the issuing governmental authorities, which action or failure to act
could cause interest on the Bonds to be subject to federal income tax. If any
portion of the Bonds proceeds are not committed for the purpose of the issue,
Bonds in such amount could be subject to earlier mandatory redemption at par,
including issues of Zero Coupon Bonds (see "Original Issue Discount and Zero
Coupon Bonds").
Housing Bonds. Some of the aggregate principal amount of Bonds of the
Trust may consist of obligations of state and local housing authorities whose
revenues are primarily derived from mortgage loans to housing projects for low
to moderate income families. Since such obligations are not general
obligations of a particular state or municipality and are generally payable
primarily or solely from rents and other fees, adverse economic developments
including failure or inability to increase rentals, fluctuations of interest
rates and increasing construction and operating costs may reduce revenues
available to pay existing obligations.
The housing bonds in the Trust, despite their optional redemption
provisions which generally do not take effect until ten years after the
original issuance dates of such Bonds (often referred to as "ten year call
protection"), do contain provisions which require the issuer to redeem such
obligations at par from unused proceeds of the issue within a stated period.
In recent periods of declining interest rates there have been increased
redemptions of housing bonds pursuant to such redemption provisions. In
addition, the housing bonds in the Trust are also subject to mandatory
redemption in part at par at any time that voluntary or involuntary
prepayments of principal on the underlying mortgages are made to the trustee
for such Bonds or that the mortgages are sold by the bond issuer. Prepayments
of principal tend to be greater in periods of declining interest rates; it is
possible that such prepayments could be sufficient to cause a housing bond to
be redeemed substantially prior to its stated maturity date, earliest call
date or sinking fund redemption date.
Public Power Revenue Bonds. General problems of the electric utility
industry include difficulty in financing large construction programs during an
inflationary period; restrictions on operations and increased costs and delays
attributable to environmental considerations; the difficulty of the capital
markets in absorbing utility debt and equity securities; the availability of
fuel for electric generation at reasonable prices, including among other
considerations the potential rise in fuel costs and the costs associated with
conversion to alternate fuel sources such as coal; technical cost factors and
other problems associated with construction, licensing, regulation and
operation of nuclear facilities for electric generation, including among other
considerations the problems associated with the use of radioactive materials
and the disposal of radioactive waste; and the effects of energy conservation.
Certain Bonds may have been issued in connection with the financing of nuclear
generating facilities. In view of recent developments in connection with such
facilities, legislative and administrative actions have been taken and
proposed relating to the development and operation of nuclear generating
facilities. The Sponsors are unable to predict whether any such actions or
whether any such proposals or litigation, if enacted or instituted, will have
an adverse impact on the revenues available to pay the debt service on the
Bonds in the portfolio issued to finance such nuclear projects.
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Each of the problems referred to above could adversely affect the
ability of the issuers of public power revenue bonds to make payments of
principal of and/or interest on such bonds. Certain municipal utilities or
agencies may have entered into contractual arrangements with investor-owned
utilities and large industrial users and consequently may be dependent in
varying degrees on the performance of such contracts for payment of bond debt
service.
Health Care Revenue Bonds. Some of the aggregate principal amount of
Bonds of the Trust may consist of hospital revenue bonds. Ratings of hospital
bonds are often initially based on feasibility studies which contain
projections of occupancy levels, revenues and expenses. Actual experience may
vary considerably from such projections. A hospital's gross receipts and net
income will be affected by future events and conditions including, among other
things, demand for hospital services and the ability of the hospital to
provide them, physicians' confidence in hospital management capability,
economic developments in the service area, competition, actions by insurers
and governmental agencies and the increased cost and possible unavailability
of malpractice insurance. Additionally, a major portion of hospital revenue
typically is derived from federal or state programs such as Medicare and
Medicaid which have been revised substantially in recent years and which are
undergoing further review at the state and federal level.
Proposals for significant changes in the health care system and the
present programs for third party payment of health care costs are under
consideration in Congress and many states. Future legislation or changes in
the areas noted above, among other things, would affect all hospitals to
varying degrees and, accordingly, any adverse change in these areas may affect
the ability of such issuers to make payment of principal and interest on such
bonds.
Higher Education Revenue Bonds. Higher education revenue bonds
include debt of state and private colleges, universities and systems, and
parental and student loan obligations. The ability of universities and
colleges to meet their obligations is dependent upon various factors,
including the revenues, costs and enrollment levels of the institutions. In
addition, their ability may be affected by declines in Federal, state and
alumni financial support, fluctuations in interest rates and construction
costs, increased maintenance and energy costs, failure or inability to raise
tuition or room charges and adverse results of endowment fund investments.
Pollution Control Facility Revenue Bonds. Bonds in the pollution
control facilities category include securities issued on behalf of a private
corporation,* including utilities, to provide facilities for the treatment of
air, water and solid waste pollution. Repayment of these bonds is dependent
upon income from the specific pollution control facility and/or the financial
condition of the project corporation.
Other Utility Revenue Bonds. Bonds in this category include
securities issued to finance natural gas supply, distribution and transmission
facilities, public water supply, treatment and distribution facilities, and
sewage collection, treatment and disposal facilities. Repayment of these bonds
is dependent primarily on revenues derived from the billing of residential,
commercial and industrial customers for utility services, as well as, in some
instances, connection fees and hook-up charges. Such utility revenue bonds may
be adversely affected by the lack of availability of Federal and state grants
and by decisions of Federal and state regulatory bodies and courts.
Solid Waste and Resource Recovery Revenue Bonds. Bonds in this
category include securities issued to finance facilities for removal and
disposal of solid municipal waste. Repayment of these bonds is dependent on
factors which
- --------
* For purposes of the description of users of facilities, all references to
"corporations" shall be deemed to include any other nongovernmental person
or entity.
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may include revenues from appropriations from a governmental entity, the
financial condition of the private project corporation and revenues derived
from the collection of charges for disposal of solid waste. Repayment of
resource recovery bonds may also be dependent to various degrees on revenues
from the sale of electric energy or steam. Bonds in this category may be
subject to mandatory redemption in the event of project non-completion, if the
project is rendered uneconomical or if it is considered an environmental
hazard.
Transportation Revenue Bonds. Bonds in this category include bonds
issued for airport facilities, bridges, turnpikes, port authorities, railroad
systems, or mass transit systems. Generally, airport facility revenue bonds
are payable from and secured by the revenues derived from the ownership and
operation of a particular airport. Payment on other transportation bonds is
often dependent primarily or solely on revenues from financed facilities,
including user fees, charges, tolls and rents. Such revenues may be adversely
affected by increased construction and maintenance costs or taxes, decreased
use, competition from alternative facilities, scarcity of fuel, reduction or
loss of rents or the impact of environmental considerations. Other
transportation bonds may be dependent primarily or solely on Federal, state or
local assistance including motor fuel and motor vehicle taxes, fees, and
licenses and, therefore, may be subject to fluctuations in such assistance.
Private Activity Bonds. The portfolio of the Trust may contain other
Bonds that are "private activity bonds," which would be primarily of two
types: (1) Bonds for a publicly owned facility that a private entity may have
a right to use or manage to some degree, such as an airport, seaport facility
or water system and (2) Bonds for facilities deemed owned or beneficially
owned by a private entity but which were financed with tax-exempt bonds of a
public issuer, such as a manufacturing facility or a pollution control
facility. In the case of the first type, bonds are generally payable from a
designated source of revenues derived from the facility and may further
receive the benefit of the legal or moral obligation of one or more political
subdivisions or taxing jurisdictions. In most cases of project financing of
the first type, receipts or revenues of the Issuer are derived from the
project or the operator or from the unexpended proceeds of the bonds. Such
revenues include user fees, service charges, rental and lease payments, and
mortgage and other loan payments.
The second type of issue will generally finance projects which are
owned by or for the benefit of, and are operated by, corporate entities.
Ordinarily, such private activity bonds are not general obligations of
governmental entities and are not backed by the taxing power of such entities,
and are solely dependent upon the creditworthiness of the corporate user of
the project or corporate guarantor.
The private activity bonds in the Trust have generally been issued
under bond resolutions, agreements or trust indentures pursuant to which the
revenues and receipts payable under the issuer's arrangements with the users
or the corporate operator of a particular project have been assigned and
pledged to the holders of the private activity bonds. In certain cases a
mortgage on the underlying project has been assigned to the holders of the
private activity bonds or a trustee as additional security. In addition,
private activity bonds are frequently directly guaranteed by the corporate
operator of the project or by another affiliated company.
Special Tax Revenue Bonds. Bonds in this category are bonds secured
primarily or solely by receipt of certain state or local taxes, including
sales and use taxes or excise taxes. Consequently, such bonds may be subject
to fluctuations in the collection of such taxes. Such bonds do not include tax
increment bonds or special assessment bonds.
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Other Revenue Bonds. Certain of the Bonds in the Trust may be revenue
bonds which are payable from and secured primarily or solely by revenues from
the ownership and operation of particular facilities, such as correctional
facilities, parking facilities, convention centers, arenas, museums and other
facilities owned or used by a charitable entity. Payment on bonds related to
such facilities is, therefore, primarily or solely dependent on revenues from
such projects, including user fees, charges and rents. Such revenues may be
affected adversely by increased construction and maintenance costs or taxes,
decreased use, competition from alternative facilities, reduction or loss of
rents or the impact of environmental considerations.
Certain of the Bonds in the Trust are 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. In a few isolated instances
to date, bonds which were thought to be escrowed to maturity have been called
for redemption prior to maturity.
Puerto Rico Bonds
Certain of the Bonds in the Trust may be general obligations and/or
revenue bonds of issuers located in Puerto Rico which will be affected by
general economic conditions in Puerto Rico. The economy of Puerto Rico is
closely integrated with that of the mainland United States. During fiscal year
1994, approximately 87% of Puerto Rico's exports were to the United States
mainland, which was also the source of 69% of Puerto Rico's imports. In fiscal
1994, Puerto Rico experienced a $4.3 billion positive adjusted trade balance.
The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the
years as a result of increased emphasis on higher wage, high technology
industries such as pharmaceuticals, electronics, computers, microprocessors,
professional and scientific instruments, and certain high technology machinery
and equipment. The service sector, including finance, insurance and real
estate, also plays a major role in the economy. It ranks second only to
manufacturing in contribution to the gross domestic product and leads all
sectors in providing employment. In recent years, the service sector has
experienced significant growth in response to and paralleling the expansion of
the manufacturing sector. Since fiscal 1985, personal income, both aggregate
and per capita, has increased consistently in each fiscal year. In fiscal
1994, aggregate personal income was $25.7 billion ($21.6 billion in 1987
prices) and personal income per capita was $7,047 ($5,902 in 1987 prices).
Personal income includes transfer payments to individuals in Puerto Rico under
various social programs. Total federal payments to Puerto Rico, which include
many types in addition to federal transfer payments, are lower on a per capita
basis in Puerto Rico than in any state. Transfer payments to individuals in
fiscal 1994 were $5.7 billion, of which $3.9 billion, or 68.9%, represent
entitlement to individuals who had previously performed services or made
contributions under programs such as Social Security, veterans benefits and
Medicare. The number of persons employed in Puerto Rico during fiscal 1994
averaged 1,011,000. Unemployment, although at a low level compared to the late
1970s, remains above the average for the United States. At fiscal year end
June 30, 1994, the unemployment rate in Puerto Rico was 16.0%. Puerto Rico's
decade-long economic expansion continued throughout the five-year period from
fiscal 1990 through fiscal 1994. Almost every sector of its economy was
affected and record levels of employment were achieved. Factors behind this
expansion include Commonwealth sponsored economic development programs, the
relatively stable prices of oil imports, the continued growth of the United
States economy, periodic declines in exchange value of the United States
dollar and the relatively low cost of borrowing during the period. The Puerto
Rico Planning Board's most recent Gross Product forecast for fiscal 1995 and
fiscal 1996, made in February 1995, shows increases of 2.9% and 2.7%,
respectively. The Planning Board's economic activity index, a composite index
for thirteen economic indicators, increased 2.7% for the first seven months of
fiscal 1995 compared to the same period of fiscal 1994, which period showed an
increase of 1.3% over the same period of fiscal 1993. Growth in the Puerto
Rico economy in fiscal
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1996 depends on several factors, including the state of the United States
economy and the relative stability in the price of oil imports, the exchange
value of the U.S. dollar and the cost of borrowing.
Original Issue Discount Bonds and Zero Coupon Bonds
Certain of the Bonds in the Trust may be original issue discount
bonds and/or zero coupon bonds. Original issue discount bonds are bonds that
were originally issued at less than the market interest rate. Zero coupon
bonds are original issue discount bonds that do not provide for the payment of
current interest. For Federal income tax purposes, original issue discount on
such bonds must be amortized over the term of such bonds. On sale or
redemption, the difference between the (i) the amount realized (other than
amounts treated as tax-exempt income as described below) and (ii) the tax
basis of such bonds (properly adjusted, in the circumstances described below,
for amortization of original issue discount) will be treated as taxable income
or loss. See "The Trust--Tax Status" in this Part B. The Code requires holders
of tax-exempt obligations issued with original issue discount, such as the
Trust, to accrue tax-exempt original issue discount by using the constant
interest method provided for the holders of taxable obligations. In addition,
the Code provides that the basis of a tax-exempt obligation is increased by
the amount of accrued tax-exempt original issue discount. These provisions are
applicable to obligations issued after September 3, 1982 and acquired after
March 1, 1984. Each Trust's tax basis in a Bond is increased by any accrued
original issue discount as is a Unit holder's tax basis in his Units. For
Bonds issued after June 9, 1980 that are redeemed prior to maturity, the
difference between the Trust's basis, as adjusted, and the amount received
will be taxable gain or loss to the Unit holders. All or a portion of any gain
may be taxable as ordinary income.
