AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1996
REGISTRATION NO. 33-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
For Registration Under the Securities Act
of 1933 of Securities of Unit Investment
Trusts Registered on Form N-8B-2
A. EXACT NAME OF TRUST:
Empire State Municipal Exempt Trust, Guaranteed Series 128
B. NAME OF DEPOSITORS:
Glickenhaus & Co.
Lebenthal & Co., Inc.
C. COMPLETE ADDRESS OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
Glickenhaus & Co. Lebenthal & Co., Inc.
6 East 43rd Street 120 Broadway
New York, New York 10017 New York, New York 10271
D. NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE:
COPY OF COMMENTS TO:
MICHAEL R. ROSELLA, Esq.
SETH M. GLICKENHAUS JAMES A. LEBENTHAL Battle Fowler LLP
Glickenhaus & Co. Lebenthal & Co., Inc. 75 East 55th Street
6 East 43rd Street 120 Broadway New York, New York 10022
New York, New York 10017 New York, New York 10271 (212) 856-6858
E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
290 Units of Empire State Municipal Exempt Trust,
Guaranteed Series 128 are being registered under the Securities Act of 1933
and the Investment Company Act of 1940.
F. PROPOSED MAXIMUM AGGREGATE OFFERING PRICE TO THE PUBLIC OF THE SECURITIES
BEING REGISTERED:
$290,000*
G. AMOUNT OF FILING FEE (computed at one-twenty-ninth of 1 percent of the
proposed maximum aggregate offering price to the public):
$100
H. APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of the Registration
Statement.
Check if it is proposed that this filing will become effective
immediately upon filing pursuant to Rule 487.
- -----------------
* Estimated solely for purposes of calculating filing fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY THE EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFCALLY STATES THAT THIS STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
C/M: 316700.1
<PAGE>
<TABLE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST,
GUARANTEED SERIES 128
CROSS-REFERENCE SHEET
Pursuant to Rule 404(e) of Regulation C
Under the Securities Act of 1933
(Form N-8B-2 Items Required by Instruction as
to the Prospectus in Form S-6)
<CAPTION>
FORM N-8B-2 FORM S-6
ITEM NUMBER HEADING IN PROSPECTUS
I. ORGANIZATION AND GENERAL INFORMATION
<S> <C>
1. (a) Name of trust.......................................... Front cover of Prospectus
(b) Title of securities issued............................. Front cover of Prospectus
2. Name and address of each depositor.......................... Sponsors
3. Name and address of trustee................................. Trustee
4. Name and address of principal underwriters Sponsors, Underwriting Account, Back
Cover
5. State of organization of trust.............................. The Trust
6. Execution and termination of trust agreement The Trust, Amendment and Termination of
the Trust Agreement
7. Changes of name............................................. Not Applicable
8. Fiscal year................................................. Not Applicable
9. Litigation.................................................. None
II. GENERAL DESCRIPTION OF THE TRUST AND SECURITIES OF THE TRUST
10. (a) Registered or bearer securities........................ Rights of Unit Holders
(b) Cumulative or distributive securities Rights of Unit Holders
(c) Redemption Rights of Unit Holders
(d) Conversion, transfer, etc Rights of Unit Holders
(e) Periodic payment plan.................................. Not Applicable
(f) Voting rights Amendment and Termination of the Trust
Agreement
(g) Notice to certificateholders Right of Unit Holders--Reports and
Records, Sponsors--Responsibility, Trustee--
Resignation, Amendment and Termination
of the Trust Agreement--Amendment
(h) Consents required Sponsors-Responsibility, Amendment and
Termination of the Trust Agreement
(i) Other provisions....................................... The Trust-Tax Status
11. Type of securities comprising units Prospectus front cover, The Trust-Portfolio
12. Certain information regarding periodic payment
certificates................................................ Not Applicable
i
C/M: 316700.1
<PAGE>
FORM N-8B-2 FORM S-6
ITEM NUMBER HEADING IN PROSPECTUS
13. (a) Load, fees, expenses, etc Prospectus front cover, Summary of
Essential Financial Information, The
Trust--Expenses and Charges, Public
Offering--Offering Price, Public Offering--
Market for Units, Public Offering--
Sponsors' and Underwriters' Profits
(b) Certain information regarding periodic
payment certificates................................... Not Applicable
(c) Certain percentages Public Offering--Offering Price
(d) Other loads, fees, expenses Rights of Unit Holders--Certificates
(e) Certain profits receivable by depositors,
principal underwriters, trustee or
affiliated persons Public Offering--Offering Price, Public
Offering--Sponsors' and Underwriters'
Profits, Rights of Unit Holders--
Redemption--Purchase by the Sponsors of
Units Tendered for Redemption
(f) Ratio of annual charges to income Not Applicable
14. Issuance of trust's securities The Trust, Rights of Unit Holders--
Certificates
15. Receipt and handling of payments from purchasers Public Offering--Offering Price, Public
Offering--Sponsors' and Underwriters'
Profits, Amendment and Termination of the
Trust Agreement
16. Acquisition and disposition of underlying
securities The Trust-Portfolio, Sponsors--
Responsibility
17. Withdrawal or redemption Public Offering--Market for Units, Rights of
Unit Holders--Redemption
18. (a) Receipt, custody and disposition of income The Trust-Portfolio--General Considerations,
