<PAGE>
As filed with the Securities and Exchange Commission on July 29, 1994
Registration No. 33-39304
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 4
to
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
A. Exact name of trust:
Empire State Municipal Exempt Trust,
Guaranteed Series 74
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 25 Broadway
New York, New York 10017 New York, New York 10004
D. Name and complete address of agents for service:
SETH M. GLICKENHAUS JAMES A. LEBENTHAL
Glickenhaus & Co. Lebenthal & Co., Inc.
6 East 43rd Street 25 Broadway
New York, New York 10017 New York, New York 10004
Copies to:
KEVIN A. WALSH, Esq.
Keck, Mahin & Cate
220 East 42nd Street
New York, New York 10017
[X] Check box if it is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b) of Rule 485.
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
Prospectus, Part I 14,916 Units Dated: July 29, 1994
NOTE: Part I of this Prospectus may not be distributed
-------------------------------------------------------
unless accompanied by Part II.
-----------------------------
This Prospectus consists of two parts. The first part contains a "Summary
---------------
of Essential Financial Information" on the reverse hereof as of April 29, 1994
and a summary of additional specific information including "Special Factors
Concerning the Portfolio" and audited financial statements of the Trust,
including the related bond portfolio, as of March 31, 1994. The second part of
this Prospectus contains a general summary of the Trust and "Special Factors
Affecting New York."
In the opinion of special counsel for the Sponsors as of the Date of
--------------------------------------------------------------------
Deposit, interest on the Bonds which is exempt from federal income tax when
- ---------------------------------------------------------------------------
received by the Trust will be excludable from the federal gross income of the
- -----------------------------------------------------------------------------
Unit Holders and, with certain exceptions, interest income to the Unit Holders
- ------------------------------------------------------------------------------
is generally exempt from all New York State and New York City income taxes.
- ---------------------------------------------------------------------------
Capital gains, if any, are subject to tax. See Part II under "The Trust -- Tax
- -------------------------------------------------------------------------------
Status."
- --------
The Trust is a unit investment trust formed for the purpose of obtaining
tax-exempt interest income through investment in a diversified, insured
portfolio of long-term bonds, 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 and their public
authorities (the "Bonds"). See Part II under "The Trust." The Bonds deposited
in the portfolio of the Trust are sometimes referred to herein as the
"Securities." Insurance guaranteeing the payment of principal and interest on
the Securities while in the Trust has been obtained by the Trust from the
Insurer as set forth in Part II under "The Trust -- Insurance on the Bonds."
Such insurance does not guarantee the market value of the Securities or the
Units offered hereby. The payment of interest and the preservation of
principal are, of course, dependent upon the continuing ability of the issuers
of the Bonds and any other insurer to meet their obligations. As a result of
the insurance on the Bonds, the Units are rated "AAA" by Standard & Poor's
Corporation.
Offering. The initial public offering of Units in the Trust has been
--------
completed. The Units offered hereby are issued and outstanding Units which have
been acquired by the Sponsors either by purchase from the Trustee of Units
tendered for redemption or in the secondary market. See Part II under "Rights of
Unit Holders --Redemption -- Purchase by the Sponsors of Units Tendered for
Redemption" and "Public Offering -- Market for Units." The price at which the
Units offered hereby were acquired was not less than the redemption price
determined as described herein. See Part II under "Rights of Unit Holders --
Redemption -- Computation of Redemption Price per Unit."
The Public Offering Price of the Units is based on the aggregate bid
-------------------------
price of the Securities in the Trust divided by the number of Units
outstanding, plus a sales charge determined on the basis of the maturities of
the Securities in the Trust. See "Public Offering -- Offering Price" in Part
II of this Prospectus.
Market for Units. The Sponsors, although they are not obligated to do so,
----------------
intend to maintain a secondary market for the Units at prices based upon the
aggregate bid price of the Securities in the Trust plus accrued interest to the
date of settlement, as more fully described in Part II under "Public Offering --
Market for Units." 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 underlying Securities. The purchase price of the
Securities in the Trust, if they were available for direct purchase by
investors, would not include the sales charges included in the Public Offering
Price of the Units.
Investors should 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 SECURITIES
- -----------------------------------------------------------------------------
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
- --------------------------------------------------------------------------
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
- --------------------------------------------------------------------------------
CRIMINAL OFFENSE.
- -----------------
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST, GUARANTEED SERIES 74
SUMMARY OF ESSENTIAL FINANCIAL INFORMATION
AT APRIL 29, 1994
SPONSORS: GLICKENHAUS & CO.
LEBENTHAL & CO., INC.
AGENT FOR SPONSORS: GLICKENHAUS & CO.
TRUSTEE: THE BANK OF NEW YORK
EVALUATOR: MULLER DATA CORPORATION
<TABLE>
<CAPTION>
<S> <C>
Aggregate Principal Amount of Bonds in the Trust: $ 14,990,000
Number of Units: 14,916
Fractional Undivided Interest in the Trust Per Unit: 1/14,916
Total Value of Securities in the Portfolio
(Based on Bid Side Evaluations of Securities): $15,483,200.76
==============
Sponsors' Repurchase Price Per Unit: $ 1,038.03
Plus Sales Charge(1): 43.98
--------------
Public Offering Price Per Unit(2): $ 1,082.01
==============
Redemption Price Per Unit(3): $ 1,038.03
Excess of Public Offering Price Over Redemption
Price Per Unit: $ 43.98
Weighted Average Maturity of Bonds in the Trust: 16.339 years
Evaluation Time: 2:00 p.m., New York Time, on the day next following receipt by a Sponsor
of an order for a Unit sale or purchase or by the Trustee of a Unit
tendered for redemption.
Annual Insurance Premium: $49,176
Evaluator's Fee: $.55 for each issue of Bonds in the Trust for each daily valuation.
Trustee's Annual Fee: For each $1,000 principal amount of Bonds in the Trust, $.91 under the
monthly and $.51 under the semi-annual distribution plan.
Sponsors' Annual Fee: Maximum of $.25 per $1,000 face amount of underlying securities.
Date of Deposit: May 10, 1991
Date of Trust Agreement: May 10, 1991
Mandatory Termination Date: December 31, 2040
Minimum Principal Distribution: $1.00 per Unit
Minimum Value of the Trust under which
Trust Agreement may be Terminated: $2,000,000
</TABLE>
-2-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST, GUARANTEED SERIES 74
SUMMARY OF ESSENTIAL FINANCIAL INFORMATION
AT APRIL 29, 1994
(Continued)
<TABLE>
<CAPTION>
Monthly Semi-annual
--------- -------------
<S> <C> <C>
P Estimated Annual Interest Income: $ 71.73 $ 71.73
Less Annual Premium on
Portfolio Insurance 3.29 3.29
E Less Estimated
Annual Expenses 1.59 1.12
------- -------
R Estimated Net Annual Interest
Income: $ 66.85 $ 67.32
======= =======
U Estimated Interest Distribution: $ 5.57 $ 33.66
N Estimated Current Return Based on
Public Offering Price (4): 6.18% 6.22%
I
Estimated Long-Term Return Based
T on Public Offering Price (5): 4.84% 4.89%
Estimated Daily Rate of Net Interest
Accrual: $.18569 $.18700
Record Dates: 15th Day of 15th Day of May
Month and November
Payment Dates: 1st Day of 1st Day of June
Month and December
</TABLE>
- --------------------
1. The sales charge is determined based on the maturities of the underlying
securities in the portfolio. See "Public Offering -- Offering Price" in Part
II of this Prospectus.
2. Plus accrued interest to May 6, 1994, the expected date of settlement, of
$14.31 monthly and $42.57 semi-annually.
3. Based solely upon the bid side evaluations of the portfolio securities. Upon
tender for redemption, the price to be paid will include accrued interest as
described in Part II under "Rights of Unit Holders -- Redemption --
Computation of Redemption Price per Unit."
4. 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
Trustee 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" and "The Trust -- Estimated Current
Return and Estimated Long-Term Return to Unit Holders" in Part II of this
Prospectus.
5. 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. See "The Trust --
Estimated Current Return and Estimated Long-Term Return to Unit Holders" in
Part II of this Prospectus.
-3-
<PAGE>
Portfolio Information
---------------------
On March 31, 1994, the bid side valuation of 12.0% of the aggregate
principal amount of Bonds in the Portfolio for this Trust was at a discount
from par and 88.0% was at a premium over par. See Note (B) to "Tax-Exempt
Bond Portfolio" for information concerning call and redemption features of
the Bonds.
Special Factors Concerning the Portfolio
----------------------------------------
The Portfolio consists of 9 issues of Bonds issued by entities located in
New York or certain United States territories or possessions. The following
information is being supplied to inform Unit Holders of circumstances
affecting the Trust. 20.4% of the aggregate principal amount of the Bonds in
the Portfolio are general obligations of the governmental entities issuing
them and are backed by the taxing power thereof. 20.6% of the aggregate
principal amount of the Bonds in the Portfolio are payable from
appropriations. 59.0% 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 the purpose of issue are as follows: General Obligation, 2
(20.4%); Appropriations, 1 (20.6%); Revenue: Housing, 1 (20.0%); Higher
Education, 1 (6.7%); Health Care, 1 (11.0%); Water and Sewer, 1 (3.0%); and
Transportation, 2 (18.3%). The Trust is not deemed to be concentrated in any
particular category of Bonds./1/ Five issues, constituting 50.6% of the Bonds
in the Portfolio, are "original issue discount" bonds, of which 1 is a zero
coupon bond. On March 31, 1994, 4 issues (64.2%) were rated AAA and 1 issue
(5.3%) was rated A- by Standards & Poor's Corporation; 2 issues (3.8%) were
rated Aaa, 1 issue (20.0%) was rated Aa and 1 issue (6.7%) was rated Baa1 by
Moody's Investors Service, Inc./2/ Subsequent to such date, such ratings may
have changed. See "Tax-Exempt Bond Portfolio." For a more detailed
discussion, it is recommended that Unit Holders consult the official
statements for each Security in the Portfolio of the Trust.
Tax Status (The tax opinion which is described herein was rendered on the
----------
Date of Deposit. Consult your tax advisor to discuss any relevant changes
in tax laws since the Date of Deposit. See also "The Trust -- Tax Status"
-------------------------------------------
in Part II of this Prospectus.)
------------------------------
Interest income on the Bonds contained in the Trust Portfolio is, in the
opinion of bond counsel to the issuing governmental authorities, excludable
from gross income under the Internal Revenue Code of 1986, as amended. See
"The Trust -- Portfolio" in Part II of this Prospectus.
- ------------------------
/1/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 II of this Prospectus.
/2/For the meanings of ratings, see "Description of Bond Ratings" in Part
II of this Prospectus.
-4-
<PAGE>
Gain (or loss) realized on a sale, maturity or redemption of the Bonds or
on a sale or redemption of a Unit of the Trust is, however, includable 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
facts and circumstances. 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. For tax years
beginning after December 31, 1992, long-term capital gains will be taxed at a
maximum federal income tax rate of 28%, while ordinary income will be taxed
at a maximum federal income tax rate of 36% (plus a 10% surtax applicable to
certain high income taxpayers).
On the date of deposit, Battle Fowler, special counsel for the Sponsors as to
Guaranteed Series 74, issued an opinion as to the tax status of the Trust. In
the opinion of Battle Fowler, under existing law at the date of deposit:
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 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).
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. 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. A Unit
holder, however, will be considered to have received income or gain with
respect to bonds in such previously issued Series on receipt (or earlier
accrual, depending on the Unit holder's method of accounting) by the
previously issued Series.
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.
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 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 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.
-5-
<PAGE>
INDEPENDENT AUDITORS' REPORT
============================
The Sponsors, Trustee and Unit Holders of Empire State Municipal
Exempt Trust, Guaranteed Series 74:
We have audited the accompanying statement of net assets of Empire State
Municipal Exempt Trust, Guaranteed Series 74, including the bond portfolio,
as of March 31, 1994, and the related statements of operations and changes in
net assets for the years ended March 31, 1994 and 1993. These financial
statements are the responsibility of the Sponsors. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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.
Our procedures included confirmation of securities owned as of March 31,
1994, by correspondence with the Trustee. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Empire State Municipal
Exempt Trust, Guaranteed Series 74 as of March 31, 1994, and the results of
its operations and changes in net assets for the years ended March 31, 1994
and 1993 in conformity with generally accepted accounting principles.