There can be no assurance that additional Federal legislation will
not be enacted or that existing legislation will not be amended hereafter with
the effect that interest on bonds becomes subject to Federal income taxation.
If the interest on the Bonds in the Trust should ultimately be deemed to be
taxable, the Trustee may sell them and, since they would be sold as taxable
securities, it is expected that they would have to be sold at a substantial
discount from current market prices.
Bonds Subject to Sinking Fund Provisions
Most of the Bonds in the Trust are subject to redemption prior to
their stated maturity date pursuant to sinking fund or call provisions. A
sinking fund is a reserve fund accumulated over a period of time for
retirement of debt. Sinking fund provisions are designed to redeem a
significant portion of an issue gradually over the life of the issue.
Obligations to be redeemed are generally chosen by lot. On the Date of
Deposit, the offering valuations of some of the Bonds in the Trust may have
been at a premium and subject to retirement or refunding within ten years of
the Date of Deposit. A callable debt obligation is one which is subject to
redemption prior to maturity at the option of the issuer. To the extent that
obligations are deposited in the Trust at a price higher than their par value,
such redemption at par would result in a loss of capital to a purchaser of
Units at their original public offering price. The estimated current return of
the Units might also be adversely affected if the return on the retired Bonds
is greater than the average return on the Bonds in the Trust. In general, call
provisions are more likely to be exercised when the offering side valuation is
at a premium over par than when it is at a discount from par. See "The
Portfolio" in Part A for a list of original issue discount and/or zero coupon
bonds and for a breakdown of the percentage of Bonds in the Trust with
offering side valuations at a premium, discount or at par. See also "Estimated
Current Return and Estimated Long Term Return" in Part A. The portfolio
contains a listing of the sinking fund and call provisions, if any, with
respect to each of the Bonds therein.
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Substitution of Bonds
In the event of a failure to deliver any Bond that has been purchased
for the Trust under a contract, including those Bonds purchased on a "when, as
and if issued" basis ("Failed Bonds"), the Sponsors are authorized to purchase
other bonds ("Replacement Bonds") which the Trustee shall pay for out of funds
held in connection with the Failed Bonds and to accept delivery of the
Replacement Bonds to make up the original corpus of the Trust. The Replacement
Bonds must be purchased within 20 days after delivery of the notice of the
failed contract, and the purchase price (exclusive of accrued interest) may
not exceed the principal attributable to the Failed Bonds. The Replacement
Bonds (i) must be tax-exempt bonds issued by the State of New York or
counties, municipalities, authorities or political subdivisions thereof or
issued by certain United States territories or possessions or their public
authorities as described in the first paragraph under "Portfolio," (ii) must
have a fixed maturity date not exceeding the maturity date of the Failed Bonds
and not less than ten years after the date of purchase, (iii) shall be
purchased at a price that results in a yield to maturity and a current return,
in each case as of the Date of Deposit, at least equal to the yield to
maturity and the current return of the Failed Bonds, (iv) shall not be "when
issued" bonds, (v) must be rated at least equal to the Failed Bonds and (vi)
must be eligible for coverage under the MBIA Insurance Corporation insurance
policy obtained by the Trust. Whenever a Replacement Bond has been acquired
for the Trust, the Trustee shall, within five days thereafter, notify all Unit
holders of the Trust of the acquisition of the Replacement Bond and shall, on
the next monthly Payment Date which is more than 30 days thereafter, make a
pro rata distribution of the amount, if any, by which the cost to the Trust of
the Failed Bond exceeded the cost of the Replacement Bond. Once the original
corpus of the Trust is acquired, the Trustee will have no power to vary the
investment of the Trust, i.e., the Trustee will have no managerial power to
take advantage of market variations to improve a Unit holder's investment.
If the right of limited substitution described in the preceding
paragraph shall not be utilized to acquire Replacement Bonds in the event of a
failed contract, the Sponsors will refund the sales charge attributable to
such Failed Bonds to all Unit holders of the Trust, and distribute the
principal and accrued interest (at the coupon rate of such Failed Bond, or
earned original issue discount in the case of zero coupon bonds, from the
Deposit Date to the date the Sponsors notify the Trustee that they will not
purchase Replacement Bonds) attributable to such Failed Bonds on the next
monthly Payment Date which is more than 30 days thereafter. In the event a
Replacement Bond is not acquired by the Trust, the Estimated Net Annual
Interest Income per Unit for the Trust would be reduced and the Estimated
Current Return thereon might be lowered.
Other Matters
An amendment to the Federal Bankruptcy Act relating to the adjustment
of indebtedness owed by any political subdivision or public agency or
instrumentality of any state, including municipalities, became effective in
1979. Among other things, this amendment facilitates the use of proceedings
under the Federal Bankruptcy Act by any such entity to restructure or
otherwise alter the terms of its obligations, including those of the type
comprising the Trust's portfolio. The Sponsors are unable to predict at this
time what effect, if any, this legislation will have on the Trust.
To the best knowledge of the Sponsors, there is no litigation pending
as of the Date of Deposit in respect of any Securities which might reasonably
be expected to have a material adverse effect upon the Trust. At any time
after the Date of Deposit, litigation may be initiated on a variety of grounds
with respect to Securities in the Trust. Such litigation as, for example,
suits challenging the issuance of pollution control revenue bonds under
recently enacted environmental protection statutes, may affect the validity of
such Securities or the tax-free nature of the interest thereon. While the
outcome of such litigation can never be entirely predicted with certainty,
bond counsel has given or will give opinions to the issuing authorities of
each Bond on the date of issuance to the effect that such Securities have been
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validly issued and that the interest thereon is exempt from regular Federal
income tax. In addition, other litigation or other factors may arise from time
to time which potentially may impair the ability of issuers to meet
obligations undertaken with respect to Securities.
PUBLIC OFFERING
Offering Price
The price of the Units of the Trust as of the Date of Deposit was
determined by adding to the Evaluator's determination of the aggregate
offering price of the Securities per Unit a sales charge of 5.152% thereof
equal to 4.9% of the Public Offering Price. During the initial public offering
period, sales of at least 250 Units will be entitled to a volume discount from
the Public Offering Price as described below. For purchases settling after the
First Settlement Date, a proportionate share of accrued and undistributed
interest on the Securities at the date of delivery of the Units to the
purchaser is also added to the Public Offering Price.
During the initial offering period the aggregate offering price of
the Securities in the Trust is determined by the Evaluator (1) on the basis of
current offering prices for the Securities,* (2) if offering prices are not
available for any Securities, on the basis of current offering prices for
comparable securities, (3) by making an appraisal of the value of the
Securities on the basis of offering prices in the market, or (4) by any
combination of the above. Such determinations are made each business day
during the initial public offering period as of the Evaluation Time set forth
in the "Summary of Essential Financial Information" in Part A, effective for
all sales made subsequent to the last preceding determination. For information
relating to the calculation of the Redemption Price, which is based upon the
aggregate bid price of the underlying Securities and which may be expected to
be less than the aggregate offering price, see "Rights of Unit
Holders--Redemption" in Part B. Unless Securities are in default in payment of
principal or interest or in significant risk of such default, the Evaluator
will not attribute any value to the Units due to the MBIA Insurance
Corporation insurance obtained by the Trust. See also "Rights of Unit
Holders--Certificates" and "Rights of Unit Holders--Redemption" in Part B for
information relating to redemption of Units.
The Evaluator will consider in its evaluation of Securities which are
in default in payment of principal or interest or, in the Sponsors' opinion,
in significant risk of such default ("Defaulted Bonds") and which are covered
by insurance obtained by the Trust the value of the insurance guaranteeing
interest and principal payments. The value of the insurance will be equal to
the difference between (i) the market value of Defaulted Bonds assuming the
exercise of the right to obtain Permanent Insurance (less the insurance
premium attributable to the purchase of Permanent Insurance and the related
custodial fee) and (ii) the market value of such Defaulted Bonds not covered
by Permanent Insurance. In any case the Evaluator will consider the ability of
MBIA Insurance Corporation to meet its commitments under the Trust's insurance
policy, including the commitment to issue Permanent Insurance. The Evaluator
intends to use a similar valuation method with respect to Securities insured
by the Trust if there is a significant risk of default and a resulting
decrease in the market value. For a description of the circumstances under
which a full or partial
- --------
* With respect to the evaluation of Bonds during the initial syndicate
offering period for such Bonds, the "current offering price," as
determined by the Evaluator, will normally be equal to the syndicate
offering price as of the Evaluation Time, unless the Evaluator determines
that a material event has occurred which it believes may result in the
syndicate offering price not accurately reflecting the market value of
such Bonds, in which case the Evaluator, in making its determination with
respect to such Bonds, will consider not only the syndicate offering price
but also the factors described in (2) and (3) herein.
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suspension of the right of Unit holders to redeem their Units may occur, see
"Rights of Unit Holders--Redemption" in Part B.
If the Trustee does not exercise the right to obtain Permanent
Insurance as to any Defaulted Bonds in the Trust, it is the present intention
of the Trustee, so long as the Trust contains either some Bonds not in default
or any Pre-insured Bonds, not to sell Defaulted Bonds to effect redemptions or
for any other reason but rather to retain them in the portfolio BECAUSE VALUE
ATTRIBUTABLE TO THE INSURANCE OBTAINED BY THE TRUST CANNOT BE REALIZED UPON
SALE. Insurance obtained by the issuer of a Pre-insured Bond, or by some party
other than the Trust, is effective so long as such Pre-insured Bond is
outstanding and the insurer of such Bond continues to fulfill its obligations.
Therefore, any such insurance may be considered to represent an element of
market value in regard to the Pre-insured Bond, but the exact effect, if any,
of this insurance on such market value cannot be predicted. Regardless of
whether the insurer of a Pre-insured Bond continues to fulfill its
obligations, however, such Bond will in any case continue to be insured under
the policy obtained by the Trust from MBIA Insurance Corporation as long as
the Bond is held in the Trust.
No value has been ascribed to the MBIA Insurance Corporation
insurance obtained by the Trust as of the date of this Prospectus.
The secondary market Public Offering Price of the Units of the Trust
is based on the aggregate bid price of the Bonds in the Trust (as determined
by the Evaluator) plus a sales charge determined in accordance with the
schedule set forth below, which is based upon the maturities of each Bond in
the Trust. The Sponsors have implemented this variable format as a more
equitable method of assessing the sales charge for secondary market purchases.
For purposes of computation, Bonds will be deemed to mature on their expressed
maturity dates unless the Evaluator evaluates the price of the Bonds to a
different date such as a call date or a mandatory tender date, in which case
the maturity will be deemed to be such other date.
This method of sales charge computation will apply different sales
charge rates to each Bond in the Trust based upon the maturity of each such
Bond in accordance with the following schedule:
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<TABLE>
<CAPTION>
Secondary Market
Period Sales Change
-------------------------------------------------------
Percentage of Percentage of
Public Offering Net Amount
Per Bond Price Invested
------------------------ ----------------------
<S> <C> <C>
Years to Maturity Per Bond
0 Months to 2 years......................................... 1.0% 1.010%
2 but less than 3........................................... 2.0% 2.091%
3 but less than 4........................................... 3.0% 3.093%
4 but less than 8........................................... 4.0% 4.167%
8 but less than 12.......................................... 5.0% 5.363%
12 but less than 15......................................... 5.5% 5.820%
15 or more.................................................. 5.9% 6.270%
</TABLE>
A minimum sales charge of 1.0% of the Public Offering Price will be
applied to all secondary market unit purchases.
During the initial public offering period, purchasers of 250 Units or
more will be entitled to a volume discount from the Public Offering Price as
set forth in the table below:
<TABLE>
<CAPTION>
Discount From
Public Offering
Number of Units Price Per Unit
--------------- ----------------
<S> <C>
250-499............................................................. $ 2.50
500-999............................................................. 7.50
1,000-1,999......................................................... 15.00
2,000 or more....................................................... 20.00
</TABLE>
Except as discussed under "Distribution of Units" below, the above
volume discount will be the responsibility of the Selling Underwriter or
dealer and will apply on all purchases at any one time by the same person of
Units in the Trust in the amounts stated. Units held in the name of the spouse
of the purchaser or in the name of a child of the purchaser under 21 years of
age are deemed for the purposes hereof to be registered in the name of the
purchaser. The graduated sales charges are also applicable to a trustee or
other fiduciary purchasing Units for a single trust estate or single fiduciary
account.
Certain commercial banks are making Units of the Trust available to
their customers on an agency basis. A portion of the sales charge discussed
above is retained by or remitted to the banks. Under the Glass-Steagall Act,
banks are prohibited from underwriting Trust Units; however, the
Glass-Steagall Act does permit certain agency transactions, and banking
regulators have not indicated that these particular agency transactions are
not permitted under such Act.
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Market for Units
Although they are not obligated to do so, the Sponsors intend to
maintain a market for the Units of the Trust and continuously to offer to
purchase Units of the Trust during the initial offering period at prices based
upon the aggregate offering price of the Securities in the Trust; and
thereafter at prices based on the aggregate bid price of the related
Securities. After the initial offering period the Sponsors' Repurchase Price
shall be not less than the Redemption Price plus accrued interest through the
expected date of settlement. (See "Rights of Unit Holders--Redemption--
Computation of Redemption Price per Unit" in Part B). There is no sales charge
incurred when a Unit holder sells Units back to the Sponsors. Any Units
repurchased by the Sponsors may be reoffered to the public by the Sponsors at
the Public Offering Price at the time, plus accrued interest.
