As filed with the Securities and Exchange Commission on March 30, 1998
Registration No. 33-36784
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20449
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 15 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 17 [X]
(Check appropriate box or boxes)
LEBENTHAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
c/o Lebenthal Asset Management, Inc.
120 Broadway
New York, New York 10271
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 425-6116
Hiram Lazar Copy to: MICHAEL ROSELLA, ESQ.
Lebenthal & Co., Inc. Battle Fowler LLP
120 Broadway 75 East 55th Street
New York, New York 10271 New York, New York 10022
(Name and Address of Agent for Service)
It is proposed that this filing will become effective: (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on [ ] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
The Registrant filed a Rule 24f-2 Notice for its fiscal year end
November 30, 1997 on or about February 12, 1998.
466160.2
<PAGE>
LEBENTHAL FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 404(c)
Part A
Item No. Prospectus Heading
1. Cover Page..........................Cover Page
2. Synopsis............................Introduction; Table of Fees and
Expenses
3. Condensed Financial
Information.........................Financial Highlights
4. General Description
of Registrant.......................General Information; Investment
Objectives, Policies and Risks
5. Management of the Fund..............Management of the Fund; Custodian,
Transfer Agent and Dividend Agent;
Distribution and Service Plan
5a. Management's Discussion of
Fund Performance....................Management of the Fund
6. Capital Stock and
Other Securities....................Description of Common Stock; How to
Purchase and Redeem Shares; General
Information; Dividends and
Distributions; Federal Income Taxes
7. Purchase of Securities
Being Offered.......................How to Purchase and Redeem Shares;
Net Asset Value; Distribution and
Service Plan
8. Redemption or Repurchase............How to Purchase and Redeem Shares
9. Legal Proceedings...................*
10. Cover Page..........................Cover Page
* Not Applicable
466160.2
ii
<PAGE>
Part B Caption in Statement of
Item No Additional Information
11. Table of Contents...................Table of Contents
12. General Information and
History.............................Management of the Fund
13. Investment Objectives,
Policies and Risks..................Investment Objectives, Policies and
Risks
14. Management of the Fund..............Management of the Fund
15. Control Persons and Principal
Holders of Securities...............Management of the Fund
16. Investment Advisory and
Other Services......................Management of the Fund; Distribution
and Service Plan; Custodian;
Transfer Agent and Dividend Agent;
Expense Limitation
17. Brokerage Allocation................Investment Objectives, Policies and
Risks
18. Capital Stock and Other
Securities..........................Description of Common Stock
19. Purchase, Redemption and Pricing
of Securities Being Offered.........How to Purchase and Redeem Shares;
Net Asset Value
20. Tax Status..........................Federal Income Taxes; New York
Income Taxes; New Jersey Income
Taxes
21. Underwriters........................Distribution and Service Plan
22. Calculations of Yield Quotations
of Money Market Funds...............Yield Quotations
23. Financial Statements................Independent Auditor's Report;
Statements of Investments;
Statements of Assets and
Liabilities; Statements of
Operations; Statement of Changes in
Net Assets; Notes to Financial
Statements
466160.2
iii
<PAGE>
LEBENTHAL 120 Broadway, New York, NY 10271
FUNDS, INC 212-425-6116
OUTSIDE NYC TOLL FREE 1-800-221-5822
PROSPECTUS March 31, 1998
Lebenthal Funds, Inc. (the "Fund") is an open-end, management investment company
currently consisting of two non-diversified portfolios and one diversified
portfolio. No assurance can be given that each of the Portfolios' objectives
will be achieved.
Lebenthal New York Municipal Bond Fund - The Lebenthal New York Municipal Bond
Fund (the "New York Portfolio") is a non-diversified municipal bond fund whose
investment objectives are to maximize income exempt from regular Federal income
taxes and from New York State and New York City personal income taxes,
consistent with preservation of capital and with consideration given to
opportunities for capital gain. The New York Portfolio seeks to achieve its
investment objectives by investing principally in long term investment grade
tax-exempt securities of New York State, Puerto Rico and other U.S. territories
and their political subdivisions, municipalities and public authorities. The New
York Portfolio offers two classes of shares for sale as further described in
this Prospectus.
Lebenthal New Jersey Municipal Bond Fund - The Lebenthal New Jersey Municipal
Bond Fund (the "New Jersey Portfolio") is a non-diversified municipal bond fund
whose investment objectives are to maximize income exempt from regular Federal
income taxes and from New Jersey gross income tax, consistent with preservation
of capital and with consideration given to opportunities for capital gain. The
New Jersey Portfolio seeks to achieve its investment objectives by investing
principally in long-term investment grade tax-exempt securities of New Jersey,
Puerto Rico and other U.S. territories and their political subdivisions,
municipalities and public authorities.
Lebenthal Taxable Municipal Bond Fund - The Lebenthal Taxable Municipal Bond
Fund (the "Taxable Portfolio") is a diversified municipal bond fund whose
investment objectives are to maximize income consistent with preservation of
capital and with consideration given to opportunities for capital gain. The
Taxable Portfolio seeks to achieve its investment objectives by investing
principally in taxable, long-term investment grade securities issued by state
and municipal governments and by their political subdivisions and public
authorities ("Taxable Municipal Obligations"). The interest on the Taxable
Municipal Obligations is includible in gross income for Federal income tax
purposes and may be subject to personal income taxes imposed by any state of the
United States or any political subdivision thereof, or by the District of
Columbia. Shares of the Portfolio may be particularly appropriate, therefore,
for retirement plans such as Individual Retirement Accounts. (See "Retirement
Plans.") Investors should consult their tax advisors concerning the taxability
of interest on the Taxable Municipal Obligations.