BDO Seidman
Woodbridge, New Jersey
April 29, 1994
-6-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
STATEMENT OF NET ASSETS
MARCH 31, 1994
====================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
CASH...................................................................... $ 83 149
INVESTMENTS IN SECURITIES, at market value (cost $14,192,586)............. 15 517 002
ACCRUED INTEREST RECEIVABLE............................................... 287 444
------------
Total trust property.................................................. 15 887 595
LESS - ACCRUED EXPENSES AND OTHER LIABILITIES............................. 3 275
------------
NET ASSETS................................................................ $15 884 320
============
</TABLE>
<TABLE>
<CAPTION>
NET ASSETS REPRESENTED BY:
Monthly Semi-annual
distribution distribution
plan plan Total
---------- ---------- ------------
<S> <C> <C> <C>
VALUE OF FRACTIONAL
UNDIVIDED
INTERESTS................. $9 761 710 $5 753 736 $15 515 446
UNDISTRIBUTED NET INVESTMENT
INCOME.................... 173 042 195 832 368 874
---------- ---------- ------------
Total value........... $9 934 752 $5 949 568 $15 884 320
========== ========== ============
UNITS OUTSTANDING........... 9 394 5 537 14 931
========== ========== ============
VALUE PER UNIT.............. $1 057.56 $ 1 074.51
========== ==========
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
STATEMENTS OF OPERATIONS
=====================================
<TABLE>
<CAPTION>
Year ended
March 31,
-----------------------
1994 1993
----------- ----------
<S> <C> <C>
INVESTMENT INCOME - INTEREST............... $1 103 025 $1 142 952
---------- ----------
EXPENSES:
Trustee fees............................... 14 041 13 530
Evaluation fees............................ 1 326 1 590
Insurance premiums......................... 50 262 51 936
Sponsors' advisory fees.................... 3 757 3 981
Auditors' fees............................. 1 800 1 800
---------- ----------
Total expenses.......................... 71 186 72 837
---------- ----------
NET INVESTMENT INCOME...................... 1 031 839 1 070 115
REALIZED GAIN ON SECURITIES SOLD
OR REDEEMED................................ 100 921 21 333
NET CHANGE IN UNREALIZED MARKET
APPRECIATION (DEPRECIATION)................ (690 918) 1 186 153
---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................. $ 441 842 $2 277 601
========== ==========
</TABLE>
See accompanying notes to financial statements.
-8-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
STATEMENTS OF CHANGES IN NET ASSETS
===================================
<TABLE>
<CAPTION>
Year ended
March 31,
-------------------------
1994 1993
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income................... $ 1 031 839 $ 1 070 115
Realized gain on securities
sold or redeemed....................... 100 921 21 333
Net change in unrealized market
appreciation (depreciation)............ (690 918) 1 186 153
----------- -----------
Net increase in net assets resulting
from operations...................... 441 842 2 277 601
DISTRIBUTIONS TO UNIT HOLDERS
OF NET INVESTMENT INCOME................ (1 045 355) (1 079 826)
CAPITAL SHARE TRANSACTIONS:
Redemption of 820 and 249 units......... (883 555) (263 207)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS.... (1 487 068) 934 568
NET ASSETS:
Beginning of period..................... 17 371 388 16 436 820
----------- -----------
End of period........................... $15 884 320 $17 371 388
=========== ===========
DISTRIBUTIONS PER UNIT (Note 2):
Interest:
Monthly plan........................... $66.95 $66.86
Semi-annual plan....................... $67.45 $67.34
</TABLE>
See accompanying notes to financial statements.
-9-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
NOTES TO FINANCIAL STATEMENTS
====================================
NOTE 1 - ACCOUNTING POLICIES
- ----------------------------
Securities
----------
Securities are stated at bid side market value as determined by an
independent outside evaluator.
Taxes on income
---------------
The Trust is not subject to taxes on income and, accordingly, no provision
has been made.
NOTE 2 - DISTRIBUTIONS
- ----------------------
Interest received by the Trust is distributed to Unit Holders either semi-
annually on the first day of June and December or, if elected by the Unit
Holder, on the first day of each month, after deducting applicable expenses. No
principal distributions, resulting from the sale or redemption of securities,
were made in year ended March 31, 1994.
NOTE 3 - BONDS SOLD OR REDEEMED
- -------------------------------
<TABLE>
<CAPTION>
Port-
folio Principal Date Realized
No. Amount Redeemed Description Net Proceeds Cost Gain
- ----- --------- -------- ----------------------------- ------------ ---- ---------
Year ended March 31, 1994:
<S> <C> <C> <C> <C> <C> <C>
3 $100 000 5/3/93 Triborough Bridge and Tunnel $111 000 $103 335 $ 7 665
Authority, General Purpose
Bonds, Series I
7 380 000 8/18/93 New York City Municipal Water 448 780 377 754 71 026
Finance Authority, Water and
Sewer System Revenue Bonds,
Fiscal 1991 Series A
7 70 000 2/1/94 New York City Municipal Water 82 670 69 586 13 084
Finance Authority, Water and
Sewer System Revenue Bonds,
Fiscal 1991 Series A
3 225 000 3/30/94 Triborough Bridge and Tunnel 241 650 232 504 9 146
Authority, General
Purpose Bonds, Series I
--------
$775 000 $884 100 $783 179 $100 921
======== ======== ======== ========
</TABLE>
-10-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
NOTES TO FINANCIAL STATEMENTS
(Concluded)
====================================
<TABLE>
<CAPTION>
NOTE 4 - NET ASSETS
- -------------------
<S> <C>
Cost of 16,000 units at Date of Deposit $15 999 378
Less gross underwriting commission 783 840
-----------
Net cost - initial offering price 15 215 538
Realized net gain on securities sold or redeemed 122 254
Redemption of 1,069 units (1 146 762)
Unrealized market appreciation of securities 1 324 416
Undistributed net investment income 368 874
-----------
Net assets $15 884 320
===========
</TABLE>
-11-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
TAX-EXEMPT BOND PORTFOLIO
MARCH 31, 1994
==================================
<TABLE>
<CAPTION>
Redemption Features
Ant. - Anticipated Market Value Annual
Port- Aggregate Date of S.F. - Sinking Fund Cost of as of Interest
folio Rating Principal Name of Issuer and Coupon Maturity Opt. - Optional Call Bonds March 31, Income to
No. (Note A) Amount Title of Bond Rate (Note B) (Note B) to Trust 1994 Trust
- ------- --------- ---------- -------------------- -------- --------- ---------------------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 AAA $1 650 000 New York Medical 7.625% 02/15/23 02/15/06 @ 100 Ant. $1 727 451 $1 793 203 $125 813
Care Facilities 02/15/98 @ 102 Opt.
Finance Agency,
Hospital and
Nursing Home FHA-
Insured Mortgage
Revenue Bonds,
1988 Series A
(MBIA Insured)
2 Aa* 3 000 000 State of New York 7.750 10/01/17 04/01/11 @ 100 S.F. 3 102 870 3 127 440 232 500
Mortgage Agency, 10/01/00 @ 102 Opt.
Homeowner Mort-
gage Revenue
Bonds, Series RR
3 AAA 2 640 000 Triborough Bridge 7.625 01/01/14 01/01/07 @ 100 S.F. 2 728 044 2 838 502 201 300
and Tunnel Au- 01/01/96 @ 102 Opt.
thority, General
Purpose Revenue
Bonds, Series I
4 AAA 2 250 000 The City of New 7.750 08/15/19 No Sinking Fund 2 115 427 2 587 320 174 375
York, General 08/15/99 @ 101.5 Opt.
Obligation Bonds,
Fiscal 1990
Series I
5 A- 800 000 The City of New 0.000 06/01/20 No Sinking Fund 92 000 130 352 -
York, General No Optional call
Obligation Bonds,
Principal New
York CitySavers,
Fiscal 1991
Series B
</TABLE>
-12-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
TAX-EXEMPT BOND PORTFOLIO
MARCH 31, 1994
(Continued)
<TABLE>
<CAPTION>
Redemption Features
Ant. - Anticipated Market Value Annual
Port- Aggregate Date of S.F. - Sinking Fund Cost of as of Interest
folio Rating Principal Name of Issuer and Coupon Maturity Opt. - Optional Call Bonds March 31, Income to
No. (Note A) Amount Title of Bond Rate (Note B) (Note B) to Trust 1994 Trust
- ------- --------- ---------- -------------------- -------- --------- ---------------------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6 AAA $3 085 000 Metropolitan Trans- 7.875% 07/01/17 07/01/09 @ 100 S.F. $ 3 147 533 $ 3 588 626 $ 242 944
portation Au- 07/01/00 @ 101.5 Opt.
thority, Transit
Facilities Ser-
vice Contract
Bonds, Series 4
7 Aaa* 455 000 New York City 7.500 06/15/19 06/15/16 @ 100 S.F. 452 311 519 888 34 125
Municipal Water 06/15/00 @ 101.5 Opt.
Finance Authority,
Water and Sewer
System Revenue
Bonds, Fiscal
1991 Series A
8 Baa1* 1 000 000 Dormitory Authority 5.000 07/01/17 No Sinking Fund 715 190 810 890 50 000
of The State of 07/01/00 @ 100 Opt.
New York, City
University System
Consolidated
Second General
Resolution
Revenue Bonds,
Series 1990C
9 Aaa* 110 000 Metropolitan Trans- 8.000 07/01/12 07/01/07 @ 100 S.F. 111 760 120 781 8 800
portation Au- 07/01/96 @ 102 Opt.
thority, Transit
Facilities
Revenue Bonds,
Series G
----------- ----------- ----------- ----------
$14 990 000 $14 192 586 $15 517 002 $1 069 857
=========== =========== =========== ==========
</TABLE>
-13-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
TAX-EXEMPT BOND PORTFOLIO
MARCH 31, 1994
(Continued)
===================================
NOTES TO TAX-EXEMPT BOND PORTFOLIO
(A) A description of the rating symbols and their meanings appears under
"Description of Bond Ratings" in Part II of this Prospectus. Ratings are by
Standard & Poor's Corporation, except for those indicated by (*), which are
by Moody's Investors Service. Certain bond ratings have changed since the
Date of Deposit, at which time all such bonds were rated A or better by
either Standard & Poor's Corporation or Moody's Investors Service.
(B) Bonds may be redeemable prior to maturity from a sinking fund (mandatory
partial redemption) (S.F.) or at the stated optional call (at the option of
the issuer) (Opt.) or by refunding. Certain bonds in the portfolio may be
redeemed earlier than dates shown in whole or in part under certain unusual
or extraordinary circumstances as specified in the terms and provisions of
such bonds. Single-family mortgage revenue bonds and housing authority
bonds are most likely to be called subject to such provisions, but other
bonds may have similar call features.
-14-
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES
PROSPECTUS, Part II
Note: Part II of this Prospectus may not be
distributed unless accompanied by Part I.
THE TRUST
The Trust is one of a Series of similar but separate unit investment
trusts. Each Trust was created under the laws of the State of New York pursuant
to a Trust Indenture and Agreement (the "Trust Agreement"), dated the Date of
Deposit as set forth in "Summary of Essential Financial Information" in Part I
of this Prospectus, among the Sponsors, the Trustee and the Evaluator. The Bank
of New York acts as successor trustee of Series 1 through 22 and as Trustee of
Series 23 and subsequent Series. Muller Data Corporation acts as successor
Evaluator for all Series. Glickenhaus & Co. and Lebenthal & Co., Inc. act as
co-Sponsors for all Series (the "Sponsors").
On the Date of Deposit for each Trust, the Sponsors deposited with the
Trustee obligations or contracts for the purchase of such obligations (the
"Bonds" or "Securities"). Certain of the Bonds may have been purchased at
prices which resulted 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 capital gain. Any capital gain 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.
PORTFOLIO
The objective of the Trust is to obtain tax-exempt income through an
investment in a diversified, insured portfolio consisting primarily of long-term
municipal bonds. No assurance can be given that the Trust's objective will be
achieved because the Trustee's ability to do so is subject to the continuing
ability of the issuers of the bonds in the Portfolio to meet their obligations
and of the Insurer to meet its obligations under the insurance.
Series 1 through 5, Series 6 through 30 and Series 31 and subsequent Series
have obtained insurance guaranteeing the payment of principal and interest on
the Bonds in each respective Trust from National Union Fire Insurance Company of
Pittsburgh, Pa. ("National Union"), Municipal Bond Insurance Association
("MBIA") and Municipal Bond Investors Assurance Corporation ("MBIAC"),
respectively (National Union, MBIA and MBIAC are collectively referred to herein
as the "Insurer"). Insurance obtained by the Trust applies only while Bonds are
retained in the Trust. As to Series 18 through Series 30 and Series 31 and
subsequent Series, however, pursuant to irrevocable commitments of MBIA and
MBIAC, respectively, 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. It is expected that the Trustee will exercise the right to obtain
permanent insurance for a Bond in such Series 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. Insurance 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. Certain Bonds in the Trust may also be insured under
insurance obtained by the issuers of such Bonds or third parties ("Pre-insured
Bonds"). As a result of the insurance, Moody's Investors
<PAGE>
Service, Inc. has assigned a rating of "Aaa" to all of the Bonds in Series 6
and subsequent Series, as insured, and Standard & Poor's Corporation has
assigned a rating of "AAA" to the Units of the Trust, and to the Bonds in Series
17 and subsequent Series, as insured. No representation is made as to any
insurer's ability to meet its commitments. Insurance is not a substitute for
the basic credit of an issuer, but supplements the existing credit and provides
additional security therefor. 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 pre-insured by such Insurer. No premium will be paid
by Series 1 through 5, Series 6 through 30 and Series 31 and subsequent Series
on Bonds pre-insured by National Union, MBIA and MBIAC, respectively. See "The
Trust - Insurance on the Bonds."
In view of the Trust's objective, 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 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 diversified 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) availability of insurance for the payment of
principal and interest on the Bonds./1/ 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 may be considered in the
Sponsors' determination to direct the Trustee to dispose of the Bonds. See
"Sponsors -Responsibility."