The Trust--Insurance on the Bonds, Public
Offering--Offering Price, Rights of Unit
Holders--Distribution of Interest and
Principal, Rights of Unit Holders--Reports
and Records, Amendment and Termination
of the Trust Agreement
(b) Reinvestment of distributions Automatic Accumulation Account
(c) Reserves or special funds The Trust--Expenses and Charges--Other
Charges, Rights of Unit Holders--
Distribution of Interest and Principal,
Amendment and Termination of the Trust
Agreement
(d) Schedule of distributions Not Applicable
19. Records, accounts and reports Rights of Unit Holders--Reports and
Records; Rights of Unit Holders--
Distribution of Interest and Principal,
ii
C/M: 316700.1
<PAGE>
FORM N-8B-2 FORM S-6
ITEM NUMBER HEADING IN PROSPECTUS
Amendment and Termination of the Trust
Agreement
20. Certain miscellaneous provisions of trust
agreement
(a) Amendment Sponsors--Resignation, Trustee--Resignation,
Trustee--Limitations on Liability,
Amendment and Termination of the Trust
Agreement
(b) Termination Sponsors--Resignation, Trustee--Resignation,
Trustee--Limitations on Liability,
Amendment and Termination of the Trust
Agreement
(c) and (d) Trustee, removal and successor Sponsors--Resignation, Trustee--Resignation,
Trustee--Limitations on Liability,
Amendment and Termination of the Trust
Agreement
(e) and (f) Depositor, removal and successor Sponsors--Resignation, Trustee--Resignation,
Trustee--Limitations on Liability,
Amendment and Termination of the Trust
Agreement
21. Loans to security holders Not Applicable
22. Limitations on liability The Trust-Portfolio, Sponsors--Limitations
on Liability, Trustee--Limitations on
Liability
23. Bonding arrangements Additional Information - Item A
24. Other material provisions of trust agreement Not Applicable
III. Organization, Personnel and Affiliated Persons of Depositor
25. Organization of depositor Sponsors
26. Fees received by depositor Not Applicable
27. Business of depositor Sponsors
28. Certain information as to officials and affiliated
persons of depositor Contents of Registration Statement
29. Voting securities of depositor.............................. Not Applicable
30. Persons controlling depositor............................... Not Applicable
31. Payments by depositor for certain services
rendered to trust........................................... Not Applicable
32. Payments by depositor for certain other services
rendered to trust........................................... Not Applicable
33. Remuneration of employees of depositor for
certain services rendered to trust.......................... Not Applicable
34. Remuneration of other person for certain services
rendered to trust........................................... Not Applicable
IV. Distribution and Redemption of Securities
iii
C/M: 316700.1
<PAGE>
FORM N-8B-2 FORM S-6
ITEM NUMBER HEADING IN PROSPECTUS
35. Distribution of trust's securities by states................ Public Offering--Distribution of Units
36. Suspension of sales of trust's securities................... Not Applicable
37. Revocation of authority to distribute....................... Not Applicable
38. (a) Method of distribution Public Offering--Distribution of Units,
Public Offering--Underwriting Account,
Public Offering--Sponsors' and
Underwriters' Profits
(b) Underwriting agreements Public Offering--Distribution of Units,
Underwriting Account, Public Offering--
Sponsors' and Underwriters' Profits
(c) Selling agreements Public Offering--Distribution of Units,
Underwriting Account, Public Offering--
Sponsors' and Underwriters' Profits
39. (a) Organization of principal underwriters................. Sponsors
(b) N.A.S.D. membership of principal
underwriters........................................... Sponsors
40. Certain fees received by principal underwriters............. Not Applicable
41. (a) Business of principal underwriters Sponsors
(b) Branch offices of principal underwriters............... Not Applicable
(c) Salesmen of principal underwriters..................... Not Applicable
42. Ownership of trust's securities by certain persons Not Applicable
43. Certain brokerage commissions received by
principal underwriters...................................... Not Applicable
44. (a) Method of valuation Prospectus front cover, Public Offering--
Offering Price, Public Offering--Distribution
of Units
(b) Schedule as to offering price Not Applicable
(c) Variation in offering price to certain
persons Public Offering--Offering Price, Public
Offering--Distribution of Units
45. Suspension of redemption rights Not Applicable
46. (a) Redemption valuation Rights of Unit Holders--Redemption--
Computation of Redemption Price per Unit
(b) Schedule as to redemption price Not Applicable
47. Maintenance of position in underlying securities Public Offering--Market for Units; Public
Offering--Sponsors' and Underwriters'
Profits, Rights of Unit Holders--
Redemption--Purchase by the Sponsors of
Units Tendered for Redemption, Rights of
Unit Holders--Redemption--Computation of
Redemption Price per Unit
V. Information Concerning the Trustee or Custodian
48. Organization and regulation of trustee Trustee
iv
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<PAGE>
FORM N-8B-2 FORM S-6
ITEM NUMBER HEADING IN PROSPECTUS
49. Fees and expenses of trustee The Trust--Expenses and Charges, Rights of
Unit Holders--Distribution of Interest and
Principal
50. Trustee's lien The Trust--Expenses and Charges--Other
Charges, Rights of Unit Holders--
Distribution of Interest and Principal