This Prospectus sets forth concisely the information about each of the
Portfolios that prospective investors will find helpful in making their
investment decisions and should be read and retained by investors for future
reference. The Statement of Additional Information ("SAI") has been filed with
the Securities and Exchange Commission ("SEC") and is available upon request and
without charge by calling or writing the Fund at the above address. The SEC
maintains a web site (http://www.sec.gov) that contains the SAI and other
reports and information regarding the Portfolios which have been filed
electronically with the SEC.
Lebenthal Asset Management, Inc., the Manager of the Fund, is a registered
investment adviser, and Lebenthal & Co., Inc., Distributor of its shares, is a
registered broker-dealer and investment adviser and member of the National
Association of Securities Dealers, Inc.
Shares in the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and the shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
467596.5
<PAGE>
TABLE OF FEES AND EXPENSES
Shareholder Transaction Expenses
(as a percentage of offering price)
<TABLE>
<CAPTION>
New Jersey Taxable
New York Portfolio Portfolio Portfolio
------------------ --------- ---------
Class A Shares Class B Shares Class A Shares Class A Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases 4.50% None 4.50% 4.50%
Deferred Sales Charge (as a percentage of the lower None 5%(1) None None
of original purchase price or redemption
proceeds)
Sales Load on Reinvestment Dividends None None None None
Redemption Fees None None None None
Exchange Fees None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
New Jersey Taxable
New York Portfolio Portfolio Portfolio
------------------ --------- ---------
Class A Shares Class B Shares Class A Shares Class A Shares
-------------- -------------- -------------- --------------
Management Fees - After Fee Waiver 0.23% 0.23% 0.00% 0.00%
12b-1 Fees - After Fee Waiver (2) 0.25% 1.00%(3) 0.00% 0.00%
Other Expenses - After Reimbursement 0.41% 0.32% 0.70% 0.79%
Total Fund Operating Expenses - After Fee Waivers 0.89% 1.55% 0.70% 0.79%
and Reimbursements
</TABLE>
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
<S> <C> <C> <C> <C>
New York Portfolio (Class A Shares) $54 $72 $92 $150
(Class B Shares) $66 $79 $94 $185
New Jersey Portfolio $52 $66 $82 $129
Taxable Portfolio $53 $69 $87 $139
</TABLE>
- --------------------------------------------------------------------------------
(1) The deferred sales charge is 5% in the first year, declining to 1% in the
sixth year and is eliminated thereafter.
(2) No 12b-1 fee waiver for New York Portfolio.
(3) 12b-1 fees include 0.75% of asset based sales charges and 0.25% of service
fees.
The purpose of the above fee table is to assist an investor in understanding the
various costs and expenses that an investor in each of the Portfolios will bear
directly or indirectly. The Class B Shares were activated on December 2, 1997.
The sales load is a one-time charge paid at the time of purchase of the shares.
An investor may be entitled to a reduction in such sales loads. See "How to
Purchase and Redeem Shares." The deferred sales charge is only payable if the
shares are redeemed before the end of the sixth year after purchase. See "How To
Purchase and Redeem Shares." The Manager may, at its discretion, waive all or a
portion of its fees under the Management Contract. Absent such waiver, the
Management Fee for the New Jersey Portfolio and the Taxable Portfolio would have
been .25% of average daily net assets. With respect to the New York Portfolio,
the Distributor may, at its discretion, waive all or a portion of its 12b-1 fee
for the Class A or Class B Shares under the Distribution Agreement. With respect
to the New Jersey Portfolio and the Taxable Portfolio, the Distributor may, at
its discretion, waive all or a portion of its reimbursement or service fee under
the Distribution Agreement and the Shareholder Servicing Agreement. Absent such
waivers ,the maximum reimbursement under the Distribution Agreement would have
been .10% of average daily net assets and the service fee under the Shareholder
Servicing Agreement would have been .25% of average daily net assets. The
reimbursement to the Distributor under the Distribution Agreement for The New
Jersey and The Taxable Portfolio and the 0.75% of 12b-1 fees under the
Distribution Agreement for the New York Portfolio are asset-based sales charges
and as a result long-term shareholders of each Portfolio may pay more than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc. (the "NASD"). The Manager has
voluntarily reimbursed the New Jersey and Taxable Portfolio for certain Other
Expenses. Absent such reimbursements and waivers, Other Expenses for such
Portfolios would have been 2.57% and 1.42%, respectively, and Total Fund
Operating Expenses would have been 3.27% and 2.21%, respectively. For further
discussion of these fees see "Management of the Fund" and "Distribution and
Service Plan" herein. The figures reflected in this example should not be
considered as a representation of past or future expenses. Actual expenses may
be greater or lesser than those shown above and the 5% annual return used in the
example is a hypothetical rate.
-2-
467596.5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
The following financial highlights of the New York Portfolio for the year ended
November 30, 1997 has been audited by Coopers & Lybrand, LLP, Independent
Certified Public Accountants, whose report thereon appears in the Fund's Annual
Report to Shareholders incorporated by reference in the SAI. Financial
highlights for periods prior to December 1, 1997 were audited by McGladrey &
Pullen LLP whose report thereon appears in the Fund's 1996 Annual Report to
Shareholders and is incorporated by reference in the SAI.
