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Rule No. 497(b)
Registration No. 33-58013
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[EMPIRE, GTD., LOGO] 10,000 Units
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Dated: May 25, 1995
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EMPIRE STATE MUNICIPAL EXEMPT TRUST, GUARANTEED SERIES 116
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The Empire State Municipal Exempt Trust, Guaranteed Series 116
(the 'Trust') is a unit investment trust formed for the purpose of
obtaining tax-exempt interest income through investment in a fixed
insured portfolio of long-term bonds, including contracts and
funds for the purchase thereof, issued by or on behalf of the
State of New York and counties, municipalities, authorities or
political subdivisions thereof or issued by certain United States
territories or possessions, including Puerto Rico, and their
public authorities (the 'Bonds' or the 'Securities'). The Sponsors
of the Trust are Glickenhaus & Co., and Lebenthal & Co., Inc.
Units of the Trust will be offered to residents of New York,
Connecticut, Pennsylvania and Florida. On the Date of Deposit, all
of the Units and the Bonds while in the Trust will be rated AAA by
Standard & Poor's Corporation and Moody's Investors Service will
assign a rating of 'Aaa' to all of the Bonds in the Trust, as
insured. The value of the Units of the Trust will fluctuate with
the value of the underlying Bonds. Minimum purchase: 1 Unit.
In the opinion of counsel, under existing law, interest income to
the Trust, and, with certain exceptions, to Unit Holders is exempt
from all regular federal, New York State and New York City income
taxes, but may be subject to state and local taxes in other
jurisdictions. Capital gains, if any, are subject to tax. Interest
on the Bonds will not be subject to the federal alternative
minimum tax. See 'The Trust--Tax Status' in Part B of this
Prospectus.
This Prospectus consists of two parts. Part A contains the Summary
of Essential Information including descriptive material relating
to the Trust, the Statement of Condition of the Trust and the
Portfolio. Part B contains general information about the Trust.
Part A may not be distributed unless accompanied by Part B. Please
read and retain both parts of this Prospectus for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS PART A DATED MAY 25, 1995
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EMPIRE STATE MUNICIPAL EXEMPT TRUST,
GUARANTEED SERIES 116
[EMPIRE, GTD., LOGO]
SUMMARY OF ESSENTIAL FINANCIAL INFORMATION
AT MAY 24, 1995 (1):
SPONSORS: GLICKENHAUS & CO.
LEBENTHAL & CO., INC.
AGENT FOR SPONSORS: GLICKENHAUS & CO. TRUSTEE: THE BANK OF NEW YORK
EVALUATOR: MULLER DATA CORPORATION
<TABLE>
<S> <C>
DATE OF DEPOSIT: May 25, 1995
AGGREGATE PRINCIPAL AMOUNT OF BONDS IN TRUST: $10,000,000.00(2)
NUMBER OF UNITS: 10,000
FRACTIONAL UNDIVIDED INTEREST IN TRUST PER UNIT: 1/10,000
TOTAL VALUE OF SECURITIES IN PORTFOLIO (Based on Offering
Side Valuations of Securities): $ 9,496,152.50
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SPONSORS' INITIAL REPURCHASE PRICE PER UNIT (Total Value of
Securities divided by 10,000 Units): $ 949.61(3)
Plus Sales Charge of 4.9% (on sales of fewer than 250
Units) of Public Offering Price (4): 48.92
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PUBLIC OFFERING PRICE PER UNIT: $ 998.53(5)
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REDEMPTION PRICE PER UNIT: $ 945.04(6)
EXCESS OF PUBLIC OFFERING PRICE OVER REDEMPTION PRICE PER
UNIT: $ 53.49
EXCESS OF PUBLIC OFFERING PRICE OVER SPONSORS' INITIAL
REPURCHASE PRICE PER UNIT: $ 48.92
WEIGHTED AVERAGE MATURITY OF BONDS IN THE TRUST: 24.47 years
</TABLE>
<TABLE>
<S> <C>
EVALUATION TIME: 4:00 P.M. New York Time during the initial
offering period and 2:00 P.M. New York Time
after the initial offering period.
ANNUAL INSURANCE PREMIUM (7): $7,200.00
EVALUATOR'S FEE: $.55 per Bond for each valuation.
TRUSTEE'S ANNUAL FEE: For each $1,000 principal amount of Bonds in the
Trust, $1.31 under the monthly and $.91 under
the semi-annual distribution plan.
SPONSORS' ANNUAL FEE: Maximum of $0.25 per $1,000 principal amount of
underlying Securities. See 'The Trust--Expenses
and Charges.'
</TABLE>
<TABLE>
<S> <C>
SPONSORS' PROFIT (LOSS) ON DEPOSIT: $98,113.40
MANDATORY TERMINATION DATE: December 31, 2044
FIRST SETTLEMENT DATE: June 2, 1995
MINIMUM PRINCIPAL DISTRIBUTION: $1.00 per Unit
MINIMUM VALUE OF THE TRUST UNDER WHICH
TRUST AGREEMENT MAY BE TERMINATED: $2,000,000 or 20% of the principal
amount of the Bonds deposited in Trust,
whichever is lower.
</TABLE>
MONTHLY SEMI-ANNUAL
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ESTIMATED ANNUAL INTEREST INCOME
(INCLUDES CASH INCOME ACCRUAL ONLY): $ 55.49 $ 55.49
Less Annual premium on Portfolio
Insurance: .72 .72
P
E Less Estimated Annual Expenses (8): 2.05 1.55
R
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ESTIMATED NET ANNUAL INTEREST INCOME: $ 52.72 $ 53.22
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U ESTIMATED INTEREST DISTRIBUTION (9): $ 4.39 $ 26.61
N ESTIMATED CURRENT RETURN BASED ON
I PUBLIC OFFERING PRICE (INCLUDES CASH
INCOME ACCRUAL ONLY) (10): 5.28% 5.33%
T ESTIMATED LONG-TERM RETURN (11): 5.32% 5.37%
ESTIMATED DAILY RATE OF NET INTEREST
ACCRUAL: $ .14646 $ .14784
RECORD DATES: 15th Day of Month 15th Day of
May and November
PAYMENT DATES: 1st Day of Month 1st Day of
June and December
(CONTINUED ON FOLLOWING PAGE)
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NOTES TO SUMMARY OF ESSENTIAL INFORMATION
(1) The business day prior to the date of this Prospectus. The date of this
Prospectus is the date on which the Trust Agreement was signed and the deposit
with the Trustee was made.
(2) If a Replacement Bond is not acquired when a contract for the purchase
of Bonds fails, the aggregate principal amount of the Bonds may be reduced. See
'The Trust--Portfolio--General Considerations' in Part B.
(3) Based, during the initial offering period, solely upon the offering
prices of the Securities and thereafter on the bid prices of such Securities.
See 'The Trust--Market for Units' in this Part A.
(4) After the initial offering period, Units may be available for purchase
from the Sponsors at a price based upon the aggregate bid price of the Bonds in
the Trust (as determined by the Evaluator) plus a sales charge determined in
accordance with the schedule set forth in 'Public Offering--Offering Price' in
Part B of this Prospectus, which is based upon the maturities of each Bond in
the Trust.
(5) No accrued interest will be added to the Public Offering Price in
connection with purchases of Units contracted for on May 25, 1995. With respect
to purchases contracted for after such date, accrued interest from June 2, 1995
to, but not including, the date of settlement (normally five business days after
order) will be added to the Public Offering Price.
(6) Based solely upon the bid prices of the Securities. Upon tender for
redemption, the price to be paid will include accrued interest as described in
'Rights of Unit Holders--Redemption--Computation of Redemption Price per Unit'
in Part B.
(7) Based upon the aggregate principal amount of the Bonds in the Trust. If
the Trustee had exercised its right to obtain Permanent Insurance on all of the
Bonds in the Trust as of the Date of Deposit, the total cost of the Permanent
Insurance premiums for such insurance would have been $82,313.00.
(8) Excluding insurance costs.
(9) The first monthly interest distribution of $1.90 per Unit will be made
on July 1, 1995 (the 'First Distribution Date') to all monthly
certificateholders of record on June 15, 1995 (the 'First Record Date'). The
regular monthly payment will be $4.39 on August 1, 1995 and thereafter. The
first semi-annual interest distribution of $24.09 per Unit will be made on
December 1, 1995 to all semi-annual certificateholders of record on November 15,
1995. The regular semi-annual payment will be $26.61 on June 1, 1996 and
thereafter. In order to reduce the amount of accrued interest investors have to
pay in addition to the Public Offering Price, the Trustee has agreed to advance
to the Trust the amount of accrued interest due on Securities through and
including May 25, 1995. This accrued interest will be paid to the Sponsors as
the holders of record of all Units on such date. Consequently, when the Sponsors
sell Units, the amount of accrued interest to be added to the Public Offering
Price of the Units purchased by an investor will include only accrued interest
from May 25, 1995 to but not including the date of settlement of the investor's
purchase (normally five business days after the purchase contract), less any
distributions from the Interest Account. Since a person who contracts to
purchase Units on May 25, 1995 will settle his purchase on June 2, 1995, no
accrued interest will be added to the Public Offering Price of Units settled on
that date. The Trustee will recover its advancements (without interest or other
cost to the Trust) from interest received on the Securities deposited in the
Trust. See 'Rights of Unit Holders--Redemption--Computation at Redemption Price
per Unit in Part B.'
(10) Calculated after payment of insurance premiums payable by the Trust.
The Estimated Current Return on such date on an identical portfolio without such
insurance would have been 5.40% based on the semi-annual payment plan and 5.35%
based on the monthly payment plan. Estimated Current Return is calculated by
dividing the estimated net annual interest income received in cash per Unit by
the Public Offering Price. Interest income per Unit will vary with changes in
fees and expenses of the Trust and the Evaluator, and with the redemption,
maturity, exchange or sale of Securities. This calculation, which includes cash
income accrual only, does not include discount accretion on original issue
discount bonds or on zero coupon bonds or premium amortization on bonds
purchased at a premium. See 'The Trust--Tax Status' in Part B of this Prospectus
and 'The Trust--Estimated Current Return and Estimated Long-Term Return to Unit
Holders' in this Part A.
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(notes continued from preceding pages)
(11) Calculated after payment of insurance premiums payable by the Trust.
The Estimated Long-Term Return on such date on an identical portfolio without
such insurance would have been 5.44% based on the semi-annual payment plan and
5.39% based on the monthly payment plan. Estimated Long-Term Return is
calculated by using a formula that takes into account the yields (including
accretion of discounts and amortization of premiums) of the individual Bonds in
the Trust's portfolio, weighted to reflect the market value and time to maturity
(or, in certain cases, to earlier call date) of such Bonds, adjusted to reflect
the Public Offering Price (including sales charge and expenses) per Unit. This
calculation does not take into account delays in payment to Unit holders for the
first few months of the Trust's operations, which reduces the Long-Term Return
number. See 'The Trust--Estimated Current Return and Estimated Long-Term Return
to Unit Holders' in this Part A.
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THE TRUST
Empire State Municipal Exempt Trust (the 'Fund'), Guaranteed Series 116
(the 'Trust') is one of a series of similar but separate unit investment trusts
created under the laws of the State of New York by a Trust Indenture and
Agreement* (the 'Trust Agreement'), dated the Date of Deposit, among Glickenhaus
& Co. and Lebenthal & Co., Inc. as sponsors (the 'Sponsors'), The Bank of New
York, as trustee (the 'Trustee'), and Muller Data Corporation, as evaluator (the
'Evaluator'). The objective of the Trust is to obtain tax-exempt interest income
through an investment in a fixed insured portfolio consisting primarily of
various long-term municipal bonds with average maturities of over 10 years.
Insurance does not protect against the risk of market fluctuations on the
underlying bonds in the Trust's portfolio and of the units of the Trust. No
assurance can be given that the Trust's objectives will be achieved as these
objectives are subject to the continuing ability of the respective issuers of
the bonds to meet their obligations or of the insurer to meet its obligations
under the insurance. In addition, an investment in such portfolio can be
affected by fluctuations in interest rates.
Certain of the Bonds in the Trust may be purchased at prices which result
in the portfolio as a whole being purchased at a discount due to original issue
discount, market discount or the inclusion of zero coupon bonds. Bonds selling
at market discount tend to increase in market value as they approach maturity
when the principal amount is payable, thus increasing the potential for gain
(all or a portion of which may be taxable as ordinary income). Any income other
than any earned original issue discount will be taxable and will not be realized
until maturity, redemption or sale of the underlying Bonds or Units of the
Trust. In the case of Bonds acquired at a market discount, gain will be treated
as ordinary income to the extent of accrued market discount. At the time of the
original issuance of the Bonds held by the Trust, opinions relating to the
validity of the Bonds and the exemption of interest thereon from Federal income
tax and New York State and City personal income tax were (or with respect to
'when-issued' Bonds will be) rendered by bond counsel to the issuing
governmental authority. The continued tax-exempt status will depend upon the
issuer's ability to comply with the provisions of the Internal Revenue Code of
1986, as amended. See 'The Trust--Tax Status' in Part B of this Prospectus. On
the Date of Deposit, the Sponsors, acting for the Underwriting Account (see
'Underwriting Account' in this Part A), deposited with the Trustee delivery
statements relating to contracts for the purchase of $10,000,000 aggregate
principal amount for the interest-bearing obligations, including funds
(represented by cash, cash equivalents and/or an irrevocable letter of credit
issued by a major financial institution) for the purchase of certain such
obligations (the 'Bonds' or the 'Securities'). The Trustee thereafter delivered
to the Sponsors a registered certificate of 10,000 Units, representing the
entire ownership of the Trust, which Units are being offered hereby.
In view of the Fund's objectives, the following factors, among others, were
considered in selecting the Bonds: (1) all the Bonds are obligations of the
State of New York and counties, municipalities, authorities or political
subdivisions thereof or issued by certain United States territories or
possessions, including Puerto Rico, and their public authorities so that the
interest on them will be exempt from Federal, New York State and New York City
income tax under existing law; (2) the Bonds are varied as to purpose of issue;
(3) in the opinion of the Sponsors, the Bonds are fairly valued relative to
other bonds of comparable quality and maturity; and (4) MBIA Insurance
Corporation insurance for the payment of principal and interest on the
Securities is available. Subsequent to the Date of Deposit, a Bond may cease to
be rated or its rating may be reduced. In the event a Bond's rating is
downgraded to below investment grade (i.e., 'high yield' or 'junk bond' status),
such a Bond, as compared to an investment grade bond, is subject to greater
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* References in this Prospectus to the Trust Agreement are qualified in their
entirety by the Trust Agreement which is incorporated herein by reference.
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<PAGE>
risk of downward price volatility in periods of economic uncertainty. If a Bond
in the Trust is downgraded to high yield bond status, a decrease in the net
asset value of the Trust may result. If such a decrease in net asset value
occurs and Units of the Trust are tendered for redemption, the Trust may be
forced to liquidate some of the Bonds at a loss. If such redemptions are
substantial enough, this could trigger a complete and unexpected liquidation of
the Trust before maturity, resulting in unanticipated losses for investors.
Notwithstanding such risk, neither the downgrading of a Bond to below investment
grade nor a Bond's ceasing to be rated, requires an elimination of such Bond
from the portfolio of the Trust, but such an event may be considered in the
Sponsors' determination to direct the Trustee to dispose of the Bonds. See
'Sponsors--Responsibility' in Part B.
PUBLIC OFFERING PRICE
The Public Offering Price of the Units of the Trust during the initial
offering period is equal to the aggregate offering price of the Securities in
the respective Trust's portfolio divided by the number of Units outstanding,
plus a sales charge equal to 4.9% of the Public Offering Price of the Trust on
sales of fewer than 250 Units. In addition, for Units ordered after the date
hereof, accrued interest will be payable from the First Settlement Date for
Units of the Trust (five business days from the date hereof) to the expected
date of settlement (five business days after order). For additional information
regarding the Public Offering Price, the descriptions of interest and principal
distributions, repurchase and redemption of Units and other essential
information regarding the Trust, see the 'Summary of Essential Information' in
this Part A. During the initial public offering period, sales of at least 250
Units will be entitled to a volume discount from the Public Offering Price. See
'Public Offering--Offering Price' in Part B. If the Units of the Trust had been
available for sale on May 24, 1995, the Public Offering Price per Unit would
have been $998.53.
MARKET FOR UNITS
The Sponsors, although they are not obligated to do so, currently intend to
maintain a secondary market for the Units in the Trust at prices based upon the
aggregate bid price of the Securities plus accrued interest, if any, and a sales
charge of 4.9% of the Public Offering Price of the Trust at the time. If such a
market is not maintained, a Unit holder may be able to dispose of his Units only
through redemption at prices based upon the aggregate bid price of the
Securities. The purchase price of the Securities, if they were available for
direct purchase by investors, would not include the sales charge included in the
Public Offering Price of the Units. Neither the bid nor the offering side
valuations of the underlying Securities or of the Units of the Trust, absent
situations in which Securities are in default in payment of principal or
interest or in significant risk of such default, include value, if any,
attributable to the insurance obtained by the Trust. See 'Public
Offering--Market for Units' in Part B of this Prospectus.
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN
Units of the Trust are offered to investors on a 'dollar price' basis
(using the computation method previously described under 'Public Offering
Price') as distinguished from a 'yield price' basis often used in offerings of
tax exempt bonds (involving the lesser of the yield as computed to maturity of
bonds or to an earlier redemption date). Since they are offered on a dollar
price basis, the rate of return on an investment in Units of the Trust is
measured in terms of 'Estimated Current Return' and 'Estimated Long Term
Return.'
Estimated Long Term Return is calculated by: (1) computing the yield to
maturity or to an earlier call date (whichever results in a lower yield) for
each Bond in the Trust portfolio in accordance with accepted practices, which
practices take into account not only the interest payable on the Bonds but also
the amortization of premiums or accretion of discounts, if any; (2) calculating
the average of the yields for the Bonds in the Trust portfolio by weighing
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each Bond's yield by the market value of the Bond and by the amount of time
remaining to the date to which the Bond is priced (thus creating an average
yield for the portfolio of the Trust); and (3) reducing the average yield for
the portfolio of the Trust in order to reflect estimated fees and expenses of
the Trust and the maximum sales charge paid by Unit holders. The resulting
Estimated Long Term Return represents a measure of the return to Unit holders
earned over the estimated life of the Trust. The Estimated Long Term Return as
of the day prior to the Date of Deposit is stated for the Trust under 'Summary
of Essential Information' in Part A.
Estimated Current Return is computed by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price per Unit. In contrast to
the Estimated Long Term Return, the Estimated Current Return does not take into
account the amortization of premium or accretion of discount, if any, on the
Bonds in the portfolio of the Trust. Moreover, because interest rates on Bonds
purchased at a premium are generally higher than current interest rates on newly
issued bonds of a similar type with comparable rating, the Estimated Current
Return per Unit may be affected adversely if such Securities are redeemed prior
to their maturity. On the day prior to the Date of Deposit, the Estimated Net
Annual Interest Income per Unit divided by the Public Offering Price resulted in
the Estimated Current Return stated for the Trust under 'Summary of Essential
Information' in Part A.
The Estimated Net Annual Interest Income per Unit of the Trust will vary
with changes in the fees and expenses of the Trustee and the Evaluator
applicable to the Trust and with the redemption, maturity, sale or other
disposition of the Bonds in the Trust. The Public Offering Price will vary with
changes in the offering prices (bid prices in the case of the secondary market)
of the Bonds. Therefore, there is no assurance that the present Estimated
Current Return or Estimated Long Term Return will be realized in the future.
A schedule of cash flow projections is available from the Sponsor upon
request.
DISTRIBUTIONS
Distributions of interest received by the Trust, pro rated on an annual
basis, will be made semi-annually unless the Unit holder elects to receive them
monthly. The first monthly distribution will be $1.90 for Units of the Trust and
will be made on July 1, 1995, to monthly Unit holders of record on June 15,
1995, and $4.39 thereafter. The first semi-annual distribution will be $24.09
for Units of the Trust and will be made on December 1, 1995, to semi-annual Unit
holders of record on November 15, 1995, and $26.61 thereafter. See 'Rights of
Unit Holders--Distribution of Interest and Principal' in Part B of this
Prospectus.
Each Unit of the Trust at the Date of Deposit represents 1/10,000
fractional undivided interest in the $10,000,000 face amount of underlying Bonds
and net income of the Trust in the ratio of 1 Unit for each $1,000 principal
amount of underlying Bonds (including contracts and funds for the purchase
thereof) in the Trust.
AUTOMATIC ACCUMULATION ACCOUNT
Distributions from the Trust are made semi-annually unless the Unit holder
elects to receive them monthly. Unit holders of the Trust have the option,
however, of either receiving their interest check, together with any principal
payments, from the Trustee or participating in the Automatic Accumulation
Account reinvestment program offered by the Sponsors (the 'Plan'). Under the
Plan, a Unit holder may elect to have distributions from Units in the Trust
automatically reinvested in shares of an open-end mutual fund. For a description
of the fund involved see 'Automatic Accumulation Account' in Part B.
Participation in the Plan is conditioned on the participating fund's lawful
qualification for sale in the state in which the Unit holder is a resident. The
Plan is not designed to be a complete
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investment program. See 'Automatic Accumulation Account' in Part B for details
on how to enroll in the Plan and how to obtain a prospectus.
INSURANCE
Insurance guaranteeing the payment of all principal (either at stated
maturity or by advancement of maturity pursuant to a mandatory sinking fund
payment) and interest on each of the Bonds in the Trust as such payments shall
become due but shall not be paid has been obtained by the Trust from MBIA
Insurance Corporation (sometimes referred to hereinafter as the 'Insurer').
Insurance obtained by the Trust applies only while Bonds are retained in the
Trust. Pursuant to an irrevocable commitment of the Insurer, in the event of a
sale of a Bond from the Trust, the Trustee has the right to obtain permanent
insurance for such Bond upon the payment of a single predetermined insurance
premium from the proceeds of the sale of such Bond. Insurance obtained by the
Trust relates only to the payment of principal and interest on the Bonds in the
Trust but neither covers the nonpayment of any redemption premium on the Bonds
nor guarantees the market value of the Units. With respect to small-issue
industrial development Bonds and pollution control revenue Bonds covered by the
insurance, the Insurer also guarantees any accelerated payments required to be
made by or on behalf of an issuer of such Bonds if there occurs an event which
results in the loss of the tax-exempt status of interest on such Bonds,
including principal, interest or premium payments payable thereon, if any, as
and when thereby required. The insurance does not otherwise guarantee any
accelerated payments required to be made by or on behalf of an issuer of other
than small-issue industrial development Bonds or pollution control revenue Bonds
if there occurs an event which results in the loss of the tax-exempt status of
such Bonds nor will the insurance cover accelerated payments of principal or
penalty interest or premiums unrelated to taxability of interest on any of the
Bonds. In the event of such an acceleration, the payments guaranteed by the
Insurer shall be made in such amounts and at such times as such payments would
have been made absent such acceleration. As a result of the MBIA Insurance
Corporation insurance, Moody's Investors Service has assigned a rating of 'Aaa'
to all of the Bonds in the Trust, as insured, and Standard & Poor's Corporation
has assigned a rating of 'AAA' to the Units and Bonds while in the Trust. See
'The Trust--Insurance on the Bonds'in Part B. No representation is made as to
any insurer's ability to meet its commitments.
Some of the Bonds in the Trust may also have been previously insured by
insurance obtained by the issuers of such Bonds or by persons other than the
Trust ('Pre-insured Bonds'). Six of the issues (80.00%) initially deposited in
the Trust were Pre-insured Bonds. Insurance obtained by the Trust from the
Insurer is effective only while the Bonds thus insured are held in such Trust;
however, insurance previously obtained by the issuer or by persons other than
the Trust, for which a single premium has been paid, is effective so long as the
Pre-insured Bonds are outstanding. No representation is made as to the ability
of any insurer to meet its commitments.
Neither the Public Offering Price nor any evaluation of Units of the Trust
for purposes of repurchases or redemptions reflects any element of value for the
insurance obtained by the Trust unless Securities are in default in payment of
principal or interest or, in the Sponsors' opinion, is in significant risk of
such default. See 'Public Offering--Offering Price' in Part B of this
Prospectus. On the other hand, the value, if any, of insurance obtained by the
issuer of the Securities or by parties other than the Trust is reflected and
included in the market value of such Securities.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. If an
issue is accepted for MBIA Insurance Corporation insurance, a non-cancellable
policy for the payment of interest on and principal of the bonds is issued by
the Insurer. A single or annual premium is paid by the issuer or any other party
for its insurance on Pre-insured Bonds, and a monthly premium is paid by the
Trust for the
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insurance it obtains from the Insurer on the Bonds in the Trust that are not
also MBIA Insurance Corporation Pre-insured Bonds or Municipal Bond Insurance
Association Pre-insured Bonds. No premium will be paid by the Trust for the
insurance it obtains from the Insurer on Bonds that are also MBIA Insurance
Corporation Pre-insured Bonds or Municipal Bond Insurance Association
Pre-insured Bonds. Pursuant to an irrevocable commitment of the Insurer, upon
the sale of a Bond from the Trust, the Trustee has the right to obtain permanent
insurance with respect to such Bond upon the payment of a single predetermined
insurance premium from the proceeds of the sale of such Bond. It is expected
that the Trustee will exercise the right to obtain permanent insurance for a
Bond in the Trust upon instruction from the Sponsors whenever the value of that
Bond insured to its maturity less the applicable permanent insurance premium and
the related custodial fee exceeds the value of the Bond without such insurance.
See 'The Trust--Insurance on the Bonds' in Part B of this Prospectus.
THE PORTFOLIO
The portfolio of the Trust contains contracts to purchase 7 issues of Bonds
issued by entities located in New York or certain United States territories or
possessions, including Puerto Rico. All such contracts are expected to be
settled by June 2, 1995. The following information is being supplied to inform
Unit holders of circumstances affecting the Trust. None of the aggregate
principal amount of the Bonds in the portfolio are general obligations of the
governmental entity issuing them which are backed by the taxing power thereof.
34.30% of the aggregate principal amount of the Bonds in the portfolio are
payable from appropriations. 65.70% of the aggregate principal amount of the
Bonds in the portfolio are payable from the income of specific projects or
authorities and are not supported by the issuers' power to levy taxes. Although
income to pay such Bonds may be derived from more than one source, the primary
sources of such income, the number of issues (and the related dollar weighted
percentage of such issues) deriving income from such sources and purpose of
issue are as follow: Appropriation, 2 (34.30%); Health Care, 2 (38.75%); Higher
Education, 1 (2.70%); Single Family Housing, 1 (20.00%); and Water & Sewer, 1
(4.25%). The Trust is deemed to be concentrated in the Appropriation and Health
Care categories.* Prior to their deposit in the Trust, 6 issues (80.00%) were
rated AAA by Standard and Poor's Corporation; and 1 issue (20.00%) was rated
Baa1 by Moody's Investors Service.** Bonds rated Baa have adequate capacity to
pay interest and to repay principal, however, such Bonds may have certain
speculative characteristics as well. Furthermore, Bonds rated Baa are more
sensitive to adverse economic changes or individual corporate developments. See
'Description of Bond Ratings' in Part B of this Prospectus. For a more detailed
discussion, it is recommended that Unit holders consult the official statements
for each security in the portfolio of the Trust.