VI. Information Concerning Insurance of Holders of Securities
51. Insurance of holders of trust's securities The Trust--Insurance on the Bonds
VII. Policy of Registrant
52. (a) Provisions of trust agreement with respect
to selection or elimination of underlying
securities Prospectus front cover, Sponsors--
Responsibility
(b) Transactions involving elimination of
underlying securities.................................. Not Applicable
(c) Policy regarding substitution or elimination
of underlying securities............................... Sponsors--Responsibility
(d) Fundamental policy not otherwise covered............... Not Applicable
53. Tax status of trust Prospectus front cover, The Trust--Tax
Status
VIII. FINANCIAL AND STATISTICAL INFORMATION
54. Trust's securities during last ten years.................... Not Applicable
55. Hypothetical account for issuers of periodic
payment plans............................................... Not Applicable
56. Certain information regarding periodic payment
certificates................................................ Not Applicable
57. Certain information regarding periodic payment
plans.........................................Not Applicable
58. Certain other information regarding periodic
payment plans............................................... Not Applicable
59. Financial statements (Instruction 1(c) to Form
S-6) Statement of Condition
</TABLE>
v
C/M: 316700.1
<PAGE>
SUBJECT TO COMPLETION
ISSUE DATE: MARCH 20, 1996
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 128
The attached final prospectus for a prior Guaranteed Series of Empire
State Municipal Exempt Trust is hereby used as a preliminary prospectus for
Guaranteed Series 128. The narrative information and structure of the final
prospectus for this Series will be substantially the same as that of the
attached final prospectus. Information with respect to pricing, the number of
Units, dates and summary information regarding the characteristics of
securities to be deposited in this Series is not now available and will be
different because each Series has a unique portfolio. Accordingly, the
information contained herein with regard to the previous Series should be
considered as being included for informational purposes only. Ratings of the
securities in this Series are expected to be comparable to those of the
securities deposited in the previous Series. However, the estimated current
return and estimated long term return for this Series will depend on the
interest rates and offering prices of the securities in this Series and may
vary materially from that of the previous Series. Investors should contact
account executives of the underwriters who will be informed of the expected
effective date of this Series and who will be supplied with complete
information with respect to such Series on the day of and immediately prior to
the effectiveness of the registration statement relating to Units of this
Series.
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.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
316852.1
<PAGE>
10,000 Units
Dated: March 14, 1996
EMPIRE STATE MUNICIPAL EXEMPT TRUST, GUARANTEED SERIES 126
The Empire State Municipal Exempt Trust, Guaranteed Series 126 (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 MARCH 14, 1996
347555.1
<PAGE>
<TABLE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST,
GUARANTEED SERIES 126
SUMMARY OF ESSENTIAL FINANCIAL INFORMATION
AT MARCH 13, 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: March 14, 1996
<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): $ 9,484,575.00
==============
Sponsors' Initial Repurchase Price Per Unit (Total Value of Securities divided by 10,000 Units): $ 948.46(3)
Plus Sales Charge of 4.9% (on sales of fewer than 250 Units) of Public Offering Price (4): 48.87
--------------
Public Offering Price Per Unit: $ 997.33(5)
===============
Redemption Price Per Unit: $ 942.60(6)
Excess of Public Offering Price Over Redemption Price Per Unit: $ 54.73
Excess of Public Offering Price Over Sponsors' Initial Repurchase Price Per Unit: $ 48.87
Weighted Average Maturity of Bonds in the Trust: 25.32 years
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): $14,000.00
Evaluator's Fee: $.55 per Bond for each valuation.
Trustee's Annual Fee: For each $1,000 principal amount of Bonds in the Trust, $1.37 under the monthly and
$.97 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: $90,515.00
Mandatory Termination Date: December 31, 2045
First Settlement Date: March 19, 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>
<CAPTION>
Monthly Semi-Annual
<S> <C> <C> <C>
Estimated Annual Interest Income (includes cash income accrued only): $55.76 $55.76
P Less Annual Premium on Portfolio Insurance: 1.40 1.40
E Less Organizational Expenses (8): .42 .42
R Less Estimated Annual Expenses (9): 2.12 1.62
---- ----
Estimated Net Annual Interest Income: $51.82 $52.32
====== ======
U Estimated Interest Distribution (10): $ 4.31 $26.16
N Estimated Current Return Based on Public Offering Price (includes cash
I income accrual only) (11): 5.20% 5.25%
T Estimated Long-Term Return (12): 5.24% 5.29%
Estimated Daily Rate of Net Interest Accrual: $.14396 $.14535
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)
A-2
347555.1
<PAGE>
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 March 14, 1996. With
respect to purchases contracted for after such date, accrued interest from March
19, 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 $147,481.00.