<TABLE>
New York Portfolio
(Class A shares only)
<CAPTION>
Year Ended November 30,
June 24,
1991
(inception)
to
November
1997 1996 1995 1994+++ 1993 1992 30, 1991
---- ---- ---- ------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 8.09 $ 7.99 $ 6.84 $ 8.03 $7.54 $7.19 $7.16
-------- -------- -------- ------- ------- ------- -------
Income from investment operations:
Net investment income 0.42 0.41 0.43 0.41 0.44 0.47 0.14
Net realized and unrealized 0.23 0.10 1.15 (1.15) 0.50 0.35 0.03
-------- -------- -------- ------- ------- ------- -------
gain (loss) on investments
Total from investment operations 0.65 0.51 1.58 (0.74) 0.94 0.82 0.17
-------- -------- -------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income (0.42) (0.41) (0.43) (0.41) (0.44) (0.47) (0.14)
Distributions from net realized -- -- -- (0.04) (0.01) -- --
-------- -------- -------- ------- ------- ------- -------
gain on investments
Total distributions (0.42) (0.41) (0.43) (0.45) (0.45) (0.47) (0.14)
-------- -------- -------- ------- ------- ------- -------
Net asset value, end of period $ 8.32 $ 8.09 $ 7.99 $ 6.84 $ 8.03 $ 7.54 7.19
======== ======== ======== ======= ======= ======= =======
Total Return (without deduction of sales load) 8.27% 6.63%** 23.56% ( 9.62%) 12.63% 11.68% 2.36%+
Ratios/Supplemental Data:
Net assets, end of period (000's omitted) $134,144 $122,611 $105,579 $75,326 $80,727 $39,350 $14,549
Ratios to average net assets:
Expenses 0.89%# 1.09% 0.99% 0.64%++ 0.20% ++ 0.17% ++ 0%*++
Net investment income 5.16% 5.17% 5.63% 5.44%++ 5.42%++ 6.08% ++ 6.08%*++
Portfolio turnover 60.80% 45.92% 148.88% 192.91% 7.88% 8.14% 0%
Bank loans
Amount outstanding at end of period (000) $0 $ 0 $1,737
Average amount of bank loans $0 797 1,857
outstanding during the period (000)
Average number of shares 14,473 11,866
outstanding during the six period (000)
Average amount of debt per share 0.06 0.16
during the period
</TABLE>
* Annualized
** Includes the effect of a capital contribution from the Fund's Manager.
Without the capital contribution the total return would have been 6.24%.
+ Not Annualized
++ If the Investment Manager had not waived fees and reimbursed expenses
and the Administrator and Distributor had not waived fees, the ratio of
operating expenses to average net assets would have been 1.10%, 1.12%, and
1.44% for the periods ended November 30, 1994, 1993, and 1992,
respectively.
+++ Effective August 15, 1994, the investment advisor changed to Lebenthal Asset
Management, Inc.
# Includes fees paid indirectly of less than 0.01% for the New York Municipal
Bond Fund.
-3-
467596.5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
The following financial highlights of the New Jersey Portfolio and the Taxable
Portfolio for the year ended November 30, 1997 have been audited by Coopers &
Lybrand, LLP, Independent Certified Public Accountants, whose report thereon
appears in the Funds' Annual Report to Shareholder's incorporated by reference
in the SAI. Financial highlights for periods prior to December 1, 1997 were
audited by McGladrey & Pullen LLP whose report thereon appears in the Fund's
1996 Annual Report to Shareholders and is incorporated by reference in the SAI.
<TABLE>
<CAPTION>
New Jersey Portfolio
Year Ended November 30,
------------------------------------------------------
1997 1996 1995 1994+*
<S> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period...................... $6.74 $6.70 $5.95 $7.16
------ ------ ------ ------
Income from investment operations:
Net investment income..................................... 0.35 0.36 0.36 0.32
Net realized and unrealized
gain (loss) on investments.............................. 0.23 0.04 0.75 (1.21)
------ ------ ------ ------
Total from investment operations.......................... 0.58 0.40 1.11 (.89)
------ ------ ------ ------
Less distributions:
Dividends from net investment income...................... (0.35) (0.36) (0.36) (0.32)
Distributions from net realized
gain on investments..................................... - - - -
Total distributions....................................... (0.35) (0.36) (0.36) (0.32)
Net asset value, end of period............................ $6.97 $6.74 $6.70 $5.95
====== ====== ====== ======
Total Return (without deduction of sales load)............ 8.84% 6.18% 19.10% (12.70%)
Ratios/Supplemental Data:
Net assets, end of period (000's omitted)................. $6,122 $5,182 $3,358 $2,145
Ratios to average net assets:
Expenses++ 0.70%** 0.63%** 0.60% 0.60%
Net investment income.................................. 5.12% 5.37% 5.64% 4.97%
Portfolio turnover..................................... 57.19% 28.56% 61.69% 291.60%
</TABLE>
<TABLE>
<CAPTION>
Taxable Portfolio
Year Ended November 30,
----------------------------------------------------
1997 1996 1995 1994+*
<S> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period............................ $7.13 $7.22 $6.34 $7.16
----- ----- ----- -----
Income from investment operations:
Net investment income........................................... 0.50 0.52 0.53 0.44
Net realized and unrealized
gain (loss) on investments.................................... 0.24 (0.09) 0.88 (0.82)
---- ---- ---- -----
Total from investment operations................................ 0.74 0.43 1.41 (0.38)
---- ---- -----
Less distributions:
Dividends from net investment income............................ (0.50) (0.52) (0.53) (0.44)
Distributions from net realized
gain on investments........................................... - - - -
Total distributions............................................. (0.50) (0.52) (0.53) (0.44)
---- ---- ----
Net asset value, end of period.................................. $7.37 $7.13 $7.22 $6.34
----- ===== ===== =====
Total Return (without deduction of sales load).................. 10.89% 6.35% 23.11% (5.45%)
Ratios/Supplemental Data:
Net assets, end of period (000's omitted)....................... $14,994 $14,607 $8,686 $2,990
Ratios to average net assets:
Expenses++ 0.79%** 0.61%** 0.60% 0.60%
Net investment income........................................ 7.06% 7.34% 7.57% 6.74%
Portfolio turnover........................................... 34.52% 44.46% 84.74% 93.73%
</TABLE>
+ Effective August 15, 1994, the investment adviser changed to Lebenthal
Asset Management, Inc.