If the supply of Units of any Series exceeds demand, or for some
other business reason, the Sponsors may discontinue purchases of Units of such
Series at prices based on the aggregate bid price of the Securities. The
Sponsors do not in any way guarantee the enforceability, marketability, or
price of any Security in the portfolio or of the Units of the Trust. In the
event that a market is not maintained for the Units of the Trust, a Unit
holder desiring to dispose of his Units may be able to do so only by tendering
such Units to the Trustee for redemption at the Redemption Price, which is
based upon the aggregate bid price of the underlying Securities. The aggregate
bid price of the Securities in the Trust may be expected to be less than the
aggregate offering price. If a Unit holder wishes to dispose of his Units, he
should inquire of the Sponsors as to current market prices prior to making a
tender for redemption to the Trustee. See "Rights of Unit Holders--Redemption"
and "Sponsors" in Part B.
Employees (and their immediate families) of Glickenhaus & Co. and
Lebenthal & Co., Inc. may, pursuant to employee benefit arrangements, purchase
Units of the Trust at a price equal to the offering side evaluation of the
underlying securities in the Trust during the initial offering period and at
the bid side thereafter, divided by the number of Units outstanding plus a
reduced sales charge of 1.5% of the Public Offering Price. Such arrangements
result in less selling effort and selling expenses than sales to employee
groups of other companies. Resales or transfers of Units purchased under the
employee benefit arrangements may only be made through the Sponsors' secondary
market, so long as it is being maintained.
Distribution of Units
The Underwriters of the Units of the Trust are listed in the
Underwriting Account (see "Underwriting Account" in Part A). It is the
Underwriters' intention to qualify Units of the Trust for sale in certain of
the states and to effect a public distribution of the Units solely through
their own organizations. However, Units may be sold to dealers who are members
of the National Association of Securities Dealers, Inc. at prices which
represent a concession equal to $32.00 per Unit from the related Public
Offering Price applicable to sales of fewer than 500 Units subject in each
case to change from time to time by the Agent for the Sponsors. Any volume
discount (see "Offering Price" in Part B) offered to investors will be borne
by the selling Underwriter or dealer except that, during the initial public
offering period, the Sponsors may pay the selling Underwriter or dealer $2.50
per Unit for individual sales of more than 500 Units.
Sales will be made only with respect to whole Units, and the Sponsors
reserve the right to reject, in whole or in part, any order for the purchase
of Units.
Underwriters and broker-dealers of the Trust, banks and/or others are
eligible to participate in a program in which such firms receive from the
Sponsors a nominal award for each of their registered representatives who have
sold
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<PAGE>
a minimum number of units of unit investment trusts created by the Sponsors
during a specified time period. In addition, at various times the Sponsors may
implement other programs under which the sales forces of Underwriters,
brokers, dealers, banks and/or others may be eligible to win other nominal
awards for certain sales efforts, or under which the Sponsors will reallow to
any such Underwriters, brokers, dealers, banks and/or others that sponsor
sales contests or recognition programs conforming to criteria established by
the Sponsors, or participate in sales programs sponsored by the Sponsors, an
amount not exceeding the total applicable sales charges on the sales generated
by such person at the public offering price during such programs. Also, the
Sponsors in their discretion may from time to time pursuant to objective
criteria established by the Sponsors pay fees to qualifying Underwriters,
brokers, dealers, banks and/or others for certain services or activities which
are primarily intended to result in sales of Units of the Trust. Such payments
are made by the Sponsors out of their own assets and not out of the assets of
the Trust. These programs will not change the price Unitholders pay for their
Units or the amount that the Trust will receive from the Units sold.
Sponsors' and Underwriters' Profits
As set forth under "Public Offering--Offering Price" in Part B, the
Underwriters will receive gross commissions equal to the specified percentages
of the Public Offering Price of the Units of the Trust. The Sponsors will
receive from the Underwriters the excess of such gross sales commission over
$35 per Unit from Underwriters underwriting 100 to 249 Units, will receive the
excess over $36 per Unit from Underwriters underwriting 250 to 499 Units, will
receive the excess over $37 per Unit from Underwriters underwriting 500 to 749
Units, will receive the excess over $38 per Unit from Underwriters
underwriting 750 to 999 Units, will receive the excess over $39 per Unit from
Underwriters underwriting 1,000 or more Units and will receive the excess over
$40 per Unit from Underwriters who underwrite 15% of the Units of the Trust.
In addition, the Sponsors may, during the initial public offering period, pay
any Underwriter an additional $2.50 per Unit for sales to individual
purchasers of 500 or more Units. The Sponsors may also from time to time pay,
in addition to the amounts referenced above, an additional concession, in the
form of cash or other compensation, any Underwriter who underwrites or sells,
during a specific period, minimum dollar amounts of the Units of the Trust. In
no event will such additional concession paid by the Sponsors to the
Underwriter exceed the difference between the sales charge and the
Underwriter's allowance in respect of Units underwritten by the Underwriter.
Such Units then may be distributed to the public by the dealers at the Public
Offering Price then in effect.
In addition, the Sponsors realize a profit or sustain a loss, as the
case may be, in the amount of any difference between the cost of the
Securities to the Trust (which is based on the aggregate offering price of the
Securities on the Date of Deposit) and the purchase price of such Securities
to the Sponsors (which is the cost of such Securities at the time they were
acquired for the account of the Trust). The Underwriters share in the profits,
if any, described in the preceding sentence. See "Summary of Essential
Financial Information" in Part A. In addition, the Sponsors may realize
profits or sustain losses with respect to Bonds deposited in the Trust which
were acquired from one or more of the Sponsors or from underwriting syndicates
of which they were members. During the initial 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
Securities and hence in the Public Offering Price received by the Underwriters
for Units. Cash, if any, made available to the Sponsors prior to the
settlement date for the purchase of Units of the Trust may be used in the
Sponsors' businesses, subject to the limitations of the Securities Exchange
Act of 1934 and may be of benefit to the Sponsors.
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<PAGE>
The Sponsors may have participated as underwriters or as managers or
members of underwriting syndicates from which some of the aggregate principal
amount of the Bonds were acquired for the Trust in the amounts set forth in
Part A. The Sponsors have not purchased any of the Securities in the Trust
from their managed accounts.
In maintaining a market for the Units of the Trust (see "Market for
Units") the Sponsors and Underwriters will also realize profits or sustain
losses in the amount of any difference between the price at which they buy
Units and the price at which they resell or redeem such Units and to the
extent they earn sales charges on resales.
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN TO UNIT HOLDERS
Units of the Trust are offered on a "dollar price" basis. In
contrast, tax-exempt bonds customarily are offered on a "yield price" basis.
Therefore, the rate of return on each Unit is measured in terms of both
Estimated Current Return and Estimated Long-Term Return. Estimated Current
Return based on the Public Offering Price per Unit and Estimated Long-Term
Return per Unit, each as of the business day prior to the Date of Deposit, is
set forth under "Summary of Essential Financial Information " in Part A.
Information regarding the estimated monthly distributions of principal and
interest to Unit holders of the Trust is available from the Sponsors on
request.
Estimated Current Return is computed by dividing the Estimated Net
Annual Interest Income per Unit by the Public Offering Price. Estimated Net
Interest Income per Unit will vary with changes in fees and expenses of the
Trustee and the Evaluator and with principal prepayment, redemption, maturity,
exchange or sale of Bonds. The Public Offering Price per Unit will vary with
changes in the offering price of the Bonds. Estimated Current Return takes
into account only the interest payable on the Bonds and does not involve a
computation of yield to maturity or to an earlier redemption date nor does it
reflect any amortization of premium or discount from par value in the Bond's
purchase price. Moreover, because interest rates on Bonds purchased at a
premium are generally higher than current interest rates on newly issued bonds
of a similar type with comparable ratings, the Estimated Current Return per
Unit may be affected adversely if such Bonds are redeemed prior to their
maturity. Therefore, there is no assurance that the Estimated Current Return
as set forth under "Summary of Essential Financial Information" in Part A will
be realized in the future.
Estimated Long-Term Return is calculated using a formula that (i)
takes into consideration, and determines and factors in the relative
weightings of, the market values, yields (taking into account the amortization
of premiums and the accretion of discounts) and estimated retirements of all
the Bonds in the Trust and (ii) takes into account the expenses and sales
charge associated with each Unit of the Trust. The Estimated Long-Term Return
assumes that each Bond is retired on its pricing life date (i.e., that date
which produces the lowest dollar price when yield price calculations are done
for each optional call date and the maturity date of a callable security). If
the Bond is retired on any optional call or maturity date other than the
pricing life date, the yield to the holder of that Bond will be greater than
the initial quoted yield. Since the market values and estimated retirements of
the Bonds, the expenses of the Trust and the Net Annual Interest Income and
Public Offering Price per Unit may change, there is no assurance that the
Estimated Long-Term Return as set forth under "Summary of Essential Financial
Information" in Part A will be realized in the future.
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<PAGE>
INSURANCE ON THE BONDS
Insurance guaranteeing the timely payment, when due, of all principal
and interest on the Bonds in the Trust has been obtained from the Insurer by
the Trust. The Insurer has issued a policy of insurance covering each of the
Bonds in the Trust, including Pre-insured Bonds. The MBIA Insurance
Corporation insurance obtained by the Trust is only effective as to Bonds
owned by and held in the Trust and, consequently, does not cover Bonds for
which the contract for purchase fails. A "when issued" Bond will be covered
under the MBIA Insurance Corporation policy upon the settlement date of the
issue of such "when issued" Bond. The MBIA Insurance Corporation policy shall
continue in force only with respect to Bonds held in and owned by the Trust,
and the Insurer shall not have any liability under the policy with respect to
any Bonds which do not constitute part of the Trust. In determining to insure
the Bonds, the Insurer has applied its own standards which generally
correspond to the standards it has established for determining the
insurability of new issues of municipal bonds. See "Notes to Portfolio" in
Part A of this Prospectus.
By the terms of its policy, the Insurer will unconditionally
guarantee to the Trust the payment, when due, required of the issuer of the
Bonds of an amount equal to the principal of (either at the stated maturity or
by any advancement of maturity pursuant to a mandatory sinking fund payment)
and interest on the Bonds as such payments shall become due but not paid.
Except as provided below with respect to issues of small issue industrial
development Bonds and pollution control revenue Bonds, in the event of any
acceleration of the due date of principal by reason of mandatory or optional
redemption (other than mandatory sinking fund redemption), default or
otherwise, the payments guaranteed will be made in such amounts and at such
times as would have been due had there not been an acceleration. The Insurer
will be responsible for such payments less any amounts received by the Trust
from any trustee for the Bond issuers or from any other source. Except as
provided below, the MBIA Insurance Corporation policy does not guarantee
payment on an accelerated basis, the payment of any redemption premium or the
value of the Units of the Trust. The MBIA Insurance Corporation policy also
does not insure against nonpayment of principal of or interest on the Bonds
resulting from the insolvency, negligence or any other act or omission of the
Trustee or other paying agent for the Bonds. However, with respect to small
issue industrial development Bonds and pollution control revenue Bonds covered
by the policy, the Insurer guarantees any accelerated payments required to be
made by or on behalf of an issuer of such Bonds if there occurs pursuant to
the terms of the Bonds an event which results in the loss of the tax-exempt
status of interest on such Bonds, including principal, interest or premium
payments payable thereon, if any, as and when required to be made by or on
behalf of the issuer pursuant to the terms of such Bonds. No assurance can be
given that the MBIA Insurance Corporation policy would insure the payment of
principal or interest on Bonds which is not required to be paid by the issuer
thereof because the Bonds were not validly issued. At the respective times of
issuance of the Bonds, opinions relating to the validity thereof were rendered
by bond counsel to the respective issuing authorities.
The MBIA Insurance Corporation insurance policy is non-cancellable
and will continue in force so long as the Trust is in existence and the
Securities described in the policy continue to be held in and owned by the
Trust (see "The Trust-- Insurance" in Part A of this Prospectus). Failure to
pay premiums on the MBIA Insurance Corporation policy obtained by the Trust
will not result in the cancellation of insurance but will force the Insurer to
take action against the Trustee to recover premium payments due it. The
Trustee in turn will be entitled to recover such payments from the Trust.
The MBIA Insurance Corporation policy shall terminate as to any Bond
which has been redeemed from the Trust or sold by the Trustee on the date of
such redemption or on the settlement date of such sale, and the Insurer shall
not have any liability under the policy as to any such Bond thereafter. If the
date of such redemption or the settlement
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date of such sale occurs between a record date and a date of payment of any
such Bonds, the MBIA Insurance Corporation policy will terminate as to such
Bond on the business day next succeeding such date of payment. The termination
of the MBIA Insurance Corporation policy as to any Bond shall not affect the
Insurer's obligations regarding any other Bond in the Trust or any other trust
which has obtained a MBIA Insurance Corporation insurance policy. The MBIA
Insurance Corporation policy will terminate as to all Bonds on the date on
which the last of the Bonds matures, is redeemed or is sold by the Trust.