None of the Bonds initially deposited in the Trust have been purchased on a
'when issued' basis and none of the Bonds initially deposited in the Trust have
been purchased on a delayed settlement basis. Normally, delivery of 'when
issued' Bonds and delayed settlement Bonds is expected to take place within 30
days after the First Settlement Date. Accordingly, delivery may be delayed or
may not occur. Interest on such Bonds begins accruing to the benefit of Unit
holders on the date of delivery. Holders of Units will be 'at risk' with respect
to such Bonds (i.e., may derive either gain or loss from fluctuations in the
offering side valuation of such Bonds) from the date they commit for Units.
- ------------------------------------
* A Trust is considered to be 'concentrated' in a particular category or issuer
when the Bonds in that category or of that issuer constitute 25% or more of
the aggregate face amount of the portfolio. See 'The Trust--General
Considerations' in Part B of this Prospectus.
** For the meanings of ratings, including the symbols 'p' and 'Con. (. . .),'
see 'Description of Bond Ratings' in Part B of this Prospectus. Security
letter ratings may be modified by the addition of a plus or minus sign, when
appropriate, to show relative standing within the major rating categories.
There can be no assurance that the economic and political conditions on which
the ratings of the Bonds in any Trust are based will continue or that
particular Bond issues may not be adversely affected by changes in economic,
political or other conditions that do not affect the above ratings. See 'The
Trust--Special Factors Affecting New York' and 'The Trust--General
Considerations' in Part B of this Prospectus.
A-9
<PAGE>
Moreover, the insurance on the Bonds in the portfolio obtained by the Trust does
not cover such Bonds until they are delivered to the Trust. See 'The
Trust--Portfolio--General Considerations' in Part B.
80.00% of the aggregate principal amount of the Bonds in the Trust are
original issue discount bonds and have mandatory sinking fund installment
provisions beginning on April 1, 2011 at redemption prices equal to the compound
accreted value on the date of redemption. Of these original issue discount
bonds, 2.70% are zero coupon bonds. Zero coupon bonds do not provide for the
payment of any current interest and provide for payment and maturity at par
value unless sooner sold or redeemed. The market for zero coupon bonds is
subject to greater fluctuations than coupon bonds in response to changes in
interest rates. (See 'Original Issue Discount and Zero Coupon Bonds' in Part B
of this Prospectus). On the Date of Deposit, the offering side valuation of
portfolio number 1 for the Trust was at a premium and this Bond is subject to
retirement or refunding within ten years of the Date of Deposit. On the Date of
Deposit, based on the offering side valuation, none of the aggregate principal
amount of the Bonds were at par, 80.00% of the aggregate principal amount of the
Bonds were at a discount from par and 20.00% of the aggregate principal amount
of the Bonds were at a premium.
An investment in Units of the Trust should be made with an understanding of
the risks entailed in investments in fixed-rate bonds, including the risk that
the value of such bonds (and, therefore, of the Units) will decline with
increases in interest rates or a decrease in the federal or New York State
income tax rate. Inflation and recession, as well as measures implemented to
address these and other economic problems, contribute to fluctuations in
interest rates and the values of fixed-rate bonds generally. Additionally,
changes in the tax treatment of bonds may have an adverse impact on the value of
the Units. The Sponsors cannot predict future economic policies or their
consequences, nor can they predict the course or extent of such fluctuations in
the future.
A-10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Sponsors, Trustee, and Unit Holders of Empire State Municipal Exempt Trust,
Guaranteed Series 116
We have audited the Statement of Condition of Empire State Municipal Exempt
Trust, Guaranteed Series 116, including the Portfolio as of May 25, 1995. This
financial statement is the responsibility of the Sponsors. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Sponsors, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion. An
irrevocable letter of credit deposited on May 25, 1995 in the amount required to
purchase securities, as described in the Statement of Condition, was confirmed
to us by the Trustee.
In our opinion, the Statement of Condition referred to above presents
fairly, in all material respects, the financial position of Empire State
Municipal Exempt Trust, Guaranteed Series 116 at May 25, 1995 in conformity with
generally accepted accounting principles.
BDO SEIDMAN
New York, New York
May 25, 1995
A-11
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 116
STATEMENT OF CONDITION AS OF DATE OF DEPOSIT
MAY 25, 1995
TRUST PROPERTY
<TABLE>
<S> <C>
Investment in Securities:
Contracts to purchase underlying Securities (1) (2)............ $9,496,152.50
Accrued interest receivable...................................... 143,881.67
-------------
Total....................................................... $9,640,034.17
-------------
-------------
</TABLE>
INTEREST OF UNIT HOLDERS
<TABLE>
<S> <C> <C>
Units of fractional undivided interest outstanding
(10,000):
Cost to investors (3)............................. $9,985,352.50
Less--gross underwriting commission(4).......... 489,200.00 $9,496,152.50
-------------
Accrued interest receivable....................... 143,881.67
-------------
Total................................... $9,640,034.17
-------------
-------------
</TABLE>
- ------------------
(1) Aggregate cost to the Trust of the Securities listed under 'Portfolio'
is based on offering side valuation determined by the Evaluator on the basis set
forth under 'Public Offering--Offering Price' in Part B. The aggregate bid side
evaluation of the Securities in the portfolio, as determined by the Evaluator,
as of the Date of Deposit was $9,450,490.00. An irrevocable letter of credit
issued by Bankers Trust, in an aggregate amount equal to or in excess of
$9,647,161.19 has been deposited with the Trustee. The amount of such letter of
credit includes: $9,496,152.50 the amount required to purchase the tax-exempt
securities listed in the related portfolio, plus $151,008.69 covering accrued
interest through expected dates of delivery. Insurance coverage providing for
the payment of all principal and interest on the Bonds in the Trust has been
obtained by the Trust. The cost of insurance for the Trust is $7,200.00. Such
insurance does not guarantee the market value of the Bonds or the value of the
Units of the Trust. The insurance obtained by the Trust is effective only while
Bonds thus insured are held in the Trust. Neither the bid nor offering prices of
the underlying Bonds, or of the Units, absent situations in which Bonds are in
default in payment of principal or interest or in significant risk of such
default, include value, if any, attributable to the insurance obtained by the
Trust.
(2) On the basis set forth under 'Rights of Unit Holders--Distribution of
Interest and Principal' in Part B the Trustee will advance an amount equal to
the accrued interest on the Securities as of June 2, 1995 (the 'First Settlement
Date') plus any cash received by the Trustee with respect to interest on the
Securities prior to such date, and the same will be distributed to the Sponsors
on the First Settlement Date. Consequently, the amount of interest accrued on a
Unit to be added to the public offering price thereof will include only such
accrued interest from the First Settlement Date to the date of settlement, less
all withdrawals and deductions from the Interest Account subsequent to the First
Settlement Date made with respect to the Unit.
(3) Aggregate public offering price (exclusive of interest) is computed on
10,000 Units on the basis set forth above under 'Public Offering--Offering
Price' in Part B.
(4) A sales charge of 4.9% computed on 10,000 Units. See 'Public
Offering--Offering Price' in Part B for volume discounts on sales of 250 Units
or more.
A-12
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES 116
PORTFOLIO AS OF DATE OF DEPOSIT, MAY 25, 1995
<TABLE>
<CAPTION>
REDEMPTION FEATURES
PORT- COUPON ANT.--ANTICIPATED YIELD COST OF
FOLIO RATING PRINCIPAL REPRESENTED BY CONTRACTS TO RATE AND S.F.--SINKING FUND TO SECURITIES
NO. (1)(2) AMOUNT (3) PURCHASE SECURITIES (4) MATURITY OPT.--OPTIONAL (5) MATURITY TO TRUST (6)(7)
- ----- --------- ----------- ------------------------------------- -------- ------------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 AAA/Aaa $2,000,000 State of New York Mortgage Agency, 6.450% 04/01/10 @ 100 S.F. 5.970% $ 2,077,620.00
Homeowner Mortgage Revenue Bonds, 10/01/17 09/01/04 @ 102 Opt.
Series 43 (MBIA Insured)
2 AAA/Aaa 1,875,000 New York State Medical Care, 5.750 02/15/09 @ 100 Ant. 5.800 1,862,681.25
Facilities Finance Agency, Hospital 08/15/19 08/15/02 @ 102 Opt.
and Nursing Home FHA-Insured Mortgage
Revenue Bonds, 1992 Series C (MBIA
Insured)
3 AAA/Aaa 1,430,000 New York State Thruway Authority, 5.750 04/01/11 @ 100 S.F. 5.754 1,429,285.00
Local Highway and Bridge Service 04/01/13 04/01/04 @ 102 Opt.
Contract Bonds, Series 1994 (MBIA
Insured)
4 AAA/Aaa 425,000 New York City Municipal Water Finance 5.500 06/15/21 @ 100 S.F. 5.800 407,426.25
Authority, Water and Sewer System 06/15/23 06/15/04 @ 101.5
Revenue Bonds, Fixed Rate Fiscal 1994 Opt.
Series F (MBIA Insured)
5 AAA/Aaa 2,000,000 New York State Medical Care, 5.375 02/15/12 @ 100 Ant. 5.782 1,885,000.00
Facilities Finance Agency, Hospital 02/15/25 02/15/04 @ 102 Opt.
Insured Mortgage Revenue Bonds, 1994
Series A Refunding (MBIA Insured)
6 AAA/Aaa 270,000 Dormitory Authority of the State of 0.000 No Sinking Fund 5.801 64,800.00
New York, State University 05/15/20 No Optional Call
Educational Facilities, Revenue
Bonds, Series 1994A (MBIA Insured)
7 Baa1*/Aaa 2,000,000 New York State Urban Development 5.250 01/01/17 @ 100 S.F. 6.150 1,769,340.00
Corporation, Correctional Capital 01/01/21 01/01/04 @ 102 Opt.
Facilities Revenue Bonds, 1993A
Refunding Series
----------- ---------------
$10,000,000 $ 9,496,152.50
----------- ---------------
----------- ---------------
</TABLE>
A-13
<PAGE>
NOTES TO PORTFOLIO
The symbol 'NR' denotes a non-rated issue of Bonds.
(1) All ratings except those identified by an asterisk (*) are by Standard &
Poor's Corporation. A Standard & Poor's corporate or municipal bond rating is a
current assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment of creditworthiness may take into
consideration obligors such as guarantors, insurers or lessees. The bond rating
is not a recommendation to purchase, sell or hold a security, inasmuch as it
does not comment as to market price or suitability for a particular investor. A
brief description of the rating symbols and their meanings is set forth under
'Description of Bond Ratings' in Part B.
(2) Ratings in the right hand column are after deposit of these issues in
the Trust and their insurance by MBIA. Moody's Investors Service has assigned
its 'Aaa' investment rating to all of the Bonds while in the Trust, as insured
by MBIA Insurance Corporation.
(3) All Bonds are represented by contracts to purchase.
(4) All contracts to purchase the Bonds were entered into from May 19, 1995
to May 23, 1995. All contracts are expected to be settled prior to or on the
First Settlement Date of the Trust which is expected to be June 2, 1995. These
bonds are expected to be settled (and interest begins accruing on these bonds to
the benefit of Unit holders of the Trust) within 30 days after the First
Settlement Date.
(5) Unless otherwise indicated, there is shown under this heading the year
in which each issue of bonds initially is redeemable and the redemption price
for that year. Each such issue continues to be redeemable at declining prices
thereafter, but not below par. 'S.F.' indicates a sinking fund has been or will
be established with respect to an issue of Bonds. In addition, certain Bonds in
the Trust may be redeemed in whole or in part other than by operation of the
stated optional call or sinking fund provisions under certain unusual or
extraordinary circumstances specified in the instruments setting forth the terms
and provisions of such Bonds. A sinking fund is a reserve fund accumulated over
a period of time for retirement of debt. 'Ant.' indicates the existence of
anticipated redemptions at a price of 100%. Under certain circumstances, these
anticipated redemptions can be altered. A callable bond is one which is subject
to redemption or refunding prior to maturity at the option of the issuer. A
refunding is a method by which a bond issue is redeemed before maturity by the
proceeds of a new bond issue.
Redemption pursuant to call provisions generally will, and redemption
pursuant to sinking fund provisions may, occur at times when the redeemed Bonds
have an offering side valuation which represents a premium over par. To the
extent that the Bonds were deposited in the Trust at a price higher than the
price at which they are redeemed, this will represent a loss of capital when
compared with the original Public Offering Price of the Units. Conversely, to
the extent that the Bonds were acquired at a price lower than the redemption
price, this will represent an increase in capital when compared with the
original Public Offering Price of the Units. Monthly and semi-annual
distributions will generally be reduced by the amount of the income which would
otherwise have been paid with respect to redeemed Bonds and there will be
distributed to Unit holders the principal amount and any premium received on
such redemption. The estimated current return in this event may be affected by
such redemptions. The Federal tax effect on Unit holders of such redemptions and
resultant distributions is described in the section entitled 'The Trust--Tax
Status' in Part B.
(6) See Note (1) to 'Statement of Condition as of Date of Deposit' regarding
cost of Bonds. The offering prices are greater than the current bid prices of
the Bonds which is the basis on which Redemption Price per Unit is determined
for purposes of redemption of Units (see the first paragraphs under 'Public
Offering--Offering Price' and 'Rights of Unit Holders--Redemption--Computation
of Redemption Price Per Unit' in Part B). On the business day prior to the Date
of Deposit the aggregate bid side valuation of the Securities in the Trust was
lower than the aggregate offering side valuation by .481%. Yield of Bonds was
computed on the basis of offering prices on the Date of Deposit.
Bonds identified as escrowed to maturity under 'Portfolio' for the Trust in
this Part A are priced to the maturity date not the call date.
(7) Annual interest income to the Trust is $554,912.50.
(8) Yield calculated based on a call date prior to stated maturity.
A-14
<PAGE>
UNDERWRITING ACCOUNT
The names and addresses of the Underwriters and the number of Units of the
Trust each has agreed to purchase from the Underwriting Account are:
<TABLE>
<CAPTION>
UNITS
NAME ADDRESS SERIES 116
- ----------------------------- ------------------------------------- ----------
<S> <C> <C>
Glickenhaus & Co............. 6 East 43rd Street 3,000
New York, New York 10017
Lebenthal & Co., Inc......... 120 Broadway 3,000
New York, New York 10271
Gruntal & Co., Inc........... 14 Wall Street 1,200
New York, New York 10005
David Lerner Associates,
Inc........................ 477 Jericho Turnpike 250
Syosset, New York 11791
Federated Securities, Inc.... P.O. Box 214 250
Huntington Station, New York 11746
First Investors
Corporation................ 95 Wall Street 250
New York, New York 10005
Josephthal Lyon & Ross
Incorporated............... 6 East 43rd Street 250
New York, New York 10017
Pershing (Division of
Donaldson, Lufkin &
Jenrette Securities
Corporation)............... One Pershing Plaza 250
Jersey City, New Jersey 07399
W.H. Newbolds, a division of
Fahnestock & Co............ 1500 Walnut Street 250
Philadelphia, Pennsylvania 19102
Advest, Incorporated......... 280 Trumbull Street 100
Hartford, Connecticut 06103
Cadaret, Grant & Co., Inc.... 108 W. Jefferson Street 100
Syracuse, New York 13203
Cowen & Company.............. Financial Square 100
New York, New York 10005
First Albany Corporation..... 41 State Street 100
Albany, New York 12207
Gibraltar Securities Co...... Ten James Street 100
Florham Park, New Jersey 07932
Kemper Securities, Inc....... 77 West Wacker Drive 100
Chicago, Illinois 60606
Nathan & Lewis Securities
Inc........................ 1140 Avenue of the Americas 100
New York, New York 10036
Oppenheimer & Company........ World Financial Center 100
New York, New York 10281
</TABLE>
A-15
<PAGE>
<TABLE>
<CAPTION>
UNITS
NAME ADDRESS SERIES 116
- ----------------------------- ------------------------------------- ----------
<S> <C> <C>
Roosevelt & Cross, Inc....... 20 Exchange Place 100
New York, New York 10005
Sage, Rutty & Co. Inc........ 183 E. Main Street 100
Rochester, New York 14604
Smith Barney Inc............. 388 Greenwich Street 100
New York, New York 10013
Stuart, Coleman & Co.,
Inc........................ 11 West 42nd Street 100
New York, New York 10036
William R. Hough & Co........ 100 Second Avenue South 100
St. Petersburg, Florida 33701
----------
10,000
----------
----------
</TABLE>
A-16
<PAGE>
TAX EQUIVALENT YIELDS
The following tables indicate the approximate yield resident individuals in
various income brackets must earn on a security subject to Federal, New York
State and New York City income taxes to receive an after-tax yield equivalent to
that provided by a tax-exempt bond yielding from 4.5% to 8.5%, based on
anticipated 1995 Federal, New York State and New York City marginal tax rates.
New York City taxpayers should refer to Table I. New York State taxpayers
outside of New York City should refer to Table II.
TABLE I. COMBINED EFFECT OF FEDERAL, NEW YORK STATE AND NEW YORK CITY
INCOME TAXES
<TABLE>
<CAPTION>
Approx.
1995 To equal a tax-exempt yield of:
Federal, --------------------------------------------------------------------------------------
If your net taxable income 1 NYS & NYC 4.50% 5.00% 5.50% 6.00% 6.25% 6.50% 6.75% 7.00%
is approximately 2 Marginal --------------------------------------------------------------------------------------
Joint Return Single Return Tax Rates 4 A taxable investment would have to pay you: 3
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$27,001-$39,000 $15,001-$23,350 25.33% 6.0% 6.7% 7.4% 8.0% 8.4% 8.7% 9.0% 9.4%
- -----------------------------------------------------------------------------------------------------------------------------------
$39,001-$94,250 $23,351-$56,550 36.84% 7.1% 7.9% 8.7% 9.5% 9.9% 10.3% 10.7% 11.1%
- -----------------------------------------------------------------------------------------------------------------------------------
$94,251- $56,551-
$143,600 $117,950 39.51% 7.4% 8.3% 9.1% 9.9% 10.3% 10.8% 11.2% 11.6%
- -----------------------------------------------------------------------------------------------------------------------------------
$143,601- $117,951-
$256,500 $256,500 43.89% 8.0% 8.9% 9.8% 10.7% 11.1% 11.6% 12.0% 12.5%
- -----------------------------------------------------------------------------------------------------------------------------------
$256,501+ $256,501+ 47.05% 8.5% 9.4% 10.4% 11.3% 11.8% 12.3% 12.8% 13.2%
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Approx.
1995 To equal a tax-exempt yield of:
Federal, --------------------------------------------------------
If your net taxable income 1 NYS & NYC 7.25% 7.50% 7.75% 8.00% 8.50%
is approximately 2 Marginal --------------------------------------------------------
Joint Return Single Return Tax Rates 4 A taxable investment would have to pay you: 3
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$27,001-$39,000 $15,001-$23,350 25.33% 9.7% 10.0% 10.4% 10.7% 11.4%
- -----------------------------------------------------------------------------------------------------
$39,001-$94,250 $23,351-$56,550 36.84% 11.5% 11.9% 12.3% 12.7% 13.5%
- -----------------------------------------------------------------------------------------------------
$94,251- $56,551-
$143,600 $117,950 39.51% 12.0% 12.4% 12.8% 13.2% 14.1%
- -----------------------------------------------------------------------------------------------------
$143,601- $117,951-
$256,500 $256,501 43.89% 12.9% 13.4% 13.8% 14.3% 15.2%
- ------------------------------------------------------------------------------------------------------
$256,501+ $256,501+ 47.05% 13.7% 14.2% 14.6% 15.1% 16.1%
- ------------------------------------------------------------------------------------------------------
</TABLE>
TABLE II. COMBINED EFFECT OF FEDERAL AND NEW YORK STATE INCOME TAXES
<TABLE>
<CAPTION>
Approx.
1995 To equal a tax-exempt yield of:
Federal --------------------------------------------------------------------------------------
If your net taxable income 1 & NYS 4.50% 5.00% 5.50% 6.00% 6.25% 6.50% 6.75% 7.00%
is approximately 2 Marginal --------------------------------------------------------------------------------------
Joint Return Single Return Tax Rates 5 A taxable investment would have to pay you: 3
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$27,001-$39,000 $15,001-$23,350 21.69% 5.8% 6.4% 7.0% 7.7% 8.0% 8.3% 8.6% 8.9%
- -----------------------------------------------------------------------------------------------------------------------------------
$39,001-$94,250 $23,351-$56,550 33.67% 6.8% 7.5% 8.3% 9.0% 9.4% 9.8% 10.2% 10.6%
- -----------------------------------------------------------------------------------------------------------------------------------
$94,251- $56,551-
$143,600 $117,950 36.43% 7.1% 7.9% 8.7% 9.4% 9.8% 10.2% 10.6% 11.0%
- -----------------------------------------------------------------------------------------------------------------------------------
$143,601- $117,951-
$256,500 $256,500 41.04% 7.6% 8.5% 9.3% 10.2% 10.6% 11.0% 11.5% 11.9%
- -----------------------------------------------------------------------------------------------------------------------------------
$256,501+ $256,501+ 44.36% 8.1% 9.0% 9.9% 10.8% 11.2% 11.7% 12.1% 12.6%
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Approx.
1995 To equal a tax-exempt yield of:
Federal ---------------------------------------------------------
If your net taxable income 1 & NYS 7.25% 7.50% 7.75% 8.00% 8.50%
is approximately 2 Marginal ---------------------------------------------------------
Joint Return Single Return Tax Rates 5 A taxable investment would have to pay you: 3
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$27,001-$39,000 $15,001-$23,350 21.69% 9.3% 9.6% 9.9% 10.2% 10.9%
- ------------------------------------------------------------------------------------------------------
$39,001-$94,250 $23,351-$56,550 33.67% 10.9% 11.3% 11.7% 12.1% 12.8%
- ------------------------------------------------------------------------------------------------------
$94,251- $56,551-
$143,600 $117,950 36.43% 11.4% 11.8% 12.2% 12.6% 13.4%
- ------------------------------------------------------------------------------------------------------
$143,601- $117,951-
$256,500 $256,500 41.04% 12.3% 12.7% 13.1% 13.6% 14.4%
- ------------------------------------------------------------------------------------------------------
$256,501+ $256,501+ 44.36% 13.0% 13.5% 13.9% 14.4% 15.3%
- ------------------------------------------------------------------------------------------------------
</TABLE>
1 After exemptions and deductions other than state and local tax
deductions.
2 The tables cover only a representative range of incomes, and income
brackets have been rounded off to facilitate illustration. Actual
Federal, New York State and New York City income brackets may differ
slightly from those in the table.
3 Yields on taxable investments have been rounded off to facilitate
illustration.
4 This rate is calculated by using the highest New York State and New York
City marginal tax rates that apply to the bracket and a marginal Federal
tax rate based on a single return claiming one personal exemption and a
joint return claiming two personal exemptions (subject to the personal
exemption phaseout applicable at the highest two categories of income).
5 This rate is calculated by using the highest New York State marginal tax
rate that applies to the bracket and a marginal Federal tax rate based on
a single return claiming one personal exemption and a joint return
claiming two personal exemptions (subject to the personal exemption phase
out applicable at the highest two categories of income).
A-17
<PAGE>
[This page intentionally left blank]
<PAGE>
EMPIRE STATE MUNICIPAL EXEMPT TRUST
PROSPECTUS PART B
PART B OF THIS PROSPECTUS MAY NOT BE DISTRIBUTED UNLESS ACCOMPANIED BY PART A
THE TRUST
ORGANIZATION
Empire State Municipal Exempt Trust (the 'Fund'), Guaranteed Series 116
(the 'Trust') is one of a series of similar but separate unit investment trusts
created under the laws of the State of New York by a Trust Indenture and
Agreement* (the 'Trust Agreement'), dated the Date of Deposit, among Glickenhaus
& Co. and Lebenthal & Co., Inc. as sponsors (the 'Sponsors'), The Bank of New
York, as trustee (the 'Trustee'), and Muller Data Corporation, as evaluator (the
'Evaluator').
On the date of this Prospectus each Unit represented the fractional
undivided interest in the Trust set forth under 'Summary of Essential Financial
Information' in Part A. Thereafter, if any Units of the Trust are redeemed by
the Trustee, the fractional undivided interest Trust represented by each
unredeemed Unit will increase, although the actual interest in the Trust
represented by each such Unit will remain essentially the same. Units will
remain outstanding until redeemed upon tender to the Trustee by any Unit holder,
which may include the Sponsors, or until the termination of the Trust Agreement
for the related Trust. See 'Rights of Unit Holders--Redemption' in this Part B.
OBJECTIVES
The objective of the Fund is to obtain tax-exempt interest income through
an investment in a fixed insured portfolio consisting primarily of various
long-term municipal bonds with average maturities of over 10 years. No assurance
can be given that the Fund's objectives will be achieved as these objectives are
subject to the continuing ability of the respective issuers of the bonds to meet
their obligations and, of the Insurer to meet its obligations under the
insurance. In addition, an investment in such portfolio can be affected by
fluctuations in interest rates.
PORTFOLIO
The portfolio of the Trust consists of the Bonds described in 'The
Portfolio' in Part A and are represented by the Sponsors' contracts to purchase,
which are expected to be settled by the date set forth in Part A. The Trust may
contain Bonds which have been purchased on a when, as, and if issued basis.
Accordingly, the delivery of such Bonds may be delayed or may not occur. (See
'The Portfolio' in Part A.) Interest on these Bonds begins accruing to the
benefit of Unit holders on their respective dates of delivery. Unit holders will
be 'at risk' with respect to these Bonds (i.e., may derive either gain or loss
from fluctuations in the offering side evaluation of the Bonds) from the date
they commit for Units. (See 'The Portfolio' in Part A.) For a discussion of the
Sponsors' obligations in the event of the failure of any contract for the
purchase of any of the Bonds and limited right to substitute other bonds to
replace any failed contract, see 'Substitution of Bonds' in this Part B. As a
result of the MBIA Insurance Corporation insurance, Moody's Investors Service
('Moody's') has assigned a rating of 'Aaa' to all of the Bonds in the Trust, as
insured and Standard & Poor's Corporation ('Standard & Poors') has assigned a
rating of 'AAA' to the Units and Bonds while in the Trust. (See 'Insurance on
the Bonds' in this Part B).
In view of the Fund's objectives, the following factors, among others, were
considered in selecting the Bonds: (1) All the Bonds are obligations of the
State of New York and counties, municipalities, authorities or political
- ------------------------------------
* References in this Prospectus to the Trust Agreement are qualified in their
entirety by the Trust Agreement which is incorporated herein by reference.
<PAGE>
subdivisions thereof or issued by certain United States territories or
possessions, including Puerto Rico and their public authorities so that the
interest on them will be exempt from Federal, New York State and New York City
income tax under existing law; (2) the Bonds are varied as to purpose of issue;
(3) in the opinion of the Sponsors, the Bonds are fairly valued relative to
other bonds of comparable quality and maturity; and (4) MBIA Insurance
Corporation insurance for the payment of principal and interest on the
Securities is available. Subsequent to the Date of Deposit, a Bond may cease to
be rated or its rating may be reduced. Neither event requires an elimination of
such Bond from the portfolio, but such an event may be considered in the
Sponsors' determination to direct the Trustee to dispose of the Bonds. See
'Sponsors-Responsibility' in Part B. The insurance on the Bonds in the portfolio
obtained by the Trust does not cover such Bonds until they are delivered to the
Trust. See 'The Trust--Portfolio--General Considerations' in this Part B.
SPECIAL FACTORS AFFECTING NEW YORK
The information set forth below is derived from the official statements
and/or preliminary drafts of official statements prepared in connection with the
issuance of New York State and New York City municipal bonds. The Sponsors have
not independently verified this information.