++ If the Investment Manager had not waived fees and reimbursed expenses and
the Administrator and Distributor had not waived fees, the ratio of
operating expenses to average net assets would have been 2.57%, 3.20%,
4.13%, and 4.83% for the periods ended November 30, 1997, 1996, 1995, and
1994, respectively, for the New Jersey Bond Fund; and 1.42%, 1.63%, 2.59%,
and 3.60% for the periods ended November 30, 1997, 1996, 1995, and 1994,
respectively, for the Taxable Bond Fund.
* Fund commenced operations on December 1, 1993.
** Includes fees paid indirectly of 0.02% and 0.01% for the New Jersey Bond
Fund and the Taxable Bond Fund, respectively.
-4-
467596.5
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Fund is an open-end, management investment company comprised of two
non-diversified portfolios: New York Portfolio and New Jersey Portfolio and one
diversified portfolio: Taxable Portfolio. The New York Portfolio, the New Jersey
Portfolio and the Taxable Portfolio are sometimes referred to herein as the
"Portfolios" or the "Portfolio".
The following outlines the investment objectives, policies and risks of each of
the Portfolios. The investment objectives and policies described in this section
are fundamental and may not be changed unless approved by the holders of a
majority of the outstanding shares of the Portfolio that would be affected by
such a change. As used in this Prospectus, the term "majority of the outstanding
shares" of a Portfolio means, respectively, the vote of the lesser of (i) 67% or
more of the shares of the Portfolio present at a meeting, if the holders of more
than 50% of the outstanding shares of the Portfolio are present or represented
by proxy or (ii) more than 50% of the outstanding shares of the Portfolio.
The New York and The New Jersey Portfolios -- The New York and the New Jersey
Portfolios are non-diversified, municipal bond funds whose investment objectives
are to maximize income exempt from regular Federal income tax and from New York
State and New York City personal income taxes and New Jersey gross income tax,
respectively, to the extent consistent with the preservation of capital and with
consideration given to opportunities for capital gain. Each of the Portfolios
are subject to market risk. There can be no assurance that the Portfolios'
investment objectives will be achieved.
The New York and New Jersey Portfolios' assets will be invested primarily in
long-term investment grade tax-exempt securities issued by or on behalf of the
States of New York and New Jersey, respectively, and other states, Puerto Rico
and other U.S. territories and possessions of the United States, and their
authorities, agencies, instrumentalities and political subdivisions ("Municipal
Obligations"). The average maturity of the Municipal Obligations in which the
New York and New Jersey Portfolios invest is expected to be 15 to 25 years.
Securities with longer maturities are more likely to lead to a greater degree of
market fluctuations in the value of such securities than do securities with
shorter maturities. The New York and New Jersey Portfolios attempt to invest
100%, and as a matter of fundamental policy, invest at least 80% of the value of
their net assets in securities the interest on which is, in the opinion of bond
counsel to the issuer at the date of issuance, exempt from regular Federal
income tax and from the personal income taxes of New York State and New York
City ("New York Municipal Obligations") and from New Jersey gross income tax
("New Jersey Municipal Obligations"), respectively, with remaining maturities of
one year or more. The New York and New Jersey Portfolios may also invest up to
20% of the value of their net assets in tax-exempt securities of issuers outside
New York State and the State of New Jersey, respectively, if such securities
bear interest which is exempt from regular Federal income tax and personal
income taxes of either State. The New York and New Jersey Portfolios also
reserve the right to invest up to 20% of the value of their net assets in
securities, the interest on which is exempt from regular Federal income tax but
not New York State and City personal income taxes and New Jersey gross income
tax, respectively, and other taxable obligations. Although the Supreme Court has
determined that Congress has the authority to subject the interest on municipal
bonds to Federal income taxation, existing law excludes such interest from
regular Federal income tax. However, such tax-exempt interest may be subject to
the Federal alternative minimum tax. Securities, the interest income on which
may be subject to the Federal alternative minimum tax, may be purchased by the
New York and New Jersey Portfolios without limit. (See "Federal Income Taxes"
herein.)
The New York and New Jersey Portfolios will invest principally, without
percentage limitations, in tax-exempt securities which on the date of investment
are within the four highest credit ratings of Moody's Investors Service
("Moody's") (Aaa, Aa, A, Baa for bonds; MIG-1, MIG-2, MIG-3, MIG-4 for notes;
P-1, P-2, P-3 for commercial paper; VMIG-1, VMIG-2, VMIG-3, VMIG-4 for variable
and floating demand notes); Standard & Poor's Corporation ("S&P") (AAA, AA, A,
BBB for bonds; SP-1, SP-2, SP-3 for notes and variable and floating demand
notes; A-1, A-2, A-3, B for commercial paper); or Fitch Investors Service, Inc.,
("Fitch") (AAA, AA, A, BBB for bonds; F-1, F-2, F-3 for notes, variable floating
demand notes and commercial paper). Although bonds and notes rated in the fourth
credit rating category are commonly referred to as investment grade, they may
have speculative characteristics. Such characteristics may under certain
circumstances lead to a greater degree of market fluctuations in the value of
such securities than do higher rated tax-exempt securities of similar
maturities. In addition, changes in economic conditions or other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds. The Fund will not necessarily
dispose of a security that falls below investment grade upon the Manager's
determination as to whether retention of such a security is consistent with the
Fund's investment objectives. A detailed discussion of such characteristics and
circumstances and their effect upon the New York and New Jersey Portfolios
appears in the SAI under the heading "Description of the Portfolios' Investment
Securities." A description of the credit ratings is contained in Appendix A to
the SAI. The New York and New Jersey Portfolios may invest in tax-exempt
securities which are not rated or which do not fall into the credit ratings
noted above if, based upon credit analysis by the Manager, it is believed that
such securities are of comparable credit quality.