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. 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.
The Sponsors cannot predict future economic policies or their consequences; nor,
therefore, can they predict the course or extent of such fluctuations in the
future.
Special Factors Affecting New York
Beginning in early 1975, New York State (the "State") and several of its
public benefit corporations that issue municipal bonds under State legislation
("authorities") and municipalities, particularly New York City (the "City"),
faced serious financing difficulties which impaired the borrowing abilities of
the State and the respective entities. If during the term of the Trust there
should be a default by any authority or municipality, or other financial crisis
relating to the State, its authorities or municipalities, the market price and
marketability of outstanding Bonds in the Trust, and therefore the asset value
of Units of the Trust, could be adversely affected.
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 municipal bonds. The Sponsors have not independently
verified this information.
(1) 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
- -------------------------
/1/ For the meanings of ratings, including the symbols "p" and "Con.(...)," see
"Description of Bond Ratings." 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."
2
<PAGE>
significant portion of the City's total employment earnings. The City is also
the nation's leading tourist destination. Manufacturing activity in the City is
conducted primarily in apparel and printing.
For each of the past twelve fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"), and the City's current fiscal year results are projected to
be balanced in accordance with GAAP. The City was required to close substantial
budget gaps in its 1990, 1991 and 1992 fiscal years in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget, or that it can maintain a balanced
budget 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. As a result of the
national and regional economic recession, the State's tax revenues for its 1991
and 1992 fiscal years were substantially lower than projected. The State
completed its 1993 fiscal year with a cash-basis positive balance of $671
million in the State's General Fund (the major operating fund of the State).
The State's 1994 fiscal year budget, as enacted, projects a balanced General
Fund. If the State experiences revenue shortfalls or spending increases beyond
its projections during its 1994 fiscal year or subsequent years, such
developments could result in reductions in anticipated State aid to the City.
In addition, there can be no assurance that State budgets in future fiscal years
will be adopted by the April 1 statutory deadline and that there will not be
adverse effects on the City's cash flow and additional City expenditures as a
result of such delays.
The Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan for the 1994 through 1997 fiscal
years (the "1994-1997 Financial Plan" or "Financial Plan"). The City's
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 timing of any
regional and local economic recovery, the impact on real estate tax revenues of
the current downturn in the real estate market, the absence of wage increases
for City employees in excess of the increases assumed in the Financial Plan,
employment growth, provision of State and Federal aid and mandate relief and the
impact on the New York City region of the tax increases contained in President
Clinton's economic plan.
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 1994 through 1997 contemplates the
issuance of $11.7 billion of general obligation bonds primarily to reconstruct
and rehabilitate the
3
<PAGE>
City's infrastructure and physical assets and to make 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 achieved balanced operating results as reported in accordance with
GAAP for the 1993 fiscal year. On November 23, 1993, the City submitted to the
Control Board the Financial Plan for the 1994 through 1997 fiscal years, which
relates to the City, the Board of Education ("BOE") and the City University of
New York ("CUNY"). The 1994-1997 Financial Plan projects revenues and
expenditures for the 1994 fiscal year balanced in accordance with GAAP.
The 1994-1997 Financial Plan sets forth actions to close a previously
projected gap of approximately $2.0 billion in the 1994 fiscal year. The gap-
closing actions for the 1994 fiscal year include agency actions aggregating $666
million, including productivity savings and savings from restructuring the
delivery of City services; service reductions aggregating $274 million; the sale
of delinquent real property tax receivables for $215 million; discretionary
transfers from the 1993 fiscal year of $110 million; reduced debt service costs
aggregating $187 million, resulting from refinancings and other actions; $150
million in proposed increased Federal assistance; a continuation of the personal
income tax surcharge, resulting in revenues of $143 million; $80 million in
proposed increased State aid, which is subject to approval by the Governor; and
revenue actions aggregating $173 million.
The Financial Plan also sets forth projections for the 1995 through 1997
fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $1.7 billion, $2.5 billion and $2.7 billion for the 1995-1997
fiscal years, respectively. The projections include $150 million of increased
Federal assistance in each of the 1995 through 1997 fiscal years and the
continuation of the personal income tax surcharge, resulting in revenues of
$420, $446 and $471 million in the 1995, 1996 and 1997 fiscal years,
respectively. The proposed gap-closing actions include City actions aggregating
$640 million, $814 million and $870 million in the 1995 through 1997 fiscal
years, respectively; $100 million and $200 million in proposed additional
Federal assistance in the 1996 and 1997 fiscal years, respectively; savings from
various proposed mandate relief measures and the proposed reallocation of State
education aid among various localities, aggregating $175 million, $325 million
and $475 million in the 1995 through 1997 fiscal years, respectively; $131
million, $291 million and $291 million of increased State assistance in the
1995, 1996 and 1997 fiscal years, respectively, which could include savings from
the proposed State assumption of certain Medicaid costs or various proposed
mandate relief measures; and other unspecified Federal, State or City actions of
$784 million, $983 million and $863 million in the 1995, 1996 and 1997 fiscal
years, respectively.
Various actions proposed in the Financial Plan, including the proposed
continuation of the personal income tax surcharge beyond December 1995 and the
proposed increase in State aid, are subject to approval by the Governor and the
State Legislature, and the proposed increase in Federal aid is subject to
approval by Congress and the President. The State Legislature has in previous
legislative sessions failed to approve similar proposals for State assistance,
thereby increasing the uncertainty as to the receipt of the State assistance
included in the Financial Plan. If these actions cannot be implemented, the
City will be required to take other actions to decrease expenditures or increase
revenues to maintain a balanced financial plan.
The State Legislature has approved the continuation of the personal income
tax surcharge through December 31, 1995, and the Governor is expected to approve
this continuation. The Financial Plan has been the subject of extensive public
comment and criticism particularly regarding the sale of delinquent property tax
receivables, the sale of the New York City Off-Track Betting Corporation
("OTB"), the amount of State and Federal aid included in the Financial Plan and
the inclusions of non-recurring actions.
In May 1993 the Mayor appointed a three-member panel to study the gap
between the City's recurring expenditures and recurring revenues and to make
recommendations for achieving structural balance. In its report, the panel
concluded that the City's budget imbalance is likely to be greater than set
forth in the Financial Plan, with possible budget gaps of approximately $2
billion, $3.2 billion, $4.2 billion and $5 billion in the 1995 through 1998
fiscal years, respectively, and proposed expenditure reductions, additional
State aid and additional taxes and user fees to deal with the projected budget
gaps. The proposed expenditure reductions include reductions in City-funded
personnel from the current level of 214,000 to 185,000 by the 1998 fiscal year.
Revenue increased proposed by the panel include an increase in property taxes
payable by one and two family homeowners in the City; a 1/4% increase in the
City sales tax; extension of the personal income tax surcharge; the imposition
of tolls on the East
4
<PAGE>
River bridges and certain Harlem River crossings and user fees for residential
garbage collection; and additional State aid, including the State assumption of
certain Medicaid costs paid by the City and an increase in State education aid
provided to the City.
In November 1993, Rudolph W. Guiliani was elected mayor of the City,
replacing the previous administration on January 1, 1994. Mayor Giuliani's
Modification No. 94-2 to the Financial Plan for the City and Covered
Organizations for fiscal years 1994-1998 (the "Modification"), issued February
10, 1994, reports that for 1995 fiscal year, the budget gap is estimated at
$2.26 billion, or nearly a 12 percent shortfall of existing tax revenues over
baseline expenditures. Absent gap closing initiatives, the Modification reports
that the projected budget gap will grow to nearly $3.4 billion by 1998 fiscal
year. According to the Modification, the 1995 fiscal year budget gap is the
largest that the City has faced since 1981, when the City converted to GAAP. The
Modification attributes the projected budget gaps to the lingering national
recession, to a sharp growth in expenditures during the boom years of the 1980s
and the failure of the City to reduce the City's municipal workforce. The
Modification reports that at the same time that City employment has declined as
a percentage of U.S. employment, local government employment in the City, which
exceeds the state government employment of the five largest states, is on the
verge of an historic high. According to the Modification, at the end of December
1993, the City's full-time municipal workforce stood at more than 362,000
employees, and absent reductions, will reach an all-time high at the end of
fiscal year 1994.
The Modification states that in order to strengthen the City's long-term
fiscal position the City's gap closing initiatives must be accomplished without
resorting to one-shot gap-closing measures, such as tax increases; instead, it
must balance its budgets by reducing City spending, reducing the size of the
City's municipal workforce and reducing certain City taxes to encourage economic
growth. Under the Modification, fiscal year 1995 spending declines by $516
million over the current fiscal year, the lowest projected spending rate since
1975. The Modification plans to reduce the City's municipal workforce by
15,000 positions, as compared to the current actual headcount, by the end of
fiscal year 1995. The workforce reduction will be achieved through an
aggressive severance package, and if necessary, layoffs. It is anticipated
that these workforce reduction initiatives will save $117 million, $144 million,
$311 million, $415 million and $539 million in fiscal years 1994 through 1998,
respectively, after taking into account and estimated $200 million in costs
related to instituting the proposed severance programs which are anticipated to
be financed with surplus Municipal Assistance Corporation funds (see below for a
discussion of the Municipal Assistance Corporation). The Modification also
contemplates the loss of $35 million, $186 million, $534 million and $783
million in a tax revenues in 1995 through 1998, respectively, as a result of the
reduction in certain City taxes such as the reduction of the hotel tax from 6
percent to 5 percent, commercial rent tax reductions and the elimination of the
12.5 percent personal income tax surcharge.
The City Comptroller and other agencies and public officials have issued
reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be greater than those
forecast in the Financial Plan. In addition, the Control Board staff and others
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 January 11, 1993, the City announced a settlement with a coalition of
municipal unions, including Local 237 of the International Brotherhood of
Teamsters ("Local 237"), District Council 37 of the American Federation of
State, County and Municipal Employees ("District Council 37") and other unions
covering approximately 44% of the City's workforce. The settlement, which has
been ratified by the unions, includes a total net expenditure increase of 8.25%
over a 39-month period, ending March 31, 1995 for most of these employees. On
April 9, 1993 the City announced an agreement with the Uniformed Fire Officers
Association ("UFOA") which is consistent with the coalition agreement. The
agreement has been ratified.
On August 30, 1993, the BOE and the City announced an agreement with the
United Federation of Teachers ("UFT"). The agreement, which has been ratified by
the UFT members, is generally consistent with the coalition agreement. However,
while the coalition agreement covers a period of 39 months, the UFT agreement is
for 48 1/2 months. The Financial Plan reflects the costs for all City-funded
employees associated with these settlements and provides for similar increases
for all City-funded employees. Additional expenditures aggregating $42 million
for fiscal year 1995 and $79 million for each year thereafter have been added to
the Financial Plan to provide funding for the additional 9 1/2 months provided
for under the UFT agreement.
The Financial Plan provides no additional wage increases for City employees
after their contracts expire in the 1995 fiscal year. Each 1% wage increase for
all employees commencing in the 1995 fiscal year would cost the City an
additional $30 million for the 1995 fiscal year and $135 million for the 1996
fiscal year and $150 million for each year thereafter above the amounts provided
for in the Financial Plan.
In the event of a collective bargaining impasse, 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 Municipal Assistance Corporation for the City of New York ("MA") 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. MA 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 MA debt service and reserve fund
requirements and paying MA'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 MA, nor is the State obligated to
continue to
5
<PAGE>
appropriate the State per capita aid to the City which would be required to pay
the debt service on certain MA obligations. MA has no taxing power and MA bonds
do not create an enforceable obligation of either the State or the City. As of
September 30, 1992, MA had outstanding approximately $5.549 billion of its
bonds.
Standard & Poor's has rated City Bonds A-. Moody's Investors Service, Inc.
("Moody's") has rated City Bonds Baa1. Such ratings reflect only the views of
Standard & Poor's and Moody's, from which an explanation of the significance of
such ratings may be obtained. There is no assurance that either or both of such
ratings will continue for any given period of time or that either or both will
not be revised downward or withdrawn entirely. Any such downward revision or
withdrawal could have an adverse effect on the market prices of the Bonds.
In 1975, Standard & Poor's suspended its A rating of City Bonds. This
suspension remained in effect until March 1981, at which time the City received
an investment grade rating of BBB from Standard & Poor's. On July 2, 1985,
Standard & Poor's revised its rating of City Bonds upward to BBB+ and on
November 19, 1987, to A-. Moody's ratings of City bonds were revised in
November 1981 from B (in effect since 1977) to Ba, in November 1983 to Baa, in
December 1985 to Baa1, in May 1988 to A and again in February 1991 to Baa1.
On November 6, 1990, the voters of the borough of Staten Island voted to
establish a charter commission for the purpose of proposing a charter under
which Staten Island would secede from The City of New York to become a separate
City of Staten Island. A referendum approving the charter proposed by such
commission was approved by the voters of the borough of Staten Island on
November 2, 1993. The charter commission is expected to submit to the State
Legislature proposed legislation enabling Staten Island to separate from the
City. The charter would take effect upon approval of such enabling legislation
by the State Legislature. Any such legislation would be subject to legal
challenge by the City and would require approval by the United States Department
of Justice under the Federal Voting Rights Act.