State Economic Trends. Over the long term, the State of New York (the
'State') and the City of New York (the 'City') face serious potential economic
problems. The City accounts for approximately 41% of the State's population and
personal income, and the City's financial health affects the State in numerous
ways. The State historically has been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic affluence. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in the City.
In recent years the State's economic position has improved in a manner
consistent with that for the Northeast as a whole.
The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these taxes to
develop and maintain their transportation networks, public schools and colleges,
public health systems, other social services and recreational facilities.
Despite these benefits, the burden of State and local taxation, in combination
with the many other causes of regional economic dislocation, has contributed to
the decisions of some businesses and individuals to relocate outside, or not
locate within, the State.
Notwithstanding the numerous initiatives that the State and its localities
may take to encourage economic growth and achieve balanced budgets, reductions
in Federal spending could materially and adversely affect the financial
condition and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.3 million, is
an international center of business and culture. Its non-manufacturing economy
is broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and construction
industries accounting for a significant portion of the City's total employment
earnings. Additionally, the City is the nation's leading tourist destination.
The City's manufacturing activity is conducted primarily in apparel and
publishing.
The national economic downturn which began in July 1990 adversely affected
the local economy, which had been declining since late 1989. As a result, the
City experienced job losses in 1990 and 1991 and real Gross City Product (GCP)
fell in those two years. In order to achieve a balanced budget as required by
the laws of the State for the 1992 fiscal year, the City increased taxes and
reduced services during the 1991 fiscal year to close a then projected gap of
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$3.3 billion in the 1992 fiscal year which resulted from, among other things,
lower than projected tax revenue of approximately $1.4 billion, reduced State
aid for the City and greater than projected increases in legally mandated
expenditures, including public assistance and Medicaid expenditures. Beginning
in calendar year 1992, the improvement in the national economy helped stabilize
conditions in the City. Employment losses moderated toward year-end and real GCP
increased, boosted by strong wage gains. The City's current four-year financial
plan assumes that, after noticeable improvements in the City's economy during
calendar year 1994, economic growth will slow in calendar years 1995 and 1996
with local employment increasing modestly. In December 1994, the City
experienced substantial shortfalls in payments of non-property tax revenues from
those forecasted. Through December 1994, collections of non-property taxes were
approximately $200 million lower than projected.
For each of the 1981 through 1994 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ('GAAP'), and the City's 1995 fiscal year results are projected to be
balanced in accordance with GAAP. The City was required to close substantial
budget gaps in recent years in order to maintain balanced operating results. For
fiscal year 1995, the City has adopted a budget which has halted the trend in
recent years of substantial increases in City spending from one year to the
next. There can be no assurance that the City will continue to maintain a
balanced budget as required by State law without additional tax or other revenue
increases or reductions in City services, which could adversely affect the
City's economic base.
Pursuant to the laws of the State, the City prepares an annual four-year
financial plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The City is
required to submit its financial plans to review bodies, including the New York
State Financial Control Board ('Control Board'). If the City were to experience
certain adverse financial circumstances, including the occurrence or the
substantial likelihood and imminence of the occurrence of an annual operating
deficit of more than $100 million or the loss of access to the public credit
markets to satisfy the City's capital and seasonal financing requirements, the
Control Board would be required by State law to exercise powers, among others,
of prior approval of City financial plans, proposed borrowings and certain
contracts.
The City depends on the State for State aid both to enable the City to
balance its budget and to meet its cash requirements. There can be no assurance
that there will not be reductions in State aid to the City from amounts
currently projected or that State budgets in future fiscal years will be adopted
by the April 1 statutory deadline and that such reductions or delays will not
have adverse effects on the City's cash flow or expenditures.
The Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan for the 1995 through 1998 fiscal
years (the '1995-1998 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 condition of the
regional and local economies, the impact on real estate tax revenues of the real
estate market, wage increases for City employees consistent with those assumed
in the Financial Plan, employment growth, the results of a pending actuarial
audit of the City's pension system which is expected to significantly increase
the City's annual pension costs, the ability to implement proposed reductions in
City personnel and other cost reduction initiatives, which may require in
certain cases the cooperation of the City's municipal unions, revenue generating
transactions and provision of State and Federal aid and mandate relief.
Implementation of the Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1995 through 1998 contemplates the
issuance of $10.7 billion of general obligation bonds primarily to reconstruct
and rehabilitate the City's infrastructure
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and physical assets and to make other capital investments. In addition, the City
issues revenue and tax anticipation notes to finance its seasonal working
capital requirements. The success of projected public sales of City bonds and
notes will be subject to prevailing market conditions, and no assurance can be
given that such sales will be completed. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned capital and operating expenditures.
On October 25, 1994, the City published the Financial Plan for the
1995-1998 fiscal years, which is a proposed modification to a financial plan
submitted to the Control Board on July 8,1994 (the 'July Financial Plan') and
which relates to the City, the Board of Education ('BOE') and the City
University of New York.
The City's July Financial Plan set forth proposed actions for the 1995
fiscal year to close a previously projected gap of approximately $2.3 billion
for the 1995 fiscal year, which included City actions aggregating $1.9 billion,
a $288 million increase in State actions over the 1994 and 1995 fiscal years,
and a $200 million increase in Federal assistance. The City actions included
proposed agency actions aggregating $1.1 billion, including productivity
savings; tax and fee enforcement initiatives; service reductions; and savings
from the restructuring of City services. City actions also included savings of
$45 million resulting from proposed tort reform, the projected transfer to the
1995 fiscal year of $171 million of the projected 1994 fiscal year surplus,
savings of $200 million for employee health care costs, $51 million in reduced
pension costs, savings of $225 million from refinancing City bonds and $65
million from the proposed sale of certain City assets.
The 1995-1998 Financial Plan published on October 25,1994 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the July Financial Plan and projects revenues and expenditures for the
1995 fiscal year balanced in accordance with GAAP. For the 1995 fiscal year, the
Financial Plan includes actions to offset an additional potential $1.1 billion
budget gap, resulting principally from a $104 million decrease in the $171
million projected surplus from the 1994 fiscal year to be transferred to the
1995 fiscal year, due primarily to lower projected tax revenues for the 1994
fiscal year; reductions in projected tax revenues for the 1995 fiscal year
totalling $170 million; $60 million of increased City pension contributions
resulting from lower than expected earnings on pension fund assets for the 1994
fiscal year; a $166 million shortfall in projected increased Federal assistance
due primarily to the failure to enact national health care reform; the failure
of the State Legislature to approve tort reform; the failure to achieve the
projected savings of $200 million for employee health care costs; a $165 million
increase in projected overtime expenditures; and additional agency spending
requirements, primarily for increased costs for foster care and homeless
services, and other decreased projected revenues.
The gap-closing measures for the 1995 fiscal year set forth in the
1995-1998 Financial Plan include additional proposed agency actions aggregating
$851 million, including $342 million of reduced personal services costs
resulting from a reduction in the number of city employees, additional
expenditure reductions and $42 million of greater than forecast miscellaneous
revenues. Additional proposed gap-closing actions include the availability of
$200 million, primarily from reserves held for unreported health insurance
claims. The $851 million of agency actions proposed in the Financial Plan for
the 1995 fiscal year, together with the $1.1 billion of agency actions proposed
in the July Financial Plan, are substantial and difficult to implement. Agency
actions proposed in the Financial Plan for the 1995 fiscal year include reduced
expenditures for the Police Department totalling $67 million, a $107 million
reduction in the City's subsidy to the New York City Health and Hospitals
Corporation ('HHC'), reduced allocations to BOE totalling $190 million,
expenditure reductions totalling $102 million for the Human Resources
Administration, expenditure reductions totalling $32 million for the Department
of Corrections, a portion of which are subject to modification of a court
consent decree, and a $113 million reduction in the City's subsidy to the
Metropolitan Transportation Authority (the 'MTA'). The Financial Plan is subject
to the ability of the City to implement proposed reductions in City personnel
and other cost reduction initiatives.
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Based on currently available results, the Mayor's Office of Management and
Budget ('OMB') believes that developments since the publication of the Financial
Plan on October 25, 1994 have caused an additional $650 million budget gap in
the 1995 fiscal year due to (i) projected tax revenue shortfalls of $400
million, (ii) failure to renegotiate the terms of certain Port Authority leases
to increase revenues by $75 million, (iii) miscellaneous revenue shortfalls of
$25 million, and (iv) increases in certain agency expenditures of $150 million.
The projected tax revenue shortfalls for the 1995 fiscal year result from lower
capital gains, bonuses and business profits, the timing of certain payments and
discounting by retailers. OMB has also identified gap-closing actions totalling
$650 million in the 1995 fiscal year. Certain of these gap-closing actions will
be subject to the ability of the City to implement expenditure reduction
initiatives and, in the case of the social security refund, final approval by
the Internal Revenue Service. In the event these gap-closing actions cannot be
fully implemented, the City will be required to adopt additional gap-closing
measures for the remainder of the 1995 fiscal year, and there is no assurance
that such measures will enable the City to achieve a balanced budget for the
1995 fiscal year. Current forecasts of revenues and expenditures for the fiscal
year 1995, including the gap-closing actions, could require the City to take
actions within the 1995 fiscal year to meet its cash flow requirements.
The Financial Plan also sets forth projections for the 1996 through 1998
fiscal years and outlines a proposed gap-closing program to close projected gaps
of $1.0 billion, $1.5 billion and $2.0 billion for the 1996 through 1998 fiscal
years, respectively, after successful implementation of the $1.1 billion
gap-closing program for the 1995 fiscal year.
OMB believes that developments since the publication of the Financial Plan
have caused the $1.0 billion gap projected in the Financial Plan for the 1996
fiscal year to increase to $2.7 billion. The $1.5 billion increase in the
forecast budget gap for fiscal year 1996 is due to (i) a projected tax revenue
shortfall of approximately $400 million, reflecting the impact of the recent
shortfall in collections of non-property taxes described above, (ii) an $80
million shortfall in projected property tax receipts due to a lower than
forecast increase in the tentative assessment role published by the New York
City Department of Finance, (iii) a reduction of $390 million in the forecast
receipt of State and Federal aid, (iv) a reduction of $75 million in forecast
receipts of lease payments for the New York City airports, (v) higher costs of
$260 million for Medicaid and agency spending, (vi) additional pension funding
costs of $300 million resulting from an ongoing actuarial audit of the City
pension systems and (vii) $45 million in additional costs for unachieved tort
reform.
In February the Mayor published a modification (the 'February
Modification') to the Financial Plan for the City's 1995 through 1998 fiscal
years and a preliminary budget for the City's 1996 fiscal year. The February
Modification reflected changes since the Financial Plan including measures to be
taken to assure balance in the 1995 fiscal year described above and the City's
program to address the currently forecast gap of approximately $2.7 billion in
fiscal year 1996, which gap is projected to increase to $3.2 billion and $3.8
billion in 1997 and 1998, respectively. The gap closing program is subject to
change. However, the major components of the gap closing program for fiscal year
1996 are (i) a reduction in spending for entitlements of approximately $1.2
billion, primarily affecting public assistance and Medicaid payments by the
City, (ii) $600 million in savings from municipal unions and (iii) $500 million
from the Board of Education. In addition, the City will continue to seek mandate
relief such as tort reform and other changes in City procedures and use of
resources through privatization and efficient utilization of the City's assets.
The proposals contained in the February Modification to close the projected
budget gaps for the 1995 and 1996 fiscal years engendered substantial public
debate, and that the public debate relating to the 1996 fiscal year budget will
likely continue through the time the budget is scheduled to be adopted in June
1995. On January 17, 1995, Standard & Poor's placed the City's general
obligation bonds on CreditWatch with negative implications, in light of the
refunding of debt contemplated by this offering to provide $120 million of the
$650 million in gap closing actions required for the 1995 fiscal year. Standard
& Poor's stated that it will review the February Modification for evidence of
continued progress toward long-term structural balance, and eventual elimination
of certain types of budget devices, as well as the
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next State budget proposal, to determine the extent of the City's relief from
State mandates in education, social services, and health care expenditures.
Standard & Poor's stated that, by April 1995, financial plans which continue to
incorporate budget devices, such as refunding, or fail to reflect ongoing budget
relief from the State, will result in a lowering of the rating to the 'BBB'
category for New York City's general obligation bonds.
In January 1993, the City announced a settlement with a coalition of
municipal unions, including Local 237 of the International Brotherhood of
Teamsters, District Council 37 of the American Federation of State, County and
Municipal Employees 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. The City is presently bargaining with the
Correction Officers' Benevolent Association and the Sanitation Officers'
Association. In addition, the Transit Police Benevolent Association's delegate
body rejected a tentative settlement with the City. The contract dispute is
currently being arbitrated before the State's Public Employment Relations Board.
Moreover, a contract dispute between the City and the Licensed Practical Nurses
is currently in arbitration before the City's Office of Collective Bargaining.
The Financial Plan provides no additional wage increases for City employees
after their contracts expire in the 1995 and 1996 fiscal years. Each 1% wage
increase for all employees commencing in the 1995 and 1996 fiscal years would
cost the City an additional $28 million for the 1995 fiscal year, $140 million
for the 1986 fiscal year and $150 million each year thereafter above the amounts
provided for in the Financial Plan.
Various actions proposed in the Financial Plan, including 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. State and Federal actions are uncertain and no
assurance can be given that such actions will in fact be taken or that the
savings that the City projects will result from these actions will be realized.
The State Legislature failed to approve a substantial portion of the proposed
State assumption of Medicaid costs in the last session. The Financial Plan
assumes that these proposals will be approved by the State Legislature during
the 1995 fiscal year and that the Federal government will increase its share of
funding for the Medicaid program. If these measures cannot be implemented, the
City will be required to take other actions to decrease expenditures or increase
revenues to maintain a balanced financial plan.
Although the City has maintained balanced budgets in each of its last
thirteen fiscal years, and is projected to achieve balanced operating results
for the 1995 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
The 1995-1998 Financial Plan is based on numerous assumptions, including
the continuing improvement in the City's and the region's economy and a modest
employment recovery during calendar year 1994 and the concomitant receipt of
economically sensitive tax revenues in the amounts projected. The 1995-1998
Financial Plan is subject to various other uncertainties and contingencies
relating to, among other factors, the extent, if any, to which wage increases
for City employees exceed the annual increases assumed for the 1995 through 1998
fiscal years; continuation of the 9% interest earnings assumptions for pension
fund assets and current assumptions with respect to wages for City employees
affecting the City's required pension fund contributions; the willingness and
ability of the State, in the context of the State's current financial condition,
to provide the aid contemplated by the Financial Plan and to take various other
actions to assist the City, including the proposed State takeover of certain
Medicaid costs and State mandate relief; the ability of the Health and Hospitals
Corporation ('HHC'), BOE and other such agencies to maintain balanced budgets;
the willingness of the Federal government to provide Federal aid; approval of
the proposed continuation of the personal income tax surcharge; adoption of the
City's budgets by the City Council in substantially
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the forms submitted by the Mayor; the ability of the City to implement proposed
reductions in City personnel and other cost reduction initiatives, which may
require in certain cases the cooperation of the City's municipal unions, and the
success with which the City controls expenditures; savings for health care costs
for City employees in the amounts projected in the Financial Plan; additional
expenditures that may be incurred due to the requirements of certain legislation
requiring minimum levels of funding for education; the impact on real estate tax
revenues of the current weakness in the real estate market; the City's ability
to market its securities successfully in the public credit markets; and
additional expenditures that may be incurred as a result of deterioration in the
condition of the City's infrastructure. Certain of these assumptions have been
questioned by the City Comptroller and other public officials.
The projections and assumptions contained in the 1995-1998 Financial Plan
are subject to revision which may involve substantial change, and no assurance
can be given that these estimates and projections, which include actions which
the City expects will be taken but which are not within the City's control, will
be realized.
From time to time, the Control Board staff, the City Comptroller and others
issue reports and make public statements regarding the City's financial
condition, commenting on, among other matters, the City's financial plans,
projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services.
On January 17, 1995, the City Comptroller issued a report which concluded
that the risks for the 1995 fiscal year had increased from $453 million to $658
million, primarily as a result of lower than projected tax revenues totaling
$400 million, partially offset by the anticipated receipt of an additional $100
million of revenues from the refund by the Internal Revenue Service of social
security overpayments by the City in the 1995 fiscal year. The report stated
that the shortfall in tax revenue collections is explained largely by weaknesses
in the banking industry and the securities sector, which have been hurt by the
tight monetary policies of the Federal Reserve Board which have resulted in
losses from bond trading operations, layoffs and lower year-end bonuses. The
report stated that this shortfall may increase if total returns in the financial
sector do not improve in the first half of the 1995 calendar year.
On December 27, 1994, the City Comptroller issued a report on the City's
economy which noted that the City's economic recovery had slowed in the third
quarter of the 1994 calendar year and concluded that the City's economy is still
very weak and the local recovery is very fragile. The report noted that the
indications of weakness in the City's economy include slower growth in payroll
employment and retail sales in the third quarter, as well as softness in the
Manhattan commercial real estate market. The report also noted that the tight
monetary policies implemented by the Federal Reserve Bank since February to curb
inflationary pressures were particularly harmful to interest rate sensitive and
cyclical sectors, such as retailing, the securities industry, banking and
manufacturing and that the City's service-driven economy has not benefited from
the national recovery, which was largely driven by interest rate sensitive
sectors of housing, capital goods and consumer durable goods. The report noted
that the slow-down in economic activity was expected to continue in the fourth
quarter of 1994, with more cutbacks in local governments and additional layoffs
in the financial sector, which will offset new hiring in other areas and result
in a slow growth in the 1995 calendar year.
On November 30, 1994, OSDC issued a report reviewing the Financial Plan.
The report concluded that a projected budget gap of $252 million existed for the
1995 fiscal year, due largely to higher social service costs and uncertainties
concerning the receipt of revenues from increased collection efforts. The report
identified additional substantial risks for the 1995 fiscal year totaling $351
million, including the proposed reduction in the City subsidy to the Transit
Authority, the receipt of revenues by the City as a result of the refund of
social security overpayments, the projected
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subleasing of certain assets and possible additional expenditures for the BOE.
After taking into account possible reduced expenditures of $100 million, OSDC
concluded that the City faces risks of approximately $500 million for the
remainder of the 1995 fiscal year.
With respect to the 1996 through 1998 fiscal years, the OSDC in its March
21, 1995, report projects gaps of approximately $3.0 billion, $3.6 billion and
$4.1 billion, respectively. According to the OSDC, the projected gap could be
greater than forecast by the City primarily because the City has not yet secured
$133 million in anticipated health insurance savings and overtime costs from
uniformed agencies are likely to be $80 million higher than projected by the
City. The report also identified a number of additional risks which could raise
the 1996 budget gap by another $400 million (a net gap of $232 million after
accounting for possible savings from overestimating prior year's expenses).
These risks include (i) the expiration of the 14% personal income tax surcharge
which the Financial Plan assumes will be extended by the State, (ii) unfunded
liabilities at the Board of Education and (iii) potentially higher pension
costs. Additionally, the 1996 gap closing program relies to a very large degree
on cooperation from Federal and State governments and municipal unions. In fact,
the City has direct control of less than $500 million of the total gap closing
measures. Therefore, no assurance can be given that the 1996 measures will be
successfully implemented.
On December 8, 1994, the staff of the Control Board issued a report on the
Financial Plan. In its report the staff concluded that the City faced risks of
more than $513 million in the 1995 fiscal year. The staff noted that tax
receipts are stagnant, primarily because of a further contraction in the
property tax and sluggish growth in the non-property taxes, related to erosion
of profits in the securities industry, and that there are substantial risks for
the 1995 fiscal year with respect to possible increased overtime and City
Medicaid payments to HHC, shortfalls in parking fine collections, the projected
refund of social security payments, a proposed asset sale, the renegotiation of
certain Port Authority leases and possible additional expenditures at BOE. In
addition, the staff indicated that there are risks of $2.0 billion, $2.6 billion
and $3.1 billion for the 1996, 1997 and 1998 fiscal years, respectively. Risks
for the 1996 through 1998 fiscal years include the potential for increased
overtime and lower non-property tax revenues, increased spending for City
Medicaid payments to HHC, additional expenditures at BOE, uncertainties
concerning the proposed reduction in City expenditures for health care costs,
the anticipated revenues from renegotiation of the terms of certain Port
Authority leases, savings resulting from the proposed tort reform program to
limit damage claims against the City, and increased Federal aid for Medicaid.
The report noted that the City faced additional risks with respect to its
assumptions regarding pension costs, a reduced subsidy to the Transit Authority,
social services savings and the cost of wages. The staff noted that it is
imperative that the City Council and the Mayor work together to ensure that the
actions taken for the 1995 fiscal year are recurring and help reduce the over $2
billion gap for the 1996 fiscal year, and that a cooperative effort is necessary
if the City is to solve its structural budget problems and bring stability to
the delivery of services to its residents.
On March 17, 1995 the Control Board staff issued its report commenting on
the February Modification. The report notes that the February Modification
attempts to address the structural imbalances by dramatically lowering
expenditures in large budget areas while continuing the restructuring of the
City's finances. Their analysis does show a risk of at least $486 million in
fiscal 1996, particularly because more than $2 billion in projected budget
relief is dependent upon the action of others. Both the Control Board and the
OSDC have noted that the City has not yet brought its long term expenditures in
line with recurring revues; therefore, the City is likely to face future budget
gaps requiring it to reduce expenditures and/or increase revenues.
A substantial portion of the capital improvements in the City are financed
by indebtedness issued by the Municipal Assistance Corporation for the City of
New York ('MAC'). MAC was organized in 1975 to provide financing assistance for
the City and also to exercise certain review functions with respect to the
City's finances. MAC bonds are payable out of certain State sales and
compensating use taxes imposed within the City, State stock transfer taxes and
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per capita State aid to the City. Any balance from these sources after meeting
MAC debt service and reserve fund requirements and paying MAC's operating
expenses is remitted to the City or, in the case of the stock transfer taxes,
rebated to the taxpayers. The State is not, however, obligated to continue the
imposition of such taxes or to continue appropriation of the revenues therefrom
to MAC, nor is the State obligated to continue to appropriate the State per
capita aid to the City which would be required to pay the debt service on
certain MAC obligations. MAC has no taxing power and MAC bonds do not create an
enforceable obligation of either the State or the City. As of September 30,
1994, MAC had outstanding an aggregate of approximately $4.885 billion of its
bonds.
The City's general obligation bonds are rated Baa1 by Moody's. Standard &
Poor's has rated the City's general obligation bonds A-. Fitch Investors
Service, Inc. ('Fitch') has rated them A-. Such ratings reflect only the view of
Moody's, Standard & Poor's and Fitch, from which an explanation of the
significance of such ratings may be obtained. There is no assurance that such
ratings will continue for any given period of time or that they 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 City's general
obligation bonds.
New York State and its Authorities. The State's current fiscal year
commenced on April 1, 1995, and ends on March 31, 1996, and is referred to
herein as the State's 1995-96 fiscal year. The prior fiscal year, which ended on
March 31, 1995, is referred to herein as the State's 1994-95 fiscal year. The
State's budget for the 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 then Governor Cuomo.
On February 1, Governor Pataki presented his 1995-96 Executive Budget,
containing his recommendations for the upcoming fiscal year. The Governor's
budget is balanced on a cash basis in the General Fund (described below).
However, there can be no assurance that the Legislature will enact the proposed
Executive Budget into law, that the budget will be adopted in a more timely
manner than the prior year's budget, or that actual results will not differ
materially and adversely from the projections set forth below.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the State.
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
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budget gaps resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the future costs of
maintaining State programs at current levels. Any such recurring imbalance would
be exacerbated if the State were to use a significant amount of nonrecurring
resources to balance the budget in a particular fiscal year. To address a
potential imbalance for a given fiscal year, the State would be required to take
actions to increase receipts and/or reduce disbursements as it enacts the budget
for that year, and under the State Constitution the Governor is required to
propose a balanced budget each year. To correct recurring budgetary imbalances,
the State would need to take significant actions to align recurring receipts and
disbursements in future fiscal years. There can be no assurance, however, that
the State's actions will be sufficient to preserve budgetary balance in a given
fiscal year or to align recurring receipts and disbursements in future fiscal
years.
The General Fund is the general operating fund of the State and is used to
account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 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.
As a result of the national and regional economic recession, the State's
tax receipts for its 1991 and 1992 fiscal years were substantially lower than
projected, which resulted in reductions in State aid to localities for the
State's 1992 and 1993 fiscal years from amounts previously projected. The State
completed its 1993 fiscal year with a positive margin of $671 million in the
General Fund, which was deposited into a tax refund reserve account. The State's
economy, as measured by employment, started to recover near the start of the
1993 calendar year, continued into mid-1994 and then virtually ceased. The State
completed its 1994 fiscal year with a cash-basis balanced budget in the State's
General Fund (the major operating fund of the State), after depositing $1.5
billion in various reserve funds.
The State's 1994-95 Financial Plan, which is based upon the enacted State
budget, projected a balanced General Fund. The State's 1994-95 Financial Plan
provided the City with savings through various actions, which include increased
State education aid and State assumption of certain costs previously paid by the
City and restoration of certain prior year revenue sharing reductions. However,
the State Legislature failed to enact a substantial portion of the proposed
State assumption of local Medicaid costs, other significant mandate relief
items, and the proposed tort reform legislation, which would have provided the
City with additional savings. On February 1, 1995, as part of his Executive
Budget for the 1995-96 fiscal year, the Governor submitted the third quarterly
update to the State Financial Plan for the 1994-95 fiscal year. This update
reflects changes to receipts and disbursements. The update revises the projected
General Fund receipts and disbursements contained in the 1994-95 State Financial
Plan as revised by the first and second quarterly updates issued on July 29,
1994 and October 28, 1994, respectively. The update reflected that estimates of
General Fund receipts for the 1994-95 fiscal year have been reduced by $585
million, from the mid-year update, and are down $1.058 billion from the budget
enacted in June 1994 (of which $227 million results from a post mid-year
accounting restatement of the State Financial Plan). Offsetting this projected
loss in receipts, however, are projected reductions of $312 million in
disbursements from the mid-year update, attributable to lower spending through
the first nine months of the fiscal year, and to the use of greater than
anticipated receipts from the State lottery. The net result of the projected
reductions in receipts and disbursements is a negative margin of $273 million
against the mid-year update's projection of a $14 million surplus, producing a
potential deficit of $259 million for the 1994-95 fiscal year. The Governor has
proposed to close this deficit through a hiring freeze, a review of pending
contracts, and spending cuts in certain programs that were started or expanded
in the 1994-95 budget. Governor Pataki submitted a proposed budget for the
State's 1995-96 fiscal year on February 1, 1995. The Governor's budget for the
1995-96 fiscal year included significant savings from Medicaid cost containment
measures and welfare reform and substantial reductions in State aid to
localities, including the City. The 1995-96 Executive Budget is the first to be
submitted by the
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Governor, who assumed office on January 1. It proposes actual reductions in the
year-over-year dollar levels of State spending from the General Fund for the
first time in over half a century with a proposed cut of 3.4 percent. There are,
however, risks and uncertainties concerning whether or not certain tax and
spending cuts proposed in the Executive Budget will be upheld in the face of
potential legal challenges. For example, there can be no assurance that cuts in
social-welfare entitlement programs will not be challenged in court. Further,
the Comptroller has indicated his intention to challenge in Court the proposed
use of certain pension reserves in the Executive Budget.