-5-
467596.5
<PAGE>
In unusual circumstances during adverse market conditions, as determined by
Lebenthal Asset Management, Inc., the Portfolios' investment manager ( the
"Manager"), the New York and New Jersey Portfolios may invest up to 100% of the
value of their net assets on a temporary basis in securities, the interest on
which is exempt from regular Federal income tax, but not New York State and City
personal income taxes and New Jersey gross income tax, respectively, and in
taxable fixed-income securities, the interest on which is subject to regular
Federal, state and local income tax. Such circumstances include the pending
investment or reinvestment in tax-exempt securities of proceeds of sales of
shares or sales of portfolio securities or in order to avoid the necessity of
liquidating portfolio investments to meet redemptions of shares by investors or
where market conditions due to rising interest rates or other adverse factors
warrant temporary investing for defensive purposes. Investments in taxable
securities will be substantially in securities issued or guaranteed by the
United States government (such as bills, notes and bonds), its agencies,
instrumentalities or authorities, highly-rated corporate debt securities (rated
AA, or better, by S&P or Fitch or Aa3, or better, by Moody's); prime commercial
paper (rated A-1+ by S&P, P-1 by Moody's or F-1+ by Fitch) and certificates of
deposit of the 100 largest domestic banks (in terms of assets) that are subject
to regulatory supervision by the United States government or state governments
and the 50 largest foreign banks in terms of assets with branches or agencies in
the United States. Investments in certificates of deposit of foreign banks and
foreign branches of United States banks may involve certain risks, including
different regulation, use of different accounting procedures, political or other
economic developments, exchange controls, or possible seizure or nationalization
of foreign deposits.
The New York Portfolio may also purchase Municipal Obligations consisting of
general obligation bonds, revenue bonds and private activity bonds (also known
as industrial revenue bonds). A general discussion of these types of bonds is
set forth in "Municipal Obligations" in the SAI.
The New York and New Jersey Portfolios may invest in participation interests
purchased from banks in variable rate tax-exempt securities owned by banks.
Participations are frequently backed by an irrevocable letter of credit or
guarantee of a bank that the Manager has determined meet the prescribed quality
standards for the Portfolio. The Manager will monitor the pricing, quality and
liquidity of the variable rate demand instruments held by each Portfolio,
including the securities supported by bank letters of credit or guarantees, on
the basis of published financial information, reports of rating agencies and
other analytical services to which the Manager may subscribe. Participation
interests will be purchased only if, in the opinion of counsel, interest income
on such interests will be tax-exempt when distributed as dividends to
shareholders. For further information, see the SAI.
The Taxable Portfolio. The Taxable Portfolio is a diversified municipal bond
fund whose investment objectives are to maximize income to the extent consistent
with the preservation of capital and with consideration given to opportunities
for capital gain. The Portfolio is subject to market risk. There can be no
assurance that the Taxable Portfolio's investment objectives will be achieved.
The Taxable Portfolio's assets will be invested primarily in taxable long-term
investment grade securities issued by or on behalf of states and municipal
governments, other U.S. territories and possessions of the United States, and
their authorities, agencies, instrumentalities and political subdivisions
("Taxable Municipal Obligations"). The average maturity of the Taxable Municipal
Obligations in which the Taxable Portfolio invests is currently expected to be
over 10 years. The Taxable Portfolio attempts to invest 100%, and as a matter of
fundamental policy invests at least 65%, of the value of its total assets in
taxable securities with remaining maturities of one year or more. The interest
on the Taxable Municipal Obligations is includible in gross income for federal
income tax purposes and may be subject to personal income taxes imposed by any
state of the United States or any political subdivision thereof, or by the
District of Columbia. Shares of the Taxable Portfolio may be particularly
appropriate, therefore, for retirement plans such as Individual Retirement
Accounts. (See "Retirement Plans.") Investors should consult their tax advisors
concerning the taxability of interest on the Municipal Obligations.
The Taxable Portfolio will invest principally, without percentage limitations,
in securities which on the date of investment are within the four highest credit
ratings of Moody's (Aaa, Aa, A, Baa for bonds; MIG-1, MIG-2, MIG-3, MIG-4 for
notes; P-1, P-2 for commercial paper) or S&P (AAA, AA, A, BBB for bonds; SP-1,
SP-2 for notes; A, A-1 for commercial paper). Although bonds and notes rated in
the fourth credit rating category are commonly referred to as investment grade,
they may have speculative characteristics. In addition, changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. The Fund will not necessarily dispose of a security that falls below
investment grade based upon the Manager's determination as to whether retention
of such a security is consistent with the Fund's investment objectives. A
detailed discussion of such characteristics and circumstances and their effect
upon the Taxable Portfolio appears in the SAI under the heading "Description of
the Portfolio's Investment Securities." A description of the credit ratings is
contained in Appendix A to the
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SAI. The Taxable Portfolio may invest in securities which are not rated or which
do not fall into the credit ratings noted above if, based upon credit analysis
by the Manager, it is believed that such securities are of comparable credit
quality.
In unusual circumstances during adverse market conditions, as determined by the
Manager, the Taxable Portfolio may assume a temporary defensive position in
which the Taxable Portfolio may also invest in securities issued or guaranteed
by the United States Government (such as bills, notes and bonds), its agencies,
instrumentalities or authorities, tax-exempt securities, highly-rated corporate
debt securities (rated AA, or better, by S&P or Aa3, or better, by Moody's);
prime commercial paper (rated A-1+ by S&P or P-1 by Moody's) and certificates of
deposit of the 100 largest domestic banks (in terms of assets) that are subject
to regulatory supervision by the U.S. Government or state governments and the 50
largest foreign banks in terms of assets with branches or agencies in the United
States. Investments in certificates of deposit of foreign banks and foreign
branches of U.S. banks may involve certain risks, including different
regulation, use of different accounting procedures, political or other economic
developments, exchange controls, or possible seizure or nationalization of
foreign deposits.