(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)
A-3
347555.1
<PAGE>
(notes continued from preceding pages)
(10) The first monthly interest distribution of $3.74 per Unit will
be made on May 1, 1996 (the "First Distribution Date") to all monthly
certificateholders of record on April 15, 1996 (the "First Record Date"). The
regular monthly payment will be $4.31 on June 1, 1996 and thereafter. The first
semi-annual interest distribution of $8.13 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 $26.16 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 March 14,
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 March 14,
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 March 14, 1996 will settle his purchase on March 19, 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 5.38% based on the semi-annual payment
plan and 5.33% 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 5.42% based on the semi-annual payment
plan and 5.37% 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.
A-4
347555.1
<PAGE>
The Trust
Empire State Municipal Exempt Trust (the "Fund"), Guaranteed Series
126 (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.
A-5
347555.1
<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 March 13, 1996, the Public Offering
Price per Unit would have been $997.33.
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."
A-6
347555.1
<PAGE>
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 $3.74 for Units of
the Trust and will be made on May 1, 1996, to monthly Unit holders of record on
April 15, 1996, and $4.31 thereafter. The first semi-annual distribution will be
$8.13 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 $26.16 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.
A-7
347555.1
<PAGE>
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"). Five of the issues (56.80%) 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.
A-8
347555.1
<PAGE>
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 8 issues
of Bonds issued by entities located in New York or certain United States
territories or possessions, including Puerto Rico. All such contracts are
expected to be settled by March 19, 1996. The following information is being
supplied to inform Unit holders of circumstances affecting the Trust. None 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. 40% of the aggregate principal amount of the Bonds in the
portfolio are payable from appropriations. 60% 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: Healthcare, 2 (35.00%); Water & Sewer, 1
(15.00%); Transportation, 2 (7.70%); Utility, 1 (2.30%); and Appropriation, 2
(40.00%). The Trust is deemed to be concentrated in the Health Care and
Appropriation Bond categories.* Prior to their deposit in the Trust, five of the
issues (56.80%) were rated AAA and one issue (3.20%) was rated AA- by Standard
and Poor's Corporation; and
- --------
* 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.
A-9
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<PAGE>
two issues (40.00%) were rated Baa1 by Moody's Investors Service.* Bonds rated
Baa have adequate capacity to pay interest and to repay principal, however, such
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.
45% 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, none are zero coupon
bonds. None 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,
none 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, 100% of the aggregate principal amount of the
Bonds were at a discount from par and none 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.
- --------
* 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.
A-10
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Sponsors, Trustee, and Unit Holders of Empire State Municipal Exempt Trust,
Guaranteed Series 126
We have audited the Statement of Condition of Empire State Municipal
Exempt Trust, Guaranteed Series 126, including the Portfolio as of March 14,
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 March 14, 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 126 at March 14, 1996 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
New York, New York
March 14, 1996
A-11
347555.1
<PAGE>
<TABLE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
Guaranteed Series 126
STATEMENT OF CONDITION AS OF DATE OF DEPOSIT
March 14, 1996
TRUST PROPERTY
<S> <C>
Investment in Securities:
Contracts to purchase underlying Securities (1)(2)..................................................$ 9,484,575.00
Accrued interest receivable (2)........................................................................... 143,415.48
Organizational costs (3).................................................................................. 21,000.00
-----------------------
Total.....................................................................................$ 9,648,990.48
=======================
LIABILITIES AND INTEREST OF UNIT HOLDERS
Liabilities:
Accrued interest receivable (2).....................................................................$ 143,415.48
Accrued liability (3)............................................................................... 21,000.00
-----------------------
164,415.48
Interest of Unit holders:
Units of fractional undivided interest outstanding (10,000):
Cost to investors (4)...............................................................................$ 9,973,245.00
Less--gross underwriting commission (5)............................................................. 488,670.00
-----------------------
Net interest of Unit holders.............................................................................. 9,484,575.00
-----------------------
Total.....................................................................................$ 9,648,990.48
=======================
</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 $9,425,950.00. An irrevocable
letter of credit issued by Bankers Trust, in an aggregate amount equal to or in
excess of $9,628,041.59, has been deposited with the Trustee. The amount of such
letter of credit includes: $9,484,575.00, the amount required to purchase the
tax-exempt securities listed in the related portfolio, plus $143,466.59 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 March
19, 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
347555.1
<PAGE>
<TABLE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
Guaranteed Series 126
Portfolio as of Date of Deposit, March 14, 1996
<CAPTION>
Redemption Features
Port- Coupon Ant.--Anticipated Yield Cost of
folio Rating Principal Represented by Contracts to Rate and S.F.--Sinking Fund to Securities
No. (1)(2) Amount (3) Purchase Securities (4) Maturity Opt.--Optional (5) Maturity to Trust(6)(7)
- ------ ------------ ---------- -------------------------------------- ---------- -------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 AAA/Aaa $2,000,000 New York State Medical Care 5.400% 08/15/09 @100 Ant. 5.916% $1,845,00
Facilities Finance Agency, Hospital 08/15/33 08/15/03 @102 Opt.
and Nursing Home Insured
Mortgage Revenue Bonds, 1993
Series D (MBIA Insured)
2 AAA/Aaa 1,500,000 New York City Municipal Water 5.500 06/15/12 @100 S.F. 5.795 1,443,750
Finance Authority, Water & Sewer 06/15/19 06/15/04 @101 Opt.