According to the Executive Budget, in the 1995-96 fiscal year, the State
Financial Plan would be out of balance by almost $4.7 billion, as a result of
three key factors: (1) the projected structural deficit resulting from the
ongoing disparity between sluggish growth in receipts, the effect of prior-year
tax changes, and the rapid acceleration of spending growth ($2.1 billion); (2)
the impact of unfunded 1994-95 initiatives, including capital projects such as
sports and recreational facilities, an increase in revenue sharing to local
governments, further State takeover of local Medicaid costs, more school aid,
and increased tuition assistance ($1.1 billion); and (3) the use of one-time
solutions to fund recurring spending in the 1994-95 budget ($1.5 billion). Tax
cuts proposed to spur economic growth and provide relief for low and
middle-income tax payers add $240 million to the projected imbalance or budget
gap, bringing the total to approximately $5 billion.
The Executive Budget proposes to close the budget gap for the 1995-96
fiscal year through (1) $1.9 billion from cost containment savings in
social-welfare programs, particularly Medicaid cost-containment recommendations
($1.277 billion), Income-Maintenance restructuring recommendations ($340
million), and the consolidation of various child-care programs into a Family
Services Block Grant to counties and New York City; (2) $2.5 billion in savings
from State agency restructuring that is expected to reduce spending on the State
workforce, SUNY and CUNY, mental hygiene programs, capital projects, the prison
population, and public authorities; (3) $350 million in savings from local
assistance reforms, by freezing school aid, revenue sharing and county costs of
pre-school special education at current levels, while proposing program
legislation to provide relief from certain mandates that increase local
spending; and (4) $200 million in new revenue measures, primarily a new Quick
Draw Lottery game and changes to tax-payment schedules. The Executive Budget
indicates that for years State revenues have grown at a slower rate than State
spending, producing an increasing structural deficit, and that if the proposals
in the Executive Budget are upheld (particularly the spending cuts described
above) the State will start to eliminate the structural imbalance that has
characterized the State's fiscal record. There can, however, be no assurances
that the tax and spending cuts proposed in the Executive Budget will be upheld
or enacted as proposed, or that if enacted, will eliminate potential imbalances
in future fiscal years.
As expected, the Governor's proposals will engender substantial public
debate which will continue until the enactment of the budget by the State
legislature, which as expected did not occur before April 1, 1995. However, no
assurance can be given as to the amount of savings which the City might realize
from any such cost containment measures or welfare reform or the size of any
such reductions in State aid to the City. Depending upon the amount of such
savings or the size of any such reductions in State aid, the City might be
required to make substantial additional changes in the Financial Plan.
In certain recent fiscal years, the State has failed to enact a budget
prior to the beginning of the State's fiscal year. The delay in the adoption of
the State's budget could delay 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.
As a result of various uncertainties and other factors, including consumer
attitudes toward spending, Federal financial and monetary policies, the
availability of credit and the condition of the world economy, actual results
could differ materially and adversely from the State's current projections and
the State's projections could be materially and adversely changed from time to
time.
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On January 13, 1992, Standard & Poor's Corporation ('Standard & Poor's')
reduced its ratings on the State's general obligation bonds from A to A- and, in
addition, reduced its ratings on the State's moral obligation, lease purchase,
guaranteed and contractual obligation debt. Standard & Poor's also continued its
negative rating outlook assessment on State general obligation debt. On April
26, 1993, Standard & Poor's revised the rating outlook assessment to stable. On
February 14, 1994, Standard & Poor's raised its outlook to positive and, on
December 12, 1994, confirmed its A- rating. On January 6, 1992, Moody's
Investors Service, Inc. ('Moody's') reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On December 12, 1994, Moody's reconfirmed its A rating on the State's
general obligation long-term indebtedness.
The fiscal stability of the State is related to the fiscal stability of its
authorities, which generally have responsibility for financing, constructing and
operating revenue-producing public benefit facilities. The authorities are not
subject to the constitutional restrictions on the incurrence of debt which apply
to the State itself and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. As of September 30,
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.
The MTA, a State agency, oversees the operation of the City's subway and
bus system (the 'Transit Authority' or 'TA') and commuter rail lines serving the
New York metropolitan area. Fare revenues from such operations have been
insufficient to meet expenditures, and the MTA depends heavily upon a system of
State, local, Triborough Bridge and Tunnel Authority ('TBTA') and, to the extent
available, Federal support. Over the past several years, the State has enacted
several taxes, including a surcharge on the profits of banks, insurance
corporations and general business corporations doing business in the 12 county
region served by the MTA and a special one-quarter of 1% regional sales and use
tax, that provide additional revenues for mass transit purposes including
assistance to the MTA. The surcharge, which expires in November 1995, yielded
$507 million in calendar year 1992, of which 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 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the
'1992-96 Capital Program'). The MTA has received approval of the 1992-96 Capital
Program based on this legislation from the 1992-96 Capital Program Review Board,
as State law requires. This is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and amendment of a five-year
plan in 1981 for a capital program designed to upgrade the performance of the
MTA's transportation systems and to supplement, replace and rehabilitate
facilities and equipment. The MTA, the TBTA and the TA are collectively
authorized to issue an aggregate of $3.1 billion of bonds (net of certain
statutory exclusions) to finance a portion of the 1992-96 Capital Program. The
1992-96 Capital Program is expected to be financed in significant part through
the dedication of State petroleum business taxes.
There can be no assurance that all the necessary governmental actions for
the Capital Program will be taken, that funding sources currently identified
will not be decreased or eliminated, or that the 1992-96 Capital Program, or
parts thereof, will not be delayed or reduced. Furthermore, the power of the MTA
to issue certain bonds expected to be
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supported by the appropriation of State petroleum business taxes is currently
the subject of a court challenge. If the Capital Program is delayed or reduced,
ridership and fare revenues may decline, which could, among other things, impair
the MTA's ability to meet its operating expenses without additional State
assistance.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The Housing
Finance Agency ('HFA') and the Urban Development Corporation ('UDC') have in the
past required substantial amounts of assistance from the State to meet debt
service costs or to pay operating expenses. Further assistance, possibly in
increasing amounts, may be required for these, or other, Authorities in the
future. In addition, certain statutory arrangements provide for State local
assistance payments otherwise payable to localities to be made under certain
circumstances to certain Authorities. The State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could seek
additional State funds.
Litigation. A number of court actions have been brought involving State
finances. The court actions in which the State is a defendant generally involve
state programs and miscellaneous tort, real property, and contract claims and
the monetary damages sought are substantial. Adverse development in these
proceedings or the initiation of new proceedings could affect the ability of the
State to maintain a balanced State Financial Plan in the current fiscal year or
thereafter.
In addition to the proceedings noted below, the State is party to other
claims and litigation which its legal counsel has advised are not probable of
adverse court decisions. Although the amounts of potential losses, if any, are
not presently determinable, it is the State's opinion that its ultimate
liability in these cases is not expected to have a material adverse effect on
the State's financial position in the current fiscal year or thereafter.
On May 31, 1988 the United States Supreme Court 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 by New York-based
brokers incorporated in Delaware for beneficial owners who cannot be identified
or located, had been, and were 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). All 50 states and the District of Columbia
moved to intervene, 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. In a decision dated March 30, 1993, the
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.
Among the more significant of these claims still pending against the State
at various procedural stages, are those that challenge: (1) the validity of
agreements and treaties by which various Indian tribes transferred title to the
State of certain land in central New York; (2) certain aspects of the State's
Medicaid rates and regulations, including reimbursements to providers of
mandatory and optional Medicaid services; (3) contamination in the Love Canal
area of Niagara Falls; (4) 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;
(5)
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challenges to the practice of reimbursing certain Office of Mental Health
patient care expenses from the client's Social Security benefits; (6) a
challenge to the methods by which the State reimburses localities for the
administrative costs of food stamp programs; (7) alleged responsibility of State
officials to assist in remedying racial segregation in the City of Yonkers; (8)
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; (9) 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; (10) a challenge to the
constitutionality of financing programs of the Thruway Authority authorized by
Chapters 166 and 410 of the Laws of 1991; (11) a challenge to the
constitutionality of financing programs of the MTA and the Thruway Authority
authorized by Chapter 56 of the Laws of 1993; (12) challenges to the delay by
the State Department of Social Services in making two one-week Medicaid payments
to the service providers; (13) challenges to provisions of Section 2807-C of the
Public Health Law, which impose a 13% surcharge on inpatient hospital bills paid
by commercial insurers and employee welfare benefit plans and portions of
Chapter 55 of The Laws of 1992 which require hospitals to impose and remit to
the State an 11% surcharge on hospital bills paid by commercial insurers; (14)
challenges to the promulgation of the State's proposed procedure to determine
the eligibility for and nature of home care services for Medicaid recipients;
(15) a challenge to State implementation of a program which reduces Medicaid
benefits to certain home-relief recipients; (16) challenges to the rationality
and retroactive application of State regulations recalibrating nursing home
Medicaid rates; and (17) a challenge by AT&T to New York Tax Law
Section186-a(2-a) as violative of the commerce clause of the U.S. Constitution.
GENERAL CONSIDERATIONS
Because certain of the Bonds may from time to time under certain
circumstances be sold or redeemed or will mature in accordance with their terms
and the proceeds from such events will be distributed to Unit holders and will
not be reinvested, no assurance can be given that the Trust will retain for any
length of time its present size and composition. Except as described in
footnotes to 'Summary of Essential Financial Information' for the Trust interest
accrues to the benefit of Unit holders commencing with the expected date of
settlement for purchase of the Units. If a Replacement Bond is not acquired,
accrued interest (at the coupon rate of the Failed Bonds or earned original
issue discount in the case of original issue discount and zero coupon Bonds)
will be paid to Unit holders (from the Deposit Date to the date the Trustee is
notified of the failure of the Sponsors to purchase a Replacement Bond). All
such interest paid to Unit holders which accrued after the date of settlement
for a purchase of Units will be paid by the Sponsors and accordingly will not be
treated as tax-exempt income. In the event a Replacement Bond is not acquired by
the Trust, the net annual interest income per Unit for the Trust would be
reduced and the estimated current return might be lowered.
Neither the Sponsors nor the Trustee shall be liable in any way for any
default, failure or defect in any Security. In the event that any contract for
the purchase of Securities in the Trust fails and no Replacement Bond as
hereinafter defined is acquired, the Sponsors shall refund to all Unit holders
the sales charge attributable to such failed contract, and the principal and
accrued interest (at the coupon rate of the relevant Security or earned original
issue discount in the case of original issue discount and zero coupon Bonds to
the date the Sponsors are notified of the failure) which are attributable to
such failed contract, shall be distributed at the next Monthly Payment Date
which is more than 30 days after the failure to purchase Replacement Bonds. The
portion of such interest paid to a Unit holder which accrued after the expected
date of settlement for purchase of his Units will be paid by the Sponsors and
accordingly will not be treated as tax-exempt income.
The following paragraphs discuss the characteristics of the Bonds in the
Trust and of certain types of issuers of the Bonds in the Trust. These
paragraphs discuss, among other things, certain circumstances which may
adversely affect the ability of such issuers to make payment of principal of and
interest on Bonds held in the portfolio of the Trust or
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which may adversely affect the ratings of such Bonds. Because of the insurance
obtained by the Sponsors or by the issuers for the Trust, however, such changes
should not adversely affect the Trust's ultimate receipt of principal and
interest, the Standard & Poor's or Moody's ratings of the Bonds in the
portfolio, or the Standard & Poor's rating of the Units of the Trust. An
investment in Units of the Trust should be made with an understanding of the
risks that such an investment may entail, certain of which are described below.
Unit holders may obtain additional information concerning a particular Bond by
requesting an official statement from the issuer of such Bond.
GENERAL OBLIGATION BONDS
General obligation bonds are secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. The taxing
power of any governmental entity may be limited, however, by provisions of state
constitutions or laws, and an entity's credit will depend on many factors,
including potential erosion of the tax base due to population declines, natural
disasters, declines in the state's industrial base or inability to attract new
industries; economic limits on the ability to tax without eroding the tax base;
state legislative proposals or voter initiatives to limit ad valorem real
property taxes; and the extent to which the entity relies on Federal or state
aid, access to capital markets or other factors beyond the state or entity's
control.
APPROPRIATIONS BONDS
Many state or local governmental entities enter into lease purchase
obligations as a means for financing the acquisition of capital projects (e.g.,
buildings or equipment, among other things). Such obligations are often made
subject to annual appropriations. Certain Bonds in the Trust may be Bonds that
are, in whole or in part, subject to and dependent upon (i) the governmental
entity making appropriations from time to time or (ii) the continued existence
of special temporary taxes which require legislative action for their
reimposition. The availability of any appropriation is subject to the
willingness of the governmental entity to continue to make such special
appropriations or to reimpose such special taxes. The obligation to make lease
payments exists only to the extent of the monies available to the governmental
entity therefor, and no liability is incurred by the governmental entity beyond
the monies so appropriated. Subject to the foregoing, once an annual
appropriation is made, the governmental entity's obligation to make lease rental
payments is absolute and unconditional without setoff or counterclaim,
regardless of contingencies, whether or not a given project is completed or used
by the governmental entity and notwithstanding any circumstances or occurrences
which might arise. In the event of non-appropriation, certificateholders' or
bondowners' sole remedy (absent credit enhancement) generally is limited to
repossession of the collateral for resale or releasing, and the obligation of
the governmental lessee is not backed by a pledge of the general credit of the
governmental lessee. In the event of non-appropriation, the Sponsors may
instruct the Trustee to sell such Bonds.
Moral Obligation Bonds. Certain of the Bonds in the Trust may be secured by
pledged revenues and additionally by the so-called 'moral obligations' of the
State or a local governmental body. Should the pledged revenues prove
insufficient, the payment of such Bonds is not a legal obligation of the State
or local government, and is subject to its willingness to appropriate funds
therefor.
REVENUE BONDS
Mortgage Revenue Bonds. Certain Bonds may be 'mortgage revenue bonds.'
Under the Internal Revenue Code of 1986, as amended (the 'Code'), (and under
similar provisions of the prior tax law) 'mortgage revenue bonds' are
obligations the proceeds of which are used to finance owner-occupied residences
under programs which meet numerous statutory requirements relating to residency,
ownership, purchase price and target area requirements, ceiling amounts for
state and local issuers, arbitrage restrictions, and certain information
reporting, certification, and public hearing requirements. There can be no
assurance that additional federal legislation will not be introduced or that
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existing legislation will not be further amended, revised, or enacted after
delivery of these Bonds or that certain required future actions will be taken by
the issuing governmental authorities, which action or failure to act could cause
interest on the Bonds to be subject to federal income tax. If any portion of the
Bonds proceeds are not committed for the purpose of the issue, Bonds in such
amount could be subject to earlier mandatory redemption at par, including issues
of Zero Coupon Bonds (see 'Original Issue Discount and Zero Coupon Bonds').
Housing Bonds. Some of the aggregate principal amount of Bonds of the Trust
may consist of obligations of state and local housing authorities whose revenues
are primarily derived from mortgage loans to housing projects for low to
moderate income families. Since such obligations are not general obligations of
a particular state or municipality and are generally payable primarily or solely
from rents and other fees, adverse economic developments including failure or
inability to increase rentals, fluctuations of interest rates and increasing
construction and operating costs may reduce revenues available to pay existing
obligations.
The housing bonds in the Trust, despite their optional redemption
provisions which generally do not take effect until ten years after the original
issuance dates of such Bonds (often referred to as 'ten year call protection'),
do contain provisions which require the issuer to redeem such obligations at par
from unused proceeds of the issue within a stated period. In recent periods of
declining interest rates there have been increased redemptions of housing bonds
pursuant to such redemption provisions. In addition, the housing bonds in the
Trust are also subject to mandatory redemption in part at par at any time that
voluntary or involuntary prepayments of principal on the underlying mortgages
are made to the trustee for such Bonds or that the mortgages are sold by the
bond issuer. Prepayments of principal tend to be greater in periods of declining
interest rates; it is possible that such prepayments could be sufficient to
cause a housing bond to be redeemed substantially prior to its stated maturity
date, earliest call date or sinking fund redemption date.
Public Power Revenue Bonds. General problems of the electric utility
industry include difficulty in financing large construction programs during an
inflationary period; restrictions on operations and increased costs and delays
attributable to environmental considerations; the difficulty of the capital
markets in absorbing utility debt and equity securities; the availability of
fuel for electric generation at reasonable prices, including among other
considerations the potential rise in fuel costs and the costs associated with
conversion to alternate fuel sources such as coal; technical cost factors and
other problems associated with construction, licensing, regulation and operation
of nuclear facilities for electric generation, including among other
considerations the problems associated with the use of radioactive materials and
the disposal of radioactive waste; and the effects of energy conservation.
Certain Bonds may have been issued in connection with the financing of nuclear
generating facilities. In view of recent developments in connection with such
facilities, legislative and administrative actions have been taken and proposed
relating to the development and operation of nuclear generating facilities. The
Sponsors are unable to predict whether any such actions or whether any such
proposals or litigation, if enacted or instituted, will have an adverse impact
on the revenues available to pay the debt service on the Bonds in the portfolio
issued to finance such nuclear projects.
Each of the problems referred to above could adversely affect the ability
of the issuers of public power revenue bonds to make payments of principal of
and/or interest on such bonds. Certain municipal utilities or agencies may have
entered into contractual arrangements with investor-owned utilities and large
industrial users and consequently may be dependent in varying degrees on the
performance of such contracts for payment of bond debt service.
Health Care Revenue Bonds. Some of the aggregate principal amount of Bonds
of the Trust may consist of hospital revenue bonds. Ratings of hospital bonds
are often initially based on feasibility studies which contain projections of
occupancy levels, revenues and expenses. Actual experience may vary considerably
from such projections. A hospital's gross receipts and net income will be
affected by future events and conditions including, among other things, demand
for hospital services and the ability of the hospital to provide them,
physicians' confidence
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in hospital management capability, economic developments in the service area,
competition, actions by insurers and governmental agencies and the increased
cost and possible unavailability of malpractice insurance. Additionally, a major
portion of hospital revenue typically is derived from federal or state programs
such as Medicare and Medicaid which have been revised substantially in recent
years and which are undergoing further review at the state and federal level.
Proposals for significant changes in the health care system and the present
programs for third party payment of health care costs are under consideration in
Congress and many states. Future legislation or changes in the areas noted
above, among other things, would affect all hospitals to varying degrees and,
accordingly, any adverse change in these areas may affect the ability of such
issuers to make payment of principal and interest on such bonds.
Higher Education Revenue Bonds. Higher education revenue bonds include debt
of state and private colleges, universities and systems, and parental and
student loan obligations. The ability of universities and colleges to meet their
obligations is dependent upon various factors, including the revenues, costs and
enrollment levels of the institutions. In addition, their ability may be
affected by declines in Federal, state and alumni financial support,
fluctuations in interest rates and construction costs, increased maintenance and
energy costs, failure or inability to raise tuition or room charges and adverse
results of endowment fund investments.
Pollution Control Facility Revenue Bonds. Bonds in the pollution control
facilities category include securities issued on behalf of a private
corporation,* including utilities, to provide facilities for the treatment of
air, water and solid waste pollution. Repayment of these bonds is dependent upon
income from the specific pollution control facility and/or the financial
condition of the project corporation.
Other Utility Revenue Bonds. Bonds in this category include securities
issued to finance natural gas supply, distribution and transmission facilities,
public water supply, treatment and distribution facilities, and sewage
collection, treatment and disposal facilities. Repayment of these bonds is
dependent primarily on revenues derived from the billing of residential,
commercial and industrial customers for utility services, as well as, in some
instances, connection fees and hook-up charges. Such utility revenue bonds may
be adversely affected by the lack of availability of Federal and state grants
and by decisions of Federal and state regulatory bodies and courts.
Solid Waste and Resource Recovery Revenue Bonds. Bonds in this category
include securities issued to finance facilities for removal and disposal of
solid municipal waste. Repayment of these bonds is dependent on factors which
may include revenues from appropriations from a governmental entity, the
financial condition of the private project corporation and revenues derived from
the collection of charges for disposal of solid waste. Repayment of resource
recovery bonds may also be dependent to various degrees on revenues from the
sale of electric energy or steam. Bonds in this category may be subject to
mandatory redemption in the event of project non-completion, if the project is
rendered uneconomical or if it is considered an environmental hazard.
Transportation Revenue Bonds. Bonds in this category include bonds issued
for airport facilities, bridges, turnpikes, port authorities, railroad systems,
or mass transit systems. Generally, airport facility revenue bonds are payable
from and secured by the revenues derived from the ownership and operation of a
particular airport. Payment on other transportation bonds is often dependent
primarily or solely on revenues from financed facilities, including user fees,
charges, tolls and rents. Such revenues may be adversely affected by increased
construction and maintenance costs or taxes, decreased use, competition from
alternative facilities, scarcity of fuel, reduction or loss of rents or the
impact of environmental considerations. Other transportation bonds may be
dependent primarily or solely on Federal,
- ------------------------------------
* For purposes of the description of users of facilities, all references to
'corporations' shall be deemed to include any other nongovernmental person or
entity.
B-17
<PAGE>
state or local assistance including motor fuel and motor vehicle taxes, fees,
and licenses and therefore may be subject to fluctuations in such assistance.
Private Activity Bonds. The portfolio of the Trust may contain other Bonds
that are 'private activity bonds,' which would be primarily of two types: (1)
Bonds for a publicly owned facility that a private entity may have a right to
use or manage to some degree, such as an airport, seaport facility or water
system and (2) facilities deemed owned or beneficially owned by a private entity
but which were financed with tax-exempt bonds of a public issuer, such as a
manufacturing facility or a pollution control facility. In the case of the first
type, bonds are generally payable from a designated source of revenues derived
from the facility and may further receive the benefit of the legal or moral
obligation of one or more political subdivisions or taxing jurisdictions. In
most cases of project financing of the first type, receipts or revenues of the
Issuer are derived from the project or the operator or from the unexpended
proceeds of the bonds. Such revenues include user fees, service charges, rental
and lease payments, and mortgage and other loan payments.
The second type of issue will generally finance projects which are owned by
or for the benefit of, and are operated by, corporate entities. Ordinarily, such
private activity bonds are not general obligations of governmental entities and
are not backed by the taxing power of such entities, and are solely dependent
upon the creditworthiness of the corporate user of the project or corporate
guarantor.
The private activity bonds in the Trust have generally been issued under
bond resolutions, agreements or trust indentures pursuant to which the revenues
and receipts payable under the issuer's arrangements with the users or the
corporate operator of a particular project have been assigned and pledged to the
holders of the private activity bonds. In certain cases a mortgage on the
underlying project has been assigned to the holders of the private activity
bonds or a trustee as additional security. In addition, private activity bonds
are frequently directly guaranteed by the corporate operator of the project or
by another affiliated company.
Special Tax Revenue Bonds. Bonds in this category are bonds secured
primarily or solely by receipt of certain state or local taxes, including sales
and use taxes or excise taxes. Consequently, such bonds may be subject to
fluctuations in the collection of such taxes. Such bonds do not include tax
increment bonds or special assessment bonds.
Other Revenue Bonds. Certain of the Bonds in the Trust may be revenue bonds
which are payable from and secured primarily or solely by revenues from the
ownership and operation of particular facilities, such as correctional
facilities, parking facilities, convention centers, arenas, museums and other
facilities owned or used by a charitable entity. Payment on bonds related to
such facilities is, therefore, primarily or solely dependent on revenues from
such projects, including user fees, charges and rents. Such revenues may be
affected adversely by increased construction and maintenance costs or taxes,
decreased use, competition from alternative facilities, reduction or loss of
rents or the impact of environmental considerations.
Certain of the Bonds in the Trust are secured by direct obligations of the
U.S. Government, or in some cases, obligations guaranteed by the U.S.
Government, placed in an escrow account maintained by an independent trustee
until maturity or a predetermined redemption date. In a few isolated instances
to date, bonds which were thought to be escrowed to maturity have been called
for redemption prior to maturity.
PUERTO RICO BONDS
Certain of the Bonds in the Trust may be general obligations and/or revenue
bonds of issuers located in Puerto Rico which will be affected by general
economic conditions in Puerto Rico. The economy of Puerto Rico is closely
integrated with that of the mainland United States. During fiscal year 1993,
approximately 86% of Puerto Rico's
B-18
<PAGE>
exports were to the United States mainland, which was also the source of 69% of
Puerto Rico's imports. In fiscal 1993, Puerto Rico experienced a $2.5 billion
positive adjusted trade balance. The economy of Puerto Rico is dominated by the
manufacturing and service sectors. The manufacturing sector has experienced a
basic change over the years as a result of increased emphasis on higher wage,
high technology industries such as pharmaceuticals, electronics, computers,
microprocessors, professional and scientific instruments, and certain high
technology machinery and equipment. The service sector, including finance,
insurance and real estate, also plays a major role in the economy. It ranks
second only to manufacturing in contribution to the gross domestic product and
leads all sectors in providing employment. In recent years, the service sector
has experienced significant growth in response to and paralleling the expansion
of the manufacturing sector. Since fiscal 1987, personal income has increased
consistently in each fiscal year. In fiscal 1993, aggregate personal income was
$24.1 billion ($20.6 billion in 1987 prices) and personal income per capita was
$6,760 ($5,767 in 1987 prices). Real personal income showed a small decrease in
fiscal 1991 principally as a result of a decline in real transfer payments.
Total federal payments to Puerto Rico, which include many types in addition to
federal transfer payments, are lower on a per capita basis in Puerto Rico than
in any state. Transfer payments to individuals in fiscal 1993 were $5.3 billion,
of which $3.6 billion, or 67.6%, represent entitlement to individuals who had
previously performed services or made contributions under programs such as
Social Security, veterans benefits and Medicare. The number of persons employed
in Puerto Rico during fiscal 1994 averaged 1,011,000. Unemployment, although at
a low level compared to the late 1970s, remains above the average for the United
States. In fiscal 1994, the unemployment rate in Puerto Rico was 15.9%. Puerto
Rico's decade-long economic expansion continued throughout the five-year period
from fiscal 1989 through fiscal 1993. Almost every sector of its economy was
affected and record levels of employment were achieved. Factors behind this
expansion include Commonwealth sponsored economic development programs, the
relatively stable prices of oil imports, the continued growth of the United
States economy, periodic declines in exchange value of the United States dollar
and the relatively low cost borrowing during the period. Real gross product
(adjusted to reflect 1987 prices) amounted to approximately $20.07 billion in
fiscal 1993, or 3.1% above the fiscal 1992 level. The Puerto Rico Planning
Board's economic activity index, a composite index for thirteen economic
indicators, increased 1.6% in fiscal 1994 compared to fiscal 1993, which period
showed a decrease of 1.4% over fiscal 1992. Growth in the Puerto Rico economy in
fiscal 1994 and 1995 depends on several factors, including the state of the
United States economy and the relative stability in the price of oil imports,
the exchange value of the U.S. dollar and the cost of borrowing.