Portfolios - Generally. Each Portfolio may also purchase municipal leases which
may be considered illiquid securities. Investments by each Portfolio in illiquid
securities will not exceed 15% of the Portfolio's net assets. At this time, each
Portfolio does not have a current intention of investing more than 5% of its net
assets in municipal leases which are deemed to be illiquid. In the event a
Portfolio invests more than 5% of its net assets in municipal leases, the Board
of Directors must consider certain factors in determining the liquidity and
proper valuations of these obligations. For further information, see the SAI.
Each Portfolio may purchase floating rate and variable rate put option
securities including participation interests therein. Floating and variable rate
put option securities bear a variable interest rate which generally is
determined by the bond remarketing agent based on current market conditions,
although certain issuers may set rates using a designated base rate or a
specified percentage thereof. The rate of interest used will be that rate which
would enable the securities to be remarketed. These securities have a put
feature which allows the holder to demand payment of the obligation on short
notice at par plus accrued interest. Frequently, these securities are backed by
letters of credit or similar liquidity facilities provided by banks.
Each Portfolio may purchase securities on a when-issued or delayed delivery
basis. Delivery of and payment for these securities may occur a month or more
after the date of the purchase commitment. The securities are subject to market
fluctuation during this period and no interest accrues to the Portfolio until
settlement. Each Portfolio maintains with the custodian a separate account with
a segregated portfolio of liquid high grade debt securities in an amount at
least equal to these commitments. For further information, see the SAI.
When each Portfolio purchases Municipal Obligations, it may also acquire
stand-by commitments from banks and other financial institutions with respect to
such Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Portfolio's option a specified Municipal Obligation at
a specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by the Portfolio with respect to a
particular Municipal Obligation held in the Portfolio. For further information,
see the SAI.
The Fund has adopted the following fundamental investment restrictions which
apply to each Portfolio and which may not be changed unless approved by a
majority of the outstanding shares of each Portfolio of the Fund's shares that
would be affected by such a change. Each Portfolio is subject to further
investment restrictions that are set forth in the SAI. Each Portfolio may not:
1. Borrow Money. This restriction shall not apply to borrowings from banks
for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Portfolio's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at the time
the borrowing was made. While borrowings exceed 5% of the value of the
Portfolio's total assets, the Portfolio will not make any investments.
Interest paid on borrowings will reduce net income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets and only to
secure borrowings for temporary or emergency purposes.
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3. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"). The Portfolio will not
invest more than 15% of its net assets in repurchase agreements maturing
in more than seven days, variable rate demand instruments exercisable in
more than seven days and securities that are not readily marketable.
4. Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that there shall be no limitation on the
purchase of New York Municipal Obligations with respect to the New York
Portfolio and New Jersey Obligations with respect to the New Jersey
Portfolio and other obligations issued or guaranteed by the United
States government, its agencies or instrumentalities.
5. Invest in securities of other investment companies, except the Portfolio
may purchase unit investment trust securities where such unit trusts
meet the investment objectives of the Portfolio and then only up to 5%
of the Portfolio's net assets, except as they may be acquired as part of
a merger, consolidation or acquisition of assets and further except as
permitted by Section 12(d) of the Act.
Purchases and sales are made for each Portfolio whenever necessary, in the
Manager's opinion, to meet each Portfolio's objectives. For the fiscal year
ended November 30, 1997, the annual portfolio turnover rate was 60.80%, 57.19%
and 34.52% for the New York Portfolio, the New Jersey Portfolio and the Taxable
Portfolio, respectively. Portfolio turnover may involve the payment by the
Portfolios of dealer spreads or underwriting commissions, and other transaction
costs, on the sale of securities, as well as on the reinvestment of the proceeds
in other securities.
As non-diversified investment companies, the New York and New Jersey Portfolios
are not subject to any statutory restriction under the 1940 Act with respect to
investing their assets in one or relatively few issuers. This
non-diversification may present greater risks than in the case of a diversified
company. For a discussion of these "Risk Consideration" herein and in the SAI.
The New York and New Jersey Portfolios intend to maintain qualification as a
"regulated investment company" under Subchapter M of the Code. The New York and
New Jersey Portfolios will be restricted in that at the close of each quarter of
the taxable year, at least 50% of the value of each of their total assets must
be represented by cash, government securities, investment company securities and
other securities limited in respect of any one issuer to not more than 5% in
value of the total assets of the New York and New Jersey Portfolios and to not
more than 10% of the outstanding voting securities of such issuer. In addition,
at the close of each quarter of its taxable year, not more than 25% in value of
the New York and New Jersey Portfolios' total assets may be invested in
securities of one issuer other than U.S. government securities. The limitations
described in this paragraph regarding qualification as a "regulated investment
company" are not fundamental policies and may be revised to the extent
applicable Federal income tax requirements are revised. (See "Federal Income
Taxes" herein.)
As a diversified investment company, 75% of the assets of the Taxable Portfolio
is subject to the following limitations: (a) the Taxable Portfolio may not
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the United States government and its agencies and
instrumentalities, and (b) the Taxable Portfolio may not own more than 10% of
the outstanding voting securities of any one issuer. The classification of the
Taxable Portfolio as a diversified investment company is a fundamental policy of
the Taxable Portfolio and may be changed only with the approval of the holders
of a majority of the Taxable Portfolio's outstanding shares.
Risks - Generally. Investors should consider the greater risk of each of the
Portfolio's concentration versus the safety that comes with a less concentrated
investment portfolio. The Fund intends that the New York Portfolio be
concentrated in New York Municipal Obligations, the New Jersey Portfolio be
concentrated in New Jersey Municipal Obligations and the Taxable Portfolio
consist primarily of Taxable Municipal Obligations (each as defined below).