System Revenue Bonds, Fixed Rate
Fiscal 1994 Series B (MBIA
Insured)
3 AAA/Aaa 1,500,000 New York State Medical Care 5.250 08/15/14 @100 S.F. 5.806 1,395,000
Facilities Finance Agency, Mental 02/15/19 12/15/04 @102 Opt.
Health Services Facilities
Improvement Revenue Bonds, 1993
Series F Refunding (MBIA Insured)
4 AAA/Aaa 450,000 New York State Thruway Authority, 5.750 01/01/13 @100 S.F.. 5.769 448,875
General Revenue Bonds, Series A 01/01/19 01/01/02 @102 Opt.
(MBIA Insured)
5 AAA/Aaa 230,000 New York State Energy Research 5.500 No Sinking Fund 5.766 221,950
and Development Authority, Gas 01/01/21 01/01/06 @102 Opt.
Facilities Revenue Bonds, 1996
Series (The Brooklyn Union Gas
Company Project) (MBIA Insured)
6 AA-/Aaa 320,000 The Port Authority of New York 5.750 12/15/21 @100S.F. 5.834 316,000
and New Jersey Consolidated Bonds, 06/15/30 06/15/05 @101 Opt.
One Hundredth Series
7 Baa1*/Aaa 2,000,000 New York State Housing Finance 5.875 03/15/08 @100 S.F. 6.159 1,945,000
Agency Service Contract Obligation 03/15/11 09/15/03 @102 Opt.
Revenue Bonds, 1993, Series C
Refunding
8 Baa1*/Aaa 2,000,000 Dormitory Authority of the State of 5.700 No Sinking Fund 6.209 1,869,000
New York, Court Facilities, Lease 05/15/22 05/15/03 @101.5 Opt.
Revenue Bonds (The City of New
York Issue), Series 1993A
$10,000,000 $9,484,575.00
=========== =============
</TABLE>
A-13
347555.1
<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 March 11,
1996 to March 12, 1996. All contracts are expected to be settled prior to or on
the First Settlement Date of the Trust which is expected to be March 19, 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 .618%. 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 $557,675.00.
(8) Yield calculated based on a call date prior to stated maturity.
A-14
347555.1
<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 126
<S> <C> <C>
Glickenhaus & Co............................... 6 East 43rd Street 2,850
New York, New York 10017
Lebenthal & Co., Inc........................... 120 Broadway 2,850
New York, New York 10271
Gruntal & Co., Inc............................. 14 Wall Street 1,200
New York, New York 10005
Pershing (Division of Donaldson, Lufkin &
Jenrette Securities Corporation)............. One Pershing Plaza 500
Jersey City, New Jersey 07399
Josephthal Lyon & Ross Incorporated............ 6 East 43rd Street 350
New York, New York 10017
Advest Incorporated............................ 90 State House Square 250
Hartford, Connecticut 06103
Smith Barney Inc............................... 388 Greenwich Street 250
New York, New York 10013
David Lerner Associates, Inc................... 477 Jericho Turnpike 150
Syosset, New York 11791
Cadaret, Grant & Co., Inc...................... 108 W. Jefferson Street 100
Syracuse, New York 13202
Cowen & Company................................ Financial Square 100
New York, New York 10005
Everen Securities, Inc......................... 77 West Wacker Drive 100
Chicago, Illinois 60601
Federated Securities, Inc...................... P.O. Box 214 100
Huntington Station, New York 11746
First Investors Corporation.................... 95 Wall Street 100
New York, New York 10005
Gibraltar Securities Co........................ 25 Hanover Road 100
Florham Park, New Jersey 07932
Kirlin Securities, Inc......................... 6901 Jericho Turnpike 100
Syosset, New York 11791
Nathan & Lewis Securities Inc.................. 1140 Avenue of the Americas 100
New York, New York 10036
Oppenheimer & Company.......................... World Financial Center 100
New York, New York 10281
</TABLE>
A-15
347555.1
<PAGE>
<TABLE>
<CAPTION>
Units
Name Address Series 126
<S> <C> <C>
Redstone Securities, Inc........................101 Fairchild Avenue 100
Plainview, New York 11803
Roosevelt & Cross, Inc. ........................20 Exchange Place 100
New York, New York 10005
Samuel A. Ramirez & Co., Inc....................61 Broadway 100
New York, New York 10006
Stuart, Coleman & Co., Inc......................11 West 42nd Street 100
New York, New York 10036
U.S. Clearing Corporation.......................26 Broadway 100
New York, New York 10004
W.H. Newbolds, a division of Fahnestock & Co....1500 Walnut Street 100
Philadelphia, Pennsylvania 19102
William R. Hough & Co...........................100 Second Avenue South 100
St. Petersburg, Florida 33701
10,000
</TABLE>
A-16
347555.1
<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 Return Single 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%
- ------------------------------------------------------------------------------------------------------------------------------------
7.50% 7.75% 8.00% 8.50%
------------------------------------
If your net taxable income1
is approximately2
Joint 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>
TABLE II. COMBINED EFFECT OF FEDERAL AND NEW YORK STATE 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 Return Single 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%
- ------------------------------------------------------------------------------------------------------------------------------------
--------------------------------
7.50% 7.75% 8.00% 8.50%
--------------------------------
If your net taxable income1
is approximately2
Joint 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
347555.1
<PAGE>
[This page intentionally left blank]
A-18
347555.1
<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 126
(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.