Pursuant to an irrevocable commitment of the Insurer, the Trustee
upon the sale of a Bond in the Trust has the right to obtain permanent
insurance with respect to such Bond (i.e., insurance to maturity of the Bond)
(the "Permanent Insurance") upon the payment of a single predetermined
insurance premium from the proceeds of the sale of such Bond. Accordingly, any
Bond in the Trust is eligible to be sold on an insured basis. It is expected
that the Trustee will exercise the right to obtain Permanent Insurance for a
Bond in the Trust upon instruction from the Sponsors only if upon such
exercise the Trust would receive net proceeds (sale of Bond proceeds less the
insurance premium attributable to the Permanent Insurance and the related
custodial fee) from such sale in excess of the sale proceeds if such Bond were
sold on an uninsured basis.
The Permanent Insurance premium with respect to each Bond in the
Trust is determined based upon the insurability of each Bond as of the Date of
Deposit and will not be increased or decreased for any change in the
creditworthiness of such Bond unless such Bond is in default as to payment of
principal and/or interest. In such event, the Permanent Insurance premium
shall be subject to an increase predetermined at the Date of Deposit and
payable from the proceeds of the sale of such Bond. See footnote 7 to the
"Summary of Essential Financial Information" in Part A for the Trust for the
cost of Permanent Insurance as of the Date of Deposit.
Except as indicated below, insurance obtained by the Trust has no
effect on the price or redemption value of Units thereof. lt is the present
intention of the Evaluator to attribute a value to the insurance obtained by
the Trust (including the right to obtain Permanent Insurance) for the purpose
of computing the price or redemption value of Units thereof only if the Bonds
covered by such insurance are in default in payment of principal or interest
or, in the Sponsors' opinion, in significant risk of such default. The value
of the insurance will be equal to the difference between (i) the market value
of a Bond which is in default in payment of principal or interest or in
significant risk of such default assuming the exercise of the right to obtain
Permanent Insurance (less the insurance premium attributable to the purchase
of Permanent Insurance and the related custodial fee) and (ii) the market
value of such Bonds not covered by Permanent Insurance. See "Public
Offering--Offering Price" in this Part B for a more complete description of
the Evaluator's method of valuing defaulted Bonds and Bonds which have a
significant risk of default. Insurance obtained by the issuer of a Bond or by
parties other than the Trust is effective so long as such Pre-insured Bond is
outstanding and the insurer of such Pre-insured Bond continues to fulfill its
obligations.
Regardless of whether the insurer of a Pre-insured Bond continues to
fulfill its obligations, however, such Bond will continue to be insured under
the policy obtained by the Trust from the Insurer as long as the Bond is held
in the Trust. Insurance obtained by the issuer of a Bond or by other parties
may be considered to represent an element of market value in regard to the
Bonds thus insured, but the exact effect, if any, of this insurance on such
market value cannot be predicted.
In the event that interest on or principal of a Bond is due for
payment but is unpaid by reason of nonpayment by the issuer thereof, the
Insurer will make payments to its fiscal agent, State Street Bank and Trust
Company, N.A., New York, New York (the "Fiscal Agent"), equal to such unpaid
amounts of principal and interest not later than one business day after the
Insurer has been notified by the Trustee that such nonpayment has occurred
(but not earlier than
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the date such payment is due). The Fiscal Agent will disburse to the Trustee
the amount of principal and interest which is then due for payment but is
unpaid upon receipt by the Fiscal Agent of (i) evidence of the Trust's right
to receive payment of such principal and interest and (ii) evidence, including
any appropriate instruments of assignment, that all of the rights to payment
of such principal or interest then due for payment shall thereupon vest in the
Insurer. Upon payment by the Insurer of any principal or interest payments
with respect to any Bonds, the Insurer shall succeed to the rights of the
owner of such Bonds with respect to such payment.
The Insurer is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Insurer. The Insurer is a limited liability
corporation rather than a several liability association. The Insurer is
domiciled in the State of New York and licensed to do business in all 50
states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Insurer has one European branch in the
Republic of France.
As of September 30, 1995, the Insurer had admitted assets of $3.7
billion (unaudited), total liabilities of $2.5 billion (unaudited), and total
capital and surplus of $1.2 billion (unaudited) determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. As of December 31, 1994, the Insurer had admitted assets of $3.4
billion (audited), total liabilities of $2.3 billion (audited), and total
capital and surplus of $1.1 billion (audited) determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. Copies of the Insurer's year end financial statements prepared in
accordance with statutory accounting practices are available from the Insurer.
The address of the Insurer is 113 King Street, Armonk, New York 10504.
No representation is made herein as to the accuracy or adequacy of
such information or as to the absence of material adverse changes in such
information subsequent to the date thereof. The Sponsors are not aware that
the information herein is inaccurate or incomplete as of the date hereof.
Standard & Poor's Rating Group, a division of McGraw Hill ("Standard
& Poor's") has assigned to the Units and Bonds in the Trust a rating of "AAA."
Moody's Investors Service has assigned a rating of "Aaa" to all of the Bonds
in the Trust, as insured. These ratings apply to the Bonds only while they are
held in the Trust. Also, these ratings reflect Standard & Poor's and Moody's
current assessments of the creditworthiness of the Insurer and their ability
to pay claims on their policies of insurance.
Battle Fowler LLP, special counsel for the Sponsors, have rendered an
opinion to the effect that the payment of proceeds from the insurance will be
excludible from Federal gross income if, and to the same extent as, such
interest would have been so excludible if paid by the issuer of the defaulted
obligations. See "Tax Status" in this Part B.
The contract of insurance relating to the Trust, certain agreements
relating to the Permanent Insurance and the negotiations in respect thereof
represent the only significant relationship between the Insurer and the Trust.
Otherwise, neither the Insurer nor any associate thereof has any material
business relationship, direct or indirect, with the Trust or the Sponsors,
except that the Sponsors may from time to time in the normal course of their
business, participate as underwriters or as managers or as members of
underwriting syndicates in the distribution of new issues of municipal bonds
for which a policy of insurance guaranteeing the payment of interest and
principal has been obtained from the Insurer, and except that James A.
Lebenthal, Chairman of the Board of Directors of Lebenthal & Co., Inc., is a
Director of the Insurer's parent company, MBIA Inc. Although all issues
contained in the Trust are individually insured, neither the Trust, the Units
nor the portfolio is insured directly or indirectly by the Insurer.
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A purpose of the insurance on the Bonds in the portfolio obtained by
the Trust is to obtain a higher yield on the Trust portfolio than would be
available if all the Securities in such portfolio had Standard & Poor's
Corporation's "AAA" rating and/or Moody's Investors Service's "Aaa" rating but
were uninsured and yet at the same time to have the protection of insurance of
payment of interest and principal on the Securities. There is, of course, no
certainty that this result will be achieved. Any Pre-insured Bonds in the
Trust (all of which are rated "AAA" by Standard & Poor's Corporation and/or
"Aaa" by Moody's Investors Service, respectively) may or may not have a higher
yield than uninsured bonds rated "AAA" by Standard & Poor's Corporation and/or
"Aaa" by Moody's Investors Service, respectively. In selecting Pre-insured
Bonds for the portfolio of the Trust, the Sponsors have applied the criteria
hereinbefore described.
Because the Securities in the Trust are insured by MBIA Insurance
Corporation as to the payment of principal and interest, Standard & Poor's
Corporation has assigned its "AAA" investment rating to the Units and Bonds in
the Trust and Moody's Investors Service has assigned a rating of "Aaa" to all
of the Bonds in the Trust, as insured. See "Statement of Condition--Notes to
Portfolio" in Part A. The obtaining of these ratings by the Trust should not
be construed as an approval of the offering of the Units by Standard & Poor's
Corporation or Moody's Investors Service or as a guarantee of the market value
of the Trust or of the Units. These ratings are not a recommendation to buy,
hold or sell and do not take into account the extent to which Trust expenses
or portfolio asset sales for less than the Trust's acquisition price will
reduce payment to the Unit holders of the interest or principal.
TAX STATUS
Interest income on the Bonds contained in the portfolio of the Trust
is, in the opinion of bond counsel to the issuing governmental authorities,
which opinion was rendered at the time of original issuance of the Bonds,
excludible from gross income under the Code. See "The Trust" in Part A.
Gain (or loss) realized on sale, maturity, or redemption of the Bonds
or on sale or redemption of a Unit is, however, includible in gross income as
capital gain (or loss) for Federal, state and local income tax purposes
assuming that the Unit is held as a capital asset. Such gain (or loss) does
not include any amount received in respect of accrued interest. In addition,
such gain (or loss) may be long or short term depending on the holding period
of the Units. Bonds selling at a market discount tend to increase in market
value as they approach maturity when the principal amount is payable, thus
increasing the potential for taxable gain (or reducing the potential for loss)
on their redemption, maturity, or sale. Gain on the disposition of a Bond
purchased at a market discount generally will be treated as ordinary income,
rather than capital gain, to the extent of accrued market discount. The
deductibility of capital losses is limited to the amount of capital gain; in
addition, up to $3,000 of capital losses of noncorporate Unit holders may be
deducted against ordinary income. Since the proceeds from sales of Bonds,
under certain circumstances, may not be distributed pro-rata, the Unit
holder's taxable income for any year may exceed their actual cash
distributions in that year.
In the opinion of Battle Fowler LLP, special counsel for the
Sponsors, under existing law:
The Trust is not an association taxable as a corporation for
Federal income tax purposes, and interest on the Bonds which is
excludible from regular Federal gross income under the Code, when
received by the Trust, will be excludible from the regular Federal
gross income of the Unit holders of the Trust. Any proceeds paid
under the insurance policy described above issued to the Trust with
respect to the Bonds and
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any proceeds paid under individual policies obtained by issuers of
Bonds or other parties which represent maturing interest on defaulted
obligations held by the Trust will be excludible from Federal gross
income if, and to the same extent as, such interest would have been
so excludible if paid in the normal course by the issuer of the
defaulted obligations.
Each Unit holder will be considered the owner of a pro rata
portion of the Bonds and any other assets held in the Trust under the
grantor trust rules of Code Sections 671-679. Each Unit holder will
be considered to have received his pro rata share of income from
Bonds held by the Trust on receipt (or earlier accrual, depending on
the Unit holder's method of accounting and depending on the existence
of any original issue discount) by the Trust, and each Unit holder
will have a taxable event when an underlying Bond is disposed of
(whether by sale, redemption, or payment at maturity) or when the
Unit holder redeems or sells his Units. Gain from a sale will be
treated as short term or long term capital gain depending on how long
the Bond was held by the Trust. The total tax basis (i.e., cost) of
each Unit to a Unit holder is allocated among each of the Bonds held
in the Trust (in accordance with the proportion of the Trust
comprised by each such Bond) in order to determine his per Unit tax
basis for each Bond, and the tax basis reduction requirements of the
Code relating to amortization of bond premium will apply separately
to the per Unit cost of each such Bond. Therefore, under some
circumstances, a Unit holder may realize taxable gain when his Units
are sold or redeemed for an amount equal to his original cost. No
deduction is allowed for the amortization of bond premium on
tax-exempt bonds such as the Bonds. None of the interest received
from the portfolio is subject to the alternative minimum tax for
individuals; however, some or all of the interest received from the
portfolio may be includible in the calculation of a corporation's
alternative minimum tax.
For Federal income tax purposes, when a Bond is sold, a Unit
holder may exclude from his share of the amount received any amount
that represents accrued interest but may not exclude amounts
attributable to market discount. Thus, when a Bond is sold by the
Trust, taxable gain or loss will equal the difference between (i) the
amount received (excluding the portion representing accrued interest)
and (ii) the adjusted basis (including any accrued original issue
discount, limited in the case of Bonds issued after June 8, 1980 to
the portion earned from the date of acquisition, as discussed below).
In the case of Bonds acquired at a market discount, gain will be
treated as ordinary income to the extent of accrued market discount.
A Unit holder may also realize taxable gain or loss when a
Unit is sold or redeemed. Taxable gain will result if a Unit is sold
or redeemed for an amount greater than its adjusted basis to the Unit
holder. The amount received when a Unit is sold or redeemed is
allocated among all the Bonds in the Trust in the same manner as when
the Trust disposes of Bonds, and the Unit holder may exclude accrued
interest, including the earned portion of any original issue
discount, but not amounts attributable to market discount. In the
case of Bonds acquired at a market discount gain will be treated as
ordinary income to the extent of accrued market discount. The return
of a Unit holder's tax basis is otherwise a tax-free return of
capital.
If the Trust purchases any units of a previously issued
series then, based on the opinion of counsel with respect to such
series, the Trust's pro rata ownership interest in the bonds of such
series (or any previously issued series) will be treated as though it
were owned directly by the Trust.
Under the income tax laws of the State and City of New York,
the Trust is not an association taxable as a corporation and the
income of the Trust will be treated as the income of the Unit
holders.
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A Unit holder who is a non-resident of New York will not be
subject to New York State or City income tax on any interest or gain
derived from his interest in the Trust's assets or upon any gain from
the sale of his Units except to the extent that such interest or gain
is from property employed in a business, trade, profession or
occupation carried on by him in the State of New York. An individual
Unit holder who resides in New York State or City will not be subject
to State or City tax on interest income derived from the Bonds held
in the Trust (except in certain limited circumstances), although he
will be subject to New York State and, depending upon his place of
residence, City tax with respect to any gains realized when Bonds are
sold, redeemed or paid at maturity or when any such Units are sold or
redeemed. In addition, an individual Unit holder residing in New York
State or City will not be subject to State or City income tax on any
proceeds paid under the insurance policy or policies described above
with respect to the Trust which represent maturing interest on
defaulted obligations held by the Trustee if, and to the same extent
as, such interest would have been so excludible if paid by the issuer
of the defaulted obligations. A New York State or City resident
should determine his basis and holding period for his Units for New
York State and City tax purposes in the same manner as for Federal
tax purposes.