Payment of interest and preservation of capital are dependent upon the
continuing ability of New York and New Jersey and other issuers and/or obligors
of state, municipal and public authority debt obligations to meet their
obligations thereunder. Summaries of special risk factors affecting the States
of New York and New Jersey are set forth under "New York Risk Factors" and "New
Jersey Risk Factors" herein and the SAI. A summary of special risk factors
affecting Taxable Municipal Obligations is set forth under "Investment
Objectives, Policies and Risks" herein and the SAI.
New York Risk Factors. The primary purpose of investing in a portfolio of New
York Municipal Obligations is the special tax treatment accorded New York
resident individual investors. Investment in the New York Portfolio should be
made with an understanding of the risks which an investment in New York
Municipal Obligations may entail. However, payment of interest and preservation
of principal are dependent upon the continuing ability of the New York issuers
and/or obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder. Investors should consider the greater risk of
the Portfolio's concentration versus the safety that comes with a less
concentrated investment portfolio and
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<PAGE>
should compare yields available on portfolios of New York issues with those of
more diversified portfolios including out-of-state issues before making an
investment decision. For additional information, please refer to the SAI.
This summary is included for the purpose of providing a general description of
New York State and New York City credit and financial conditions. For a more
complete description of these risk factors, see "New York Risk Factors" in the
Statement of Additional Information.
The City's general obligation bonds are rated A3 by Moody's. S&P has rated the
City's general obligation bonds BBB+. Fitch has rated them A-. Such ratings
reflect only the view of Moody's, S&P and Fitch, from which an explanation of
the significance of such ratings may be obtained. The State's general obligation
long-term indebtedness is rated A2 and the State's outstanding limited liability
State lease purchase and contractual obligations are rated A3 by Moody's. S&P
has rated the State's general obligation bonds A. 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.
The fiscal health of the State is closely related to the fiscal health of its
localities, particularly the City, which have required and continue to require
significant financial assistance from the State. Over the long term, the State
and the City face serious potential economic problems. The State has long been
one of the wealthiest states in the nation. For decades, however, the State
economy has grown more slowly than that of the nation as a whole, resulting in
the gradual erosion of its relative economic affluence. The causes of this
relative decline are varied and complex, in many cases, involving national and
international developments beyond the State's control. Part of the reason for
the long-term relative decline in the State economy has been attributed to the
combined State-local tax burden, which is among the highest in the United
States. The existence of this tax burden limits the State's ability to impose
higher taxes in the event of future financial difficulties. Recently, attempts
have been made to bring the rate of growth in the public sector in the State
into line with the slower expansion in the private economy. Prior to those
efforts, annual increases in expenditures at both the State and local levels
exceeded the increases in revenues generated by economic growth and were
therefore financed in part through discretionary tax increases at both levels of
government.
The burdens of State and local taxation, in combination with a number of other
causes of regional economic dislocation, may have contributed to the decisions
of businesses and individuals to relocate outside, or not locate within, the
State. The State undertook a series of tax reductions and other programs which
are intended both to limit expansion in the public sector and encourage
expansion in the private sector in order to make possible a reversal of these
trends. However, no immediate reversal of the erosion of the State's economic
position relative to the nation as a whole has been projected.
The effect of inflation on costs and the State's tax reduction program, the
possible failure to receive Federal funds in expected amounts, especially in
light of the cost of the proposed State assumption of the local share of
Medicaid costs, and anticipated weakness in the State and Federal economies may
make realization of balanced State budgets in future years more difficult than
in recent years.
New Jersey Risk Factors. The primary purpose of investing in a portfolio of New
Jersey Municipal Obligations is the special tax treatment accorded New Jersey
resident individual investors. Investment in the Portfolio should be made with
an understanding of the risks which an investment in New Jersey Municipal
Obligations may entail. However, payment of interest and preservation of
principal are dependent upon the continuing ability of the New Jersey issuers
and/or obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder. Investors should consider the greater risk of
the Portfolio's concentration versus the safety that comes with a less
concentrated investment portfolio and should compare yields available on
portfolios of New Jersey issues with those of more diversified portfolios
including out-of-state issues before making an investment decision. For
additional information, please refer to the Statement of Additional Information.
This summary is included for the purpose of providing a general description of
the credit and financial conditions of the State of New Jersey. For a more
complete description of these risk factors, see "New Jersey Risk Factors" in the
Statement of Additional Information.
The combination of the northeast region's cyclical adjustment and the national
recession which officially began in July 1990 (according to the National Bureau
of Economic Research) adversely affected the growth of New Jersey's economy. New
Jersey experienced declines in its construction and manufacturing sectors and
overall increases in the rates of unemployment. In the wake of the continued
expansion of the national economy which began in late 1993, New Jersey's
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<PAGE>
economy has experienced a protracted recovery that in 1994 began to generate
internal momentum due to increases in employment and income levels. Although
employment growth in New Jersey has occurred in a variety of employment sectors,
business services and trade sectors have been the greatest generators of
employment growth in New Jersey while manufacturing jobs continued to trend
downward albeit at a more moderate pace. Other evidence of New Jersey's
improving economy can be found in increased home-building above the depressed
levels of 1990 through 1992 and rising consumer spending.
New Jersey's Constitution and budget and appropriations system require a
balanced budget. Pursuant to the State Constitution, no money may be drawn from
the State Treasury except for appropriations made by law. In addition, all
moneys for the support of State purposes must be provided for in one general
appropriation law covering one and the same fiscal year. No general
appropriations law or other law appropriating money for any State purpose may be
enacted if the total amount of appropriations for the fiscal year exceed the
total revenue anticipated for that fiscal year. The State's current Fiscal Year
ends June 30, 1998.