347624.1
<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.
B-2
347624.1
<PAGE>
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
B-3
347624.1
<PAGE>
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.
B-4
347624.1
<PAGE>
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.
B-5
347624.1
<PAGE>
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
B-6
347624.1
<PAGE>
(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-overyear 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 forecasts that national economic growth will
weaken, but not turn negative, during the course of 1995 before beginning
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to rebound by the end of the year. This dynamic is often described as a "soft
landing". The overall rate of growth of the national economy during calendar
year 1995 will be slightly below the "consensus" of a widely followed survey of
national economic forecasters. Growth in the real gross domestic product during
1995 is projected to be moderate (3.0 percent), with declines in defense
spending and net exports more than offset by increases in consumption and
investment. Continuing efforts by business and government to reduce costs are
expected to exert a drag on economic growth. Inflation, as measured by the
Consumer Price Index, is projected to remain about 3 percent due to moderate
wage growth and foreign competition. Personal income and wages are projected to
increase by about 6 percent or more.
New York's economy is expected to continue to expand modestly during
1995, but there will be a pronounced slow-down during the course of the year.
Although industries that export goods and services abroad are expected to
benefit from the lower dollar, growth will be slowed by government cutbacks at
all levels. On an average annual basis, employment growth will be about the same
as 1994. Both personal income and wages are expected to record moderate gains in
1995. Bonus payments in the securities industry are expected to increase from
last year's depressed level.
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, as compared to the level of receipts in 1995-96. Similarly, many
actions taken to reduce disbursements in the State's
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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.
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
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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 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
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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.
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.
B-15
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<PAGE>
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.
B-16
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<PAGE>
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.
B-17
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<PAGE>
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
B-18
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<PAGE>
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.
B-19
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<PAGE>
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
B-20
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<PAGE>
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> <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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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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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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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
Tanner Propp LLP, 99 Park Avenue, New York, New York 10016, 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.
B-50
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<PAGE>
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.
B-51
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B-52
347624.1
<PAGE>
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 EMPIRE, GTD.,
Evaluator, or the Sponsors. The Trust is
registered as a unit investment trust under the EMPIRE STATE
Investment Company Act of 1940. Such registration MUNICIPAL EXEMPT TRUST
does not imply that the Trust or any of its Units GUARANTEED SERIES
have been guaranteed, sponsored, recommended or 126
approved by the United States or any state or any
agency or officer thereof.
-------------------------
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-21 New York, New York 10271
Estimated Current Return and (212) 425-6116
Estimated Long Term .......................B-26
Insurance on the Bonds ......................B-27
Tax Status...................................B-30 ___________
Rights of Unit Holders.......................B-35
Automatic Accumulation Account...............B-43
Sponsors.....................................B-44
Trustee......................................B-46 Insurer:
Evaluator ...................................B-47
Amendment and Termination of the Trust MBIA INSURANCE CORPORATION
Agreement..................................B-48
Legal Opinions...............................B-49 113 King Street
Auditors.....................................B-49 Armonk, New York 10504
Description of Bond Ratings..................B-49
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.
347624.1
<PAGE>
PART II--ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM A--BONDING ARRANGEMENTS
The employees of Glickenhaus & Co. and Lebenthal & Co., Inc. are covered
under Brokers' Blanket Policy, Standard Form 14, in the respective amounts of
$5,000,000 and $10,000,000.
ITEM B--CONTENTS OF REGISTRATION STATEMENT
This Registration Statement on Form S-6 comprises the following papers and
documents:
The facing sheet on Form S-6.
The Cross-Reference Sheet.
The Prospectus consisting of pages.
Undertakings.
Signatures.
Written consents of the following persons:
Battle Fowler LLP (included in Exhibit 99.3.1)
BDO Seidman, LLP
Muller Data Corporation (included in Exhibit 99.5.1)
The following exhibits:
*99.1.1 -- Reference Trust Agreement including certain Amendments to
the Trust Indenture and Agreement referred to under
Exhibit 99.99.1 below.
99.1.1.1 -- Trust Indenture and Agreement (filed as Exhibit 1.1.1 to
Amendment No. 1 to Form S-6 Registration Statement No.