The above opinion of Battle Fowler LLP as to the tax status of the
Trust is not affected by the provision of the Trust Agreement that authorizes
the acquisition of Replacement Bonds or by the implementation of the option
automatically to reinvest principal and interest distributions from the Trust
pursuant to the Automatic Accumulation Plan, described under "Automatic
Accumulation Account" in this Part B.
Among other things, the Code provides for the following: (1) interest
on certain private activity bonds issued after August 7, 1986 is included in
the calculation of the individual's alternative minimum tax (currently taxed
at a rate of up to 28%); none of the Bonds in the Trust is a Private Activity
Bond the interest on which is subject to the alternative minimum tax; (2)
interest on certain Private Activity Bonds issued after August 7, 1986 is
included in the calculation of the corporate alternative minimum tax and 75%
of the amount by which adjusted current earnings (including interest on all
tax-exempt bonds, such as the Bonds) exceed alternative minimum taxable
income, as modified for this calculation, will be included in alternative
minimum taxable income. Interest on the Bonds is includible in the adjusted
current earnings of a corporation for purposes of such alternative minimum
tax. The Code does not otherwise require corporations, and does not require
taxpayers other than corporations, including individuals, to treat interest on
the Bonds as an item of tax preference in computing an alternative minimum
tax; (3) subject to certain exceptions, no financial institution is allowed a
deduction for that portion of the institution's interest expense allocable to
tax-exempt interest on tax-exempt bonds acquired after August 7, 1986; (4) the
amount of the deduction allowed to property and casualty insurance companies
for underwriting loss is decreased by an amount determined with regard to
tax-exempt interest income and the deductible portion of dividends received by
such companies; (5) all taxpayers are required to report for informational
purposes on their Federal income tax returns the amount of tax-exempt interest
they receive; (6) an issuer must meet certain requirements on a continuing
basis in order for interest on a tax-exempt bond to be tax-exempt, with
failure to meet such requirements resulting in the loss of tax exemption; and
(7) a branch profits tax on U.S. branches of foreign corporations is
implemented which, because of the manner in which the branch profits tax is
calculated, may have the effect of subjecting the U.S. branch of a foreign
corporation to Federal income tax on the interest on bonds otherwise exempt
from such tax.
Section 86 of the Code provides that a portion of social security
benefits is includible in taxable income for taxpayers whose "modified
adjusted gross income" combined with a portion of their social security
benefits exceeds a base amount. The base amount is $25,000 for an individual,
$32,000 for a married couple filing a joint return and zero for married
persons filing separate returns. Under Section 86 of the Code, interest on
tax-exempt bonds is to be
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added to adjusted gross income for purposes of determining whether an
individual's income exceeds the base amount above which a portion of the
benefits would be subject to tax.
In addition, certain "S Corporations", with accumulated earnings and
profits from Subchapter C years, may be subject to minimum tax on excess
passive income, including tax-exempt interest, such as interest on the Bonds.
At the time of the original issuance of the Bonds held by the Trust,
opinions relating to the validity of the Bonds and the exemption of interest
thereon from regular Federal income tax were or (with respect to "when issued"
Bonds) were to be rendered by bond counsel to the issuing governmental
authorities. Neither the Sponsors nor their special counsel have made any
review of proceedings relating to the issuance of such Bonds or the basis for
bond counsel's opinions.
Under Section 265 of the Code, if borrowed funds are used by a Unit
holder to purchase or carry Units of the Trust, interest on such indebtedness
will not be deductible for Federal income tax purposes. 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 are applicable for purposes
of state and local taxation. Also, under Section 291 of the Code, certain
financial institutions that acquire Units may be subject to a reduction in the
amount of interest expense that would otherwise be allowable as a deduction
for Federal income tax purposes. Investors with questions regarding this issue
should consult with their tax advisors.
The Trust may contain Bonds issued with original issue discount. The
Code requires holders of tax-exempt obligations issued with original issue
discount, such as the Trust, to accrue tax-exempt original issue discount by
using the constant interest method provided for the holders of taxable
obligations and to increase the basis of a tax-exempt obligation by the amount
of accrued tax-exempt original issue discount. These provisions are applicable
to obligations issued after September 3, 1982 and acquired after March 1,
1984. The Trust's tax basis in a Bond is increased by any accrued original
issue discount as is a Unit holder's tax basis in his Units. For Bonds issued
after June 9, 1980 that are redeemed prior to maturity, the difference between
the Trust's basis, as adjusted, and the amount received will be taxable gain
or loss to the Unit holders.
Unit holders should consult their own tax advisors with respect to
the state and local tax consequences of owning original issue discount bonds.
It is possible that under applicable provisions governing determination of
such state and local taxes, interest on tax-exempt bonds such as any Bonds
issued with original issue discount may be deemed to be received in the year
of accrual even though there is no corresponding cash payment.
If a Unit holder's tax cost for his pro rata interest in a Bond
exceeds his pro rata interest in the Bond's face amount, the Unit holder will
be considered to have purchased his pro rata interest in the Bond at a
"premium." The Unit holder will be required to amortize any premium relating
to his pro rata interest in a Bond prior to the maturity of the Bond.
Amortization of premium on a Bond will reduce a Unit holder's tax basis for
his pro rata interest in the Bond, but will not result in any deduction from
the Unit holder's income. Thus, for example, a Unit holder who purchases a pro
rata interest in a Bond at a premium and resells it at the same price will
recognize taxable gain equal to the portion of the premium that was amortized
during the period the Unit holder is considered to have held such interest.
Bond premium must be amortized under the method the Unit holder
regularly employs for amortizing bond premium (assuming such method is
reasonable). With respect to a callable bond, the premium must be computed
with
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respect to the call price and be amortized to the first call date (and
successively to later call dates based on the call prices for those dates).
In the case of Bonds that are private activity bonds, the opinions of
bond counsel to the respective issuing authorities indicate that interest on
such Bonds is exempt from regular federal income tax. However, interest on
such Bonds will not be exempt from regular federal income tax for any period
during which such Bonds are held by a "substantial user" of the facilities
financed by the proceeds of such Bonds or by a "related person" thereof within
the meaning of the Code. Therefore, interest on any such Bonds allocable to a
Unit holder who is such a "substantial user" or "related person" thereof will
not be tax-exempt. Furthermore, in the case of Bonds that qualify for the
"small issue" exemption, the "small issue" exemption will not be available or
will be lost if, at any time during the three-year period beginning on the
later of the date the facilities are placed in service or the date of issue,
all outstanding tax-exempt IRBs, together with a proportionate share of any
present issue, of an owner or principal user (or related person) of the
facilities was determined to have exceeded $40,000,000 on the date of issue.
In the case of Bonds issued under the $10,000,000 "small issue" exemption,
interest on such Bonds will become taxable if the face amount of the Bonds
plus certain capital expenditures exceeds $10,000,000 within 3 years of the
date of issue of such Bonds.
In addition, a Bond can lose its tax-exempt status as a result of
other subsequent but unforeseeable events such as prohibited "arbitrage"
activities by the issuer of the Bond or the failure of the Bond to continue to
satisfy the conditions required for the exemption of interest thereon from
regular federal income tax. No investigation has been made as to the current
or future owners or users of the facilities financed by the Bonds, the amount
of such persons' outstanding tax-exempt private activity bonds, or the
facilities themselves, and no assurance can be given that future events will
not affect the tax-exempt status of the Bonds. Investors should consult their
tax advisors for advice with respect to the effect of these provisions on
their particular tax situation.
THE EXEMPTION OF INTEREST ON MUNICIPAL OBLIGATIONS FOR FEDERAL INCOME
TAX PURPOSES DOES NOT NECESSARILY RESULT IN EXEMPTION UNDER THE INCOME TAX
LAWS OF ANY STATE OR LOCAL GOVERNMENT. INTEREST INCOME DERIVED FROM THE BONDS
IS NOT EXCLUDED FROM NET INCOME IN DETERMINING NEW YORK STATE OR NEW YORK CITY
FRANCHISE TAXES ON CORPORATIONS OR FINANCIAL INSTITUTIONS. THE LAWS OF SUCH
STATES AND LOCAL GOVERNMENTS VARY WITH RESPECT TO THE TAXATION OF SUCH
OBLIGATIONS.
From time to time, proposals have been introduced before Congress,
the purpose of which is to restrict or eliminate the Federal income tax
exemption for interest on debt obligations similar to the Bonds in the Trust,
and it can be expected that similar proposals, including proposals for a "flat
tax" or "consumption tax", may be introduced in the future. The Sponsors
cannot predict whether additional legislation, if any, in respect of the
Federal income tax status of interest on debt obligations may be enacted and
what the effect of such legislation would be on Bonds in the Trust.
The Revenue Reconciliation Act of 1993 increases maximum marginal tax
rates for individuals and corporations, extends the authority to issue certain
categories of tax-exempt bonds (qualified small issue bonds and qualified
mortgage bonds), expands a category of qualified tax-exempt bonds (bonds for
high-speed intercity rail facilities), limits the availability of capital gain
treatment for tax-exempt bonds purchased at a market discount, and makes a
variety of other changes. Prospective investors are urged to consult their own
tax advisors as to the effect of this Act on a possible investment in the
Trust.
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In South Carolina v. Baker, the U.S. Supreme Court held that the
federal government may constitutionally require states to register bonds they
issue and subject the interest on such bonds to federal income tax if not
registered, and that there is no constitutional prohibition against the
federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the federal
government to regulate and control bonds such as the Bonds in the Trust and to
tax interest on such bonds in the future. The decision does not, however,
affect the current exemption from taxation of the interest earned on the Bonds
in the Trust in accordance with Section 103 of the Code.
The opinions of counsel to the issuing governmental authorities to
the effect that interest on the Bonds is exempt from regular federal income
tax may be limited to law existing at the time the Bonds were issued, and may
not apply to the extent that future changes in law, regulations or
interpretations affect such Bonds. Investors are advised to consult their own
advisors for advice with respect to the effect of any legislative changes.
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units of the Trust is evidenced by registered
certificates executed by the Trustee and the Sponsors. The Trustee is
authorized to treat as the record owner of Units that person who is registered
as such owner on the books of the Trustee. Certificates are transferable by
presentation and surrender to the Trustee properly endorsed and 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
While interest will be distributed semi-annually or monthly,
depending on the method of distribution chosen, principal, including capital
gains, will be distributed only semi-annually; provided, however, that, other
than for purposes of redemption, no distribution need be made from the
Principal Account if the balance therein is less than $1.00 per Unit then
outstanding, and that, if at any time the pro rata share represented by the
Units of cash in the Principal Account exceeds $10.00 as of a Monthly Record
Date, the Trustee shall, on the next succeeding Monthly Distribution Date,
distribute the Unit holder's pro rata share of the balance of the Principal
Account. Interest (semi-annually or monthly) and principal, including capital
gains, if any (semi-annually), received by the Trust will be distributed on
each Distribution Date to Unit holders of record of the Trust as of the
preceding Record Date who are entitled to such distributions at that time
under the plan of distribution chosen. All distributions will be net of
applicable expenses and funds required for the redemption of Units. See
"Summary of Essential Financial Information" in Part A, "The Trust--Expenses
and Charges" and "Rights of Unit Holders--Redemption" in Part B.
The Trustee will credit to the Interest Account for the Trust all
interest received by the Trust, including that part of the proceeds of any
disposition of Securities which represents accrued interest. Other receipts of
the Trust will
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be credited to the Principal Account for the Trust. The pro rata share of the
Interest Account of the Trust and the pro rata share of cash in the Principal
Account (other than amounts representing failed contracts as previously
discussed) represented by each Unit thereof will be computed by the Trustee
each month as of the Record Date. See "Summary of Essential Financial
Information" in Part A. Proceeds received from the disposition of any of the
Securities subsequent to a Record Date and prior to the next succeeding
Distribution Date will be held in the Principal Account for the Trust and will
not be distributed until the second succeeding Distribution Date. Because
interest on the Securities is not received by the Trust at a constant rate
throughout the year, any particular interest distribution may be more or less
than the amount credited to the Interest Account of the Trust as of the Record
Date. See "Summary of Essential Financial Information" in Part A. 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 under the applicable plan of distribution. 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 difference between the estimated net interest accrued to the
first Record Date and to the related Distribution Date is an asset of the
respective Unit holder and will be realized in subsequent distributions or
upon the earlier of the sale of such Units or the maturity, redemption or sale
of Securities in the Trust.
Purchasers of Units who desire to receive distributions on a monthly
basis may elect to do so at the time of purchase during the initial public
offering period. Those indicating no choice will be deemed to have chosen the
semi-annual distribution plan. Record dates for monthly distributions will be
the fifteenth day of the preceding month and record dates for semi-annual
distributions will be the fifteenth day of May and November.
Details of estimated interest distributions under the payment plans,
on a per Unit basis, appear in footnote 9 to the "Summary of Essential
Financial Information" in Part A.
The plan of distribution selected by a Unit holder will remain in
effect until changed. Unit holders purchasing Units in the secondary market
will initially receive distributions in accordance with the election of the
prior owner. Each April, the Trustee will furnish each Unit holder a card to
be returned together with the Certificate by May 15 of such year if the Unit
holder desires to change his plan of distribution, and the change will become
effective on May 16 of such year for the ensuing twelve months. For a
discussion of redemption of Units, see "Rights of Unit Holders--
Redemption--Tender of Units" in Part B.