ORIGINAL ISSUE DISCOUNT BONDS AND ZERO COUPON BONDS
Certain of the Bonds in the Trust may be original issue discount bonds
and/or zero coupon bonds. Original issue discount bonds are bonds that were
originally issued at less than the market interest rate. Zero coupon bonds are
original issue discount bonds that do not provide for the payment of current
interest. For Federal income tax purposes, original issue discount on such bonds
must be amortized over the term of such bonds. On sale or redemption, the excess
of (i) the amount realized (other than amounts treated as tax-exempt income as
described below) over (ii) the tax basis of such bonds (properly adjusted, in
the circumstances described below, for amortization of original issue discount)
will be treated as taxable income or loss. See 'The Trust--Tax Status' in this
Part B. The Code requires holders of tax-exempt obligations issued with original
issue discount, such as the Trust, to accrue tax-exempt original issue discount
by using the constant interest method provided for the holders of taxable
obligations. In addition, the Code provides that the basis of a tax-exempt
obligation is increased by the amount of accrued tax-exempt original issue
discount. These provisions are applicable to obligations issued after September
3, 1982 and acquired after March 1, 1984. Each Trust's tax basis in a Bond is
increased by any accrued original issue discount as is a Unit holder's tax basis
in his Units. For Bonds issued after June 9, 1980 that are redeemed prior to
maturity, the difference between the Trust's basis, as adjusted, and the amount
received will be taxable gain or loss to the Unit holders: all or a portion of
any gain may be taxable as ordinary income.
B-19
<PAGE>
There can be no assurance that additional Federal legislation will not be
enacted or that existing legislation will not be amended hereafter with the
effect that interest on bonds becomes subject to Federal income taxation. If the
interest on the Bonds in the Trust should ultimately be deemed to be taxable,
the Trustee may sell them and, since they would be sold as taxable securities,
it is expected that they would have to be sold at a substantial discount from
current market price.
BONDS SUBJECT TO SINKING FUND PROVISIONS
Bonds in the Trust may be subject to redemption prior to their stated
maturity date pursuant to sinking fund or call provisions. A sinking fund is a
reserve fund accumulated over a period of time for retirement of debt. Sinking
fund provisions are designed to redeem a significant portion of an issue
gradually over the life of the issue. Obligations to be redeemed are generally
chosen by lot. On the Date of Deposit, the offering valuations of some of the
Bonds in the Trust may have been at a premium and subject to retirement or
refunding within ten years of the Date of Deposit. A callable debt obligation is
one which is subject to redemption prior to maturity at the option of the
issuer. To the extent that obligations are deposited in the Trust at a price
higher than their par value, such redemption at par would result in a loss of
capital to a purchaser of Units at their original public offering price. The
estimated current return of the Units might also be adversely affected if the
return on the retired Bonds is greater than the average return on the Bonds in
the Trust. In general, call provisions are more likely to be exercised when the
offering side valuation is at a premium over par than when it is at a discount
from par. See 'The Portfolio' in Part A for a list of original issue discount
and/or zero coupon bonds and for a breakdown of the percentage of Bonds in the
Trust with offering side valuations at a premium, discount or at par. See also
'Estimated Current Return and Estimated Long Term Return' in Part A. The
portfolio contains a listing of the sinking fund and call provisions, if any,
with respect to each of the Bonds therein.
SUBSTITUTION OF BONDS
In the event of a failure to deliver any Bond that has been purchased for
the Trust under a contract, including those Bonds purchased on a 'when, as and
if issued' basis ('Failed Bonds'), the Sponsors are authorized to purchase other
bonds ('Replacement Bonds') which the Trustee shall pay for out of funds held in
connection with the Failed Bonds and to accept delivery of the Replacement Bonds
to make up the original corpus of the Trust. The Replacement Bonds must be
purchased within 20 days after delivery of the notice of the failed contract,
and the purchase price (exclusive of accrued interest) may not exceed the
principal attributable to the Failed Bonds. The Replacement Bonds (i) must be
tax-exempt bonds issued by the State of New York or counties, municipalities,
authorities or political subdivisions thereof or issued by certain United States
territories or possessions or their public authorities as described in the first
paragraph under 'Portfolio,' (ii) must have a fixed maturity date not exceeding
the maturity date of the Failed Bonds and not less than ten years after the date
of purchase, (iii) shall be purchased at a price that results in a yield to
maturity and a current return, in each case as of the Date of Deposit, at least
equal to the yield to maturity and the current return of the Failed Bonds, (iv)
shall not be 'when issued' bonds, (v) must be rated at least equal to the Failed
Bonds and (vi) must be eligible for coverage under the MBIA Insurance
Corporation insurance policy obtained by the Trust. Whenever a Replacement Bond
has been acquired for the Trust, the Trustee shall, within five days thereafter,
notify all Unit holders of the Trust of the acquisition of the Replacement Bond
and shall, on the next monthly Payment Date which is more than 30 days
thereafter, make a pro rata distribution of the amount, if any, by which the
cost to the Trust of the Failed Bond exceeded the cost of the Replacement Bond.
Once the original corpus of the Trust is acquired, the Trustee will have no
power to vary the investment of the Trust, i.e., the Trustee will have no
managerial power to take advantage of market variations to improve a Unit
holder's investment.
If the right of limited substitution described in the preceding paragraph
shall not be utilized to acquire Replacement Bonds in the event of a failed
contract, the Sponsors will refund the sales charge attributable to such
B-20
<PAGE>
Failed Bonds to all Unit holders of the Trust, and distribute the principal and
accrued interest (at the coupon rate of such Failed Bond, or earned original
issue discount in the case of zero coupon bonds, from the Deposit Date to the
date the Sponsors notify the Trustee that they will not purchase Replacement
Bonds) attributable to such Failed Bonds on the next monthly Payment Date which
is more than 30 days thereafter. In the event a Replacement Bond is not acquired
by the Trust, the Estimated Net Annual Interest Income per Unit for the Trust
would be reduced and the Estimated Current Return thereon might be lowered.
OTHER MATTERS
An amendment to the Federal Bankruptcy Act relating to the adjustment of
indebtedness owed by any political subdivision or public agency or
instrumentality of any state, including municipalities, became effective in
1979. Among other things, this amendment facilitates the use of proceedings
under the Federal Bankruptcy Act by any such entity to restructure or otherwise
alter the terms of its obligations, including those of the type comprising the
Trust's portfolio. The Sponsors are unable to predict at this time what effect,
if any, this legislation will have on the Trust.
To the best knowledge of the Sponsors, there is no litigation pending as of
the Date of Deposit in respect of any Securities which might reasonably be
expected to have a material adverse effect upon the Trust. At any time after the
Date of Deposit, litigation may be initiated on a variety of grounds with
respect to Securities in the Trust. Such litigation as, for example, suits
challenging the issuance of pollution control revenue bonds under recently
enacted environmental protection statutes, may affect the validity of such
Securities or the tax-free nature of the interest thereon. While the outcome of
such litigation can never be entirely predicted with certainty, bond counsel has
given or will give opinions to the issuing authorities of each Bond on the date
of issuance to the effect that such Securities have been validly issued and that
the interest thereon is exempt from regular Federal income tax. In addition,
other litigation or other factors may arise from time to time which potentially
may impair the ability of issuers to meet obligations undertaken with respect to
Securities.
PUBLIC OFFERING
OFFERING PRICE
The price of the Units of the Trust as of the Date of Deposit was
determined by adding to the Evaluator's determination of the aggregate offering
price of the Securities per Unit a sales charge of 5.152% thereof equal to 4.9%
of the Public Offering Price. During the initial public offering period, sales
of at least 250 Units will be entitled to a volume discount from the Public
Offering Price as described below. For purchases settling after the First
Settlement Date, a proportionate share of accrued and undistributed interest on
the Securities at the date of delivery of the Units to the purchaser is also
added to the Public Offering Price.
During the initial offering period the aggregate offering price of the
Securities in the Trust is determined by the Evaluator (1) on the basis of
current offering prices for the Securities,* (2) if offering prices are not
available for any Securities, on the basis of current offering prices for
comparable securities, (3) by making an appraisal of the value of the Securities
on the basis of offering prices in the market, or (4) by any combination of the
above. Such determinations are made each business day during the initial public
offering period as of the Evaluation Time set forth in the
- ------------------------------------
* With respect to the evaluation of Bonds during the initial syndicate offering
period for such Bonds, the 'current offering price,' as determined by the
Evaluator, will normally be equal to the syndicate offering price as of the
Evaluation Time, unless the Evaluator determines that a material event has
occurred which it believes may result in the syndicate offering price not
accurately reflecting the market value of such Bonds, in which case the
Evaluator, in making its determination with respect to such Bonds, will
consider not only the syndicate offering price but also the factors described
in (2) and (3) herein.
B-21
<PAGE>
'Summary of Essential Financial Information' in Part A, effective for all sales
made subsequent to the last preceding determination. For information relating to
the calculation of the Redemption Price, which is based upon the aggregate bid
price of the underlying Securities and which may be expected to be less than the
aggregate offering price, see 'Rights of Unit Holders--Redemption' in Part B.
Unless Securities are in default in payment of principal or interest or in
significant risk of such default, the Evaluator will not attribute any value to
the Units due to the MBIA Insurance Corporation insurance obtained by the Trust.
See also 'Rights of Unit Holders--Certificates' and 'Rights of Unit
Holders--Redemption' in Part B for information relating to redemption of Units.
The Evaluator will consider in its evaluation of Securities which are in
default in payment of principal or interest or, in the Sponsors' opinion, in
significant risk of such default ('Defaulted Bonds') and which are covered by
insurance obtained by the Trust the value of the insurance guaranteeing interest
and principal payments. The value of the insurance will be equal to the
difference between (i) the market value of Defaulted Bonds assuming the exercise
of the right to obtain Permanent Insurance (less the insurance premium
attributable to the purchase of Permanent Insurance and the related custodial
fee) and (ii) the market value of such Defaulted Bonds not covered by Permanent
Insurance. In any case the Evaluator will consider the ability of MBIA Insurance
Corporation to meet its commitments under the Trust's insurance policy,
including the commitment to issue Permanent Insurance. The Evaluator intends to
use a similar valuation method with respect to Securities insured by the Trust
if there is a significant risk of default and a resulting decrease in the market
value. For a description of the circumstances under which a full or partial
suspension of the right of Unit holders to redeem their Units may occur, see
'Rights of Unit Holders--Redemption' in Part B.
If the Trustee does not exercise the right to obtain Permanent Insurance as
to any Defaulted Bonds in the Trust, it is the present intention of the Trustee,
so long as the Trust contains either some Bonds not in default or any
Pre-insured Bonds, not to sell Defaulted Bonds to effect redemptions or for any
other reason but rather to retain them in the portfolio BECAUSE VALUE
ATTRIBUTABLE TO THE INSURANCE OBTAINED BY THE TRUST CANNOT BE REALIZED UPON
SALE. Insurance obtained by the issuer of a Pre-insured Bond, or by some party
other than the Trust, is effective so long as such Pre-insured Bond is
outstanding and the insurer of such Bond continues to fulfill its obligations.
Therefore, any such insurance may be considered to represent an element of
market value in regard to the Pre-insured Bond, but the exact effect, if any, of
this insurance on such market value cannot be predicted. Regardless of whether
the insurer of a Pre-insured Bond continues to fulfill its obligations, however,
such Bond will in any case continue to be insured under the policy obtained by
the Trust from MBIA Insurance Corporation as long as the Bond is held in the
Trust.
No value has been ascribed to the MBIA Insurance Corporation insurance
obtained by the Trust as of the date of this Prospectus.
The secondary market Public Offering Price of the Units of the Trust is
based on the aggregate bid price of the Bonds in the Trust (as determined by the
Evaluator) plus a sales charge determined in accordance with the schedule set
forth below, which is based upon the maturities of each Bond in the Trust. The
Sponsors have implemented this variable format as a more equitable method of
assessing the sales charge for secondary market purchases. For purposes of
computation, Bonds will be deemed to mature on their expressed maturity dates
unless the Evaluator evaluates the price of the Bonds to a different date such
as a call date or a mandatory tender date, in which case the maturity will be
deemed to be such other date.
B-22
<PAGE>
This method of sales charge computation will apply different sales charge
rates to each Bond in the Trust based upon the maturity of each such Bond in
accordance with the following schedule:
<TABLE>
<CAPTION>
SECONDARY MARKET
PERIOD SALES CHARGE
-----------------------------
PERCENTAGE OF
PUBLIC PERCENTAGE OF
OFFERING NET AMOUNT
PER BOND PRICE INVESTED
-------------- -------------
<S> <C> <C>
YEARS TO MATURITY
PER BOND
- -------------------------
0 Months to 2 years...... 1.0% 1.010%
2 but less than 3........ 2.0% 2.091%
3 but less than 4........ 3.0% 3.093%
4 but less than 8........ 4.0% 4.167%
8 but less than 12....... 5.0% 5.363%
12 but less than 15...... 5.5% 5.820%
15 or more............... 5.9% 6.270%
</TABLE>
A minimum sales charge of 1.0% of the Public Offering Price will be applied
to all secondary market unit purchases.
During the initial public offering period, purchasers of 250 Units or more
will be entitled to a volume discount from the Public Offering Price as set
forth in the table below:
<TABLE>
<CAPTION>
DISCOUNT FROM
PUBLIC OFFERING
NUMBER OF UNITS PRICE PER UNIT
- ------------------ ---------------
<S> <C>
250-499........... $ 2.50
500-999........... 7.50
1,000-1,999....... 15.00
2,000 or more..... 20.00
</TABLE>
Except as discussed under 'Distribution of Units' below, the above volume
discount will be the responsibility of the Selling Underwriter or dealer and
will apply on all purchases at any one time by the same person of Units in the
Trust in the amounts stated. Units held in the name of the spouse of the
purchaser or in the name of a child of the purchaser under 21 years of age are
deemed for the purposes hereof to be registered in the name of the purchaser.
The graduated sales charges are also applicable to a trustee or other fiduciary
purchasing Units for a single trust estate or single fiduciary account.
Certain commercial banks are making Units of the Trust available to their
customers on an agency basis. A portion of the sales charge discussed above is
retained by or remitted to the banks. Under the Glass-Steagall Act, banks are
prohibited from underwriting Trust Units; however, the Glass-Steagall Act does
permit certain agency transactions, and banking regulators have not indicated
that these particular agency transactions are not permitted under such Act.
Market for Units
Although they are not obligated to do so, the Sponsors intend to maintain a
market for the Units of the Trust and continuously to offer to purchase Units of
the Trust during the initial offering period at prices based upon the aggregate
offering price of the Securities in the Trust; and thereafter at prices based on
the aggregate bid price of the related Securities. After the initial offering
period the Sponsors' Repurchase Price shall be not less than the Redemption
Price plus accrued interest through the expected date of settlement. (See
'Rights of Unit Holders--Redemption--Computation of Redemption Price per Unit'
in Part B). There is no sales charge incurred when a Unit holder sells
B-23
<PAGE>
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 either Series exceeds demand, or for some other
business reason, the Sponsors may discontinue purchases of Units of either
Series at prices based on the aggregate bid price of the Securities. The
Sponsors do not in any way guarantee the enforceability, marketability, or price
of any Security in the portfolio or of the Units of the Trust. In the event that
a market is not maintained for the Units of the Trust, a Unit holder desiring to
dispose of his Units may be able to do so only by tendering such Units to the
Trustee for redemption at the Redemption Price, which is based upon the
aggregate bid price of the underlying Securities. The aggregate bid price of the
Securities in the Trust may be expected to be less than the aggregate offering
price. If a Unit holder wishes to dispose of his Units, he should inquire of the
Sponsors as to current market prices prior to making a tender for redemption to
the Trustee. See 'Rights of Unit Holders--Redemption' and 'Sponsors' in Part B.
Employees (and their immediate families) of Glickenhaus & Co. and Lebenthal
& Co., Inc. may, pursuant to employee benefit arrangements, purchase Units of
the Trust at a price equal to the offering side evaluation of the underlying
securities in the Trust during the initial offering period and at the bid side
thereafter, divided by the number of Units outstanding plus a reduced sales
charge of 1.5% of the Public Offering Price. Such arrangements result in less
selling effort and selling expenses than sales to employee groups of other
companies. Resales or transfers of Units purchased under the employee benefit
arrangements may only be made through the Sponsors' secondary market, so long as
it is being maintained.
DISTRIBUTION OF UNITS
The Underwriters of the Units of the Trust are listed in the Underwriting
Account (see 'Underwriting Account' in Part A). It is the Underwriters'
intention to qualify Units of the Trust for sale in certain of the states and to
effect a public distribution of the Units solely through their own
organizations. However, Units may be sold to dealers who are members of the
National Association of Securities Dealers, Inc. at prices which represent a
concession equal to $30.00 per Unit from the related Public Offering Price
applicable to sales of fewer than 500 Units subject in each case to change from
time to time by the Agent for the Sponsors. Any volume discount (see 'Offering
Price' in Part B) offered to investors will be borne by the selling Underwriter
or dealer except that, during the initial public offering period, the Sponsors
may pay the selling Underwriter or dealer $2.50 per Unit for individual sales of
more than 500 Units.
Sales will be made only with respect to whole Units, and the Sponsors
reserve the right to reject, in whole or in part, any order for the purchase of
Units.
Underwriters and broker-dealers of the Trust, banks and/or others are
eligible to participate in a program in which such firms receive from the
Sponsors a nominal award for each of their registered representatives who have
sold a minimum number of units of unit investment trusts created by the Sponsors
during a specified time period. In addition, at various times the Sponsors may
implement other programs under which the sales forces of Underwriters, brokers,
dealers, banks and/or others may be eligible to win other nominal awards for
certain sales efforts, or under which the Sponsors will reallow to any such
Underwriters, brokers, dealers, banks and/or others that sponsor sales contests
or recognition programs conforming to criteria established by the Sponsors, or
participate in sales programs sponsored by the Sponsors, an amount not exceeding
the total applicable sales charges on the sales generated by such person at the
public offering price during such programs. Also, the Sponsors in their
discretion may from time to time pursuant to objective criteria established by
the Sponsors pay fees to qualifying Underwriters, brokers, dealers, banks and/or
others for certain services or activities which are primarily intended to result
in sales of Units of the Trust. Such payments are made by the Sponsors out of
their own assets and not out of the assets of the Trust. These programs will not
change the price Unitholders pay for their Units or the amount that the Trust
will receive from the Units sold.
B-24
<PAGE>
SPONSORS' AND UNDERWRITERS' PROFITS
As set forth under 'Public Offering--Offering Price' in Part B, the
Underwriters will receive gross commissions equal to the specified percentages
of the Public Offering Price of the Units of the Trust. The Sponsors will
receive from the Underwriters the excess of such gross sales commission over $35
per Unit from Underwriters underwriting 100 to 249 Units, will receive the
excess over $36 per Unit from Underwriters underwriting 250 to 499 Units, will
receive the excess over $37 per Unit from Underwriters underwriting 500 to 749
Units, will receive the excess over $38 per Unit from Underwriters underwriting
750 to 999 Units, will receive the excess over $39 per Unit from Underwriters
underwriting 1,000 or more Units and will receive the excess over $40 per Unit
from Underwriters who underwrite 15% of the Units of the Trust. In addition, the
Sponsors may, during the initial public offering period, pay any Underwriter an
additional $2.50 per Unit for sales to individual purchasers of 500 or more
Units. The Sponsors may also from time to time pay, in addition to the amounts
referenced above, an additional concession, in the form of cash or other
compensation, any Underwriter who underwrites or sells, during a specific
period, minimum dollar amounts of the Units of the Trust. In no event will such
additional concession paid by the Sponsors to the Underwriter exceed the
difference between the sales charge and the Underwriter's allowance in respect
of Units underwritten by the Underwriter. Such Units then may be distributed to
the public by the dealers at the Public Offering Price then in effect.
In addition, the Sponsors realize a profit or sustain a loss, as the case
may be, in the amount of any difference between the cost of the Securities to
the Trust (which is based on the aggregate offering price of the Securities on
the Date of Deposit) and the purchase price of such Securities to the Sponsors
(which is the cost of such Securities at the time they were acquired for the
account of the Trust). The Underwriters share in the profits, if any, described
in the preceding sentence. See 'Summary of Essential Financial Information' in
Part A. In addition, the Sponsors may realize profits or sustain losses with
respect to Bonds deposited in the Trust which were acquired from one or more of
the Sponsors or from underwriting syndicates of which they were members. During
the initial offering period, the Underwriters also may realize profits or
sustain losses as a result of fluctuations after the Date of Deposit in the
offering prices of the Securities and hence in the Public Offering Price
received by the Underwriters for Units. Cash, if any, made available to the
Sponsors prior to the settlement date for the purchase of Units of the Trust may
be used in the Sponsors' businesses, subject to the limitations of the
Securities Exchange Act of 1934 and may be of benefit to the Sponsors.
The Sponsors may have participated as underwriters or as managers or
members of underwriting syndicates from which some of the aggregate principal
amount of the Bonds were acquired for the Trust in the amounts set forth in Part
A. The Sponsors have not purchased any of the Securities in the Trust from their
managed accounts.
In maintaining a market for the Units of the Trust (see 'Market for Units')
the Sponsors and Underwriters will also realize profits or sustain losses in the
amount of any difference between the price at which they buy Units and the price
at which they resell or redeem such Units and to the extent they earn sales
charges on resales.
ESTIMATED CURRENT RETURN AND ESTIMATED LONG-TERM RETURN TO UNIT HOLDERS
Units of the Trust are offered on a 'dollar price' basis. In contrast,
tax-exempt bonds customarily are offered on a 'yield price' basis. Therefore,
the rate of return on each Unit is measured in terms of both Estimated Current
Return and Estimated Long-Term Return. Estimated Current Return based on the
Public Offering Price per Unit and Estimated Long-Term Return per Unit, each as
of the business day prior to the Date of Deposit, is set forth under 'Summary of
Essential Financial Information ' in Part A. Information regarding the estimated
monthly distributions of principal and interest to Unit holders of the Trust is
available from the Sponsors on request.
B-25
<PAGE>
Estimated Current Return is computed by dividing the Estimated Net Annual
Interest Income per Unit by the Public Offering Price. Estimated Net Interest
Income per Unit will vary with changes in fees and expenses of the Trustee and
the Evaluator and with principal prepayment, redemption, maturity, exchange or
sale of Bonds. The Public Offering Price per Unit will vary with changes in the
offering price of the Bonds. Estimated Current Return takes into account only
the interest payable on the Bonds and does not involve a computation of yield to
maturity or to an earlier redemption date nor does it reflect any amortization
of premium or discount from par value in the Bond's purchase price. Moreover,
because interest rates on Bonds purchased at a premium are generally higher than
current interest rates on newly issued bonds of a similar type with comparable
ratings, the Estimated Current Return per Unit may be affected adversely if such
Bonds are redeemed prior to their maturity. Therefore, there is no assurance
that the Estimated Current Return as set forth under 'Summary of Essential
Financial Information' in Part A will be realized in the future.
Estimated Long-Term Return is calculated using a formula that (i) takes
into consideration, and determines and factors in the relative weightings of,
the market values, yields (taking into account the amortization of premiums and
the accretion of discounts) and estimated retirements of all the Bonds in the
Trust and (ii) takes into account the expenses and sales charge associated with
each Unit of the Trust. The Estimated Long-Term Return assumes that each Bond is
retired on its pricing life date (i.e., that date which produces the lowest
dollar price when yield price calculations are done for each optional call date
and the maturity date of a callable security). If the Bond is retired on any
optional call or maturity date other than the pricing life date, the yield to
the holder of that Bond will be greater than the initial quoted yield. Since the
market values and estimated retirements of the Bonds, the expenses of the Trust
and the Net Annual Interest Income and Public Offering Price per Unit may
change, there is no assurance that the Estimated Long-Term Return as set forth
under 'Summary of Essential Financial Information' in Part A will be realized in
the future.
INSURANCE ON THE BONDS
Insurance guaranteeing the timely payment, when due, of all principal and
interest on the Bonds in the Trust has been obtained from the Insurer by the
Trust. The Insurer has issued a policy of insurance covering each of the Bonds
in the Trust, including Pre-insured Bonds. The MBIA Insurance Corporation
insurance obtained by the Trust is only effective as to Bonds owned by and held
in the Trust and, consequently, does not cover Bonds for which the contract for
purchase fails. A 'when issued' Bond will be covered under the MBIA Insurance
Corporation policy upon the settlement date of the issue of such 'when issued'
Bond. The MBIA Insurance Corporation policy shall continue in force only with
respect to Bonds held in and owned by the Trust, and the Insurer shall not have
any liability under the policy with respect to any Bonds which do not constitute
part of the Trust. In determining to insure the Bonds, the Insurer has applied
its own standards which generally correspond to the standards it has established
for determining the insurability of new issues of municipal bonds. See 'Notes to
Portfolio' in Part A of this Prospectus.
By the terms of its policy, the Insurer will unconditionally guarantee to
the Trust the payment, when due, required of the issuer of the Bonds of an
amount equal to the principal of (either at the stated maturity or by any
advancement of maturity pursuant to a mandatory sinking fund payment) and
interest on the Bonds as such payments shall become due but not paid. Except as
provided below with respect to issues of small 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 by reason of mandatory or optional redemption
(other than a mandatory sinking fund redemption). The Insurer will be
responsible for such payments less any amounts received by the Trust from any
trustee for the Bond issuers or from any other source. Except as provided below,
the MBIA Insurance Corporation policy does not guarantee payment on an
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accelerated basis, the payment of any redemption premium or the value of the
Units of the Trust. The MBIA Insurance Corporation policy also does not insure
against nonpayment of principal of or interest on the Bonds resulting from the
insolvency, negligence or any other act or omission of the Trustee or other
paying agent for the Bonds. However, with respect to small issue industrial
development Bonds and pollution control revenue Bonds covered by the policy, the
Insurer guarantees any accelerated payments required to be made by or on behalf
of an issuer of such Bonds if there occurs pursuant to the terms of the Bonds an
event which results in the loss of the tax-exempt status of interest on such
Bonds, including principal, interest or premium payments payable thereon, if
any, as and when required to be made by or on behalf of the issuer pursuant to
the terms of such Bonds. No assurance can be given that the MBIA Insurance
Corporation policy would insure the payment of principal or interest on Bonds
which is not required to be paid by the issuer thereof because the Bonds were
not validly issued. At the respective times of issuance of the Bonds, opinions
relating to the validity thereof were rendered by bond counsel to the respective
issuing authorities.
The MBIA Insurance Corporation insurance policy is non-cancellable and will
continue in force so long as the Trust is in existence and the Securities
described in the policy continue to be held in and owned by the Trust (see 'The
Trust--Insurance' in Part A of this Prospectus). Failure to pay premiums on the
MBIA Insurance Corporation policy obtained by the Trust will not result in the
cancellation of insurance but will force the Insurer to take action against the
Trustee to recover premium payments due it. The Trustee in turn will be entitled
to recover such payments from the Trust.
The MBIA Insurance Corporation policy shall terminate as to any Bond which
has been redeemed from the Trust or sold by the Trustee on the date of such
redemption or on the settlement date of such sale, and the Insurer shall not
have any liability under the policy as to any such Bond thereafter. If the date
of such redemption or the settlement date of such sale occurs between a record
date and a date of payment of any such Bonds, the MBIA Insurance Corporation
policy will terminate as to such Bond on the business day next succeeding such
date of payment. The termination of the MBIA Insurance Corporation policy as to
any Bond shall not affect the Insurer's obligations regarding any other Bond in
the Trust or any other trust which has obtained a MBIA Insurance Corporation
insurance policy. The MBIA Insurance Corporation policy will terminate as to all
Bonds on the date on which the last of the Bonds matures, is redeemed or is sold
by the Trust.