33-33746 of Empire State Municipal Exempt Trust, Guaranteed
Series 66 on December 18, 1990, and incorporated herein by
reference).
99.1.3 -- Form of Agreement Among Underwriters and Selected Dealers
Agreement (filed as Exhibit 1.8 to Amendment No. 1 to Form
S-6 Registration Statement No. 33-28268 of Empire State
Municipal Exempt Trust, Guaranteed Series 49 on July 18,
1989, and incorporated herein by reference).
99.1.6 -- Restated Agreement of Limited Partnership of Glickenhaus &
Co. (filed as Exhibit 1.3 to Form S-6 Registration
Statement No. 2-95041 of Municipal Insured National Trust
Series 1 on December 21, 1984, and incorporated herein by
reference).
99.1.6(a) -- Agreement of Amendment to Restated Agreement of Limited
Partnership of Glickenhaus & Co. (filed as Exhibit 1.3(a)
to Form S-6 Registration Statement No. 2-95041 of Municipal
Insured National Trust Series 1 on December 21, 1984, and
incorporated herein by reference).
99.1.6(b) -- Certificate of Amendment to Restated Agreement of Limited
Partnership of Glickenhaus & Co. (filed as Exhibit 1.3(b)
to Form S-6 Registration Statement No. 2-95041 of Municipal
Insured National Trust Series 1 on December 21, 1984, and
incorporated herein by reference).
- --------
* To be filed by amendment.
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<PAGE>
99.1.6(c) -- Agreement of Amendment to Restated Agreement of Limited
Partnership of Glickenhaus & Co. (filed as Exhibit 1.3(c)
to Form S-6 Registration Statement No. 2-95041 of Municipal
Insured National Trust Series 1 on December 21, 1984, and
incorporated herein by reference).
99.1.6(d) -- Agreement of Amendment to Restated Agreement of Limited
Partnership of Glickenhaus & Co. (filed as Exhibit 1.2(d)
to Amendment No. 1 to Form S-6 Registration Statement No.
33-814 of Empire State Municipal Exempt Trust, Guaranteed
Series 23 on April 11, 1986, and incorporated herein by
reference).
99.1.6(e) -- Agreement of Amendment to Restated Agreement of Limited
Partnership of Glickenhaus & Co. (filed as Exhibit 1.3(e)
to Amendment No. 1 to Form S-6 Registration Statement No.
33-52058 of MINT Group 8 on November 18, 1992, and
incorporated herein by reference).
99.1.6(f) -- Agreement of Amendment to Restated Agreement of Limited
Partnership of Glickenhaus & Co. (filed as Exhibit 1.3(e)
to Amendment No. 1 to Form S-6 Registration Statement No.
33-78036 of MINT Group 11 on May 3, 1994, and incorporated
herein by reference).
99.1.6.1 -- Certificate of Incorporation of Lebenthal & Co., Inc. as
amended (filed as Exhibit 1.5 to Form S-6 Registration
Statement No. 2-95041 of Municipal Insured National Trust
Series 1 on December 21, 1984, and incorporated herein by
reference.)
99.1.6.2 -- By-Laws of Lebenthal & Co., Inc. (filed as Exhibit 1.5 to
Amendment No. 1 to Form S-6 Registration Statement No.
33-22568 of Empire State Municipal Exempt Trust, Guaranteed
Series 39 on August 9, 1988, and incorporated herein by
reference).
*99.1.7 -- Form of Insurance Policy obtained by the Trust.
99.1.7(a) -- Master Letter Agreement of Municipal Bond Investors
Assurance Corporation (filed as Exhibit 1.7(a) to Amendment
No. 1 to Form S-6 Registration Statement No. 33-35124 of
Empire State Municipal Exempt Trust, Guaranteed Series 59
on July 1, 1990, and incorporated herein by reference).
99.1.7(b) -- Form of Permanent Insurance Policy of Municipal Bond
Investors Assurance Corporation (filed as Exhibit 1.7.1 to
Amendment No. 1 to Form S-6 Registration Statement No.
33-10860 of Empire State Municipal Exempt Trust, Guaranteed
Series 31 on June 10, 1987, and incorporated herein by
reference).
99.2.1 -- Form of Certificate (filed as Exhibit 2.1 to Amendment No.
1 to Form S-6 Registration Statement No. 33-33746 of Empire
State Municipal Exempt Trust, Guaranteed Series 66 on
December 18, 1990, and incorporated herein by reference).
*99.3.1 -- Opinion of Battle Fowler LLP as to the legality of the
securities being registered.
99.4.1 -- Information as to Partners of Glickenhaus & Co. (filed as
Exhibit 4.1 to Amendment No. 1 to Form S-6 Registration
Statement No. 33-26577 of Empire State Municipal Exempt
Trust, Guaranteed Series 46 on April 19, 1989, and
incorporated herein by reference).
- --------
* To be filed by amendment.
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<PAGE>
99.4.2 -- Information as to Officers and Directors of Lebenthal &
Co., Inc. (filed as Exhibit 4.2 to Amendment No. 1 to Form
S-6 Registration Statement No. 33-22568 of Empire State
Municipal Exempt Trust, Guaranteed Series 39 on August 9,
1988, and incorporated herein by reference).