The Trustee will, as of the fifteenth day of each month, deduct from
the Interest Account and, to the extent funds are not sufficient therein, from
the Principal Account, amounts necessary to pay the expenses of the Trust as
of the first day of such month. See "The Trust--Expenses and Charges" in Part
B. 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 the 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" in Part B. Funds which are available for future
distributions, payments of expenses and redemptions are in accounts which are
non-interest bearing to the Unit holders and are available for use by the
Trustee pursuant to normal banking procedures.
Because interest on Securities in the Trust is payable at varying
intervals, usually in semi-annual installments, the interest accruing to the
Trust will not be equal to the amount of money received and available monthly
for distribution from the Interest Account to Unit holders choosing the
monthly payment plan. Therefore, on each monthly
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Distribution Date, the amount of interest actually deposited in the Interest
Account and available for distribution may be slightly more or less than the
monthly interest distribution made. In order to eliminate fluctuations in
monthly interest distributions resulting from such variances during the first
year of the Trust, the Trustee is required by the Trust Agreement to advance
such amounts as may be necessary to provide monthly interest distributions of
approximately equal amounts. In addition, the Trustee has agreed to advance
sufficient funds to the Trust in order to reduce the amount of time before
monthly distributions of interest to Unit holders commence. The Trustee will
be reimbursed, without interest, for any such advances from funds available
from the Interest Account of the Trust. The Trustee's fee takes into account
the costs attributable to the outlay of capital needed to make such advances.
In order to acquire certain of the Securities subject to contract, it
may be necessary to pay on the settlement dates for delivery of such
Securities amounts covering accrued interest on such Securities which exceed
the amounts paid by Unit holders (which excess will be made available under a
letter of credit furnished by the Sponsors on the Date of Deposit). The
Trustee has agreed to pay for any amounts necessary to cover any such excess
and will be reimbursed therefor (without interest) when funds become available
from interest payments on the particular Securities with respect to which such
payments may have been made. Also, since interest on such Securities in the
portfolio of the Trust (see "The Portfolio" in Part A) does not begin accruing
as tax-exempt interest income to the benefit of Unit holders until such Bonds'
respective dates of delivery (accrued interest prior to delivery being treated
under the Code as a return of principal), the Trustee will, in order to cover
interest treated as a return of principal, adjust its fee downward in an
amount equal to the amount of interest that would have so accrued as
tax-exempt interest (if not treated as a return of principal) on such
Securities between the date of settlement for the Units and such dates of
delivery.
In addition, because of the varying interest payment dates of the
Securities comprising the Trust portfolio, accrued interest at any point in
time, subsequent to the recovery of any advancements of interest made by the
Trustee, will be greater than the amount of interest actually received by the
Trust and distributed to Unit holders. Therefore, there will usually remain an
item of accrued interest that is added to the value of the Units. If a Unit
holder sells all or a portion of his Units he will be entitled to receive his
proportionate share of the accrued interest from the purchaser of his Units.
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 accrued interest on the Securities. Thus, the accrued
interest attributable to a Unit will not be entirely recovered until the Unit
holder either redeems or sells such Unit or until the Trust is terminated.
Expenses and Charges
Initial Expenses
All or a portion of the expenses incurred in creating and
establishing the Trust, including the cost of the initial preparation and
execution of the Trust Agreement, the initial fees and expenses of the
Trustee, legal expenses and other actual out-of-pocket expenses, will be paid
by the Trust and amortized over a five year period. All advertising and
selling expenses, as well as any organizational expenses not paid by the
Trust, will be borne by the Sponsors at no cost to the Trust.
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Fees
The Trustee's, Sponsors' and Evaluator's fees are set forth under the
"Summary of Essential Financial Information" in Part A. The Sponsors' fee,
which is earned for portfolio supervisory services, is based on the face
amount of Securities in the Trust at December 1 of each year. The Sponsors'
fee, which is not to exceed the maximum amount set forth under the "Summary of
Essential Financial Information" for the Trust, may exceed the actual costs of
providing portfolio supervisory services for the Trust, but at no time will
the total amount the Sponsors receive for portfolio supervisory services
rendered to all series of Empire State Municipal Exempt Trust in any calendar
year exceed the aggregate cost to them of supplying such services in such
year.
The Trustee will receive for its ordinary recurring services to the
Trust an annual fee in the amount set forth in the "Summary of Essential
Financial Information" for the Trust; provided, however, that such fees may be
adjusted as set forth under the "Summary of Essential Financial Information".
There is no minimum fee and, except as hereinafter set forth, no maximum fee.
For a discussion of certain benefits derived by the Trustee from the Trust's
funds, see "Rights of Unit Holders--Distribution of Interest and Principal" in
Part B. For a discussion of the services performed by the Trustee pursuant to
its obligations under the Trust Agreement, reference is made to the material
set forth under "Rights of Unit Holders" in Part B.
The Trustee's and Evaluator's fees are payable monthly on or before
each Distribution Date and the Sponsors' annual fee is payable annually on
December 1, each from the Interest Account to the extent funds are available
and then from the Principal Account. These 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"; except no such
increase in the Trustee's fee will be so made for the sole purpose of making
up any downward adjustment therein as described in "Summary of Essential
Financial Information". If the balances in the Principal and Interest Accounts
are insufficient to provide for amounts payable by the Trust, or amounts
payable to the Trustee which are secured by its prior lien on the Trust, the
Trustee is permitted to sell Bonds to pay such amounts.
Insurance Premiums
The cost of the MBIA Insurance Corporation insurance obtained by the
Trust, based on the aggregate amount of Bonds in the Trust as of the Date of
Deposit, is set forth in the "Summary of Essential Financial Information".
Premiums, which are obligations of the Trust, are payable monthly by the
Trustee on behalf of the Trust. As Securities in the portfolio mature, are
redeemed by their respective issuers or are sold by the Trustee, the amount of
the premium will be reduced in respect of those Securities no longer owned by
and held in the Trust. The Trust does not incur any premium expense for any
insurance which has been obtained by an issuer of a Pre-insured Bond, since
the premium or premiums for such insurance have been paid by such issuer or
other party. Pre-insured Bonds, however, are additionally insured by the
Trust. No premium will be paid by the Trust on Bonds which are also MBIA
Insurance Corporation Pre-insured Bonds or Municipal Bond Insurance
Association Pre-insured Bonds. The premium payable for Permanent Insurance and
the related custodial fee will be paid solely from the proceeds of the sale of
a Bond from the Trust in the event the Trustee exercises the right to obtain
Permanent Insurance on such Bond.
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Other Charges
The following additional charges are or may be incurred by the Trust:
all expenses (including audit and counsel fees) of the Trustee incurred in
connection with its activities under the Trust Agreement, including annual
audit expenses by independent public accountants selected by the Sponsors (so
long as the Sponsors maintain a secondary market, the Sponsors will bear any
audit expense which exceeds 50 cents per Unit), the expenses and costs of any
action undertaken by the Trustee to protect the 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 willful misconduct, bad
faith, or gross negligence on its part, arising out of or in connection with
its acceptance or administration of the Trust; and all taxes and other
governmental charges imposed upon the Securities or any part of the Trust (no
such taxes or charges are being levied or made or, to the knowledge of the
Sponsors, contemplated). The above expenses, including the Trustee's fee, when
paid by or owing to the Trustee, are secured by a lien on the Trust. In
addition, the Trustee is empowered to sell Securities in order to make funds
available to pay all expenses.
Reports and Records
The Trustee shall furnish Unit holders of the Trust 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. 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 providing
the following information: (1) as to the Interest Account: interest received
(including amounts representing interest received upon any disposition of
Securities and any earned original issue discount), and, if the issuers of the
Securities are located in different states or territories, the percentage of
such interest by such states or territories, deductions for payment of
applicable taxes and for fees and expenses of the Trust (including insurance
costs), 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 Securities and the net proceeds received therefrom
(including any unearned original issue discount but excluding any portion
representing interest, with respect to the Trust the premium attributable to
the Trustee's exercise of the right to obtain Permanent Insurance and any
related custodial fee), deductions for payments of applicable taxes and for
fees and expenses of the Trust, purchase of Replacement Bonds, redemptions of
Units, the amount of any "when issued" interest treated as a return of capital
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 Securities 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 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 of the Trust, certificates issued or held, a current list of
Securities in the Trust and a copy of the Trust Agreement.
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Redemption
Tender of Units
While it is anticipated that Units can be sold in the secondary
market, Units may also be tendered to the Trustee for redemption at its
corporate trust office at 101 Barclay Street, New York, New York 10286, upon
payment of any applicable tax. At the present time there are no specific taxes
related to the redemption of the Units. No redemption fee will be charged by
the Sponsors or the Trustee. Units redeemed by the Trustee will be cancelled.
Certificates for Units to be redeemed must be delivered to the
Trustee and must be properly endorsed and accompanied by a written instrument
of transfer. Thus, redemption of Units cannot be effected until certificates
representing such Units have been delivered to the person seeking redemption
(see "Rights of Unit Holders-- Certificates" in Part B). Unit holders must
sign exactly as their names appear on the face of the certificate with
signature(s) guaranteed by an officer of a national bank or trust company, a
member firm of either the New York, Midwest or Pacific Stock Exchange, or in
such other manner as may be acceptable to the Trustee. 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, or if the seventh
calendar day is not a business day, on the first business day prior thereto,
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 Financial Information" as of the
next subsequent Evaluation Time. See "Redemption--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 that as regards Units received after the
Evaluation Time on the New York Stock Exchange, the date of tender is the next
day on which such Exchange is open for trading or the next day on which there
is a sufficient degree of trading in Units of the Trust, and such Units will
be deemed to have been tendered to the Trustee on such day for redemption at
the Redemption Price computed on that day. For information relating to the
purchase by the Sponsors of Units tendered to the Trustee for redemption at
prices in excess of the Redemption Price, see "Redemption--Purchase by the
Sponsors of Units Tendered for Redemption" in Part B.
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 Securities in
order to make funds available for redemption. Such sales, if required, could
result in a sale of Securities by the Trustee at a loss. To the extent
Securities are sold, the size and diversity of the Trust will be reduced.
If the Trustee exercises the right to obtain Permanent Insurance on a
Bond in the Trust, such Bond will be sold from the Trust on an insured basis.
In the event that the Trustee does not exercise the right to obtain Permanent
Insurance on a Bond, such Bond will be sold from the Trust on an uninsured
basis, since the MBIA Insurance Corporation insurance obtained by the Trust
covers the timely payment of principal and interest when due on the Bonds only
while the Bonds are held in and owned by the Trust. If the Trustee does not
obtain Permanent Insurance on a Defaulted Bond, to the extent that Bonds which
are current in payment of interest are sold from the Trust portfolio in order
to meet redemption requests and Defaulted Bonds are retained in the Portfolio
in order to preserve the related insurance protection applicable to said
Bonds, the overall value of the Bonds remaining in the Trust will tend to
diminish. See "Sponsors--Responsibility" in Part B for the effect of selling
Defaulted Bonds to meet redemption requests.
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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 during which trading on that Exchange is restricted
or during which (as determined by the Securities and Exchange Commission by
rule or regulation) 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.
Because insurance obtained by the Trust terminates as to Bonds which
are sold by the Trustee, and because the insurance obtained by the Trust does
not have a realizable cash value which can be used by the Trustee to meet
redemptions of Units, under certain circumstances the Sponsors may apply to
the Securities and Exchange Commission for an order permitting a full or
partial suspension of the right of Unit holders to redeem their Units if a
significant portion of the Bonds in the Trust is in default in payment of
principal or interest or in significant risk of such default. No assurances
can be given that the Securities and Exchange Commission will permit the
Sponsors to suspend the rights of Unit holders to redeem their Units, and
without the suspension of such redemption rights when faced with excessive
redemptions the Sponsors may not be able to preserve the benefits of the
Trust's insurance on Defaulted Bonds.
Computation of Redemption Price per Unit
The Redemption Price per Unit is determined by the Trustee on the
basis of the bid prices of the Securities in the Trust, while the Public
Offering Price of Units during the initial offering period is determined on
the basis of the offering prices of the Securities, both as of the Evaluation
Time on the day any such determination is made. The bid prices of the
Securities may be expected to be less than the offering prices. This
Redemption Price per Unit is each Unit's pro rata share, determined by the
Trustee, of: (1) the aggregate value of the Securities in the Trust
(determined by the Evaluator as set forth below), except for those cases in
which the value of insurance has been included, (2) cash on hand in the Trust
(other than cash covering contracts to purchase Securities), and (3) accrued
and unpaid interest on the Securities as of the date of computation, less (a)
amounts representing taxes or governmental charges payable out of the Trust,
(b) the accrued expenses of the Trust, and (c) cash held for distribution to
Unit holders of record as of a date prior to the evaluation. The Evaluator may
determine the value of the Securities in the Trust (1) on the basis of current
bid prices for the Securities, (2) if bid prices are not available for any
Securities, on the basis of current bid prices for comparable bonds, (3) by
appraisal, or (4) by any combination of the above. In determining the
Redemption Price per Unit no value will be assigned to the portfolio insurance
obtained by the Trust on the Bonds in the Trust unless such Bonds are in
default in payment of principal or interest or in significant risk of such
default. On the other hand, Pre-insured Bonds in the Trust are entitled at all
times to the benefits of insurance obtained by their respective issuers so
long as the Pre-insured Bonds are outstanding and the insurer continues to
fulfill its obligations, and such benefits are reflected and included in the
market value of Pre-insured Bonds. For a description of the situations in
which the Evaluator may value the insurance obtained by the Trust, see "Public
Offering--Offering Price" in this Part B.