Pursuant to an irrevocable commitment of the Insurer, the Trustee upon the
sale of a Bond in the Trust has the right to obtain permanent insurance with
respect to such Bond (i.e., insurance to maturity of the Bond) (the 'Permanent
Insurance') upon the payment of a single predetermined insurance premium from
the proceeds of the sale of such Bond. Accordingly, any Bond in the Trust is
eligible to be sold on an insured basis. It is expected that the Trustee will
exercise the right to obtain Permanent Insurance for a Bond in the Trust upon
instruction from the Sponsors only if upon such exercise the Trust would receive
net proceeds (sale of Bond proceeds less the insurance premium attributable to
the Permanent Insurance and the related custodial fee) from such sale in excess
of the sale proceeds if such Bond were sold on an uninsured basis.
The Permanent Insurance premium with respect to each Bond in the Trust is
determined based upon the insurability of each Bond as of the Date of Deposit
and will not be increased or decreased for any change in the creditworthiness of
such Bond unless such Bond is in default as to payment of principal and/or
interest. In such event, the Permanent Insurance premium shall be subject to an
increase predetermined at the Date of Deposit and payable from the proceeds of
the sale of such Bond. See footnote 7 to the 'Summary of Essential Financial
Information' in Part A for the Trust for the cost of Permanent Insurance as of
the Date of Deposit.
Except as indicated below, insurance obtained by the Trust has no effect on
the price or redemption value of Units thereof. lt is the present intention of
the Evaluator to attribute a value to the insurance obtained by the Trust
(including the right to obtain Permanent Insurance) for the purpose of computing
the price or redemption value of Units thereof
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<PAGE>
only if the Bonds covered by such insurance are in default in payment of
principal or interest or, in the Sponsors' opinion, in significant risk of such
default. The value of the insurance will be equal to the difference between (i)
the market value of a Bond which is in default in payment of principal or
interest or in significant risk of such default assuming the exercise of the
right to obtain Permanent Insurance (less the insurance premium attributable to
the purchase of Permanent Insurance and the related custodial fee) and (ii) the
market value of such Bonds not covered by Permanent Insurance. See 'Public
Offering--Offering Price' in this Part B for a more complete description of the
Evaluator's method of valuing defaulted Bonds and Bonds which have a significant
risk of default. Insurance obtained by the issuer of a Bond or by parties other
than the Trust is effective so long as such Pre-insured Bond is outstanding and
the insurer of such Pre-insured Bond continues to fulfill its obligations.
Regardless of whether the insurer of a Pre-insured Bond continues to
fulfill its obligations, however, such Bond will continue to be insured under
the policy obtained by the Trust from the Insurer as long as the Bond is held in
the Trust. Insurance obtained by the issuer of a Bond or by other parties may be
considered to represent an element of market value in regard to the Bonds thus
insured, but the exact effect, if any, of this insurance on such market value
cannot be predicted.
In the event that interest on or principal of a Bond is due for payment but
is unpaid by reason of nonpayment by the issuer thereof, the Insurer will make
payments to its fiscal agent, State Street Bank and Trust Company, N.A., New
York, New York (the 'Fiscal Agent'), equal to such unpaid amounts of principal
and interest not later than one business day after the Insurer has been notified
by the Trustee that such nonpayment has occurred (but not earlier than the date
such payment is due). The Fiscal Agent will disburse to the Trustee the amount
of principal and interest which is then due for payment but is unpaid upon
receipt by the Fiscal Agent of (i) evidence of the Trust's right to receive
payment of such principal and interest and (ii) evidence, including any
appropriate instruments of assignment, that all of the rights to payment of such
principal or interest then due for payment shall thereupon vest in the Insurer.
Upon payment by the Insurer of any principal or interest payments with respect
to any Bonds, the Insurer shall succeed to the rights of the owner of such Bonds
with respect to such payment.
The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts of or
claims against the Insurer. The Insurer is a limited liability corporation
rather than a several liability association. The Insurer is domiciled in the
State of New York and licensed to do business in all 50 states, the District of
Columbia and the Commonwealth of Puerto Rico.
As of December 31, 1993, the Insurer had admitted assets of $3.1 billion
(audited), total liabilities of $2.1 billion (audited), and total capital and
surplus of $978 million (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of December 31, 1994, the Insurer had admitted assets of $3.4
billion (audited), total liabilities of $2.3 billion (audited), and total
capital and surplus of $1.1 billion (audited) determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities. Copies of the Insurer's year end financial statements prepared in
accordance with statutory accounting practices are available from the Insurer.
The address of the Insurer is 113 King Street, Armonk, New York 10504.
No representation is made herein as to the accuracy or adequacy of such
information or as to the absence of material adverse changes in such information
subsequent to the date thereof. The Sponsors are not aware that the information
herein is inaccurate or incomplete as of the date hereof.
Standard & Poor's Rating Group, a division of McGraw Hill ('Standard &
Poor's') has assigned to the Units and Bonds in the Trust a rating of 'AAA.'
Moody's Investors Service has assigned a rating of 'Aaa' to all of the Bonds in
the Trust, as insured. These ratings apply to the Bonds only while they are held
in the Trust. Also, these ratings
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reflect Standard & Poor's and Moody's current assessments of the
creditworthiness of the Insurer and their ability to pay claims on their
policies of insurance.
Battle Fowler LLP, special counsel for the Sponsors, have rendered an
opinion to the effect that the payment of proceeds from the insurance will be
excludible from Federal gross income if, and to the same extent as, such
interest would have been so excludible if paid by the issuer of the defaulted
obligations. See 'Tax Status' in this Part B.
The contract of insurance relating to the Trust, certain agreements
relating to the Permanent Insurance and the negotiations in respect thereof
represent the only significant relationship between the Insurer and the Trust.
Otherwise, neither the Insurer nor any associate thereof has any material
business relationship, direct or indirect, with the Trust or the Sponsors,
except that the Sponsors may from time to time in the normal course of their
business, participate as underwriters or as managers or as members of
underwriting syndicates in the distribution of new issues of municipal bonds for
which a policy of insurance guaranteeing the payment of interest and principal
has been obtained from the Insurer, and except that James A. Lebenthal, Chairman
of the Board of Directors of Lebenthal & Co., Inc., is a Director of the
Insurer's parent company, MBIA Inc. Although all issues contained in the Trust
are individually insured, neither the Trust, the Units nor the portfolio is
insured directly or indirectly by the Insurer.
A purpose of the insurance on the Bonds in the portfolio obtained by the
Trust is to obtain a higher yield on the Trust portfolio than would be available
if all the Securities in such portfolio had Standard & Poor's Corporation's
'AAA' rating and/or Moody's Investors Service's 'Aaa' rating but were uninsured
and yet at the same time to have the protection of insurance of payment of
interest and principal on the Securities. There is, of course, no certainty that
this result will be achieved. Any Pre-insured Bonds in the Trust (all of which
are rated 'AAA' by Standard & Poor's Corporation and/or 'Aaa' by Moody's
Investors Service, respectively) may or may not have a higher yield than
uninsured bonds rated 'AAA' by Standard & Poor's Corporation and/or 'Aaa' by
Moody's Investors Service, respectively. In selecting Pre-insured Bonds for the
portfolio of the Trust, the Sponsors have applied the criteria hereinbefore
described.
Because the Securities in the Trust are insured by MBIA Insurance
Corporation as to the payment of principal and interest, Standard & Poor's
Corporation has assigned its 'AAA' investment rating to the Units and Bonds in
the Trust and Moody's Investors Service has assigned a rating of 'Aaa' to all of
the Bonds in the Trust, as insured. See 'Statement of Condition--Notes to
Portfolio' in Part A. The obtaining of these ratings by the Trust should not be
construed as an approval of the offering of the Units by Standard & Poor's
Corporation or Moody's Investors Service or as a guarantee of the market value
of the Trust or of the Units. These ratings are not a recommendation to buy,
hold or sell and do not take into account the extent to which Trust expenses or
portfolio asset sales for less than the Trust's acquisition price will reduce
payment to the Unit holders of the interest or principal.
TAX STATUS
Interest income on the Bonds contained in the portfolio of the Trust is, in
the opinion of bond counsel to the issuing governmental authorities, which
opinion was rendered at the time of original issuance of the Bonds, excludible
from gross income under the Code. See 'The Trust' in Part A.
Gain (or loss) realized on sale, maturity, or redemption of the Bonds or on
sale or redemption of a Unit is, however, includible in gross income as capital
gain (or loss) for Federal, state and local income tax purposes assuming that
the Unit is held as a capital asset. Such gain (or loss) does not include any
amount received in respect of accrued interest. In addition, such gain (or loss)
may be long or short term depending on the holding period of the Units. Bonds
selling at a market discount tend to increase in market value as they approach
maturity when the principal amount is payable, thus increasing the potential for
taxable gain (or reducing the potential for loss) on their redemption, maturity,
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<PAGE>
or sale. Gain on the dispositon of a Bond purchased at a market discount
generally will be treated as ordinary income, rather than capital gain, to the
extent of accrued market discount. The deductibility of capital losses is
limited to the amount of capital gain; in addition, up to $3,000 of capital
losses of noncorporate Unit holders may be deducted against ordinary income.
Since the proceeds from sales of Bonds, under certain circumstances, may not be
distributed pro-rata, the Unit holder's taxable income for any year may exceed
their actual cash distributions in that year.
In the opinion of Battle Fowler LLP, special counsel for the Sponsors,
under existing law:
The Trust is not an association taxable as a corporation for Federal
income tax purposes, and interest on the Bonds which is excludible from
regular Federal gross income under the Code, when received by the Trust,
will be excludible from the regular Federal gross income of the Unit
holders of the Trust. Any proceeds paid under the insurance policy
described above issued to the Trust with respect to the Bonds and any
proceeds paid under individual policies obtained by issuers of Bonds or
other parties which represent maturing interest on defaulted obligations
held by the Trust will be excludible from Federal gross income if, and to
the same extent as, such interest would have been so excludible if paid in
the normal course by the issuer of the defaulted obligations.
Each Unit holder will be considered the owner of a pro rata portion of
the Bonds and any other assets held in the Trust under the grantor trust
rules of Code Sections 671-679. Each Unit holder will be considered to have
received his pro rata share of income from Bonds held by the Trust on
receipt (or earlier accrual, depending on the Unit holder's method of
accounting and depending on the existence of any original issue discount)
by the Trust, and each Unit holder will have a taxable event when an
underlying Bond is disposed of (whether by sale, redemption, or payment at
maturity) or when the Unit holder redeems or sells his Units. Gain from a
sale will be treated as short term or long term capital gain depending on
how long the Bond was held by the Trust. The total tax basis (i.e., cost)
of each Unit to a Unit holder is allocated among each of the Bonds held in
the Trust (in accordance with the proportion of the Trust comprised by each
such Bond) in order to determine his per Unit tax basis for each Bond, and
the tax basis reduction requirements of the Code relating to amortization
of bond premium will apply separately to the per Unit cost of each such
Bond. Therefore, under some circumstances, a Unit holder may realize
taxable gain when his Units are sold or redeemed for an amount equal to his
original cost. No deduction is allowed for the amortization of bond premium
on tax-exempt bonds such as the Bonds. None of the interest received from
the portfolio is subject to the alternative minimum tax for individuals;
however, some or all of the interest received from the portfolio may be
includible in the calculation of a corporation's alternative minimum tax.
For Federal income tax purposes, when a Bond is sold, a Unit holder
may exclude from his share of the amount received any amount that
represents accrued interest but may not exclude amounts attributable to
market discount. Thus, when a Bond is sold by the Trust, taxable gain or
loss will equal the difference between (i) the amount received (excluding
the portion representing accrued interest) and (ii) the adjusted basis
(including any accrued original issue discount, limited in the case of
Bonds issued after June 8, 1980 to the portion earned from the date of
acquisition, as discussed below). In the case of Bonds acquired at a market
discount, gain will be treated as ordinary income to the extent of accrued
market discount.
A Unit holder may also realize taxable gain or loss when a Unit is
sold or redeemed. Taxable gain will result if a Unit is sold or redeemed
for an amount greater than its adjusted basis to the Unit holder. The
amount received when a Unit is sold or redeemed is allocated among all the
Bonds in the Trust in the same manner as when the Trust disposes of Bonds,
and the Unit holder may exclude accrued interest, including the earned
portion of any original issue discount, but not amounts attributable to
market discount. In the case of Bonds acquired at a market discount gain
will be treated as ordinary income to the extent of accrued market
discount. The return of a Unit holder's tax basis is otherwise a tax-free
return of capital.
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<PAGE>
If the Trust purchases any units of a previously issued series then,
based on the opinion of counsel with respect to such series, the Trust's
pro rata ownership interest in the bonds of such series (or any previously
issued series) will be treated as though it were owned directly by the
Trust.
Under the income tax laws of the State and City of New York, the Trust
is not an association taxable as a corporation and the income of the Trust
will be treated as the income of the Unit holders.
A Unit holder who is a non-resident of New York will not be subject to
New York State or City income tax on any interest or gain derived from his
interest in the Trust's assets or upon any gain from the sale of his Units
except to the extent that such interest or gain is from property employed
in a business, trade, profession or occupation carried on by him in the
State of New York. An individual Unit holder who resides in New York State
or City will not be subject to State or City tax on interest income derived
from the Bonds held in the Trust (except in certain limited circumstances),
although he will be subject to New York State and, depending upon his place
of residence, City tax with respect to any gains realized when Bonds are
sold, redeemed or paid at maturity or when any such Units are sold or
redeemed. In addition, an individual Unit holder residing in New York State
or City will not be subject to State or City income tax on any proceeds
paid under the insurance policy or policies described above with respect to
the Trust which represent maturing interest on defaulted obligations held
by the Trustee if, and to the same extent as, such interest would have been
so excludible if paid by the issuer of the defaulted obligations. A New
York State or City resident should determine his basis and holding period
for his Units for New York State and City tax purposes in the same manner
as for Federal tax purposes.
The above opinion of Battle Fowler LLP as to the tax status of the Trust is
not affected by the provision of the Trust Agreement that authorizes the
acquisition of Replacement Bonds or by the implementation of the option
automatically to reinvest principal and interest distributions from the Trust
pursuant to the Automatic Accumulation Plan, described under 'Automatic
Accumulation Account' in this Part B.
Among other things, the Code provides for the following: (1) interest on
certain private activity bonds issued after August 7, 1986 is included in the
calculation of the individual's alternative minimum tax (currently taxed at a
rate of up to 28%); none of the Bonds in the Trust is a Private Activity Bond
the interest on which is subject to the alternative minimum tax; (2) interest on
certain Private Activity Bonds issued after August 7, 1986 is included in the
calculation of the corporate alternative minimum tax and 75% of the amount by
which adjusted current earnings (including interest on all tax-exempt bonds,
such as the Bonds) exceed alternative minimum taxable income, as modified for
this calculation, will be included in alternative minimum taxable income.
Interest on the Bonds is includible in the adjusted current earnings of a
corporation for purposes of such alternative minimum tax. The Code does not
otherwise require corporations, and does not require taxpayers other than
corporations, including individuals, to treat interest on the Bonds as an item
of tax preference in computing an alternative minimum tax; (3) subject to
certain exceptions, no financial institution is allowed a deduction for that
portion of the institution's interest expense allocable to tax-exempt interest
on tax-exempt bonds acquired after August 7, 1986; (4) the amount of the
deduction allowed to property and casualty insurance companies for underwriting
loss is decreased by an amount determined with regard to tax-exempt interest
income and the deductible portion of dividends received by such companies; (5)
all taxpayers are required to report for informational purposes on their Federal
income tax returns the amount of tax-exempt interest they receive; (6) an issuer
must meet certain requirements on a continuing basis in order for interest on a
tax-exempt bond to be tax-exempt, with failure to meet such requirements
resulting in the loss of tax exemption; and (7) a branch profits tax on U.S.
branches of foreign corporations is implemented which, because of the manner in
which the branch profits tax is calculated, may have the effect of subjecting
the U.S. branch of a foreign corporation to Federal income tax on the interest
on bonds otherwise exempt from such tax.
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The Superfund Revenue Act of 1986 (the 'Superfund Act') imposes 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 before 1996, 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.
Section 86 of the Code provides that a portion of social security benefits
is includible in taxable income for taxpayers whose 'modified adjusted gross
income' combined with a portion of their social security benefits exceeds a base
amount. The base amount is $25,000 for an individual, $32,000 for a married
couple filing a joint return and zero for married persons filing separate
returns. Under Section 86 of the Code, interest on tax-exempt bonds is to be
added to adjusted gross income for purposes of determining whether an
individual's income exceeds the base amount above which a portion of the
benefits would be subject to tax.
In addition, certain 'S Corporations', with accumulated earnings and
profits from Subchapter C years, may be subject to minimum tax on excess passive
income, including tax-exempt interest, such as interest on the Bonds.
At the time of the original issuance of the Bonds held by the Trust,
opinions relating to the validity of the Bonds and the exemption of interest
thereon from regular Federal income tax were or (with respect to 'when issued'
Bonds) were to be rendered by bond counsel to the issuing governmental
authorities. Neither the the Sponsors nor their special counsel have made any
review of proceedings relating to the issuance of such Bonds or the basis for
bond counsel's opinions.
Under Section 265 of the Code, if borrowed funds are used by a Unit holder
to purchase or carry Units of the Trust, interest on such indebtedness will not
be deductible for Federal income tax purposes. Under rules used by the Internal
Revenue Service, the purchase of Units may be considered to have been made with
borrowed funds even though the borrowed funds are not directly traceable to the
purchase of Units. Similar rules are applicable for purposes of state and local
taxation. Also, under Section 291 of the Code, certain financial institutions
that acquire Units may be subject to a reduction in the amount of interest
expense that would otherwise be allowable as a deduction for Federal income tax
purposes. Investors with questions regarding this issue should consult with
their tax advisors.
The Trust may contain Bonds issued with original issue discount. The Code
requires holders of tax-exempt obligations issued with original issue discount,
such as the Trust, to accrue tax-exempt original issue discount by using the
constant interest method provided for the holders of taxable obligations and to
increase the basis of a tax-exempt obligation by the amount of accrued
tax-exempt original issue discount. These provisions are applicable to
obligations issued after September 3, 1982 and acquired after March 1, 1984. The
Trust's tax basis in a Bond is increased by any accrued original issue discount
as is a Unit holder's tax basis in his Units. For Bonds issued after June 9,
1980 that are redeemed prior to maturity, the difference between the Trust's
basis, as adjusted, and the amount received will be taxable gain or loss to the
Unit holders.
Unit holders should consult their own tax advisors with respect to the
state and local tax consequences of owning original issue discount bonds. It is
possible that under applicable provisions governing determination of such state
and local taxes, interest on tax-exempt bonds such as any Bonds issued with
original issue discount may be deemed to be received in the year of accrual even
though there is no corresponding cash payment.
If a Unit holder's tax cost for his pro rata interest in a Bond exceeds his
pro rata interest in the Bond's face amount, the Unit holder will be considered
to have purchased his pro rata interest in the Bond at a 'premium.' The Unit
holder will be required to amortize any premium relating to his pro rata
interest in a Bond prior to the maturity of the Bond. Amortization of premium on
a Bond will reduce a Unit holder's tax basis for his pro rata interest in the
Bond,
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but will not result in any deduction from the Unit holder's income. Thus, for
example, a Unit holder who purchases a pro rata interest in a Bond at a premium
and resells it at the same price will recognize taxable gain equal to the
portion of the premium that was amortized during the period the Unit holder is
considered to have held such interest.
Bond premium must be amortized under the method the Unit holder regularly
employs for amortizing bond premium (assuming such method is reasonable). With
respect to a callable bond, the premium must be computed with respect to the
call price and be amortized to the first call date (and successively to later
call dates based on the call prices for those dates).
In the case of Bonds that are private activity bonds, the opinions of bond
counsel to the respective issuing authorities indicate that interest on such
Bonds is exempt from regular federal income tax. However, interest on such Bonds
will not be exempt from regular federal income tax for any period during which
such Bonds are held by a 'substantial user' of the facilities financed by the
proceeds of such Bonds or by a 'related person' thereof within the meaning of
the Code. Therefore, interest on any such Bonds allocable to a Unit holder who
is such a 'substantial user' or 'related person' thereof will not be tax-exempt.
Furthermore, in the case of Bonds that qualify for the 'small issue' exemption,
the 'small issue' exemption will not be available or will be lost if, at any
time during the three-year period beginning on the later of the date the
facilities are placed in service or the date of issue, all outstanding tax-
exempt IRBs, together with a proportionate share of any present issue, of an
owner or principal user (or related person) of the facilities was determined to
have exceeded $40,000,000 on the date of issue. In the case of Bonds issued
under the $10,000,000 'small issue' exemption, interest on such Bonds will
become taxable if the face amount of the Bonds plus certain capital expenditures
exceeds $10,000,000 within 3 years of the date of issue of such Bonds.
In addition, a Bond can lose its tax-exempt status as a result of other
subsequent but unforeseeable events such as prohibited 'arbitrage' activities by
the issuer of the Bond or the failure of the Bond to continue to satisfy the
conditions required for the exemption of interest thereon from regular federal
income tax. No investigation has been made as to the current or future owners or
users of the facilities financed by the Bonds, the amount of such persons'
outstanding tax-exempt private activity bonds, or the facilities themselves, and
no assurance can be given that future events will not affect the tax-exempt
status of the Bonds. Investors should consult their tax advisors for advice with
respect to the effect of these provisions on their particular tax situation.
THE EXEMPTION OF INTEREST ON MUNICIPAL OBLIGATIONS FOR FEDERAL INCOME TAX
PURPOSES DOES NOT NECESSARILY RESULT IN EXEMPTION UNDER THE INCOME TAX LAWS OF
ANY STATE OR LOCAL GOVERNMENT. INTEREST INCOME DERIVED FROM THE BONDS IS NOT
EXCLUDED FROM NET INCOME IN DETERMINING NEW YORK STATE OR NEW YORK CITY
FRANCHISE TAXES ON CORPORATIONS OR FINANCIAL INSTITUTIONS. THE LAWS OF SUCH
STATES AND LOCAL GOVERNMENTS VARY WITH RESPECT TO THE TAXATION OF SUCH
OBLIGATIONS.
From time to time, proposals have been introduced before Congress, the
purpose of which is to restrict or eliminate the Federal income tax exemption
for interest on debt obligations similar to the Bonds in the Trust, and it can
be expected that similar proposals, including proposals for a 'flat tax' or
'consumption tax', may be introduced in the future. The Sponsors cannot predict
whether additional legislation, if any, in respect of the Federal income tax
status of interest on debt obligations may be enacted and what the effect of
such legislation would be on Bonds in the Trust.
The Revenue Reconciliation Act of 1993 was recently enacted. This Act
increases maximum marginal tax rates for individuals and corporations, extends
the authority to issue certain categories of tax-exempt bonds (qualified small
issue bonds and qualified mortgage bonds), expands a category of qualified
tax-exempt bonds (bonds for high-speed intercity rail facilities), limits the
availability of capital gain treatment for tax-exempt bonds purchased at a
market discount, and makes a variety of other changes. Prospective investors are
urged to consult their own tax advisors as to the effect of this Act on a
possible investment in the Trust.
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In South Carolina v. Baker, the U.S. Supreme Court held that the federal
government may constitutionally require states to register bonds they issue and
subject the interest on such bonds to federal income tax if not registered, and
that there is no constitutional prohibition against the federal government's
taxing the interest earned on state or other municipal bonds. The Supreme Court
decision affirms the authority of the federal government to regulate and control
bonds such as the Bonds in the Trust and to tax interest on such bonds in the
future. The decision does not, however, affect the current exemption from
taxation of the interest earned on the Bonds in the Trust in accordance with
Section 103 of the Code.
The opinions of counsel to the issuing governmental authorities to the
effect that interest on the Bonds is exempt from regular federal income tax may
be limited to law existing at the time the Bonds were issued, and may not apply
to the extent that future changes in law, regulations or interpretations affect
such Bonds. Investors are advised to consult their own advisors for advice with
respect to the effect of any legislative changes.
RIGHTS OF UNIT HOLDERS
CERTIFICATES
Ownership of Units of the Trust is evidenced by registered certificates
executed by the Trustee and the Sponsors. The Trustee is authorized to treat as
the record owner of Units that person who is registered as such owner on the
books of the Trustee. Certificates are transferable by presentation and
surrender to the Trustee properly endorsed and accompanied by a written
instrument or instruments of transfer.
Certificates may be issued in denominations of one Unit or any multiple
thereof. A Unit holder may be required to pay $2.00 per certificate reissued or
transferred and to pay any governmental charge that may be imposed in connection
with each such transfer or interchange. For new certificates issued to replace
destroyed, stolen or lost certificates, the Unit holder must furnish indemnity
satisfactory to the Trustee and must pay such expenses as the Trustee may incur.
Mutilated certificates must be surrendered to the Trustee for replacement.
DISTRIBUTION OF INTEREST AND PRINCIPAL
While interest will be distributed semi-annually or monthly, depending on
the method of distribution chosen, principal, including capital gains, will be
distributed only semi-annually; provided, however, that, other than for purposes
of redemption, no distribution need be made from the Principal Account if the
balance therein is less than $1.00 per Unit then outstanding, and that, if at
any time the pro rata share represented by the Units of cash in the Principal
Account exceeds $10.00 as of a Monthly Record Date, the Trustee shall, on the
next succeeding Monthly Distribution Date, distribute the Unit holder's pro rata
share of the balance of the Principal Account. Interest (semi-annually or
monthly) and principal, including capital gains, if any (semi-annually),
received by the Trust will be distributed on each Distribution Date to Unit
holders of record of the Trust as of the preceding Record Date who are entitled
to such distributions at that time under the plan of distribution chosen. All
distributions will be net of applicable expenses and funds required for the
redemption of Units. See 'Summary of Essential Financial Information' in Part A,
'The Trust--Expenses and Charges' and 'Rights of Unit Holders--Redemption' in
Part B.
The Trustee will credit to the Interest Account for the Trust all interest
received by the Trust, including that part of the proceeds of any disposition of
Securities which represents accrued interest. Other receipts of the Trust will
be credited to the Principal Account for the Trust. The pro rata share of the
Interest Account of the Trust and the pro rata share of cash in the Principal
Account (other than amounts representing failed contracts as previously
discussed) represented by each Unit thereof will be computed by the Trustee each
month as of the Record Date. See 'Summary of Essential Financial Information' in
Part A. Proceeds received from the disposition of any of the Securities
subsequent
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to a Record Date and prior to the next succeeding Distribution Date will be held
in the Principal Account for the Trust and will not be distributed until the
second succeeding Distribution Date. Because interest on the Securities is not
received by the Trust at a constant rate throughout the year, any particular
interest distribution may be more or less than the amount credited to the
Interest Account of the Trust as of the Record Date. See 'Summary of Essential
Financial Information' in Part A. Persons who purchase Units between a Record
Date and a Distribution Date will receive their first distribution on the second
Distribution Date following their purchase of Units under the applicable plan of
distribution. No distribution need be made from the Principal Account if the
balance therein is less than an amount sufficient to distribute $1.00 per Unit.
The difference between the estimated net interest accrued to the first
Record Date and to the related Distribution Date is an asset of the respective
Unit holder and will be realized in subsequent distributions or upon the earlier
of the sale of such Units or the maturity, redemption or sale of Securities in
the Trust.
Purchasers of Units who desire to receive distributions on a monthly basis
may elect to do so at the time of purchase during the initial public offering
period. Those indicating no choice will be deemed to have chosen the semi-annual
distribution plan. Record dates for monthly distributions will be the fifteenth
day of the preceding month and record dates for semi-annual distributions will
be the fifteenth day of May and November.