(2) New York State and its Authorities. Historically, the State has
accounted for, reported and budgeted its operations on a cash basis. Under this
form of accounting, receipts are recorded only at the time money or checks are
deposited in the State Treasury, and disbursements are recorded only at the time
a check is drawn. As a result, actions and circumstances, including
discretionary decisions by certain governmental officials, can affect the timing
of payments and deposits and therefore can significantly affect the amounts
reported in a fiscal year.
The State has implemented a phased changeover to accounting and financial
reporting systems based on GAAP. Substantially all State non-pension financial
operations are accounted for in the State's governmental funds. When reported
in accordance with GAAP, the State's governmental funds show an operating
surplus of $1,941 million for the 1991-92 fiscal year and net operating deficits
of $1,400 million for the 1990-91 fiscal year and $1,172 million for the 1989-90
fiscal year.
The Federal Tax Reform Act of 1986 substantially altered definitions of
income and deductions in the computation of taxable income and substantially
lowered tax rates used in the computation of Federal taxes. In 1987, the State
enacted legislation that conformed State law to most of those definitional
changes and also lowered tax rates. These changes "broadened" the income tax
base through such devices as full inclusion of capital gains, restrictions on
certain losses and adjustments to income. The changes in the Federal statute
influenced taxpayer behavior with respect to the timing of realization of income
and losses, in advance of the effective date of such changes as well as during
1987 and beyond. In addition, changes in Federal and State law increased the
attractiveness of "Subchapter S Corporation" status, thus encouraging general
business corporations to convert to Subchapter S Corporations. This shift would
generally have the effect of reducing corporate tax liability and increasing
personal income tax liability, although the extent and magnitude of the shift is
not known. Such changes in the Federal tax law are expected to continue to
influence taxpayer behavior during the next several years.
For State personal income taxes, the net effect of these changes is to make
estimates and forecasts of adjusted gross income less reliable than they had
been in the past and to add substantial uncertainty to estimates of
6
<PAGE>
State tax liability based on such estimates and forecasts. For the corporate
franchise tax, these changes have altered the relationship between corporate
profits and corporate tax liability, thus making forecasts of tax liability and
tax collections more uncertain.
The State's current fiscal year commenced on April 1, 1994, and ends on
March 31, 1995, and is referred to herein as the State's 1994-95 fiscal year.
The State's budget for the 1994-95 fiscal year was enacted by the Legislature on
June 7, 1994, 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
1994-95 fiscal year was formulated on June 16, 1994 and is based on the State's
budget as enacted by the Legislature and signed into law by the Governor.
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, Federal financial and
monetary policies, the availability of credit, 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.
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.
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 1994-95 State Financial Plan contains actions that provide nonrecurring
resources or savings, as well as actions that impose nonrecurring losses of
receipts or costs. It is believed that the net positive effect of nonrecurring
actions represents considerably less than one-half of one percent of the State's
General Fund, an amount significantly lower than the amount included in the
State Financial Plans in recent years. In addition to those nonrecurring
actions, the 1994-95 State Financial Plan reflects the use of $1.026 billion in
the positive cash margin carried over from the prior fiscal year, resources that
are not expected to be available in the State's 1995-96 fiscal year.
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 1994-95 fiscal year, the General Fund is expected to account for
approximately 52 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.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of tax
and revenue anticipation notes ("TRANs"). First, the national recession, and
then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipt and three budget deficits. For its
1992-93 and 1993-94 fiscal years, the State recorded balanced budgets on a cash
basis, with substantial fund balances in each year as described below.
The State ended its 1993-94 fiscal year with a balance of $1.140 billion in
the tax refund reserve account, $265 million in its Contingency Reserve Fund
("CRF") and $134 million in its Tax Stabilization Reserve Fund. These fund
balances were primarily the result of an improving national economy, State
employment growth, tax collections that exceeded earlier projections and
disbursements that were below expectations. Deposits to the personal income tax
refund reserve have the effect of reducing reported personal income tax receipts
in the fiscal year when made and withdrawals from such reserve increase receipts
in the fiscal year when made. The balance in the tax refund reserve account will
be used to pay taxpayer refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million will be redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process of
restructuring the State's cash flow as part of the Local Government Assistance
Corporation ("LGAC") program. The balance in the CRF will be used to meet the
cost of litigation facing the State. The Tax Stabilization Reserve Fund may be
used only in the event of an unanticipated General Fund cash-basis deficit
during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in 1993-94 exceeded those originally projected when the
State Financial Plan for that year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the bank
tax, the corporation franchise tax and the estate tax accounted for most of this
variance, and more than offset weaker-than-projected collections from the sales
and use tax and miscellaneous receipts. Collections from individual taxes were
affected by various factors including changes in Federal business laws,
sustained profitability of banks, strong performance of securities firms, and
higher-than-expected consumption of tobacco products following price cuts.
Disbursements and transfers from the General Fund were $303 million below
the level projected in April 1993, an amount that would have been $423 million
had the State not accelerated the payment of Medicaid billings, which in the
April 1993 State Financial Plan were planned to be deferred into the 1994-95
fiscal year. Compared to the estimates included in the State Financial Plan
formulated in April 1993, lower disbursements resulted from lower spending for
Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC program.
Disbursements were higher-than-expected for general support for public schools,
the State share of income maintenance, overtime for prison guards, and highway
snow and ice removal.
In certain prior fiscal years, the State has failed to enact a budget prior
to the beginning of the State's fiscal year. A delay in the adoption of the
State's budget beyond the statutory April 1 deadline and the resultant delay in
the State's Spring borrowing has in certain prior years delayed the projected
receipt by the City of State aid, and there can be no assurance that State
budgets in future fiscal years will be adopted by the April 1 statutory
deadline.
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There are a number of methods by which the State may incur debt. Under the
State Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term borrowing (i.e., borrowing for more than one year) unless
the borrowing is authorized in a specific amount for a single work or purpose by
the Legislature and approved by the voters. There is no limitation on the
amount of long-term debt that may be so authorized and subsequently incurred by
the State. With the exception of housing bonds (which must be paid in equal
annual installments, within 50 years after issuance, commencing no more than
three years after issuance), general obligation bonds must be paid in equal
annual installments, within 40 years after issuance, beginning not more than one
year after issuance of such bonds.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes, and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued bonds, by issuing bond anticipation notes.
Tax and revenue anticipation notes must mature within one year from their
dates of issuance and may not be refunded or refinanced beyond such period. The
amount of tax and revenue anticipation notes issued may not exceed either the
amount of appropriations in force (which amount normally exceeds the amount of
disbursements provided in the financial plan for each year) or the amount of
taxes and revenues reasonably expected, at the time the notes are issued, to be
available to pay such notes.
The State may issue bond anticipation notes only for the purposes and
within the amounts for which bonds may be issued. Such notes must be paid from
the proceeds of the sale of bonds in anticipation of which they were issued or
from other sources within two years of the date of issuance or, in the case of
notes for housing purposes, within five years of the date of issuance. The
State may also, pursuant to specific constitutional authorization, directly
guarantee certain Authority obligations. Payments of debt service on State
general obligation and State-guaranteed bonds and notes are legally enforceable
obligations of the State.
As of March 31, 1994, the State had approximately $5.370 billion in general
obligation bonds, excluding refunding bonds and $294 million in bond
anticipation notes outstanding. On May 24, 1993, the State issued $850 million
in tax and revenue anticipation notes all of which matured on December 31, 1993.
Principal and interest due on general obligation bonds and interest due on bond
anticipation notes and on tax and revenue anticipation notes were $782.5 million
for the 1993-1994 fiscal year, and are estimated to be $786.3 million for the
1994-95 fiscal year. These figures do not include interest on refunding bonds
issued in July 1992, to the extent that such interest is to be paid from
escrowed funds.
The State also employs two other types of long-term financing mechanisms
which are State-supported but are not general obligations of the State: moral
obligation and lease-purchase or contractual-obligation financing. Moral
obligation financing generally involves the issuance of debt by an Authority to
finance a revenue-producing project or other activity, and that debt is secured
by project revenues and statutory provisions of the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur in
the issuer's debt service reserve fund. Under lease-purchase or contractual-
obligation financing arrangements, Authorities and certain municipalities have
issued obligations to finance the construction and rehabilitation of facilities
or the acquisition and rehabilitation of equipment, and expect to cover debt
service and amortization of the obligations through the receipt of rental or
other contractual payments made by the State. The State has also entered into a
payment agreement with LGAC. State lease-purchase or contractual-obligation
financing arrangements involve a contractual undertaking by the State to make
payments to an Authority, municipality or other entity, but the State's
obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State also participates in the issuance of
certificates of participation in a pool of leases entered into by the State's
Office of General Services on behalf of several State departments and agencies.
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The State has also participated in the issuance of certificates of participation
for the acquisition of real property which represent proportionate interests in
lease payments to be paid by the State.
As of September 30, 1992, there were 18 authorities that had outstanding
debt of $100 million or more. The aggregate outstanding debt, including
refunding bonds, of these 18 authorities was $63.5 billion as of September 30,
1993. As of March 31, 1994, aggregate public authority debt outstanding as
State-supported debt was $21.1 billion and as State-related debt was $29.4
billion.
The authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
the State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the 18 authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise for debt service. This assistance is expected to
continue to be required in future years.
Payments for principal and interest due on general obligation bonds,
interest due on bond anticipation notes and on tax and revenue anticipation
notes, and contractual-obligation and lease-purchase commitments were $1.783
billion and $2.045 billion in the aggregate, for the State's 1991-92 and 1992-93
fiscal years, respectively, and are estimated to be $2.181 billion for the
State's 1993-94 fiscal year. These figures do not include interest payable on
either State General Obligation Refunding Bonds issued in July 1992 ("Refunding
Bonds") to the extent that such interest is to be paid from an escrow fund
established with the proceeds of such Refunding Bonds or the State's installment
payments relating to the issuance of certificates of participation.
The State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees. There has never been a default on any moral obligation debt
of any Authority.
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to aid
financially troubled localities. The Municipal Assistance Corporation For The
City of New York ("MAC"), created to provide financing assistance to New York
City, is the only municipal assistance corporation created to date. To enable
MAC to pay debt service on its obligations, MAC receives, subject to annual
appropriation by the Legislature, receipts from the 4% New York State Sales Tax
for the Benefit of New York City, the State-imposed Stock Transfer Tax and,
subject to certain prior liens, certain local assistance payments otherwise
payable to New York City. The legislation creating MAC also includes a moral
obligation provision. Under its enabling legislation, MAC's authority to issue
bonds and notes (other than refunding bonds and notes) expired on December 31,
1984. Legislation has been enacted which would, under certain conditions,
permit MAC to issue up to $1.465 billion of additional bonds, which are not
subject to a moral obligation provision.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating the Local Government Assistance Corporation ("LGAC"), a public benefit
corporation empowered to issue long-term obligations to fund certain payments to
local governments traditionally funded through the State's annual seasonal
borrowing. Over a period of years, the issuance of those long-term obligations,
which will be amortized over no more than 30 years, is expected to result in
eliminating the need for continuing short-term seasonal borrowing for those
purposes because the timing of local assistance payments in future years will
correspond more closely with the State's available cash flow. The legislation
also imposed a cap on the annual seasonal borrowing of the State at $4.7
billion, less net proceeds of bonds issued by the LGAC, except in cases where
the Governor and the legislative leaders have certified both the need for
additional borrowing and a schedule for reducing it to the cap. If borrowing
above the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
As of December 21, 1993, LGAC had issued its bonds to provide net proceeds of
$3.281 billion. LGAC has been authorized to issue its bonds to provide net
proceeds of up to $575 million during the State's 1993-94 fiscal year. On
December 9, 1993, LGAC sold $359 million of bonds to provide net proceeds of
$300 million for the payments to local governments and school districts.
On May 31, 1988, the Supreme Court of the United States took jurisdiction
of a claim of the State of Delaware that certain unclaimed dividends, interest
and other distributions made by issuers of securities and held
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by New York-based brokers incorporated in Delaware, for beneficial owners who
cannot be identified or located, had been, and was being, wrongfully taken by
the State of New York pursuant to New York's Abandoned Property Law (State of
Delaware v. State of New York, United States Supreme Court). Texas intervened,
claiming a portion of such distributions and similar property taken by the State
of New York from New York-based banks and depositories incorporated in Delaware.
All other states and the District of Columbia moved to intervene. In a decision
dated March 30, 1993, the United States Supreme Court granted all pending
motions of the states and the District of Columbia to intervene and remanded the
case to a Special Master for further proceedings consistent with the Court's
decision. The Court determined that the abandoned property should be remitted
first to the state of the beneficial owner's last known address, if
ascertainable, and, if not, then to the state of incorporation of the
intermediary bank, broker or depository. New York and Delaware have executed a
settlement agreement which provides for payments by New York to Delaware of $35
million in the State's 1993-94 fiscal year and five annual payments thereafter
of $33 million. New York and Massachusetts have executed a settlement agreement
which provides for aggregate payments by New York of $23 million, payable over
five consecutive years. The claims of the other states and the District of
Columbia remain.