The difference between the bid and offering prices of the Securities
may be expected to average 1 1/2% of face amount. In the case of actively
traded bonds, the difference may be as little as 1/2 of 1%, and in the case of
inactively traded bonds such difference usually will not exceed 3%. On the
business day prior to the date of this Prospectus, the aggregate bid side
evaluation was lower than the aggregate offering side evaluation by the amount
set forth in footnote 6 to the "Portfolio". For this reason, among others, the
price at which Units may be redeemed could be less than the price paid by the
Unit holder. On the Date of Deposit the aggregate current offering price of
such Securities per Unit exceeded the bid price of such Securities per Unit by
the amount set forth under "Summary of Essential Financial Information".
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Purchase by the Sponsors of Units Tendered for Redemption
The Trust Agreement requires that the Trustee notify the Sponsors of
any tender of Units for redemption. So long as the Sponsors are maintaining a
bid in the secondary market, the Sponsors, prior to the close of business on
the second succeeding business day, will purchase any Units tendered to the
Trustee for redemption at the price so bid by making payment therefor to the
Unit holder in an amount not less than the Redemption Price on the date of
tender not later than the day on which the Units would otherwise have been
redeemed by the Trustee (see "Public Offering-- Market for Units" in this Part
B). Units held by the Sponsors may be tendered to the Trustee for redemption
as any other Units, provided that the Sponsors shall not receive for Units
purchased as set forth above a higher price than they paid, plus accrued
interest.
The offering price of any Units resold by the Sponsors will be the
Public Offering Price determined in the manner provided in this Prospectus
(see "Public Offering--Offering Price" in Part B). Any profit resulting from
the resale of such Units will belong to the Sponsors which likewise will bear
any loss resulting from a lower offering or redemption price subsequent to
their acquisition of such Units (see "Public Offering--Sponsors" and
Underwriters" Profits" in this Part B).
Exchange Option
The Sponsors of the series of Empire State Municipal Exempt Trust,
(including the series of Municipal Exempt Trust, the predecessor trust to
Empire State Municipal Exempt Trust) (the "Exchange Trusts") are offering Unit
holders of the Exchange Trusts for which the Sponsors are maintaining a
secondary market an option to exchange a Unit of any series of the Exchange
Trusts for a Unit of a different series of the Exchange Trusts being offered
by the Sponsors (other than in the initial offering period) at a Public
Offering Price generally based on the bid prices of the underlying Securities
divided by the number of Units outstanding (see "Public Offering--Markets for
Units") plus a fixed sales charge of $15 per Unit (in lieu of the normal sales
charge). However, a Unit holder must have held his Unit for a period of at
least six months in order to exercise the exchange option or agree to pay a
sales charge based on the greater of $15 per Unit or an amount which together
with the initial sales charge paid in connection with the acquisition of Units
being exchanged equals the normal sales charge of the series into which the
investment is being converted, determined as of the date of the exchange. Such
exchanges will be effected in whole Units only. Any excess proceeds from the
Units being surrendered will be returned, and the Unit holder will not be
permitted to advance any new money in order to complete an exchange. The
Sponsors reserve the right to modify, suspend or terminate this plan at any
time without further notice to the Unit holders. In the event the exchange
option is not available to a Unit holder at the time he wishes to exercise it,
the Unit holder will be immediately notified and no action will be taken with
respect to his Units without further instructions from the Unit holder.
Unit holders are urged to consult their own tax advisors as to the
tax consequences of exchanging Units.
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AUTOMATIC ACCUMULATION ACCOUNT
The Sponsors have entered into an arrangement (the "Plan") with
Empire Builder Tax Free Bond Fund (the "Empire Builder") which permits Unit
holders of the Trust to elect to have distributions from Units in the Trust
automatically reinvested in shares of the Empire Builder. The Empire Builder
is an open-end, non-diversified investment company whose investment objective
is to seek as high a level of current income exempt from Federal income tax,
New York State and New York City income taxes as is believed to be consistent
with preservation of capital. It is the policy of the Empire Builder to invest
primarily in debt securities the interest income from which is exempt from
such taxes.
The Empire Builder has an investment objective which differs in
certain respects from that of the Trust. The bonds purchased by the Empire
Builder will be of "investment grade" quality--that is, at the time of
purchase by the Empire Builder, such bonds either will be rated not lower than
the four highest ratings of either Moody's (Aaa, Aa, A or Baa) or Standard &
Poor's (AAA, AA, A or BBB) or will be unrated bonds which at the time of
purchase are judged by the Empire Builder's investment advisor to be of
comparable quality to bonds rated within such four highest grades. It is a
fundamental policy of the Empire Builder that under normal market conditions
at least 90% of the income distributed to its shareholders will be exempt from
Federal income tax, New York State and New York City personal income taxes.
However, during times of adverse market conditions, when the Empire Builder is
investing for temporary defensive purposes in obligations other than New York
tax-exempt bonds, more than 10% of the Empire Builder's income distributions
could be subject to Federal income tax, New York State and/or New York City
income taxes, as described in the current prospectus relating to the Empire
Builder (the "Empire Builder Prospectus"). Glickenhaus & Co. ("Glickenhaus"),
a sponsor of the Trust, acts as the investment adviser and distributor for the
Empire Builder.
Each Unit holder may request from The Bank of New York (the "Plan
Agent"), a copy of the Empire Builder Prospectus describing the Empire Builder
and a form by which such Unit holder may elect to become a participant
("Participant") in the Plan. Thereafter, as directed by such person,
distributions on the Participant's Units will, on the applicable distribution
date, automatically be applied as of that date by the Trustee to purchase
shares (or fractions thereof) of the Empire Builder at a net asset value as
computed as of the close of trading on the New York Stock Exchange on such
date, as described in the Empire Builder Prospectus. Unless otherwise
indicated, new Participants in the Empire Builder Plan will be deemed to have
elected the monthly distribution plan with respect to their Units.
Confirmations of all transactions undertaken for each Participant in the Plan
will be mailed to each Participant by the Plan Agent indicating distributions
and shares (or fractions thereof) of the Empire Builder purchased on his
behalf. A Participant may at any time prior to ten days preceding the next
succeeding distribution date, by so notifying the Plan Agent in writing, elect
to terminate his participation in the Plan and receive future distributions on
his Units in cash. There will be no charge or other penalty for such
termination. The Sponsors, the Trustee, the Empire Builder and Glickenhaus, as
investment advisor for Empire Builder, each will have the right to terminate
this Plan at any time for any reason. The reinvestment of distributions from
the Trust through the Plan will not affect the income tax status of such
distributions. For more complete information about investing in the Empire
Builder through the Plan, including charges and expenses, return the enclosed
card for a copy of the Empire Builder Prospectus. Read it carefully before you
decide to participate.
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[ALTERNATE PAGE]
AUTOMATIC ACCUMULATION ACCOUNT
For Unit holders of the Trust who are clients of Lebenthal & Co.,
Inc., the Sponsors have entered into an arrangement (the "Plan") with
Lebenthal New York Municipal Bond Fund (the "Bond Fund") which permits Unit
holders of the Trust to elect to have distributions from Units in the Trust
automatically reinvested in shares of the Bond Fund. The Bond Fund is an
open-end, non-diversified investment company whose investment objective is to
maximize current income exempt from regular Federal income tax, and from New
York State and New York City income taxes, consistent with preservation of
capital and with consideration given to opportunities for capital gain. It is
the policy of the Bond Fund to invest primarily in long term investment grade
tax-exempt securities the interest income from which is exempt from such
taxes.
The Bond Fund has an investment objective which differs in certain
respects from that of the Trust. The bonds purchased by the Bond Fund will be
of "investment grade" quality--that is, at the time of purchase by the Bond
Fund, such bonds either will be rated not lower than the four highest ratings
of either Moody's (Aaa, Aa, A or Baa) or Standard & Poor's (AAA, AA, A or BBB)
or will be unrated bonds which at the time of purchase are judged by the Bond
Fund's investment advisor to be of comparable quality to bonds rated within
such four highest grades. It is a fundamental policy of the Bond Fund that
under normal market conditions at least 80% of the income distributed to its
shareholders will be exempt from regular Federal income tax, and from New York
State and New York City personal income taxes. However, during times of
adverse market conditions, more than 20% of the Bond Fund's income
distributions could be subject to Federal income tax, New York State and/or
New York City income taxes, as described in the current prospectus relating to
the Bond Fund (the "Bond Fund Prospectus"). Lebenthal & Co., Inc., a sponsor
of the Trust, acts as the manager and distributor for the Bond Fund.
Each Unit holder may request from The Bank of New York (the "Plan
Agent"), a copy of the Bond Fund Prospectus describing the Bond Fund and a
form by which such Unit holder may elect to become a participant
("Participant") in the Plan. Thereafter, as directed by such person,
distributions on the Participant's Units will, on the applicable distribution
date, automatically be applied as of that date by the Trustee to purchase
shares (or fractions thereof) of the Bond Fund at a net asset value as
computed as of the close of trading on the New York Stock Exchange on such
date, as described in the Bond Fund Prospectus. Unless otherwise indicated,
new Participants in the Bond Fund Plan will be deemed to have elected the
monthly distribution plan with respect to their Units. Confirmations of all
transactions undertaken for each Participant in the Plan will be mailed to
each Participant by the Plan Agent indicating distributions and shares (or
fractions thereof) of the Bond Fund purchased on his behalf. A Participant may
at any time prior to ten days preceding the next succeeding distribution date,
by so notifying the Plan Agent in writing, elect to terminate his
participation in the Plan and receive future distributions on his Units in
cash. There will be no charge or other penalty for such termination. The
Sponsors, the Trustee, the Bond Fund and Lebenthal & Co. Inc., as manager for
the Bond Fund, each will have the right to terminate this Plan at any time for
any reason. The reinvestment of distributions from the Trust through the Plan
will not affect the income tax status of such distributions. For more complete
information about investing in the Bond Fund through the Plan, including
charges and expenses, return the enclosed card for a copy of the Bond Fund
Prospectus. Read it carefully before you decide to participate.
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SPONSORS
Glickenhaus and Lebenthal are the Sponsors of Empire State Municipal
Exempt Trust, Series 10 and all subsequent series.
Glickenhaus, a New York limited partnership, is engaged in the
underwriting and securities brokerage business, and in the investment advisory
business. It is a member of the New York Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. and is an associate member of the
American Stock Exchange. Glickenhaus acts as a sponsor for successive Series
of The Municipal Insured National Trusts and for the prior series of Empire
State Municipal Exempt Trust including those sold under the name of Municipal
Exempt Trust, New York Exempt Series 1, New York Series 2 and New York Series
3. Glickenhaus, in addition to participating as a member of various selling
groups of other investment companies, executes orders on behalf of investment
companies for the purchase and sale of securities of such companies and sells
securities to such companies in its capacity as a broker or dealer in
securities.
Lebenthal, a New York corporation originally organized as a New York
partnership in 1925, has been buying and selling municipal bonds for its own
account as a dealer for over 67 years; Lebenthal also buys and sells
securities as an agent and participates as an underwriter in public offerings
of municipal bonds. It acted as a sponsor of Empire State Tax Exempt Bond
Trust, Series 8 and successive Series of The Municipal Insured National Trust
through Series 28. Lebenthal is registered as a broker/dealer with the
Securities and Exchange Commission and various state securities regulatory
agencies and is a member of the National Association of Securities Dealers,
Inc. and Securities Investors Protection Corp.
Limitations on Liability
The Sponsors are jointly and severally liable for the performance of
their obligations arising from their responsibilities under the Trust
Agreement, but will be under no liability to the Unit holders for taking any
action or refraining from any action in good faith or for errors in judgment;
nor will they be responsible in any way for depreciation or loss incurred by
reason of the sale of any Bonds, except in cases of their willful misconduct,
bad faith, gross negligence or reckless disregard for their obligations and
duties. See "The Trust--Portfolio" and "Sponsors-- Responsibility" in Part B.
Responsibility
The Trustee shall sell, for the purpose of redeeming Units tendered
by any Unit holder and for the payment of expenses for which funds are not
available, such of the Bonds in a list furnished by the Sponsors as the
Trustee in its sole discretion may deem necessary. In the event the Trustee
does not exercise the right to obtain Permanent Insurance on a Defaulted Bond
or Bonds in the Trust, to the extent that Bonds are sold which are current in
payment of principal and interest in order to meet redemption requests and
Defaulted Bonds are retained in the Trust in order to preserve the related
insurance protection applicable to said Bonds, the overall value of the Bonds
remaining in the Trust's Portfolio will tend to diminish. In the event the
Trustee does not exercise the right to obtain Permanent Insurance on a
Defaulted Bond or Bonds, except as described below and in certain other
unusual circumstances for which it is determined by the Trustee to be in the
best interests of the Unit holders or if there is no alternative, the Trustee
is not empowered to sell Defaulted Bonds for which value has been attributed
for the insurance obtained by the Trust. Because of such restrictions on the
Trustee, under certain circumstances the Sponsors may seek a full or
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partial suspension of the right of Unit holders to redeem their Units. See
"Rights of Unit Holders--Redemption" in Part B. The Sponsors are empowered,
but not obligated, to direct the Trustee to dispose of Bonds in the event of
advanced refunding.