Details of estimated interest distributions under the payment plans, on a
per Unit basis, appear in footnote 9 to the 'Summary of Essential Financial
Information' in Part A.
The plan of distribution selected by a Unit holder will remain in effect
until changed. Unit holders purchasing Units in the secondary market will
initially receive distributions in accordance with the election of the prior
owner. Each April, the Trustee will furnish each Unit holder a card to be
returned together with the Certificate by May 15 of such year if the Unit holder
desires to change his plan of distribution, and the change will become effective
on May 16 of such year for the ensuing twelve months. For a discussion of
redemption of Units, see 'Rights of Unit Holders--Redemption--Tender of Units'
in Part B.
The Trustee will, as of the fifteenth day of each month, deduct from the
Interest Account and, to the extent funds are not sufficient therein, from the
Principal Account, amounts necessary to pay the expenses of the Trust as of the
first day of such month. See 'The Trust--Expenses and Charges' in Part B. The
Trustee also may withdraw from said accounts such amounts, if any, as it deems
necessary to establish a reserve for any governmental charges payable out of the
Trust. Amounts so withdrawn shall not be considered a part of the Trust's assets
until such time as the Trustee shall return all or any part of such amounts to
the appropriate account. In addition, the Trustee may withdraw from the Interest
Account and the Principal Account such amounts as may be necessary to cover
redemption of Units by the Trustee. See 'Rights of Unit Holders--Redemption' in
Part B. Funds which are available for future distributions, payments of expenses
and redemptions are in accounts which are non-interest bearing to the Unit
holders and are available for use by the Trustee pursuant to normal banking
procedures.
Because interest on Securities in the Trust is payable at varying
intervals, usually in semi-annual installments, the interest accruing to the
Trust will not be equal to the amount of money received and available monthly
for distribution from the Interest Account to Unit holders choosing the monthly
payment plan. Therefore, on each monthly Distribution Date, the amount of
interest actually deposited in the Interest Account and available for
distribution may be slightly more or less than the monthly interest distribution
made. In order to eliminate fluctuations in monthly interest distributions
resulting from such variances during the first year of the Trust, the Trustee is
required by the Trust Agreement to advance such amounts as may be necessary to
provide monthly interest distributions of approximately equal amounts. In
addition, the Trustee has agreed to advance sufficient funds to the Trust in
order to reduce the amount of time before monthly distributions of interest to
Unit holders commence. The Trustee will be reimbursed,
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without interest, for any such advances from funds available from the Interest
Account of the Trust. The Trustee's fee takes into account the costs
attributable to the outlay of capital needed to make such advances.
In order to acquire certain of the Securities subject to contract, it may
be necessary to pay on the settlement dates for delivery of such Securities
amounts covering accrued interest on such Securities which exceed the amounts
paid by Unit holders (which excess will be made available under a letter of
credit furnished by the Sponsors on the Date of Deposit). The Trustee has agreed
to pay for any amounts necessary to cover any such excess and will be reimbursed
therefor (without interest) when funds become available from interest payments
on the particular Securities with respect to which such payments may have been
made. Also, since interest on such Securities in the portfolio of the Trust (see
'The Portfolio' in Part A) does not begin accruing as tax-exempt interest income
to the benefit of Unit holders until such Bonds' respective dates of delivery
(accrued interest prior to delivery being treated under the Code as a return of
principal), the Trustee will, in order to cover interest treated as a return of
principal, adjust its fee downward in an amount equal to the amount of interest
that would have so accrued as tax-exempt interest (if not treated as a return of
principal) on such Securities between the date of settlement for the Units and
such dates of delivery.
In addition, because of the varying interest payment dates of the
Securities comprising the Trust portfolio, accrued interest at any point in
time, subsequent to the recovery of any advancements of interest made by the
Trustee, will be greater than the amount of interest actually received by the
Trust and distributed to Unit holders. Therefore, there will usually remain an
item of accrued interest that is added to the value of the Units. If a Unit
holder sells all or a portion of his Units he will be entitled to receive his
proportionate share of the accrued interest from the purchaser of his Units.
Similarly, if a Unit holder redeems all or a portion of his Units, the
Redemption Price per Unit which he is entitled to receive from the Trustee will
also include accrued interest on the Securities. Thus, the accrued interest
attributable to a Unit will not be entirely recovered until the holder either
redeems or sells such Unit or until the Trust is terminated.
EXPENSES AND CHARGES
Initial Expenses
At no cost to the Trust, the Sponsors have borne all the expenses of
creating and establishing the Trust and the Underwriting Account, including the
cost of the initial preparation, printing and execution of the Trust Agreement
and the certificates for Units, the fees of the Evaluator during the initial
public offering, 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 the
'Summary of Essential Financial Information' in Part A. The Sponsors' fee, which
is earned for portfolio supervisory services, is based on the face amount of
Securities in the Trust at December 1 of each year. The Sponsors' fee, which is
not to exceed the maximum amount set forth under the 'Summary of Essential
Financial Information' for the Trust, may exceed the actual costs of providing
portfolio supervisory services for the Trust, but at no time will the total
amount the Sponsors receive for portfolio supervisory services rendered to all
series of Empire State Municipal Exempt Trust in any calendar year exceed the
aggregate cost to them of supplying such services in such year.
The Trustee will receive for its ordinary recurring services to the Trust
an annual fee in the amount set forth in the 'Summary of Essential Financial
Information' for the Trust; provided, however, that such fees may be adjusted as
set forth under the 'Summary of Essential Financial Information'. There is no
minimum fee and, except as hereinafter set forth, no maximum fee. For a
discussion of certain benefits derived by the Trustee from the Trust's funds,
see 'Rights of Unit Holders--Distribution of Interest and Principal' in Part B.
For a discussion of the services performed by the
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Trustee pursuant to its obligations under the Trust Agreement, reference is made
to the material set forth under 'Rights of Unit Holders' in Part B.
The Trustee's and Evaluator's fees are payable monthly on or before each
Distribution Date and the Sponsors' annual fee is payable annually on December
1, each from the Interest Account to the extent funds are available and then
from the Principal Account. These fees may be increased without approval of the
Unit holders by amounts not exceeding proportionate increases in consumer prices
for services as measured by the United States Department of Labor's Consumer
Price Index entitled 'All Services Less Rent'; except no such increase in the
Trustee's fee will be so made for the sole purpose of making up any downward
adjustment therein as described in 'Summary of Essential Financial Information'.
If the balances in the Principal and Interest Accounts are insufficient to
provide for amounts payable by the Trust, or amounts payable to the Trustee
which are secured by its prior lien on the Trust, the Trustee is permitted to
sell Bonds to pay such amounts.
Insurance Premiums
The cost of the MBIA Insurance Corporation insurance obtained by the Trust,
based on the aggregate amount of Bonds in the Trust as of the Date of Deposit,
is set forth in the 'Summary of Essential Financial Information'. Premiums,
which are obligations of the Trust, are payable monthly by the Trustee on behalf
of the Trust. As Securities in the portfolio mature, are redeemed by their
respective issuers or are sold by the Trustee, the amount of the premium will be
reduced in respect of those Securities no longer owned by and held in the Trust.
The Trust does not incur any premium expense for any insurance which has been
obtained by an issuer of a Pre-insured Bond, since the premium or premiums for
such insurance have been paid by such issuer or other party. Pre-insured Bonds,
however, are additionally insured by the Trust. No premium will be paid by the
Trust on Bonds which are also MBIA Insurance Corporation Pre-insured Bonds or
Municipal Bond Insurance Association Pre-insured Bonds. The premium payable for
Permanent Insurance and the related custodial fee will be paid solely from the
proceeds of the sale of a Bond from the Trust in the event the Trustee exercises
the right to obtain Permanent Insurance on such Bond.
OTHER CHARGES
The following additional charges are or may be incurred by the Trust: all
expenses (including audit and counsel fees) of the Trustee incurred in
connection with its activities under the Trust Agreement, including annual audit
expenses by independent public accountants selected by the Sponsors (so long as
the Sponsors maintain a secondary market, the Sponsors will bear any audit
expense which exceeds 50 cents per Unit), the expenses and costs of any action
undertaken by the Trustee to protect the Trust and the rights and interests of
the Unit holders; fees of the Trustee for any extraordinary services performed
under the Trust Agreement; indemnification of the Trustee for any loss or
liability accruing to it without willful misconduct, bad faith, or gross
negligence on its part, arising out of or in connection with its acceptance or
administration of the Trust; and all taxes and other governmental charges
imposed upon the Securities or any part of the Trust (no such taxes or charges
are being levied or made or, to the knowledge of the Sponsors, contemplated).
The above expenses, including the Trustee's fee, when paid by or owing to the
Trustee, are secured by a lien on the Trust. In addition, the Trustee is
empowered to sell Securities in order to make funds available to pay all
expenses.
REPORTS AND RECORDS
The Trustee shall furnish Unit holders of the Trust in connection with each
distribution a statement of the amount of interest, if any, and the amount of
other receipts, if any, which are being distributed, expressed in each case as a
dollar amount per Unit. Within a reasonable time after the end of each calendar
year, the Trustee will furnish to each person who at any time during the
calendar year was a Unit holder of record, a statement providing the following
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information: (1) as to the Interest Account: interest received (including
amounts representing interest received upon any disposition of Securities and
any earned original issue discount), and, if the issuers of the Securities are
located in different states or territories, the percentage of such interest by
such states or territories, deductions for payment of applicable taxes and for
fees and expenses of the Trust (including insurance costs), redemptions of Units
and the balance remaining after such distributions and deductions, expressed
both as a total dollar amount and as a dollar amount representing the pro rata
share of each Unit outstanding on the last business day of such calendar year;
(2) as to the Principal Account: the dates of disposition of any Securities and
the net proceeds received therefrom (including any unearned original issue
discount but excluding any portion representing interest, with respect to the
Trust the premium attributable to the Trustee's exercise of the right to obtain
Permanent Insurance and any related custodial fee), deductions for payments of
applicable taxes and for fees and expenses of the Trust, purchase of Replacement
Bonds, redemptions of Units, the amount of any 'when issued' interest treated as
a return of capital and the balance remaining after such distributions and
deductions, expressed both as a total dollar amount and as a dollar amount
representing the pro rata share of each Unit outstanding on the last business
day of such calendar year; (3) a list of the Securities held and the number of
Units outstanding on the last business day of such calendar year; (4) the
Redemption Price per Unit based upon the last computation thereof made during
such calendar year; and (5) amounts actually distributed during such calendar
year from the Interest Account and from the Principal Account, separately
stated, expressed both as total dollar amounts and as dollar amounts
representing the pro rata share of each Unit outstanding.
The Trustee shall keep available for inspection by Unit holders at all
reasonable times during usual business hours, books of record and account of its
transactions as Trustee including records of the names and addresses of Unit
holders of the Trust, certificates issued or held, a current list of Securities
in the Trust and a copy of the Trust Agreement.
REDEMPTION
Tender of Units
While it is anticipated that Units can be sold in the secondary market,
Units may also be tendered to the Trustee for redemption at its corporate trust
office at 101 Barclay Street, New York, New York 10286, upon payment of any
applicable tax. At the present time there are no specific taxes related to the
redemption of the Units. No redemption fee will be charged by the Sponsors or
the Trustee. Units redeemed by the Trustee will be cancelled.
Certificates for Units to be redeemed must be delivered to the Trustee and
must be properly endorsed and accompanied by a written instrument of transfer.
Thus, redemption of Units cannot be effected until certificates representing
such Units have been delivered to the person seeking redemption (see 'Rights of
Unit Holders--Certificates' in Part B). Unit holders must sign exactly as their
names appear on the face of the certificate with signature(s) guaranteed by an
officer of a national bank or trust company, a member firm of either the New
York, Midwest or Pacific Stock Exchange, or in such other manner as may be
acceptable to the Trustee. In certain instances the Trustee may require
additional documents such as, but not limited to, trust instruments,
certificates of death, appointments as executor or administrator or certificates
of corporate authority.
Within seven calendar days following such tender, or if the seventh
calendar day is not a business day, on the first business day prior thereto, the
Unit holder will be entitled to receive in cash an amount for each Unit tendered
equal to the Redemption Price per Unit computed as of the Evaluation Time set
forth in the 'Summary of Essential Financial Information' as of the next
subsequent Evaluation Time. See 'Redemption--Computation of Redemption Price per
Unit.' The 'date of tender' is deemed to be the date on which Units are received
by the Trustee, except that as regards Units received after the Evaluation Time
on the New York Stock Exchange, the date of tender is the next day on which such
Exchange is open for trading or the next day on which there is a sufficient
degree of trading in Units of the Trust, and such Units will be deemed to have
been tendered to the Trustee on such day for redemption at the
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Redemption Price computed on that day. For information relating to the purchase
by the Sponsors of Units tendered to the Trustee for redemption at prices in
excess of the Redemption Price, see 'Redemption--Purchase by the Sponsors of
Units Tendered for Redemption' in Part B.
Accrued interest paid on redemption shall be withdrawn from the Interest
Account, or, if the balance therein is insufficient, from the Principal Account.
All other amounts paid on redemption shall be withdrawn from the Principal
Account. The Trustee is empowered to sell Securities in order to make funds
available for redemption. Such sales, if required, could result in a sale of
Securities by the Trustee at a loss. To the extent Securities are sold, the size
and diversity of the Trust will be reduced.
If the Trustee exercises the right to obtain Permanent Insurance on a Bond
in the Trust, such Bond will be sold from the Trust on an insured basis. In the
event the Trustee does not exercise the right to obtain Permanent Insurance on a
Bond, such Bond will be sold from the Trust on an uninsured basis, since the
MBIA Insurance Corporation insurance obtained by the Trust covers the timely
payment of principal and interest when due on the Bonds only while the Bonds are
held in and owned by the Trust. If the Trustee does not obtain Permanent
Insurance on a Defaulted Bond, to the extent that Bonds which are current in
payment of interest are sold from the Trust portfolio in order to meet
redemption requests and Defaulted Bonds are retained in the Portfolio in order
to preserve the related insurance protection applicable to said Bonds, the
overall value of the Bonds remaining in the Trust will tend to diminish. See
'Sponsors--Responsibility' in Part B for the effect of selling Defaulted Bonds
to meet redemption requests.
The Trustee reserves the right to suspend the right of redemption and to
postpone the date of payment of the Redemption Price per Unit for any period
during which the New York Stock Exchange is closed, other than weekend and
holiday closings, or during which trading on that Exchange is restricted or
during which (as determined by the Securities and Exchange Commission by rule or
regulation) an emergency exists as a result of which disposal or evaluation of
the underlying Bonds is not reasonably practicable, or for such other periods as
the Securities and Exchange Commission has by order permitted.
Because insurance obtained by the Trust terminates as to Bonds which are
sold by the Trustee, and because the insurance obtained by the Trust does not
have a realizable cash value which can be used by the Trustee to meet
redemptions of Units, under certain circumstances the Sponsors may apply to the
Securities and Exchange Commission for an order permitting a full or partial
suspension of the right of Unit holders to redeem their Units if a significant
portion of the Bonds in the Trust is in default in payment of principal or
interest or in significant risk of such default. No assurances can be given that
the Securities and Exchange Commission will permit the Sponsors to suspend the
rights of Unit holders to redeem their Units, and without the suspension of such
redemption rights when faced with excessive redemptions the Sponsors may not be
able to preserve the benefits of the Trust's insurance on Defaulted Bonds.
Computation of Redemption Price per Unit
The Redemption Price per Unit is determined by the Trustee on the basis of
the bid prices of the Securities in the Trust, while the Public Offering Price
of Units during the initial offering period is determined on the basis of the
offering prices of the Securities, both as of the Evaluation Time on the day any
such determination is made. The bid prices of the Securities may be expected to
be less than the offering prices. This Redemption Price per Unit is each Unit's
pro rata share, determined by the Trustee, of: (1) the aggregate value of the
Securities in the Trust (determined by the Evaluator as set forth below), except
for those cases in which the value of insurance has been included, (2) cash on
hand in the Trust (other than cash covering contracts to purchase Securities),
and (3) accrued and unpaid interest on the Securities as of the date of
computation, less (a) amounts representing taxes or governmental charges payable
out of the Trust, (b) the accrued expenses of the Trust, and (c) cash held for
distribution to Unit holders of record as of a date
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prior to the evaluation. The Evaluator may determine the value of the Securities
in the Trust (1) on the basis of current bid prices for the Securities, (2) if
bid prices are not available for any Securities, on the basis of current bid
prices for comparable bonds, (3) by appraisal, or (4) by any combination of the
above. In determining the Redemption Price per Unit no value will be assigned to
the portfolio insurance obtained by the Trust on the Bonds in the Trust unless
such Bonds are in default in payment of principal or interest or in significant
risk of such default. On the other hand, Pre-insured Bonds in the Trust are
entitled at all times to the benefits of insurance obtained by their respective
issuers so long as the Pre-insured Bonds are outstanding and the insurer
continues to fulfill its obligations, and such benefits are reflected and
included in the market value of Pre-insured Bonds. For a description of the
situations in which the Evaluator may value the insurance obtained by the Trust,
see 'Public Offering--Offering Price' in this Part B.
The difference between the bid and offering prices of the Securities may be
expected to average 1 1/2% of face amount. In the case of actively traded bonds,
the difference may be as little as 1/2 of 1%, and in the case of inactively
traded bonds such difference usually will not exceed 3%. On the business day
prior to the date of this Prospectus, the aggregate bid side evaluation was
lower than the aggregate offering side evaluation by the amount set forth in
footnote 6 to the 'Portfolio'. For this reason, among others, the price at which
Units may be redeemed could be less than the price paid by the Unit holder. On
the Date of Deposit the aggregate current offering price of such Securities per
Unit exceeded the bid price of such Securities per Unit by the amount set forth
under 'Summary of Essential Financial Information'.
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 Offerin-- Market for Units' in this Part B). Units held by
the Sponsors may be tendered to the Trustee for redemption as any other Units,
provided that the Sponsors shall not receive for Units purchased as set forth
above a higher price than they paid, plus accrued interest.
The offering price of any Units resold by the Sponsors will be the Public
Offering Price determined in the manner provided in this Prospectus (see 'Public
Offering--Offering Price' in Part B). Any profit resulting from the resale of
such Units will belong to the Sponsors which likewise will bear any loss
resulting from a lower offering or redemption price subsequent to its
acquisition of such Units (see 'Public Offering--Sponsors' and Underwriters'
Profits' in this Part B).
EXCHANGE OPTION
The Sponsors of the series of Empire State Municipal Exempt Trust,
(including the series of Municipal Exempt Trust, the predecessor trust to Empire
State Municipal Exempt Trust) (the 'Exchange Trusts') are offering Unit holders
of the Exchange Trusts for which the Sponsors are maintaining a secondary market
an option to exchange a Unit of any series of the Exchange Trusts for a Unit of
a different series of the Exchange Trusts being offered by the Sponsors (other
than in the initial offering period) at a Public Offering Price generally based
on the bid prices of the underlying Securities divided by the number of Units
outstanding (see 'Public Offering--Markets for Units') plus a fixed sales charge
of $15 per Unit (in lieu of the normal sales charge). However, a Unit holder
must have held his Unit for a period of at least six months in order to exercise
the exchange option or agree to pay a sales charge based on the greater of $15
per Unit or an amount which together with the initial sales charge paid in
connection with the acquisition of Units being exchanged equals the normal sales
charge of the series into which the investment is being converted,
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determined as of the date of the exchange. Such exchanges will be effected in
whole Units only. Any excess proceeds from the Units being surrendered will be
returned, and the Unit holder will not be permitted to advance any new money in
order to complete an exchange. The Sponsors reserve the right to modify, suspend
or terminate this plan at any time without further notice to the Unit holders.
In the event the exchange option is not available to a Unit holder at the time
he wishes to exercise it, the Unit holder will be immediately notified and no
action will be taken with respect to his Units without further instructions from
the Unit holder.
Unit holders are urged to consult their own tax advisors as to the tax
consequences of exchanging Units.
AUTOMATIC ACCUMULATION ACCOUNT
The Sponsors have entered into an arrangement (the 'Plan') with Empire
Builder Tax Free Bond Fund (the 'Empire Builder') which permits Unit holders of
the Trust to elect to have distributions from Units in the Trust automatically
reinvested in shares of the Empire Builder. The Empire Builder is an open-end,
non-diversified investment company whose investment objective is to seek as high
a level of current income exempt from Federal income tax, New York State and New
York City income taxes as is believed to be consistent with preservation of
capital. It is the policy of the Empire Builder to invest primarily in debt
securities the interest income from which is exempt from such taxes.
The Empire Builder has an investment objective which differs in certain
respects from that of the Trust. The bonds purchased by the Empire Builder will
be of 'investment grade' quality--that is, at the time of purchase by the Empire
Builder, such bonds either will be rated not lower than the four highest ratings
of either Moody's (Aaa, Aa, A or Baa) or Standard & Poor's (AAA, AA, A or BBB)
or will be unrated bonds which at the time of purchase are judged by the Empire
Builder's investment advisor to be of comparable quality to bonds rated within
such four highest grades. It is a fundamental policy of the Empire Builder that
under normal market conditions at least 90% of the income distributed to its
shareholders will be exempt from Federal income tax, New York State and New York
City personal income taxes. However, during times of adverse market conditions,
when the Empire Builder is investing for temporary defensive purposes in
obligations other than New York tax-exempt bonds, more than 10% of the Empire
Builder's income distributions could be subject to Federal income tax, New York
State and/or New York City income taxes, as described in the current prospectus
relating to the Empire Builder (the 'Empire Builder Prospectus'). Glickenhaus &
Co. ('Glickenhaus'), a sponsor of the Trust, acts as the investment adviser and
distributor for the Empire Builder.
Each Unit holder may request from The Bank of New York (the 'Plan Agent'),
a copy of the Empire Builder Prospectus describing the Empire Builder and a form
by which such Unit holder may elect to become a participant ('Participant') in
the Plan. Thereafter, as directed by such person, distributions on the
Participant's Units will, on the applicable distribution date, automatically be
applied as of that date by the Trustee to purchase shares (or fractions thereof)
of the Empire Builder at a net asset value as computed as of the close of
trading on the New York Stock Exchange on such date, as described in the Empire
Builder Prospectus. Unless otherwise indicated, new Participants in the Empire
Builder Plan will be deemed to have elected the monthly distribution plan with
respect to their Units. Confirmations of all transactions undertaken for each
Participant in the Plan will be mailed to each Participant by the Plan Agent
indicating distributions and shares (or fractions thereof) of the Empire Builder
purchased on his behalf. A Participant may at any time prior to ten days
preceding the next succeeding distribution date, by so notifying the Plan Agent
in writing, elect to terminate his participation in the Plan and receive future
distributions on his Units in cash. There will be no charge or other penalty for
such termination. The Sponsors, the Trustee, the Empire Builder and Glickenhaus,
as investment advisor for Empire Builder, each will have the right to terminate
this Plan at any time for any reason. The reinvestment of distributions from the
Trust through the Plan will not affect the income tax status of
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such distributions. For more complete information about investing in the Empire
Builder through the Plan, including charges and expenses, return the enclosed
card for a copy of the Empire Builder Prospectus. Read it carefully before you
decide to participate.
SPONSORS
Glickenhaus and Lebenthal are the Sponsors of Empire State Municipal Exempt
Trust, Series 10 and all subsequent series.
Glickenhaus, a New York limited partnership, is engaged in the underwriting
and securities brokerage business, and in the investment advisory business. It
is a member of the New York Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. and is an associate member of the American Stock
Exchange. Glickenhaus acts as a sponsor for successive Series of The Municipal
Insured National Trusts and for the prior series of Empire State Municipal
Exempt Trust including those sold under the name of Municipal Exempt Trust, New
York Exempt Series 1, New York Series 2 and New York Series 3. Glickenhaus, in
addition to participating as a member of various selling groups of other
investment companies, executes orders on behalf of investment companies for the
purchase and sale of securities of such companies and sells securities to such
companies in its capacity as a broker or dealer in securities.
Lebenthal, a New York corporation originally organized as a New York
partnership in 1925, has been buying and selling municipal bonds for its own
account as a dealer for over 67 years; Lebenthal also buys and sells securities
as an agent and participates as an underwriter in public offerings of municipal
bonds. It acted as a sponsor of Empire State Tax Exempt Bond Trust, Series 8 and
successive Series of The Municipal Insured National Trust through Series 28.
Lebenthal is registered as a broker/dealer with the Securities and Exchange
Commission and various state securities regulatory agencies and is a member of
the National Association of Securities Dealers, Inc. and Securities Investors
Protection Corp.
Limitations on Liability
The Sponsors are jointly and severally liable for the performance of their
obligations arising from their responsibilities under the Trust Agreement, but
will be under no liability to the Unit holders for taking any action or
refraining from any action in good faith or for errors in judgment; nor will
they be responsible in any way for depreciation or loss incurred by reason of
the sale of any Bonds, except in cases of their willful misconduct, bad faith,
gross negligence or reckless disregard for their obligations and duties. See
'The Trust--Portfolio' and 'Sponsors--Responsibility' in Part B.
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[ALTERNATE PAGE]
determined as of the date of the exchange. Such exchanges will be effected in
whole Units only. Any excess proceeds from the Units being surrendered will be
returned, and the Unit holder will not be permitted to advance any new money in
order to complete an exchange. The Sponsors reserve the right to modify, suspend
or terminate this plan at any time without further notice to the Unit holders.
In the event the exchange option is not available to a Unit holder at the time
he wishes to exercise it, the Unit holder will be immediately notified and no
action will be taken with respect to his Units without further instructions from
the Unit holder.
Unit holders are urged to consult their own tax advisors as to the tax
consequences of exchanging Units.
AUTOMATIC ACCUMULATION ACCOUNT
For Unit holders of the Trust who are clients of Lebenthal & Co., Inc., the
Sponsors have entered into an arrangement (the 'Plan') with Lebenthal New York
Municipal Bond Fund (the 'Bond Fund') which permits Unit holders of the Trust to
elect to have distributions from Units in the Trust automatically reinvested in
shares of the Bond Fund. The Bond Fund is an open-end, non-diversified
investment company whose investment objective is to maximize current income
exempt from regular Federal income tax, and from New York State and New York
City income taxes, consistent with preservation of capital and with
consideration given to opportunities for capital gain. It is the policy of the
Bond Fund to invest primarily in long term investment grade tax-exempt
securities the interest income from which is exempt from such taxes.
The Bond Fund has an investment objective which differs in certain respects
from that of the Trust. The bonds purchased by the Bond Fund will be of
'investment grade' quality--that is, at the time of purchase by the Bond Fund,
such bonds either will be rated not lower than the four highest ratings of
either Moody's (Aaa, Aa, A or Baa) or Standard & Poor's (AAA, AA, A or BBB) or
will be unrated bonds which at the time of purchase are judged by the Bond
Fund's investment advisor to be of comparable quality to bonds rated within such
four highest grades. It is a fundamental policy of the Bond Fund that under
normal market conditions at least 80% of the income distributed to its
shareholders will be exempt from regular Federal income tax, and from New York
State and New York City personal income taxes. However, during times of adverse
market conditions, more than 20% of the Bond Fund's income distributions could
be subject to Federal income tax, New York State and/or New York City income
taxes, as described in the current prospectus relating to the Bond Fund (the
'Bond Fund Prospectus'). Lebenthal & Co., Inc., a sponsor of the Trust, acts as
the manager and distributor for the Bond Fund.