99.4.3 -- Affiliations of Sponsors with other investment companies
(filed as Exhibit 4.6 to Amendment No. 1 to Form S-6
Registration Statement No. 2-95041 of Municipal Insured
National Trust Series 1 on March 21, 1985, and incorporated
herein by reference).
99.4.4 -- Stockbrokers' Bond and Policy, Form B for Glickenhaus & Co.
(filed as Exhibit 4.7 to Form S-6 Registration Statement
No. 2-95041 of Municipal Insured National Trust Series 1 on
December 21, 1984, and incorporated herein by reference).
99.4.5 -- Stockbrokers' Blanket Bond Policy, Standard Form No. 14 for
Lebenthal & Co., Inc. (filed as Exhibit 4.9 to Form S-6
Registration Statement No. 2-95041 of Municipal Insured
National Trust Series 1 on December 21, 1984, and
incorporated herein by reference).
*99.5.1 -- Consent To Be Evaluator of Muller Data Corporation and
Affirmation Letter of Standard & Poor's Corporation.
*99.5.2 -- Affirmation Letter of Moody's Investors Service.
99.6.1 -- Copies of Powers of Attorney of General Partners of
Glickenhaus & Co. (filed as Exhibit 6.1 to Form S-6
Registration Statement No. 33-64155 of Glickenhaus Value
Portfolios, The 1996 Equity Collection on November 13,
1995, and incorporated herein by reference).
99.6.2 -- Copies of Powers of Attorney of Directors and certain
officers of Lebenthal & Co., Inc. (filed as Exhibit 6.2 to
Amendment No. 1 to Form S-6 Registration Statement No.
33-55385 of Empire State Municipal Exempt Trust, Guaranteed
Series 109 on November 2, 1994, and incorporated herein by
reference).
- --------
* To be filed by amendment.
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<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, Empire State Municipal Exempt Trust, Guaranteed Series 128 has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, hereunto duly authorized, in the City of New York
and State of New York on the 20th day of March, 1996.
EMPIRE STATE MUNICIPAL EXEMPT TRUST,
GUARANTEED SERIES 128
By: GLICKENHAUS & CO.
(Sponsor)
By: /S/ BRIAN C. LAUX
(Brian C. Laux, Attorney-in-Fact)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
NAME TITLE DATE
ALFRED FEINMAN* General Partner
(Alfred Feinman)
SETH M. GLICKENHAUS* General Partner
(Seth M. Glickenhaus)
STEVEN B. GREEN* General Partner, Chief
(Steven B. Green) Financial Officer
JEFFREY L. LEDERER* General Partner
(Jeffrey L. Lederer)
*By: /s/ Brian C. Laux March 20, 1996
(Brian C. Laux, Attorney-in-Fact)
- --------
* Executed copies of powers of attorney were filed as Exhibit 6.1 to
Amendment No. 1 to Registration Statement No. 33-64155 on November 13,
1995.
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<PAGE>
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, Empire State Municipal Exempt Trust, Guaranteed Series 128 has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of New York
and State of New York on the 20th day of March, 1996.
EMPIRE STATE MUNICIPAL EXEMPT TRUST,
GUARANTEED SERIES 128
By: LEBENTHAL & CO., INC.
(Sponsor)
By: /s/ D. WARREN KAUFMAN
(D. Warren Kaufman, Attorney-in-Fact)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
NAME TITLE DATE
H. GERARD BISSINGER, II* Director
(H. Gerard Bissinger, II)
JEFFREY M. JAMES* Director
(Jeffrey M. James)
/s/ D. WARREN KAUFMAN* Director March 20, 1996
(D. Warren Kaufman)
ALEXANDRA LEBENTHAL* Director, President
(Alexandra Lebenthal)
JAMES A. LEBENTHAL* Director, Chief Executive Officer
(James A. Lebenthal)
DUNCAN K. SMITH* Director
(Duncan K. Smith)
*By: /s/ D. WARREN KAUFMAN March 20, 1996
(D. Warren Kaufman, Attorney-In-Fact)
- --------
* An executed copy of the power of attorney was filed as Exhibit 6.2 to
Amendment No. 1 to Registration Statement No. 33-55385 on November 2,
1994.
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<PAGE>
CONSENT OF COUNSEL
The consent of counsel to the use of their name in the Prospectus
included in this Registration Statement is contained in their opinion filed as
Exhibit 99.3.1 to this Registration Statement.
CONSENT OF INDEPENDENT AUDITORS
The Sponsors and Trustee of Empire State Municipal Exempt Trust,
Guaranteed Series 128
We hereby consent to the use in this Registration Statement No.
333-________ of our report dated March, 1996, relating to the Statement of
Condition of Empire State Municipal Exempt Trust, Guaranteed Series 128 and to
the reference to our firm under the heading "Auditors" in the Prospectus which
is a part of such Registration Statement.
BDO SEIDMAN, LLP
New York, New York
March , 1996
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