On November 16, 1993, the Court of Appeals, the State's highest court,
affirmed the decision of the Appellate Division (Third Department) of the
State's Supreme Court in three actions (McDermott, et al. v Regan, et al.; Puma,
et al. v Regan, et al; and Guzdet, et al. v Regan, et al) declaring
unconstitutional certain legislation enacted in 1990. That legislation mandated
a change in the actuarial funding method for determining contributions by the
State and its local governments to the State and local retirement systems from
the aggregate cost (AC) method, previously used by the Comptroller, to the
projected unit credit (PUC) method, and it required the application of the
surplus reported under the PUC method as a credit to employer contributions. As
a result, contributions to the retirement systems have been significantly
reduced since the State's 1990-91 fiscal year. The Court of Appeals held, among
other things, that the State Constitution, which prohibits the benefits of
membership in the retirement systems from being impaired or diminished, was
violated because the PUC legislation impaired "the means designed to assure
benefits to public employees by depriving the Comptroller of his personal
responsibility to maintain `the security and sources of benefits' of the pension
fund." As a result of this decision, the Comptroller has developed a plan to
return to the AC method and to restore prior funding levels of the retirement
systems. The Comptroller expects to achieve this objective in a manner that,
consistent with his fiduciary responsibilities, will not require the State
to make additional contributions in its 1993-94 fiscal year. The
Comptroller's plan calls for a return to the AC method, using a four-year phase-
in in the New York State and Local Employees' Retirements System (ERS), with
State AC contributions capped at a percentage of payroll that increased each
year during the phase-in. Although State contributions to ERS under the plan
are expected to be lower during the phase-in period than they would have been if
the AC method were reinstated immediately, they are expected to exceed PUC
levels by $30 million in fiscal 1994-95, $63 million in fiscal 1995-96, $116
million in fiscal 1996-97, and $193 million in fiscal 1997-98. The excess over
PUC levels is expected to peak at $241 million in fiscal 1998-99, when State
contributions under the Comptroller's plan are first projected to exceed levels
that would have been required by an immediate return to the AC method. The
excess over PUC levels is projected to decline after fiscal 1998-99, and,
beginning in fiscal 2001-02, State contributions required under the
Comptroller's plan are projected to be less than PUC requirements would have
been.
A number of other court actions have been brought involving State finances,
State programs and miscellaneous tort, real property and contract claims in
which the State is a defendant and the monetary damages sought are substantial.
These proceedings could adversely affect the ability of the State to maintain a
balanced State Financial Plan in the 1994-95 fiscal year or thereafter. Among
the more significant of the other cases, which are at various procedural stages,
are those that challenge: (i) the validity of agreements and treaties by which
various Indian tribes transferred title to the State of certain land in central
New York; (ii) certain aspects of the State's Medicaid rates and regulations,
including reimbursements to providers of mandatory and optional Medicaid
services; (iii) the treatment provided at several State mental hygiene
facilities; (iv) contamination in the Love Canal area of Niagara Falls; (v) the
use by the State of certain casualty insurance reserve funds; (vi) an action
against State and New York City officials alleging that the present level of
shelter allowance for public assistance recipients is inadequate under statutory
standards to maintain proper housing; (vii) alleged employment discrimination by
the
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State and its agencies; (viii) challenges to the practice of reimbursing certain
Office of Mental Health patient care expenses from the client's Social Security
benefits; (ix) a challenge to the methods by which the State reimburses
localities for the administrative costs of food stamp programs; (x) alleged
responsibility of State officials to assist in remedying racial segregation in
the City of Yonkers; (xi) an action, in which the State is a third party
defendant, for injunctive or other appropriate relief, concerning liability for
the maintenance of stone groins constructed along certain areas of Long Island's
shoreline; (xii) actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed the actuarial funding
methods for determining contributions to State employee retirement systems;
(xiii) actions challenging legislation enacted in 1990 which requires the
withholding of certain amounts of pay from State employees until their
separation from State employment; (xiv) an action challenging legislation
enacted in 1990 which had the effect of deferring certain employer contributions
to the State Teachers' Retirement System and reducing State aid to school
districts by a like amount; (xv) a challenge to the constitutionality of
specified financing programs authorized by Chapter 190 of the Law of 1990 and
which seeks the recall and refunding of obligations of certain public
authorities issued pursuant to such legislation; (xvi) challenges to the
constitutionality of financing programs of the Thruway Authority authorized by
Chapters 166 and 410 of the laws of 1991, (xvii) an action challenging the
constitutionality of the New York Local Government Assistance Corporation;
(xviii) challenges to the delay by the State Department of Social Services in
making two one-week Medicaid payments to the service providers; (xix) challenges
to portions of Chapter 55 of the Laws of 1992 requiring hospitals to impose and
remit to the State an 11% surcharge on hospital bills paid by commercial
insurers, and which require health maintenance organizations to remit to the
State a surcharge of up to 9%; (xx) challenges to the promulgation of the
State's proposed procedure to determine the eligibility for and nature of home
care services for Medicaid recipients; (xxi) a challenge to State implementation
of a program which reduces Medicaid benefits to certain home-relief recipients;
and (xxii) a challenge to portions of Section 2807-c of the Public Health Law
and implementing regulations which impose a bad debt and charity care allowance
on all hospital bills and a 13% surcharge on inpatient bills paid by employee
welfare benefit plans.
On January 13, 1992, Standard & Poor's Corporation ("Standard & Poor's")
downgraded the State's general obligation bonds from A to A-. Also downgraded
were certain of the State's variously rated moral obligation, lease purchase,
guaranteed and contractual obligation debt, including debt issued by certain
State agencies. Standard & Poor's had downgraded the State's (i) general
obligation bonds from AA- to A and (ii) commercial paper from A-1+ to A-1 on
March 26, 1990. The short-term notes issued by the State on March 29, 1990, to
close a portion of its budget deficit for the 1990 fiscal year were assigned a
rating of SP-1. On January 6, 1992, Moody's Investors Service ("Moody's")
downgraded its rating of certain State appropriations bonds from A to Baa-1. On
March 26, 1990, Moody's assigned a MIG-2 rating to the short-term notes issued
by the State on March 29, 1990, to close a portion of its budget deficit for the
1990 fiscal year. On June 6, 1990, Moody's changed its rating of the State's
outstanding general obligation bonds from A1 to A. The State's tax and revenue
anticipation notes issued in February 1991 were rated MIG-2 by Moody's and SP-1
by Standard & Poor's. The State's tax and revenue anticipation notes issued in
June 1991 were also rated MIG-2 by Moody's and SP-1 by Standard & Poor's. Any
action taken by Standard & Poor's or Moody's to lower the credit rating on
outstanding indebtedness and obligations of the State may have an adverse impact
on the marketability of the State's notes and bonds.
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. Several authorities,
including the Urban Development Corporation ("UDC"), the New York State Housing
Finance Agency ("HFA") and the Metropolitan Transportation Authority ("MTA"),
have, in the past, experienced financial difficulties. Certain authorities
continue to experience financial difficulties, requiring financial assistance
from the State. If one or more authorities or local governments seek special
State assistance, the marketability of notes and bonds issued by the State,
other governmental entities within the State and the authorities may be
impaired.
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The MTA oversees the operation of New York City's subway and bus system
(the "TA") and commuter rail and bus lines serving suburban New York and
Connecticut. Fare revenues from such operations have been insufficient to meet
expenditures, and 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
MTA (the "Metropolitan Transportation Region") and a special one-quarter of 1%
regional sales and use tax, that provide additional revenues for mass transit
purposes including assistance to MTA. The surcharge, which expires in November,
1995, yielded approximately $507 million in calendar year 1992, of which amount
the MTA was entitled to receive approximately 90%, or approximately $456
million. For the 1994-95 State fiscal year, total State assistance to the MTA is
estimated at approximately $1.3 billion.
In addition, legislation enacted in 1987 creates a further source of
recurring revenues for the MTA. This legislation requires that the proceeds of
a one-quarter of 1% mortgage recording tax paid on certain mortgages in the
Metropolitan Transportation Region that theretofore had been paid to the State
of New York Mortgage Agency be deposited in a special MTA fund. These tax
proceeds may be used by the MTA for either operating or capital (including debt
service) expenses. The 1987 legislation also requires the MTA to pay
approximately $25 million annually from its existing recurring mortgage
recording tax revenues, of which $20 million is to be paid to the State for
highway purposes in the Metropolitan Transportation Region (other than New York
City) to the extent revenues are available therefor, and the remaining $5
million of which is to be paid to certain counties in the Metropolitan
Transportation Region.
For 1993, the TA originally projected a budget gap of approximately $266
million. The MTA Board approved an increase in TBTA tolls which took effect
January 31, 1993. Since TBTA operating surplus help subsidize TA operations,
the January toll increase on TBTA facilities, and other developments, reduced
the projected gap to approximately $241 million.
Legislation passed in April 1993 relating to the MTA's 1992-1996 Capital
Program reflected a plan for closing this gap without raising fares. A major
element of the plan provides that the TA receive a significant share of the
petroleum business tax which will be paid directly to MTA for its agencies. The
plan also relies on certain City actions that have not yet been taken. The plan
also relies on MTA and TA resources projected to be available to help close the
gap.
If any of the assumptions used in making these projections prove incorrect,
the TA's gap could grow, and the TA would be required to seek additional State
assistance, raise fares or take other actions.
Two serious accidents in December 1990 and August 1991, which caused
fatalities and many injuries, have given rise to substantial claims for damages
against both the TA and the City.
From its inception through 1975, UDC acted primarily as a lender for low,
moderate and middle income residential projects, but since 1975, UDC has not
financed any new residential projects. UDC has largely redirected its efforts
to exercising its powers to assist in the development of educational, cultural,
recreational, community and other civic facilities throughout the State. All
such civic projects must be owned or leased by the State or a municipality or an
instrumentality thereof, a public benefit corporation or an entity carrying out
a community, municipal, public service or other civic purpose. UDC has
experienced, and expects to continue to experience, financial difficulties with
the housing programs it had undertaken prior to 1975, because a substantial
number of these housing program mortgagors are unable to make full payments on
their mortgage loans. In 1975, the State appropriated money to cure a default
by UDC on notes not backed by the State's moral obligation. UDC has been, and
is expected to remain, dependent on the State for appropriations to meet its
operating expenses. In its 1987-88, 1988-89 and 1989-90 fiscal years, the State
appropriated $3.9 million, $7.1 million and $7.6 million, respectively, to UDC
for corporate operating expenses. The 1990-91 State Financial Plan included a
$6.7 million appropriation to UDC for corporate operating expenses. As of
September 30, 1991, UDC had approximately $2.85 billion in outstanding debt.
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The HFA continues to face significant financial difficulties with some of
the projects on which it holds mortgages, which could affect its ability to meet
debt service on obligations issued under one or more of its housing and certain
other programs. In the absence of State assistance, it is doubtful that HFA
will be able to meet debt service requirements on certain housing project bonds.
The most significant of the projects in arrears is Co-op City, a major tenant-
cooperative project on which HFA holds a mortgage in the original amount of $390
million. During the State's 1986-87 fiscal year, the State appropriated and
paid $6.5 million to replenish HFA's debt service reserve funds. No such
payments have since been required, nor are any anticipated to be made during the
State's 1989-90 fiscal year. Pursuant to a settlement agreement entered into
with respect to HFA's Co-op City housing project, the State paid approximately
$6 million to Co-op City in the 1987-88 fiscal year, $6.7 million in the 1988-89
fiscal year and $1.5 million in the State's 1989-90 fiscal year. The 1990-91
State Financial Plan included a payment of $5.0 million for such agreement. As
of September 30, 1991, HFA had approximately $3.1 billion in outstanding debt.
(3) Other Localities. Certain localities in addition to New York City
could have financial problems leading to requests for additional State
assistance during the State's 1993-94 fiscal year and thereafter. The potential
impact on the State of such requests by localities is not reflected in the
projections of the State receipts and disbursements in the State's 1993-94
fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board of the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
(4) State Economic Trends. Over the long term, the State and the City also
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.
During the years ended December 31, 1982 and December 31, 1983, the State's
economy in most respects performed better than that of the nation. In calendar
years 1984 through 1991, however, the State's rate of economic expansion was
somewhat slower than that of the nation. The unemployment rate in the State
dipped below the national rate in the second half of 1981 and remained lower
until 1991. Overall economic activity declined less than that of the nation as
a whole during the 1982-83 recession. In the current recession, however, the
State, and the rest of the Northeast, has been more heavily impacted.
A national recession commenced in mid-1990. The downturn, which continued
throughout the remainder of the 1990-91 fiscal year and was followed by a period
of weak economic growth during the 1991 calendar year. For calendar year 1992,
the national economy continued to recover, although at a rate below all post-war
recoveries. For calendar year 1993, the economy is expected to grow faster than
in 1992, but still at a very moderate rate, compared to other recoveries. The
recession has been more severe in the State than in other parts of the nation,
owing to a significant retrenchment in the financial services industry, cutbacks
in defense spending, and an overbuilt real estate market. The Division of the
Budget's forecast for the overall rate of growth for the national economy during
calendar year 1993 is similar to the "consensus" of a widely followed survey of
forecasters.
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
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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.
Reductions in Federal spending could materially and adversely affect the
financial condition and budget projections of the State's localities.