Each Unit holder may request from The Bank of New York (the 'Plan Agent'),
a copy of the Bond Fund Prospectus describing the Bond Fund and a form by which
such Unit holder may elect to become a participant ('Participant') in the Plan.
Thereafter, as directed by such person, distributions on the Participant's Units
will, on the applicable distribution date, automatically be applied as of that
date by the Trustee to purchase shares (or fractions thereof) of the Bond Fund
at a net asset value as computed as of the close of trading on the New York
Stock Exchange on such date, as described in the Bond Fund Prospectus. Unless
otherwise indicated, new Participants in the Bond Fund Plan will be deemed to
have elected the monthly distribution plan with respect to their Units.
Confirmations of all transactions undertaken for each Participant in the Plan
will be mailed to each Participant by the Plan Agent indicating distributions
and shares (or fractions thereof) of the Bond Fund purchased on his behalf. A
Participant may at any time prior to ten days preceding the next succeeding
distribution date, by so notifying the Plan Agent in writing, elect to terminate
his participation in the Plan and receive future distributions on his Units in
cash. There will be no charge or other penalty for such termination. The
Sponsors, the Trustee, the Bond Fund and Lebenthal & Co. Inc., as manager for
the Bond Fund, each will have the right to terminate this Plan at any time for
any reason. The reinvestment of
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[ALTERNATE PAGE]
distributions from the Trust through the Plan will not affect the income tax
status of such distributions. For more complete information about investing in
the Bond Fund through the Plan, including charges and expenses, return the
enclosed card for a copy of the Bond Fund Prospectus. Read it carefully before
you decide to participate.
SPONSORS
Glickenhaus and Lebenthal are the Sponsors of Empire State Municipal Exempt
Trust, Series 10 and all subsequent series.
Glickenhaus, a New York limited partnership, is engaged in the underwriting
and securities brokerage business, and in the investment advisory business. It
is a member of the New York Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. and is an associate member of the American Stock
Exchange. Glickenhaus acts as a sponsor for successive Series of The Municipal
Insured National Trusts and for the prior series of Empire State Municipal
Exempt Trust including those sold under the name of Municipal Exempt Trust, New
York Exempt Series 1, New York Series 2 and New York Series 3. Glickenhaus, in
addition to participating as a member of various selling groups of other
investment companies, executes orders on behalf of investment companies for the
purchase and sale of securities of such companies and sells securities to such
companies in its capacity as a broker or dealer in securities.
Lebenthal, a New York corporation originally organized as a New York
partnership in 1925, has been buying and selling municipal bonds for its own
account as a dealer for over 67 years; Lebenthal also buys and sells securities
as an agent and participates as an underwriter in public offerings of municipal
bonds. It acted as a sponsor of Empire State Tax Exempt Bond Trust, Series 8 and
successive Series of The Municipal Insured National Trust through Series 28.
Lebenthal is registered as a broker/dealer with the Securities and Exchange
Commission and various state securities regulatory agencies and is a member of
the National Association of Securities Dealers, Inc. and Securities Investors
Protection Corp.
Limitations on Liability
The Sponsors are jointly and severally liable for the performance of their
obligations arising from their responsibilities under the Trust Agreement, but
will be under no liability to the Unit holders for taking any action or
refraining from any action in good faith or for errors in judgment; nor will
they be responsible in any way for depreciation or loss incurred by reason of
the sale of any Bonds, except in cases of their willful misconduct, bad faith,
gross negligence or reckless disregard for their obligations and duties. See
'The Trust--Portfolio' and 'Sponsors--Responsibility' in Part B.
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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 are not available,
such of the Bonds in a list furnished by the Sponsors as the Trustee in its sole
discretion may deem necessary. In the event the Trustee does not exercise the
right to obtain Permanent Insurance on a Defaulted Bond or Bonds in the Trust,
to the extent that Bonds are sold which are current in payment of principal and
interest in order to meet redemption requests and Defaulted Bonds are retained
in the Trust in order to preserve the related insurance protection applicable to
said Bonds, the overall value of the Bonds remaining in the Trust's Portfolio
will tend to diminish. In the event the Trustee does not exercise the right to
obtain Permanent Insurance on a Defaulted Bond or Bonds, except as described
below and in certain other unusual circumstances for which it is determined by
the Trustee to be in the best interests of the Unit holders or if there is no
alternative, the Trustee is not empowered to sell Defaulted Bonds for which
value has been attributed for the insurance obtained by the Trust. Because of
such restrictions on the Trustee, under certain circumstances the Sponsors may
seek a full or partial suspension of the right of Unit holders to redeem their
Units. See 'Rights of Unit Holders--Redemption' in Part B. The Sponsors are
empowered, but not obligated, to direct the Trustee to dispose of Bonds in the
event of advanced refunding.
It is the responsibility of the Sponsors to instruct the Trustee to reject
any offer made by an issuer of any of the Securities to issue new obligations in
exchange and substitution for any Securities pursuant to a refunding or
refinancing plan, except that the Sponsors may instruct the Trustee to accept
such an offer or to take any other action with respect thereto as the Sponsors
may deem proper if the issuer is in default with respect to such Securities or
in the judgment of the Sponsors the issuer will probably default in respect to
such Securities in the foreseeable future.
Any obligations so received in exchange or substitution will be held by the
Trustee subject to the terms and conditions of the Trust Agreement to the same
extent as Securities originally deposited thereunder. Within five days after the
deposit of obligations in exchange or substitution for underlying Securities,
the Trustee is required to give notice thereof to each Unit holder, identifying
the obligations eliminated and the Securities substituted therefor. Except as
stated in this and the preceding paragraph and in the discussion under
'Portfolio--General Considerations' in Part B regarding the substitution of
Replacement Bonds for Failed Bonds, the acquisition by the Trust of any
securities other than the Securities initially deposited is prohibited.
If any default in the payment of principal or interest on any Bond occurs
and no provision for payment is made therefor either pursuant to the portfolio
insurance with respect to the Trust or otherwise within 30 days, the Trustee is
required to notify the Sponsors thereof. If the Sponsors fail to instruct the
Trustee to sell or to hold such Bond within 30 days after notification by the
Trustee to the Sponsors of such default, the Trustee may in its discretion sell
the defaulted Bond and not be liable for any depreciation or loss thereby
incurred. See 'The Trust--Insurance on the Bonds' in Part B.
The Sponsors may direct the Trustee to dispose of Bonds upon default in the
payment of principal or interest, institution of certain legal proceedings or
the existence of certain other impediments to the payment of Bonds, default
under other documents which may adversely affect debt service, default in the
payment of principal or interest on other obligations of the same issuer,
decline in projected income pledged for debt service on revenue Bonds, or
decline in price or the occurrence of other market factors, including advance
refunding, so that in the opinion of the Sponsors the retention of such Bonds in
the Trust would be detrimental to the interest of the Unit holders. The proceeds
from any such sales will be credited to the Principal Account for distribution
to the Unit holders.
Notwithstanding the foregoing, in connection with final distributions to
Unit holders, if the Trustee does not exercise the right to obtain Permanent
Insurance on any Defaulted Bond, because the portfolio insurance obtained by the
Trust is applicable only while Bonds so insured are held by the Trust, the price
to be received by the Trust upon the disposition of any such Defaulted Bond will
not reflect any value based on such insurance. Therefore, in connection
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with any liquidation prior to December 31, 2044, with respect to the Trust, it
shall not be necessary for the Trustee to, and the Trustee does not currently
intend to, dispose of any Bonds if retention of such Bonds, until due, shall be
deemed to be in the best interest of Unit holders, including, but not limited
to, situations in which Bonds so insured are in default and situations in which
Bonds so insured have a deteriorated market price resulting from a significant
risk of default. Since the Pre-insured Bonds in the Trust will reflect the value
of the insurance obtained by the Bond issuer, it is the present intention of the
Sponsors not to direct the Trustee to hold any Pre-insured Bonds after the date
of termination. All proceeds received, less applicable expenses, from insurance
on Defaulted Bonds in the Trust not disposed of at the date of termination will
ultimately be distributed to Unit holders of record as of such date of
termination as soon as practicable after the date such Defaulted Bonds become
due and applicable insurance proceeds have been received by the Trustee (see
'Summary of Essential Financial Information').
Agent for Sponsors
The Sponsor named as Agent for Sponsors under 'Summary of Essential
Financial Information' has been appointed by the other Sponsors as agent for
purposes of taking action under the Trust Agreement. If the Sponsors are unable
to agree with respect to action to be taken jointly by them under the Trust
Agreement and they cannot agree as to which Sponsor shall act as sole Sponsor,
then the Agent for Sponsors shall act as sole Sponsor. If one of the Sponsors
fails to perform its duties under the Trust Agreement or becomes incapable of
acting or becomes bankrupt or its affairs are taken over by public authorities,
that Sponsor is automatically discharged under the Trust Agreement and the other
Sponsors act as the Sponsors.
Resignation
Any Sponsor may resign at any time provided that at the time of such
resignation one remaining Sponsor maintains a net worth of $1,000,000 and all
the remaining Sponsors are agreeable to such resignation. Concurrent with or
subsequent to such resignation a new Sponsor may be appointed by the remaining
Sponsors and the Trustee to assume the duties of the resigning Sponsor. If, at
any time, only one Sponsor is acting under each Trust Agreement and that Sponsor
shall resign or fail to perform any of its duties thereunder or becomes
incapable of acting or becomes bankrupt or its affairs are taken over by public
authorities, then the Trustee may appoint a successor sponsor or terminate the
Trust Agreement and liquidate the Trust.
Financial Information
At September 30, 1994, the total partners' capital of Glickenhaus was
$112,898,000 (audited); and at March 31, 1994, the total stockholders' equity of
Lebenthal was $4,519,070 (audited).
The foregoing information with regard to the Sponsors relates to the
Sponsors only, and not to any series of Empire State Municipal Exempt Trust.
Such information is included in this Prospectus only for the purpose of
informing investors as to the financial responsibility of the Sponsors and their
ability to carry out their contractual obligations shown herein. More
comprehensive financial information can be obtained upon request from any
Sponsor.
TRUSTEE
The Trustee is The Bank of New York, a trust company organized under the
laws of New York, having its offices at 101 Barclay Street, New York, New York
10286 (212) 495-1784. The Bank of New York is subject to supervision and
examination by the Superintendent of Banks of the State of New York and the
Board of Governors of the Federal Reserve System, and its deposits are insured
by the Federal Deposit Insurance Corporation to the extent permitted by law. The
Trustee must be a banking corporation organized under the laws of the United
States or any state which is authorized under such laws to exercise corporate
trust powers and must have at all times an aggregate capital, surplus
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and undivided profits of not less than $5,000,000. The duties of the Trustee are
primarily ministerial in nature. The Trustee did not participate in the
selection of Securities for the Trust.
Limitations on Liability
The Trustee shall not be liable or responsible in any way for depreciation
or loss incurred by reason of the disposition of any monies, Securities or
certificates or in respect of any evaluation or for any action taken in good
faith reliance on prima facie properly executed documents except in cases of its
willful misconduct, bad faith, gross negligence or reckless disregard for its
obligations and duties. In addition, the Trustee shall not be personally liable
for any taxes or other governmental charges imposed upon or in respect of the
Trust which the Trustee may be required to pay under current or future law of
the United States or any other taxing authority having jurisdiction. (See 'The
Trust--Portfolio') in Part A.
Responsibility
For information relating to the responsibilities of the Trustee under the
Trust Agreement, reference is made to the material set forth under 'Rights of
Unit Holders,' 'Sponsors--Responsibility' and 'Sponsors--Resignation' in this
Part B.
Resignation
By executing an instrument in writing and filing the same with the
Sponsors, the Trustee and any successor may resign. In such an event the
Sponsors are obligated to appoint a successor trustee as soon as possible. If
the Trustee becomes incapable of acting or becomes bankrupt or its affairs are
taken over by public authorities, or if the Sponsors deem it to be in the best
interest of the Unit holders, the Sponsors may remove the Trustee and appoint a
successor as provided in the Trust Agreement. Such resignation or removal shall
become effective upon the acceptance of appointment by the successor trustee.
If, upon resignation of a trustee, no successor has been appointed and has
accepted the appointment within thirty days after notification, the retiring
trustee may apply to a court of competent jurisdiction for the appointment of a
successor. The resignation or removal of a trustee becomes effective only when
the successor trustee accepts its appointment as such or when a court of
competent jurisdiction appoints a successor trustee.
EVALUATOR
Both during and after the initial offering period, the Evaluator shall be
Muller Data Corporation ('Muller Data'), a New York corporation with main
offices located at 395 Hudson Street, New York, New York 10014. Muller Data is a
wholly owned subsidiary of Thomson Publishing Corporation, a Delaware
corporation.
Limitations on Liability
The Trustee and the Sponsors may rely on any evaluation furnished by the
Evaluator and shall have no responsibility for the accuracy thereof.
Determinations by the Evaluator under the Trust Agreement shall be made in good
faith upon the basis of the best information available to it; provided, however,
that the Evaluator shall be under no liability to the Trustee, the Sponsors or
Unit holders for errors in judgement. But this provision shall not protect the
Evaluator in cases of its willful misconduct, bad faith, gross negligence or
reckless disregard of its obligations and duties.
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Responsibility
The Trust Agreement requires the Evaluator to evaluate the Securities on
the basis of their bid prices on each business day after the initial offering
period, when any Unit is tendered for redemption and on any other day such
evaluation is desired by the Trustee or is requested by the Sponsors. For
information relating to the responsibility of the Evaluator to evaluate the
Securities on the basis of their offering prices, see 'Public Offering--Offering
Price' in Part B.
Resignation
The Evaluator may resign or may be removed by the Sponsors and the Trustee,
and the Sponsors and the Trustee are to use their best efforts to appoint a
satisfactory successor. Such resignation or removal shall become effective upon
the acceptance of appointment by the successor evaluator. If upon resignation of
the Evaluator no successor has accepted appointment within thirty days after
notice of resignation, the Evaluator may apply to a court of competent
jurisdiction for the appointment of a successor.
AMENDMENT AND TERMINATION OF THE TRUST AGREEMENT
The Sponsors and the Trustee have the power to amend the Trust Agreement
without the consent of any of the Unit holders when such an amendment is (1) to
cure any ambiguity or to correct or supplement any provision of the Trust
Agreement which may be defective or inconsistent with any other provision
contained therein, or (2) to make such other provisions as shall not adversely
affect the interest of the Unit holders; and the Sponsors and the Trustee may
amend the Trust Agreement with the consent of the holders of Certificates
evidencing 66 2/3% of the Units then outstanding, provided that no such
amendment will reduce the interest in the Trust of any Unit holder without the
consent of such Unit holder or reduce the percentage of Units required to
consent to any such amendment without the consent of all the Unit holders. In no
event shall the Trust Agreement be amended to increase the number of Units
issuable thereunder or to permit the deposit or acquisition of securities either
in addition to or in substitution for any of the Bonds initially deposited in
the Trust, except in accordance with the provisions of each Trust Agreement. In
the event of any amendment, the Trustee is obligated to notify promptly all Unit
holders of the substance of such amendment.
The Trust shall terminate upon the maturity, redemption, sale or other
disposition, as the case may be, of the last of the Securities. The Trustee
shall notify all Unit holders when the value of the Trust as shown by any
evaluation is less than $2,000,000 or less than 20% of the value of the Trust as
of the date hereof, whichever is lower, at which time the Trust may be
terminated (i) by the consent of 66 2/3% of the Units or (ii) by the Trustee;
provided, however, that upon affirmative written notice to the Sponsors and the
Unit holders at least 33 1/3% of the Units may instruct the Trustee not to
terminate the Trust. In no event, however, may the Trust continue beyond the
Mandatory Termination Date set forth in Part A; provided, however, that prior to
such date, the Trustee shall not dispose of any Bonds if the retention of such
Bonds, until due, shall be deemed to be in the best interest of the Unit
holders. In the event of termination, written notice thereof will be sent by the
Trustee to all Unit holders. Within a reasonable period after termination, the
Trustee will sell any remaining Securities, and, after paying all expenses and
charges incurred by the Trust, will distribute to each Unit holder, upon
surrender for cancellation of his certificate for Units, his pro rata share of
the balances remaining in the Interest and Principal Accounts of the Trust.
LEGAL OPINIONS
Certain legal matters will be passed upon by Battle Fowler LLP, 75 East
55th Street, New York, New York 10022, as special counsel for the Sponsors, and
Tanner, Propp & Farber, 99 Park Avenue, New York, New York 10016, acting as
counsel for the Trustee.
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AUDITORS
The statement of condition of the Trust included in this Prospectus has
been audited by BDO Seidman, independent certified public auditors, as stated in
their report appearing herein, and has been so included in reliance upon such
report given upon the authority of that firm as experts in accounting and
auditing.
DESCRIPTION OF BOND RATINGS
The ratings are based on current information furnished to Standard & Poor's
by the issuer and obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA--Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC--Bonds rated BB, B, CCC and CC are regarded on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-): to provide more detailed indications of credit
quality, the ratings from 'AA' to 'B' may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
Indicates that continuance of the rating is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
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
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of, or the risk of default upon failure of, such completion. Accordingly, the
investor should exercise his own judgment with respect to such likelihood and
risk.
NR--Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest. SP-3:
Speculative capacity to pay principal and interest.
* Moody's Investors Service rating. A summary of the meaning of the
applicable rating symbols as published by Moody's follows:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Con. (. . .)--Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by: (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification from 'Aa' through 'B' in its corporate rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the security ranks in the lower end of its generic rating
category.
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<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
NOT CONTAINED IN PARTS A AND B OF THIS PROSPECTUS; AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE TRUSTEE, THE EVALUATOR, OR THE SPONSORS. THE TRUST
IS REGISTERED AS A UNIT INVESTMENT TRUST UNDER THE INVESTMENT COMPANY ACT OF
1940. SUCH REGISTRATION DOES NOT IMPLY THAT THE TRUST
OR ANY OF ITS UNITS HAVE BEEN GUARANTEED, SPONSORED, RECOMMENDED OR APPROVED BY
THE UNITED STATES OR ANY STATE OR ANY AGENCY OR OFFICER THEREOF.
----------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH OFFER IN SUCH STATE.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE PAGE
- -------------------------------------------------- ----
<S> <C>
PART A
Summary of Essential Information.................. A-2
Independent Auditors' Report...................... A-11
Statement of Condition............................ A-12
Portfolio......................................... A-13
Underwriting Account.............................. A-15
<CAPTION>
PART B
<S> <C>
The Trust......................................... B-1
Public Offering................................... B-21
Estimated Current Return and
Estimated Long-Term Return to Unit Holders...... B-25
Insurance on the Bonds............................ B-26
Tax Status........................................ B-29
Rights of Unit Holders............................ B-34
Automatic Accumulation Account.................... B-41
Sponsors.......................................... B-42
Trustee........................................... B-44
Evaluator......................................... B-45
Amendment and Termination of the Trust
Agreement....................................... B-46
Legal Opinions.................................... B-46
Auditors.......................................... B-47
Description of Bond Ratings....................... B-47
</TABLE>
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PARTS A AND B OF THIS PROSPECTUS DO NOT CONTAIN ALL OF THE INFORMATION SET FORTH
IN THE REGISTRATION STATEMENT AND EXHIBITS RELATING THERETO, FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C., UNDER THE SECURITIES ACT
OF 1933, AND THE INVESTMENT COMPANY ACT OF 1940, AND TO WHICH REFERENCE IS MADE.
- -------------------------------------------------------------------------------
[EMPIRE, GTD., LOGO]
EMPIRE STATE
MUNICIPAL EXEMPT TRUST
GUARANTEED SERIES
116
Sponsors:
GLICKENHAUS & CO.
6 East 43rd Street
New York, New York 10017
(212) 953-7532
LEBENTHAL & CO., INC.
120 Broadway
New York, New York 10271
(212) 425-6116
Insurer:
MBIA INSURANCE
CORPORATION
113 King Street
Armonk, New York 10504
<PAGE>
BUILDING TAX
FREE WEALTH
WITH THE
(Photo)
EMPIRE
REINVESTMENT
OPTIONS
EMPIRE BUILDER, (LOGO)
EMPIRE BUILDER TAX FREE BOND FUND
THE EMPIRE
REINVESTMENT
OPTIONS
FREE OF SALES CHARGES & REDEMPTION FEES
The
advantages
of tax-free
income*
without the
inconve-
niences
of municipal
bonds.
Empire allows you to optimize your tax-free return with the Empire
reinvestment options. The options allow you to automatically reinvest
your Empire Trust income, principal or both into The Empire Builder Tax
Free Bond Fund, free of sales charges.
The reinvested distributions will remain in The Empire Builder Tax
Free Bond Fund, compounding monthly and triple-tax free, until you need
the proceeds.** Since the Fund offers check writing ($500 minimum),
telephone redemption and automatic cash withdrawal, you're in charge of
when you liquidate the investment. Not the bond issuer. Not the broker.
REINVESTING PRINCIPAL DISTRIBUTIONS
FOR TAX-FREE INCOME
Expected and unexpected returns of principal are a way of life for most
tax-free investors. Once a tax-free bond is called and the check is cut,
the investor stops earning income. It's practically unavoidable for
municipal bond buyers. But not for Empire investors. By choosing the
automatic reinvestment option your principal distributions, no matter
how small they may be, will be automatically reinvested into The Empire
Builder Tax Free Bond Fund where they will continue to earn tax-free income.
With Empire's principal reinvestment option, there are no reinvestment
hassles or trading commissions.
REINVESTING INTEREST AND PRINCIPAL
DISTRIBUTIONS FOR TAX-FREE WEALTH
Empire Trust investors can build a tax-free nest egg by automatically
reinvesting both interest and principal from the Empire Trust into the
Empire Builder. Twelve interest income checks per year, in addition to
principal distributions, will be reinvested from your Empire Trust into
the Empire Builder. Each month, the Empire Builder's compounded
triple-tax free dividends will be added to your Empire Trust's triple
tax-free income -- automatically.
Sooner or later, you will want or need the income from your nest egg.
With Empire's interest and principal reinvestment option, there's no
need to change investments. Just ask the broker to cancel the
reinvestment option so that earned interest income is automatically
mailed out each month to your home or to your bank. It's that
convenient. It's that easy.
THE EMPIRE
BUILDER TAX FREE
BOND FUND
A mutual fund for New York investors seeking current income exempt from
federal income tax and New York State and City personal income taxes.
The Empire Builder Tax Free Bond Fund seeks as high a level of current
income exempt from federal income tax and New York State and City income
taxes as the Fund's investment advisor believes is consistent with
preservation of capital. It is also a policy of the Fund, when possible,
to seek capital appreciation and to minimize capital losses. The Fund
invests primarily in a portfolio of New York tax-exempt bonds.
*A portion of the income from the Empire Builder may be subject to the
federal Alternative Minimum Tax (AMT).
**Redemption of the Empire Builder Tax Free Bond Fund is at the then
current net asset value which may be more or less than the original
cost.
PROFESSIONAL MANAGEMENT
The Empire Builder is actively managed. The professionals weigh the
value of each bond against other offerings in the $1 trillion municipal
market. Attention is given to each bond's credit including, but not
limited to, the strength of the issuer, the financials of the
guarantor, the source(s) and use(s) of funds, and the credit evaluations
from each of the leading rating agencies.
Careful attention is also given to the Fund's average maturity. The
yield curve, illustrating the difference between short, intermediate and
long term interest rates, is constantly changing. Investors don't want
to be positioned in a fund which limits the advisor to either short or
intermediate or long maturities. The Builder's advisors are free to
adapt to changing interest rates--seeking the highest yields available on
the yield curve.
ADDITIONAL SAFETY THROUGH
AFFORDABLE DIVERSIFICATION
The Builder provides investors with affordable diversification for a
minimum investment of just $1,000 (no minimum for reinvestment from the
Empire Group). Each share, even a fractional share, represents partial
ownership of the entire portfolio. Fund holders don't expose themselves
to undue risks by limiting their investment portfolio to just one or two
different bonds.
HOW TO GET STARTED
Selecting the reinvestment option is easy. Simply call your financial
services representative, return the attached card, or call the Empire
Builder at 1-800-847-5886, for an Empire Builder prospectus. With a
prospectus under your belt we can help you maximize Empire's
convenience, liquidity and flexibility.
EMPIRE SPECIALIZES IN
NEW YORK TAX-FREE
INVESTMENTS
- --EMPIRE STATE MUNICIPAL EXEMPT TRUST
Triple-tax free income from a diversified Unit Trust of municipal
bonds.
- --EMPIRE STATE MUNICIPAL EXEMPT TRUST, GUARANTEED SERIES
Triple-tax free income from a diversified Trust of municipal
bonds--guaranteed interest and principal payments by MBIA.
- --THE EMPIRE BUILDER TAX FREE BOND FUND
Triple-tax free income from a professionally managed mutual fund.
INVESTMENT ADVISOR
& DISTRIBUTOR
Glickenhaus & Co.
6 East 43rd Street
New York, New York 10017
ADMINISTRATOR & SHAREHOLDER
SERVICING AGENT
Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
MAXIMIZING CONVENIENCE,
LIQUIDITY AND FLEXIBILITY
THE CONVENIENCE OF AUTOMATIC REINVESTMENT--investors holding
the Empire Builder, Empire State, or Empire Gtd. can automatically
reinvest income, principal or both into the Empire Builder free of sales
charge.
EMPIRE BUILDER CHECK WRITING PRIVILEGE--shares of the Builder
can be redeemed by drawing checks on the account ($500 minimum).
A FLEXIBLE INVESTMENT RETURN--allows Empire investors to
choose tax-free appreciation, tax-free income or both.
NO REDEMPTION FEE--there is no penalty or fee for withdrawal
from the Empire Builder.
CHOICE OF INCOME DISTRIBUTIONS--the Empire Trusts offer
regular monthly, semi-annual or reinvested income. The Builder offers
regular monthly, quarterly (see "Automatic Cash Withdrawal Plan") or
reinvested dividends.
PROFESSIONAL MANAGEMENT--professional management is provided
by Glickenhaus & Co., a New York based partnership with over $100
million in capital and quarter of a century experience in managing
municipal bond portfolios.
AFFORDABLE DIVERSIFICATION--each share of the Empire Builder,
or each Unit of the Empire Trust, represents a whole portfolio of New
York tax exempt municipal bonds picked and/or managed by professionals.
NO MINIMUM INVESTMENT--the Empire Builder's minimum initial
investment of $1,000 is waived for reinvested distributions from the
Empire Trusts.
AUTOMATIC CASH WITHDRAWAL PLAN--investors with over $5,000 in
the Empire Builder can have monthly or quarterly checks automatically
sent to the owner of record, or to a bank checking account.
EMPIRE BUILDER, (LOGO)
EMPIRE BUILDER TAX FREE BOND FUND
// YES!
I would like to learn more about building tax-free wealth by reinvesting
my Empire State Municipal Exempt Trust income, principal or both into
The Empire Builder Tax Free Bond Fund.
Please send me a free prospectus on The Empire Builder Tax Free Bond
Fund, containing more complete information including all charges and
expenses. I will read it carefully before I invest or send money.
Name
Street
City State Zip
Broker Name Brokerage Firm
NO POSTAGE
NECESSARY
IF MAILED
IN THE
UNITED STATES
BUSINESS REPLY MAIL
FIRST CLASS PERMIT NO. 1579 NEW YORK, NY
POSTAGE PAID BY ADDRESSEE
Empire Builder Tax Free Bond Fund
230 Park Avenue
New York, NY 10164-2102