It is the responsibility of the Sponsors to instruct the Trustee to
reject any offer made by an issuer of any of the Securities to issue new
obligations in exchange and substitution for any Securities pursuant to a
refunding or refinancing plan, except that the Sponsors may instruct the
Trustee to accept such an offer or to take any other action with respect
thereto as the Sponsors may deem proper if the issuer is in default with
respect to such Securities or in the judgment of the Sponsors the issuer will
probably default in respect to such Securities 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 Securities originally deposited thereunder. Within five
days after the deposit of obligations in exchange or substitution for
underlying Securities, the Trustee is required to give notice thereof to each
Unit holder, identifying the obligations eliminated and the Securities
substituted therefor. Except as stated in this and the preceding paragraph and
in the discussion under "Portfolio--General Considerations" in Part B
regarding the substitution of Replacement Bonds for Failed Bonds, the
acquisition by the Trust of any securities other than the Securities initially
deposited is prohibited.
If any default in the payment of principal or interest on any Bond
occurs and no provision for payment is made therefor either pursuant to the
portfolio insurance with respect to the Trust or otherwise within 30 days, the
Trustee is required to notify the Sponsors thereof. If the Sponsors fail to
instruct the Trustee to sell or to hold such Bond within 30 days after
notification by the Trustee to the Sponsors of such default, the Trustee may
in its discretion sell the defaulted Bond and not be liable for any
depreciation or loss thereby incurred. See "The Trust--Insurance on the Bonds"
in Part B.
The Sponsors may direct the Trustee to dispose of Bonds upon default
in the payment of principal or interest, institution of certain legal
proceedings or the existence of certain other impediments to the payment of
Bonds, default under other documents which may adversely affect debt service,
default in the payment of principal or interest on other obligations of the
same issuer, decline in projected income pledged for debt service on revenue
Bonds, or decline in price or the occurrence of other market factors,
including advance refunding, so that in the opinion of the Sponsors the
retention of such Bonds in the Trust would be detrimental to the interest of
the Unit holders. The proceeds from any such sales will be credited to the
Principal Account for distribution to the Unit holders.
Notwithstanding the foregoing, in connection with final distributions
to Unit holders, if the Trustee does not exercise the right to obtain
Permanent Insurance on any Defaulted Bond, because the portfolio insurance
obtained by the Trust is applicable only while Bonds so insured are held by
the Trust, the price to be received by the Trust upon the disposition of any
such Defaulted Bond will not reflect any value based on such insurance.
Therefore, in connection with any liquidation prior to December 31, 2044, with
respect to the Trust, it shall not be necessary for the Trustee to, and the
Trustee does not currently intend to, dispose of any Bonds if retention of
such Bonds, until due, shall be deemed to be in the best interest of Unit
holders, including, but not limited to, situations in which Bonds so insured
are in default and situations in which Bonds so insured have a deteriorated
market price resulting from a significant risk of default. Since the
Pre-insured Bonds in the Trust will reflect the value of the insurance
obtained by the Bond issuer, it is the present intention of the Sponsors not
to direct the Trustee to hold any Pre-insured Bonds after the date of
termination. All proceeds received, less applicable expenses, from insurance
on Defaulted Bonds in the Trust not disposed of at the date of termination
will ultimately be distributed to Unit holders of record as of such date
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of termination as soon as practicable after the date such Defaulted Bonds
become due and applicable insurance proceeds have been received by the Trustee
(see "Summary of Essential Financial Information").
Agent for Sponsors
The Sponsor named as Agent for Sponsors under "Summary of Essential
Financial Information" has been appointed by the other Sponsors as agent for
purposes of taking action under the Trust Agreement. If the Sponsors are
unable to agree with respect to action to be taken jointly by them under the
Trust Agreement and they cannot agree as to which Sponsor shall act as sole
Sponsor, then the Agent for Sponsors shall act as sole Sponsor. If one of the
Sponsors fails to perform its duties under the Trust Agreement or becomes
incapable of acting or becomes bankrupt or its affairs are taken over by
public authorities, that Sponsor is automatically discharged under the Trust
Agreement and the other Sponsors act as the Sponsors.
Resignation
Any Sponsor may resign at any time provided that at the time of such
resignation one remaining Sponsor maintains a net worth of $1,000,000 and all
the remaining Sponsors are agreeable to such resignation. Concurrent with or
subsequent to such resignation a new Sponsor may be appointed by the remaining
Sponsors and the Trustee to assume the duties of the resigning Sponsor. If, at
any time, only one Sponsor is acting under each Trust Agreement and that
Sponsor shall resign or fail to perform any of its duties thereunder or
becomes incapable of acting or becomes bankrupt or its affairs are taken over
by public authorities, then the Trustee may appoint a successor sponsor or
terminate the Trust Agreement and liquidate the Trust.
Financial Information
At September 30, 1995, the total partners' capital of Glickenhaus was
$146,106,000 (audited); and at March 31, 1995, the total stockholders' equity
of Lebenthal was $3,561,506 (audited).
The foregoing information with regard to the Sponsors relates to the
Sponsors only, and not to any series of Empire State Municipal Exempt Trust.
Such information is included in this Prospectus only for the purpose of
informing investors as to the financial responsibility of the Sponsors and
their ability to carry out their contractual obligations shown herein. More
comprehensive financial information can be obtained upon request from any
Sponsor.
TRUSTEE
The Trustee is The Bank of New York, a trust company organized under
the laws of New York, having its offices at 101 Barclay Street, New York, New
York 10286 (212) 495-1784. The Bank of New York is subject to supervision and
examination by the Superintendent of Banks of the State of New York and the
Board of Governors of the Federal Reserve System, and its deposits are insured
by the Federal Deposit Insurance Corporation to the extent permitted by law.
The Trustee must be a banking corporation organized under the laws of the
United States or any state which is authorized under such laws to exercise
corporate trust powers and must have at all times an aggregate capital,
surplus and undivided profits of not less than $5,000,000. The duties of the
Trustee are primarily ministerial in nature. The Trustee did not participate
in the selection of Securities for the Trust.
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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 monies,
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 its willful misconduct, 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 the 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 "The Trust-- Portfolio" in Part A.
Responsibility
For information relating to the responsibilities of the Trustee under
the Trust Agreement, reference is made to the material set forth under "Rights
of Unit Holders," "Sponsors--Responsibility" and "Sponsors--Resignation" in
this Part B.
Resignation
By executing an instrument in writing and filing the same with the
Sponsors, the Trustee and any successor may resign. In such an event the
Sponsors are obligated to appoint a successor trustee as soon as possible. If
the Trustee becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, or if the Sponsors deem it to be in the best
interest of the Unit holders, the Sponsors may remove the Trustee and appoint
a successor as provided in the Trust Agreement. Such resignation or removal
shall become effective upon the acceptance of appointment by the successor
trustee. If, upon resignation or removal of a trustee, no successor has been
appointed and has accepted the appointment within thirty days after
notification, 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
Both during and after the initial offering period, the Evaluator
shall be Muller Data Corporation ("Muller Data"), a New York corporation with
main offices located at 395 Hudson Street, New York, New York 10014. Muller
Data is a wholly owned subsidiary of Thomson Publishing Corporation, a
Delaware corporation.
Limitations on Liability
The Trustee and the Sponsors may rely on any evaluation furnished by
the Evaluator and shall have no responsibility for the accuracy thereof.
Determinations by the Evaluator under the Trust Agreement shall be made in
good faith upon the basis of the best information available to it; provided,
however, that the Evaluator shall be under no liability to the Trustee, the
Sponsors or Unit holders for errors in judgement. But this provision shall not
protect the Evaluator in cases of its willful misconduct, bad faith, gross
negligence or reckless disregard of its obligations and duties.
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Responsibility
The Trust Agreement requires the Evaluator to evaluate the Securities
on the basis of their bid prices on each business day after the initial
offering period, when any Unit is tendered for redemption and on any other day
such evaluation is desired by the Trustee or is requested by the Sponsors. For
information relating to the responsibility of the Evaluator to evaluate the
Securities on the basis of their offering prices, see "Public
Offering--Offering Price" in Part B.
Resignation
The Evaluator may resign or may be removed by the Sponsors and the
Trustee, and the Sponsors and the Trustee are to use their best efforts to
appoint a satisfactory successor. Such resignation or removal shall become
effective upon the acceptance of appointment by the successor evaluator. If
upon resignation of the Evaluator no successor has accepted appointment within
thirty days after notice of resignation, the Evaluator may apply to a court of
competent jurisdiction for the appointment of a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
The Sponsors and the Trustee have the power to amend the Trust
Agreement without the consent of any of the Unit holders when such an
amendment is (1) to cure any ambiguity or to correct or supplement any
provision of the Trust Agreement which may be defective or inconsistent with
any other provision contained therein, or (2) to make such other provisions as
shall not adversely affect the interest of the Unit holders; and the Sponsors
and the Trustee may amend the Trust Agreement with the consent of the holders
of Certificates evidencing 66 2/3% of the Units then outstanding, provided
that no such amendment will reduce the interest in the Trust of any Unit
holder without the consent of such Unit holder or reduce the percentage of
Units required to consent to any such amendment without the consent of all the
Unit holders. In no event shall the Trust Agreement be 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 the Trust, except in accordance with the provisions of
each Trust Agreement. In the event of any amendment, the Trustee is obligated
to notify promptly all Unit holders of the substance of such amendment.
The Trust shall terminate upon the maturity, redemption, sale or
other disposition, as the case may be, of the last of the Securities. The
Trustee shall notify all Unit holders when the value of the Trust as shown by
any evaluation is less than $2,000,000 or less than 20% of the value of the
Trust as of the date hereof, whichever is lower, at which time the Trust may
be terminated (i) by the consent of 66 2/3% of the Units or (ii) by the
Trustee; provided, however, that upon affirmative written notice to the
Sponsors and the holders at least 33 1/3% of the Units may instruct the
Trustee not to terminate the Trust. In no event, however, may the Trust
continue beyond the Mandatory Termination Date set forth in Part A; provided,
however, that prior to such date, the Trustee shall not dispose of any Bonds
if the retention of such Bonds, until due, shall be deemed to be in the best
interest of the Unit holders. 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 remaining Securities, and,
after paying all expenses and charges incurred by the 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 Accounts of the Trust.
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LEGAL OPINIONS
Certain legal matters will be passed upon by Battle Fowler LLP, 75
East 55th Street, New York, New York 10022, as special counsel for the
Sponsors, and Kroll & Tract, 520 Madison Avenue, New York, New York 10022,
acting as counsel for the Trustee.
AUDITORS
The statement of condition of the Trust included in this Prospectus
has been audited by BDO Seidman, LLP, independent certified public auditors,
as stated in their report appearing herein, and has been so included in
reliance upon such report given upon the authority of that firm as experts in
accounting and auditing.
DESCRIPTION OF BOND RATINGS
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. Standard & Poor"s does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes in,
or unavailability of, such information or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default-capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA--Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA--Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
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are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, CC--Bonds rated BB, B, CCC and CC are regarded on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): to provide more detailed indications of credit
quality, the ratings from "AA" to "B" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating
categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own judgment with respect to
such likelihood and risk.
NR--Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
SP-1: Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest. SP-3:
Speculative capacity to pay principal and interest.
* Moody's Investors Service rating. A summary of the meaning of the
applicable rating symbols as published by Moody's 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. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
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.
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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.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
Con. (. . .)--Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by: (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from "Aa" through "B" in its corporate rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the security ranks in the lower end of its generic
rating category.
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<TABLE>
<S> <C>
No person is authorized to give any information or to make
any representations not contained in Parts A and B of this
Prospectus; and any information or representation not contained
herein must not be relied upon as having been authorized by
the Trust, the Trustee, the Evaluator, or the Sponsors. The EMPIRE, GTD.,
Trust is registered as a unit investment trust under the
Investment Company Act of 1940. Such registration does not EMPIRE STATE
imply that the Trust or any of its Units have been guaranteed, MUNICIPAL EXEMPT TRUST
sponsored, recommended or approved by the United States or GUARANTEED SERIES
any state or any agency or officer thereof. 127
-------------------------
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, securities in any state to any _________
person to whom it is not lawful to make such offer in such
state.
TABLE OF CONTENTS
Title Page Sponsors:
PART A Glickenhaus & Co.
Summary of Essential Information.......................A-2 6 East 43rd Street
Independent Auditors' Report...........................A-11 New York, New York 10017
Statements of Condition................................A-12 (212) 953-7532
Portfolio..............................................A-13
Underwriting Account...................................A-15
PART B Lebenthal & Co., Inc.
The Trust...............................................B-1 120 Broadway
Public Offering........................................B-22 New York, New York 10271
Estimated Current Return and (212) 425-6116
Estimated Long Term .................................B-27
Insurance on the Bonds ................................B-28
Tax Status.............................................B-31 ___________
Rights of Unit Holders.................................B-36
Automatic Accumulation Account.........................B-44
Sponsors...............................................B-45
Trustee................................................B-47 Insurer:
Evaluator .............................................B-48
Amendment and Termination of the Trust MBIA INSURANCE CORPORATION
Agreement............................................B-49
Legal Opinions.........................................B-50 113 King Street
Auditors...............................................B-50 Armonk, New York 10504
Description of Bond Ratings............................B-50
</TABLE>
Parts A and B of this Prospectus do not contain all of the information set
forth in the registration statement and exhibits relating thereto, 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
made.