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. The inclusion of unrated Bonds
in certain Series of the Trust may result in less flexibility in their disposal
and a loss to the Trust upon their disposition. Except as described in
footnotes to "Summary of Essential Financial Information" in Part I of this
Prospectus, interest accrues to the benefit of Unit holders commencing with the
expected date of settlement for purchase of the Units. Neither the Sponsors nor
the Trustee shall be liable in any way for any default, failure or defect in any
Security.
The following paragraphs discuss the characteristics of the Bonds in the
Trust and of certain types of issuers of the Bonds in the Trust. See "Special
Factors Concerning the Portfolio" in Part I of this Prospectus. These
paragraphs discuss, among other things, certain circumstances which may
adversely affect the ability of such issuers to make payments 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, 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 of a Trust, 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.
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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 Series of the Trust may contain Bonds
in the portfolio that are, in whole or in part, subject to and dependent upon
(1) the governmental entity making appropriations from time to time or (2) 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, certificate holders' 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 Series of the Trust may contain Bonds in
the portfolio that are 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.
Revenue Bonds
Mortgage Revenue Bonds. Certain Bonds may be "mortgage revenue bonds".
Under the Internal Revenue Code of 1986, as amended, (the "Code") "mortgage
revenue bonds" are obligations all of 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 would 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.
Housing Bonds. Some of the aggregate principal amount of Bonds 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 from rents and other
fees, 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
according 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
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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 debt service on the Bonds in the portfolio
issued to finance such nuclear projects.
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
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.
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.
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Pollution Control Facility Revenue Bonds. Bonds in the pollution control
facilities category include securities issued on behalf of a private
corporation,/2/ 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 corporation. See also "Industrial Development Bonds."
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
may include revenues from appropriations from a governmental entity, the
financial condition of the private 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" (often called industrial revenue bonds
("IRBs") if issued prior to 1987), 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, issuers
are obligated to pay the principal of, any premium then due, or interest on the
private activity bonds only to the extent that funds are available from receipts
or revenues of the Issuer 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.
- -------------------
/2/ For purposes of the description of users of facilities, all references to
"corporations" shall be deemed to include any other nongovernmental person or
entity.
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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.
Other Revenue Bonds. Certain Series of the Trust may also contain 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 Series of the Trust may also contain bonds that 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 Series of the Trust may contain general obligation bonds and/or
revenue bonds of issuers in Puerto Rico that 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 1989,
approximately 87% of Puerto Rico's exports were to the United States mainland,
which was also the source of 67% of Puerto Rico's imports. In fiscal 1989,
Puerto Rico experienced a $965.7 million 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. Since fiscal 1985, personal income has increased
consistently in each fiscal year. Personal income includes transfer payments to
individuals in Puerto Rico under various social programs. Transfer payments to
individuals in fiscal 1989 were $3.9 billion, of which $2.7 billion, or 69.2%,
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 rose to a record level
during fiscal 1990. Unemployment, although at the lowest level since the late
1970s, remains above the average for the United States. In fiscal 1990, the
unemployment rate in Puerto Rico was 14.3%. From fiscal 1985 through fiscal
1989, Puerto Rico experienced an economic expansion that affected almost every
sector of its economy and resulted in record levels of employment. 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 borrowing during the period. In
fiscal 1989, the economy of Puerto Rico completed its sixth consecutive year of
economic growth. Real gross product amounted to approximately $15.4 billion in
fiscal 1989, or 3.6% above the fiscal 1988 level. The economy continued its
growth during fiscal 1990 but at a slower rate. The Puerto Rico Planning
Board's economic activity index, a composite index for thirteen economic
indicators, increased 1% for the first ten months of fiscal 1990
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compared to the same period in fiscal 1989, which period showed an increase of
3.2% over the same period in fiscal 1988. The Planning Board is in the process
of preparing a forecast for the economy for fiscal 1991. Continued growth in
fiscal 1991 will depend on several factors, including stabilization of the price
of oil at closer to the levels of the past few years.
Original Issue Discount Bonds and Zero Coupon Bonds
Certain Series of the Trust may contain original issue discount bonds and
zero coupon bonds. Original issue discount bonds are bonds whose original issue
prices are lower than their stated redemption prices at maturity. Zero coupon
bonds are original issue discount bonds that do not provide for the payment of
current interest. For Federal income tax purposes, the original issue discount
on original issue discount bonds and zero coupon bonds must be amortized over
the term of such bonds. On sale or redemption, the excess of (1) the amount
realized (other than amounts treated as tax-exempt income as described below),
over (2) the tax basis of such bonds (properly adjusted, in the circumstances
described below, for amortization of original issue discount) will be taxable as
capital gain or loss. See "The Trust - Tax Status." The Tax Reform Act of 1984
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 Tax Reform Act of 1984 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. Original issue discount on a tax-
exempt obligation issued on or before July 1, 1982 is deemed to accrue as tax-
exempt interest ratably over the life of the obligation. Original issue
discount on any other tax-exempt obligation is also deemed to accrue as tax-
exempt interest over the life of the obligation, although it is not clear
whether such accrual is ratable or is determined under a formula based on the
compounding of interest. 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 on or 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 such
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 the Bonds becomes subject to Federal income taxation.
If the interest on the Bonds should ultimately be deemed to be taxable, the
Sponsors may instruct the Trustee to 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.
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. A callable debt obligation is one which
is subject to redemption prior to maturity at the option of the issuer.
Obligations to be redeemed are generally chosen by lot. The portfolio and
"Summary of Essential Financial Information" in Part I of this Prospectus
contain a listing of the sinking fund and call provisions, if any, with respect
to each of the Bonds therein.
Adoption of the federal Bankruptcy Code, which became effective in 1979,
facilitated the use of bankruptcy proceedings by municipalities to restructure
or otherwise alter the terms of their obligations, including those of the type
constituting the Trust. The Sponsors are unable to predict 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 hereof in respect of any Securities which might reasonably be expected
to have a material adverse effect on the Trust, unless otherwise stated in Part
I of this Prospectus. At any time, however, litigation may be initiated on a
variety of grounds with
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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-exempt nature of the interest thereon. While the outcome
of such litigation can never be entirely predicted with certainty, bond counsel
have given opinions to the issuing authorities of each Bond on the date of
issuance to the effect that such Securities have been validly issued and that
the interest thereon is exempt from Federal income tax. 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.
THE UNITS
On the date of this Prospectus, each Unit represented the fractional
undivided interest in the Trust set forth in Part I of this Prospectus under
"Summary of Essential Financial Information." Thereafter, if any Units 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. See "Rights of Unit Holders - Redemption."
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 and
information regarding estimated monthly and semi-annual distributions of
interest to Unitholders are set forth under "Summary of Essential Financial
Information" in Part I of this Prospectus.
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 interests 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 I of this Prospectus 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
portfolio and (ii) takes into account the expenses and sales charge associated
with each Unit. 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 I of this Prospectus
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. As to each Trust, 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 respective standards which generally correspond to the
standards it has established for determining the insurability of new issues of
municipal bonds.
By the terms of its policy, the Insurer unconditionally guarantees 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 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. The policy issued by the Insurer does not guarantee payment on an
accelerated basis, the payment of any redemption premium or the value of the
Units. The MBIA and MBIAC policies also do 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.
With respect to small issue industrial development Bonds and pollution control
revenue Bonds in Series 9 through Series 30 and Series 31 and subsequent Series,
however, MBIA and MBIAC, respectively, guarantee the full and complete 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 policy issued by the Insurer 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 insurance policy relating to the Trust is non-cancelable 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. Failure
to pay premiums on the 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 policy issued by the Insurer shall terminate as to any Bond which has
been redeemed from or sold by the Trustee or the Trust 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 date of such sale occurs between a Record
Date and a date of payment of any such Bonds, any MBIA or MBIAC policy will
terminate as to such Bond on the business day next succeeding such date of
payment. The termination of a MBIA or MBIAC policy as to any Bond shall not
affect MBIA's or MBIAC's obligations regarding any other Bond in such Trust or
any other Trust which has obtained a MBIA or MBIAC insurance policy. The policy
issued by the Insurer 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.
In the case of Series 18 through 30 and Series 31 and subsequent Series,
pursuant to irrevocable commitments of MBIA and MBIAC, respectively, 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 Bonds) (the
"Permanent Insurance") upon the payment of a single predetermined insurance
premium from the proceeds of the sale of such
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<PAGE>
Bond. Accordingly, any Bond in such Series of 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 was sold on an uninsured basis.
The Permanent Insurance premium with respect to each Bond 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.
Except as indicated below, insurance obtained by the Trust has no effect on
the price or redemption value of Units thereof. It is the present intention of
the Evaluator to attribute a value to the insurance obtained by the Trust
(including, as to Series 18 and subsequent Series, 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 ("Defaulted Bonds"). The value of the insurance will be equal to the
difference between (1) the market value of a Defaulted Bond insured by the Trust
(as to Series 18 and subsequent Series, the market value of a Defaulted Bond
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 (2) the market value of similar securities not in
default or significant risk thereof (as to Series 18 and subsequent Series, the
market value of such Defaulted Bonds not covered by Permanent Insurance).
Insurance obtained by the issuer of a Bond or by other parties 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 MBIA or MBIAC 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, as identified in the insurance policy (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 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 (1) evidence of the Trust's right to receive payment of such principal
and interest and (2) 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.
National Union, which was incorporated in Pennsylvania in 1901, is a stock
insurance company which provides fire and casualty insurance and is a wholly-
owned subsidiary of American International Group, Inc.
Each insurance company constituting MBIA will be severally and not jointly
obligated under any MBIA policy obtained by the Trust in the following
respective percentages: The Aetna Casualty and Surety Company, 33%; Fireman's
Fund Insurance Company, 30%; The Travelers Indemnity Company, 15%; Aetna
Insurance Company, 12%; and The Continental Insurance Company, 10%. As a
several obligor, each such insurance company will be obligated only to the
extent of its percentage of any claim under the MBIA policy and will not be
obligated to pay any unpaid obligations of any other member of MBIA. Each
insurance company's participation is backed by all of its assets. Each
insurance company is, however, a multiline insurer involved in several lines
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<PAGE>
of insurance other than municipal bond insurance, and the assets of each
insurance company will also secure all of its other insurance policy and surety
bond obligations.
MBIAC is the principal operating subsidiary of MBIA Inc., a New York Stock
Exchange listed company. MBIAC is a separate and distinct entity from MBIA.
MBIAC has no liability to the bondholders for the obligations of MBIA under any
policy of insurance. Neither MBIA Inc. nor its shareholders are obligated to
pay the debts of or claims against MBIAC. MBIAC is a limited liability
corporation rather than a several liability association. MBIAC is domiciled in
the State of New York and licensed to do business in all 50 states, the District
of Columbia and the Commonwealth of Puerto Rico. Copies of the year end
financial statements of MBIAC prepared in accordance with statutory accounting
practices are available from the Insurer upon request.
The contract of insurance relating to the Trust and the negotiations in
respect thereof (and, in the case of Series 18 and subsequent Series, certain
agreements relating to Permanent Insurance) 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 MBIA Inc. Although all issues contained in the portfolio
of the Trust are individually insured, neither the Trust, the Units nor the
portfolio is insured directly or indirectly by the Insurer.
A purpose of the insurance on the Bonds in the portfolio of 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, Inc. "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, Inc., 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, Inc., respectively.
Because the Securities are insured by the Insurer as to the payment of
principal and interest, Standard & Poor's Rating group, a division of McGraw
Hill ("Standard & Poor's"), has assigned its "AAA" investment rating to the
Units of the Trust and, in the case of Series 17 and subsequent Series, to all
the Bonds, as insured, and, in the case of Series 6 and subsequent Series,
Moody's Investors Service, Inc. has assigned a rating of "Aaa" to all of the
Bonds in the Trust, as insured. See "Tax Exempt Bond Portfolio" in Part I of
this Prospectus. 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 or
Moody's Investors Service, Inc. 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 (SEE ALSO "TAX STATUS" IN PART I OF THIS PROSPECTUS)
Interest income on the Bonds contained in the Trust portfolio 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, excludable from
gross income under the Internal Revenue Code of 1954, as amended (the "1954
Code"), or the Internal Revenue Code of 1986, as amended (the "Code"), depending
upon the date of issuance of the Bonds in any particular Series. See "The Trust
- - Portfolio."
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<PAGE>
Gain (or loss) realized on a sale, maturity or redemption of the Bonds or
on a sale or redemption of a Unit is, however, includable 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 facts and
circumstances. 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
purchase 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 non-corporate Unit holders may be
deducted against ordinary income. Since the proceeds from sales of Bonds, under
certain circumstances, may not be distributed pro-rata, a Unit holder's taxable
income for any year may exceed the actual cash distributions to the Unit holder
in that year.
The Code, among other things, provides for the following: (1) the interest
on certain private activity bonds issued after August 7, 1986 is included in the
calculation of the individual alternative minimum tax (currently taxed under a
two-tier rate structure of 26% and 28%). (None of the Bonds in the Trust is a
private activity bond, the interest on which is subject to the individual
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 (currently taxed at a 20% rate), and 75% of the amount by which
adjusted current earnings (including interest on all tax-exempt bonds) exceed
alternative minimum taxable income, as modified for this calculation, will be
included in alternative minimum taxable income; (3) although interest on the
Bonds is includable 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; (4) 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; (5) with respect to certain insurance
companies (other than life insurance companies), the Code reduces the deduction
for loss reserves by 15% of the sum of certain items, including tax-exempt
interest received or accrued by such companies; (6) all taxpayers are required
to report for informational purposes on their Federal income tax returns the
amount of tax-exempt interest they receive; (7) 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 (8) a branch profits tax on U.S. branches of foreign
corporations is imposed 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.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA '93") was passed by
Congress on August 6, 1993 and was signed into law by the President on August
10, 1993. OBRA '93 contains more than 70 changes in the Code that are projected
to increase tax revenues by more than $250 billion over the next five years.
Among other things, OBRA '93 increased individual and corporate income tax
rates. Many of the provisions of OBRA '93 went into effect on January 1, 1994.
The changes in tax rates applicable to individuals and corporations, alternative
minimum tax rates and estate and gift tax rates are effective retroactively as
of January 1, 1993. Prospective investors should consult their tax advisors as
to the effect of OBRA '93 on an investment in the Units.
The Superfund Revenue Act of 1986 (the "Superfund Act") imposed a
deductible, broad-based tax on a corporation's alternative minimum taxable
income (before net operating losses and any deduction for the tax) at a rate of
$12 per $10,000 (0.12%) of alternative minimum taxable income in excess of
$2,000,000. The tax is imposed for tax years beginning after 1986 and beginning
before 1996 and is applicable even if the corporation pays no alternative
minimum tax. For purposes of the Superfund Act, alternative minimum taxable
income includes interest on all tax-exempt bonds to the same extent and in the
same manner as the Code. The Superfund Act does not impose a tax on taxpayers
other than corporations.
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<PAGE>
Section 86 of the Code provides that a portion of social security benefits
is includable in gross income for taxpayers whose "modified adjusted gross
income", combined with 50% of their social security benefits, exceeds a base
amount. The base amount is $34,000 for an individual, $44,000 for a married
couple filing a joint return and zero for married persons filing separate
returns. OBRA '93 adds additional provisions whereby a portion of social
security benefits will be includable in gross income for certain taxpayers. For
taxpayers with "modified adjusted gross income" above the $34,000 and $44,000
levels, gross income will include the lesser of: (a) 85% of the taxpayer's
social security benefit, or (b) the sum of (1) the smaller of (i) the amount
included under prior law or (ii) $3,500 (for unmarried taxpayers) or $4,000 (for
married taxpayers filing joint returns), plus (2) 85% of the excess of the
taxpayer's modified adjusted gross income over the applicable new base amounts.
Interest on tax-exempt bonds is added to adjusted gross income for purposes of
determining whether an individual's income exceeds the base amount described
above.
In addition, certain "S Corporations" may be subject to minimum tax on
certain 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 Federal income tax were or (with respect to "when, as and if
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.
In the case of certain Bonds which may be included in the Trust, the
opinions of bond counsel indicate that, although interest on such Bonds is
generally exempt from Federal income tax, such Bonds are "industrial development
bonds" under the 1954 Code or are "private activity bonds" as that term is
defined in the Code (the following discussion also applies to Bonds that are
"industrial development bonds" as they are defined in the 1954 Code in terms
similar to those under which private activity bonds are defined in the Code and
are generally subject to the same limitations). Interest on certain qualified
small issue private activity bonds is exempt from all present Federal income
taxation only so long as the "principal user" of the bond-financed facility and
any "related person" remain within the capital expenditure limitations imposed
by Section 144(a)(4) of the Code and only so long as the aggregate private
activity bond limits of Section 144(a)(10) of the Code (Sections 103(b)(6)(D)
and 103(b)(15) of the 1954 Code, respectively) are met. In addition, interest
on private activity bonds will not be exempt from 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 a "related person" to such
a "substantial user"). Interest attributable to such Bonds, if received by a
Unit holder who is such a "substantial user" or "related person," will be
taxable (i.e., not tax-exempt) to the same extent as if such Bonds were held
directly as owner.
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 activities 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.
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 acquired Units on or before August 7, 1986 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. Subject to certain exceptions under
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<PAGE>
Section 265 of the Code, no deduction is allowed to a financial institution for
that portion of the institution's interest expense allocable to tax-exempt
interest on Units acquired after August 7, 1986. Investors with questions
regarding this issue should consult 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. Original issue
discount on a tax-exempt obligation issued on or before July 1, 1982 is deemed
to accrue as tax-exempt interest ratably over the life of the obligation.
Original issue discount on any other tax-exempt obligation is also deemed to
accrue as tax-exempt interest over the life of the obligation, although it is
not clear whether such accrual is ratable or is determined under a formula based
on the compounding of interest. 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 on or 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 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.
For obligations issued on or before September 27, 1985, bond premium must
be amortized under the method the Unit holder regularly employs for amortizing
bond premium (assuming such method is reasonable) or, otherwise, on a straight-
line basis. Thus, if a Unit holder has previously amortized bond premium with
respect to other bonds (whether tax-exempt or taxable) on a straight-line basis,
the Unit holder may be prohibited from adopting a more favorable method of
amortizing bond premium such as a constant interest method. For obligations
issued after September 27, 1985, amortizable bond premium must be computed on
the basis of the Unit holder's yield to maturity, determined by using the Unit
holder's basis for the bond, compounding at the close of each "accrual period"
(as defined in Section 1271(a)(5) of the Code). With respect to any tax-exempt
bond, the amount of bond premium is determined with reference to the amount of
the basis of such bond and the total amount payable at maturity or on an earlier
call date. If the amount payable on an earlier call date is used in determining
the amortizable bond premium attributable to the period before the earlier call
date, such bond shall be treated as maturing on such date for the amount so
payable and then reissued on such date for the amount so payable.
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 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
the effect of such legislation on Bonds in the Trust. If the interest on any
Bonds in the Trust should ultimately be deemed to be taxable, the Sponsors may
instruct the Trustee to sell such Bonds, and, since they would be sold as
taxable securities, it is expected that they would be sold at a substantial
discount from current market prices.
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<PAGE>
In South Carolina v. Baker, 485 U.S. 505 (1988), the Supreme Court held
that a nondiscriminatory Federal income tax on the interest earned on any state
and local bonds would be constitutional. In so holding, the Supreme Court
overruled Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895), which held
that any interest earned on a state or local bond was immune from Federal
taxation. This decision, in and of itself, does not affect the status of state
and local bonds previously issued or which may be issued pursuant to the
existing provisions of the Code. Under the decision, however, the continued
availability of the Federal tax exemption is now solely a matter of
Congressional grace rather than Constitutional mandate.
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.
EXPENSES AND CHARGES
Initial Expenses
At no cost to the Trust, the Sponsors have borne all the expenses of
creating and establishing the Trust, including the cost of the initial
preparation, printing and execution of the Trust Agreement and the certificates
for Units, legal expenses, advertising and selling expenses, expenses of the
Trustee and other out-of-pocket expenses.
Fees
The Trustee's, Sponsors' and Evaluator's fees are set forth under "Summary
of Essential Financial Information" in Part I of this Prospectus. The Sponsors'
fee, if any, 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
"Summary of Essential Financial Information" in Part I of this Prospectus, may
exceed the actual costs of providing portfolio supervisory services for a
particular Series, but at no time will the total amount received by the Sponsors
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 under "Summary of Essential Financial
Information" in Part I of this Prospectus. 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." 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."
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. 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."
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<PAGE>
Insurance Premiums
The cost of the insurance obtained by the Trust as set forth under "Summary
of Essential Financial Information" in Part I of this Prospectus is based on the
aggregate amount of Bonds in the Trust as of the date of such information. The
premium, which is an obligation of each respective Trust, is payable monthly by
the Trustee on behalf of the Trust. As Securities in the Trust 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 MBIAC Pre-insured
Bonds or MBIA 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 that the Trustee exercises the right to
obtain Permanent Insurance on such Bond.
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 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.
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PUBLIC OFFERING
OFFERING PRICE
The Public Offering Price of the Units is based on the aggregate bid price
of the Bonds in the Trust (as determined by the Evaluator) plus a sales charge
based on the maturity of each Bond in the Trust. For the purpose of computing
the sales charge, Bonds are 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 computing the sale charge will apply different sales charge
rates to each Bond in the Trust depending on the maturity of each Bond in
accordance with the following schedule:
<TABLE>
<CAPTION>
SECONDARY MARKET PERIOD
SALES CHARGE
PERCENTAGE OF PUBLIC PERCENTAGE OF NET
YEARS TO MATURITY PER BOND OFFERING PRICE AMOUNT INVESTED
-------------------------- -------------- ---------------
<S> <C> <C>
0 Months to 1 Year 1.0% 1.010%
1 but less than 2 2.0% 2.091%
2 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 2% of the Public Offering Price is applied to all
secondary market unit purchases. There is no reduction of the sales charge for
volume purchases in secondary market transactions.
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 insurance obtained by the Trust. See also "Rights of Unit
Holders - Certificates" and "Rights of Unit Holders - Redemption" for
information relating to redemption of Units. The Evaluator will consider in its
evaluation of Defaulted Bonds which are covered by insurance obtained by the
Trust the value of the insurance guaranteeing interest and principal payments as
well as the market value of the Securities and the market value of similar
securities of issuers whose securities, if identifiable, carry identical
interest rates and maturities and are of creditworthiness comparable to the
issuer prior to the default or risk of default. If such other securities are
not identifiable, the Evaluator will compare prices of securities with
substantially identical interest rates and maturities and are of a
creditworthiness of minimum investment grade. As to Series 18 and subsequent
Series, 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 the Insurer to meet its commitments under
the Trust's insurance policy and, in the case of Series 18 and subsequent
Series, MBIA's or MBIAC's commitment to issue Permanent Insurance. For a
description of the circumstances under which a full or partial suspension of the
right of Unit holders to redeem their Units may occur, see "Rights of Unit
Holders - Redemption."
It is the present intention of the Trustee (and, in the case of Series 18
and subsequent Series, assuming the Trustee does not exercise the right to
obtain Permanent Insurance on any Defaulted Bonds), so long as the Trust
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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 other party, 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 the Insurer as long as the
Bond is held in the Trust.
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.
Market for Units
Although they are not obligated to do so, the Sponsors have maintained and
intend to continue to maintain a market for the Units and to continuously offer
to purchase Units at prices based on the aggregate bid price of the Securities.
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." 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 of the Trust or of the Units. In the event that a
market is not maintained for the Units, 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 on 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."
DISTRIBUTION OF UNITS
The Sponsors are the sole underwriters of the Units. It is the Sponsors'
intention to effect a public distribution of the Units solely through their own
organizations. Units may, however, be sold to dealers who are members of the
National Association of Securities Dealers, Inc. at a discount. Such discount
is subject to change from time to time by the Agent for Sponsors. 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. It is the
Sponsors' intention to continue to qualify Units of the Trust for sale where
such qualification is necessary. In maintaining a market for the Units (see
"Public Offering - Market for Units"), the Sponsors will 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 such Units (the Public Offering
Price described in the currently effective Prospectus which includes the sales
charge set forth in Part I of this Prospectus under "Summary of Essential
Financial Information") or the price at which they may redeem such Units (based
on the aggregate bid side evaluation of the Securities), as the case may be, and
to the extent that they earn sales charges on resales.
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
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transactions, and banking regulators have not indicated that these particular
agency transactions are not permitted under such Act.
RIGHTS OF UNIT HOLDERS
CERTIFICATES
Ownership of Units 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 I
of this Prospectus, "The Trust - Expenses and Charges" and "Rights of Unit
Holders - Redemption."
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
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 of the Trust 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 I of this Prospectus. 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. 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.
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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."
As of the fifteenth day of each month the Trustee will deduct from the
Interest Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of the Trust as of the
first day of such month. See "The Trust - Expenses and Charges." The Trustee
also may withdraw from said accounts such amounts, if any, as it deems necessary
to establish a reserve for any governmental charges payable out of 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."
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. On each monthly Distribution Date, therefore, 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 addition, because of the varying interest payment dates of the
Securities constituting the Trust portfolio, accrued interest at any point in
time will be greater than the amount of interest actually received by the Trust
and distributed to Unit holders. There will always remain, therefore, 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. See "Rights
of Unit Holders - Redemption - Computation of Redemption Price per Unit."
REPORTS AND RECORDS
The Trustee shall furnish Unit holders in connection with each distribution
a statement of the amount of interest, if any, and the amount of other receipts,
if any, which are being distributed, expressed in each case as a dollar amount
per Unit. 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, 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, 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
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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, certificates issued or held, a current list of Securities in the
portfolio and a copy of the Trust Agreement.
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." 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 Part I of this Prospectus under "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."
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.
As to Series 18 and subsequent Series, if the Trustee exercises the right
to obtain Permanent Insurance on a Bond, 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 insurance obtained by the Trust covers the
timely payment of principal and interest when due on the Bonds
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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 (and, in
the case of Series 18 and subsequent Series, assuming that the Trustee does not
exercise the right to obtain Permanent Insurance on a Defaulted Bond) 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" for the effect of selling Defaulted
Bonds to meet redemption requests.
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 (assuming, in the case of Series 18 and subsequent Series,
that the Trustee does not exercise the right to obtain Permanent Insurance on
Defaulted Bonds), 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 portfolio 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, as of the Evaluation Time stated
under "Summary of Essential Financial Information" in Part I of this Prospectus
on the day any such determination is made. The 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, 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 (i) on the basis of current bid prices for the
Securities, (ii) if bid prices are not available for any Securities, on the
basis of current bid prices for comparable bonds, (iii) by appraisal, or (iv) 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 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 - Market for Units."
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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." 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." 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.
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 "Trust") are offering Unit holders of those
Series of the Trust for which the Sponsors are maintaining a secondary market an
option to exchange a Unit of any Series of the Trust for a Unit of a different
Series of the Trust 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 - Market for Units") plus a fixed sales charge of $15 per Unit
(in lieu of the normal sales charge). A Unit holder must have held his Unit for
a period of at least six months, however, 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 that
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 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 and 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 Investors Service, Inc. (Aaa, Aa, A or Baa) or
Standard & Poor's Corporation (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 and New York State and New York City personal income taxes.
During times of adverse market conditions, however, 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 income tax and/or New
York City income tax, 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 advisor 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 such 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 10 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, request a
copy of the Empire Builder Prospectus from The Bank of New York, Unit Investment
Trust Division, P.O. Box 988, Wall Street Station, New York, New York 10268.
Read it carefully before you decide to participate.
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SPONSORS
Glickenhaus and Lebenthal are the Sponsors for Empire State Municipal
Exempt Trust, Series 10 and all subsequent Series, including all Guaranteed
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. The principal
offices of Glickenhaus are located at 6 East 43rd Street, New York, New York
10017.
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 60 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 for 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. The principal offices of Lebenthal are located at 25 Broadway,
New York, New York 10004.
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 or
gross negligence. See "The Trust - Portfolio" and "Sponsors - Responsibility."
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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 may not be
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 that the Trustee does
not exercise the right to obtain Permanent Insurance on a Defaulted Bond or
Bonds, 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 portfolio 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. As to Series 18 and subsequent
Series, in the event that 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 partial suspension of the right of Unit holders to redeem their Units.
See "Rights of Unit Holders - Redemption." The Sponsors are empowered, but not
obligated, to direct the Trustee to dispose of Bonds in the event of advance
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
with 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, 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 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."
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
a Trust would be detrimental to the interest of the Unit holders. The proceeds
from any such sales will be credited to the Principal Account of the affected
Trust for distribution to the Unit holders.
Notwithstanding the foregoing, in connection with final distributions to
Unit holders (if, as to Series 18 and subsequent Series, 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. In connection with any liquidation, therefore, 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
38
<PAGE>
a significant risk of default. Since the Pre-insured Bonds 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 not disposed of at the date of termination will
ultimately be distributed to Unit holders of record as of such date 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" in Part I of this Prospectus.
AGENT FOR SPONSORS
The Sponsor named as Agent for Sponsors under "Summary of Essential
Information" in Part I of this Prospectus has been appointed by the other
Sponsor as agent for purposes of taking action under the Trust Agreement. In
those Trusts for which there is a sole Sponsor, references herein to the Agent
for Sponsors shall be deemed to refer to such sole Sponsor. 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 Sponsor acts 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 the 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, 1992, the total partners' capital of Glickenhaus was
$101,324,000 (audited); and at March 31, 1993, the total stockholders' equity of
Lebenthal was $5,420,701 (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) 815-2000. 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 corporation organized under the laws of the United States
or the State of New York, 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 and its principal office and
place of business in the Borough of Manhattan, New York City. The duties of the
Trustee are primarily
39
<PAGE>
ministerial in nature. The Trustee did not participate in the selection of
Securities for the portfolio of any Series of the Trust.
LIMITATIONS ON LIABILITY
The Trustee shall not be liable or responsible in any way for depreciation
or loss incurred by reason of the disposition of any moneys, Securities or
certificates or in respect of any evaluation or for any action taken in good
faith reliance on prima facie properly executed documents except in cases of its
willful misconduct, bad faith, gross negligence or reckless disregard of 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."
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."
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, in the case of Series 11 and subsequent
Series, 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
The Evaluator is Muller Data Corporation, a New York corporation, with main
offices at 395 Hudson Street, New York, New York 10014. Muller Data Corporation
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
the Unit holders for errors in judgment. 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.
40
<PAGE>
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."
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 a 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 the 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 of Deposit, whichever is lower, at which time the Trust may be
terminated (i) by the consent of the holders of 66-2/3% of the Units or (ii) by
the Trustee; provided, however, that the holders of 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 I of this Prospectus under "Summary of Essential Financial Information";
provided, however, as to Series 9 and subsequent Series, that prior to the
Mandatory Termination 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 of the affected Trust. 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.
LEGAL OPINIONS
Certain legal matters have been passed upon by Hall, McNicol, Hamilton &
Clark, The News Building, 220 East 42nd Street, New York, New York 10017, as
counsel for the Sponsors as to Series 1 through 8, by Brown & Wood, One World
Trade Center, New York, New York 10048, as special counsel for the Sponsors as
to Series
41
<PAGE>
9 through 64 and by Battle Fowler, 280 Park Avenue, New York, New York 10017 as
special counsel for the Sponsors as to Series 65 and subsequent Series of Empire
State Municipal Exempt Trust, Guaranteed Series. Tanner, Propp, Fersko &
Sterner, 99 Park Avenue, New York, New York 10016, acts as counsel for the
Trustee.
AUDITORS
The financial statements of the Trust included in Part I of this Prospectus
have been audited by BDO Seidman, independent certified public accountants, as
stated in their report with respect thereto, and are included therein in
reliance upon such report given upon the authority of that firm as experts in
accounting and auditing.
DESCRIPTION OF BOND RATINGS
All ratings except those identified by an asterisk (*) are by Standard &
Poor's Corporation ("Standard & Poor's"). A Standard & Poor's corporate or
municipal bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific 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.
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 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.
42
<PAGE>
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, Inc. ("Moody's") 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.
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
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<PAGE>
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 bonds are 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.
44
<PAGE>
EMPIRE STATE
MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES
PROSPECTUS, PART II
SPONSORS:
GLICKENHAUS & CO.
6 EAST 43RD STREET
NEW YORK, NEW YORK 10017
(212) 953-7532
LEBENTHAL & CO., INC.
25 BROADWAY
NEW YORK, NEW YORK 10004
(212) 425-6116
THIS PROSPECTUS CONTAINS INFORMATION CONCERNING THE TRUST AND THE SPONSORS, BUT
DOES NOT CONTAIN ALL THE INFORMATION SET FORTH IN THE REGISTRATION STATEMENTS
AND EXHIBITS RELATING THERETO, WHICH THE TRUST HAS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, WASHINGTON, D.C., UNDER THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS HEREBY MADE.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Trust....................... 1
Public Offering................. 29
Rights of Unit Holders.......... 31
Automatic Accumulation Account.. 36
Sponsors........................ 37
Trustee......................... 39
Evaluator....................... 40
Amendment and Termination
of the Trust Agreement........ 41
Legal Opinions.................. 41
Auditors........................ 42
Description of Bond Ratings..... 42
</TABLE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
NOT CONTAINED IN THIS PROSPECTUS AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR THE SPONSORS. 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.
<PAGE>
PART II. ADDITIONAL INFORMATION NOT REQUIRED IN PROSPECTUS
Contents of Registration Statement
This Post-Effective Amendment to the Registration Statement on Form S-6
comprises the following papers and documents:
(i) The facing sheet of Form S-6.
The Cross-Reference Sheet (previously filed).
The Prospectus.
Signatures.
(ii) Written consent of the following persons:
Battle Fowler (previously filed).
BDO Seidman.
(iii) The following exhibits:
*4.8-Consent of Muller Data Corporation, as Evaluator.
6.1-Copies of Powers of Attorney of General Partners of
Glickenhaus & Co. (filed as Exhibit 5.2(a) to Amendment No. 1 to the
Form S-6 Registration Statement No. 33-78036 of MINT Group 11 on May
3, 1994, and filed as Exhibit 6.1 to Amendment No. 1 to Form S-6
Registration Statement No. 33-58492 of Empire State Municipal Exempt
Trust, Guaranteed Series 95 on May 12, 1993 and incorporated herein by
reference).
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. 33-40723 of Empire State
Municipal Exempt Trust, Guaranteed Series 77 on August 15, 1991; as
Exhibit 6.2 to Amendment No. 1 to Form S-6 Registration Statement No.
33-37744 of Empire State Municipal Exempt Trust, Guaranteed Series 67
on January 4, 1991, and as Exhibit 5.2 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).
__________________
* Filed herewith.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
Empire Estate Municipal Exempt Trust, Guaranteed Series 74, certifies that it
meets all of the requirements for effectiveness of this Post-Effective Amendment
to the Registration Statement pursuant to Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned thereto duly authorized,
in the City of New York and State of New York on the 29th day of July, 1994.
Signature appear on pages II-3 and II-4
A majority of the General Partners of Glickenhaus & Co. have signed this
Post-Effective Amendment to the Registration Statement pursuant to powers of
attorney on file with the Commission authorizing the person signing this Post-
Effective Amendment to the Registration Statement to do so on behalf of such
persons.
A majority of the Board of Directors of Lebenthal & Co., Inc. have signed
this Post-Effective Amendment to the Registration Statement pursuant to powers
of attorney on file with the Commission authorizing the person signing this
Post-Effective Amendment to the Registration Statement to do so on behalf of
such persons.
II-2
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 74
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 Post-
Effective Amendment No. 4 to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
ROBERT SANTORO* General Partner
(Robert Santoro)
ALFRED FEINMAN* General Partner
(Alfred Feinman)
SETH M. GLICKENHAUS* General Partner
(Seth M. Glickenhaus)
STEVEN B. GREEN* General Partner
(Steven B. Green) Chief Financial Officer
ARTHUR WINSTON* General Partner
(Arthur Winston)
JEFFREY L. LEDERER* General Partner
(Jeffrey L. Lederer)
*By: /s/ Brian C. Laux July 29, 1994
(Brian C. Laux,
Attorney-in-Fact)
II-3
<PAGE>
Empire State Municipal Exempt Trust
Guaranteed Series 74
By: LEBENTHAL & CO., INC.
(Sponsor)
By: /s/ James A. Lebenthal
(James A. Lebenthal,
Chairman of the Board)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 4 to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
H. GERARD BISSINGER, II* Director
(H. Gerard Bissinger, II)
JEFFREY M. JAMES* Director
(Jeffrey M. James)
D. WARREN KAUFMAN* Director
(D. Warren Kaufman)
JAMES E. McGRATH* Chief Financial
(James B. McGrath) Officer
/s/ JAMES A. LEBENTHAL Director, Chief July 29, 1994
(James. A. Lebenthal) Executive Officer
SAYRA FISCHER LEBENTHAL* Director
(Sayre Fischer Lebenthal)
DUNCAN K. SMITH* Director
(Duncan K. Smith)
PETER J. SWEETSER* Director
(Peter J. Sweetser)
*By: /s/ James A Lebenthal July 29, 1994
(James A. Lebenthal,
Attorney-in-Fact)
II-4
<PAGE>
CONSENT OF COUNSEL
The consent of Battle Fowler to the use of their name in the Prospectus
included in the Registration Statement is contained in their opinion filed
previously.
CONSENT OF INDEPENDENT AUDITORS
The Sponsors and Trustee of
EMPIRE STATE MUNICIPAL EXEMPT TRUST GUARANTEED SERIES 74
We hereby consent to the use in Post-Effective Amendment No. 4 to
Registration Statement No. 33-39304 of our report dated April 29, 1994 relating
to the financial statements of Empire State Municipal Exempt Trust, Guaranteed
Series 74, and to the references to our firm under the heading "Auditors" in the
Prospectus which is part of such Registration Statement.
/s/ BDO Seidman
BDO SEIDMAN
Woodbridge, New Jersey
July 29, 1994
II-5
<PAGE>
EXHIBIT 99.4.8
Muller Data Corporation
A Thomson Financial Services Company
July 7, 1994
Glickenhaus & Co., Inc.
6 East 43rd Street
New York, New York 10017
Lebenthal & Co., Inc.
25 Broadway
New York, New York 10006
RE: EMPIRE STATE MUNICIPAL EXEMPT TRUST
GTD SERIES 73 AND 74 -- AMENDMENT NO. 4
Gentlemen:
We have examined the post-effective Amendment to the Registration Statement
File No. 33-39304 for the above-captioned trusts. We hereby acknowledge
that Muller Data Corporation is currently acting as the evaluator for the
trusts. We hereby consent to the use in the Amendment of the reference to
Muller Data Corporation as evaluator.
In addition, we hereby confirm that the ratings indicated in the above
referenced Amendment to the Registration Statement for the respective bonds
comprising the trust portfolios are the ratings currently indicated in our
Muniview data base.
You are hereby authorized to file a copy of this letter with the Securities
and Exchange Commission.
Sincerely,
/s/ Mario Buscemi
-----------------
Mario Buscemi
Senior Vice President
395 Hudson Street - New York - NY 10014-3622 - Telephone (212) 807-3800