The primary method for State financing of capital projects is through the sale
of the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. State tax revenues and certain other fees are
pledged to meet the principal and interest payments required to fully pay the
debt. No general obligation debt can be issued by the State without prior voter
approval. The aggregate outstanding general obligation bonded indebtedness of
the State as of June 30, 1997 was $3.437 billion. Other State-related
obligations, including lease financings, "moral" obligations, State-supported
school district bonds and bonds subject to State contracts or guarantees
amounted to $9.056 billion as of June 30, 1997.
New Jersey's local finance system is regulated by various statutes designed to
assure that all local governments and their issuing authorities remain on a
sound financial basis. Regulatory and remedial statutes are enforced by the
Division of Local Government Services (the "Division") in the State Department
of Community Affairs. The Local Budget Law imposes specific budgetary procedures
upon counties and municipalities ("local units"). Every local unit must adopt an
operating budget which is balanced on a cash basis, and items of revenue and
appropriation must be examined by the Director of the Division. The accounts of
each local unit must be independently audited by a registered municipal
accountant.
The Local Government Cap Law (the "Cap Law") generally limits the year-to-year
increase of the total appropriations of any municipality and the tax levy of any
county to either 5% or an index rate determined annually by the Director,
whichever is less. Certain exceptions exist to the Cap Law's limitation on
increases in appropriations. The principal exceptions to these limitations are
municipal and county appropriations to pay debt service requirements; to comply
with certain other State or Federal mandates; amounts approved by referendum;
and, in the case of municipalities only, to fund the preceding year's cash
deficit or to reserve for shortfalls in tax collections.
The Local Budget Law limits the amount of tax anticipation notes that may be
issued by local units and requires the repayment of such notes within 120 days
of the end of the fiscal year (six months in the case of counties) in which
issued. No local unit is permitted to issue bonds for the payment of current
expenses (other than Fiscal Year Adjustment Bonds described more fully below).
Local units may not issue bonds to pay outstanding bonds, except for refunding
purposes, and then only with the approval of the Local Finance Board. Local
units may issue bond anticipation notes for temporary periods not exceeding in
the aggregate approximately ten years from the date of first issue. The debt
that any local unit may authorize is limited to a percentage of its equalized
valuation basis, which is the average of the equalized value of all taxable real
property and improvements within the geographic boundaries of the local unit for
each of the three most recent years.
Chapter 75 of the Pamphlet Laws of 1991 signed into law on March 28, 1991
required certain municipalities and permits all other municipalities to adopt
the State fiscal year in place of the existing calendar fiscal year.
Municipalities that change fiscal years must adopt a six-month transition year
budget funded by Fiscal Year Adjustment Bonds. Notes issued in anticipation of
Fiscal Year Adjustment Bonds, including renewals, can only be issued for up to
one year unless the Local Finance Board permits the municipality to renew them
for a further period. The Local Finance Board must confirm the actual deficit
experienced by the municipality. The municipality then may issue Fiscal Year
Adjustment Bonds to finance the deficit on a permanent basis.
New Jersey's school districts operate under the same comprehensive review and
regulation as do its counties and municipalities. Certain exceptions and
differences are provided, but the State supervision of school finance closely
parallels that of local governments. The State Department of Education has been
empowered with the necessary and effective
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<PAGE>
authority in extreme cases to take over the operation of local school districts
which cannot or will not correct severe and complex educational deficiencies.
School district bonds and temporary notes are issued in conformity with the
School Bond Law. Schools are subject to debt limits and to State regulation of
their borrowing. The debt limitation on school district bonds depends upon the
classification of the school district, but may be as high as 4% of the average
equalized valuation basis of the constituent municipality. In certain cases
involving school districts in cities with populations exceeding 100,000, the
debt limit is 8% of the average equalized valuation basis of the constituent
municipality, and in cities with populations in excess of 80,000, the debt limit
is 6% of the aforesaid average equalized valuation.
In 1982, school districts were given an alternative to the traditional method of
bond financing capital improvements pursuant to the Lease Purchase Law. The
Lease Purchase Law permits school districts to acquire a site and school
buildings through a lease purchase agreement with a private lessor corporation.
The lease purchase agreement does not require voter approval. The rent payments
attributable to the lease purchase agreement are subject to annual appropriation
by the school district and are required to be included in the annual current
expense budget of the school district. Furthermore, the rent payments
attributable to the lease purchase agreement do not constitute debt of the
school district and therefore do not impact on the school district's debt
limitation. Lease purchase agreements in excess of five years require the
approval of the Commissioner and the Local Finance Board.
The Local Authorities Fiscal Control Law provides for State supervision of the
fiscal operations and debt issuance practices of independent local authorities
and special taxing districts by the State Department of Community Affairs. The
Local Authorities Fiscal Control Law applies to all autonomous public bodies
created by counties or municipalities, which are empowered to issue bonds, to
impose facility or service charges, or to levy taxes in their districts. This
encompasses most autonomous local authorities (sewerage, municipal utilities,
parking, pollution control, improvement, etc.) and special taxing districts
(fire, water, sewer, street lighting, etc.). The Local Finance Board exercises
approval power over the creation of new authorities and special districts as
well as their dissolution. The Local Finance Board also reviews, conducts public
hearings and issues findings and recommendations on any proposed project
financing of an authority or district, and on any proposed financing agreement
between a municipality or county and an authority or special district. The
Director reviews and approves annual budgets of authorities and special
districts.
Risks Relating to Year 2000 Issue. Many existing computer programs were designed
and developed without considering the impact of the upcoming change in the
century. The problem exists when a computer program uses only two digits to
identify a year in the date field. Extensive problems can result to a company's
business, requiring substantial resources to remedy. The Fund believes that the
"Year 2000" problem will be material to its investments. Although the Fund and
its Manager and Administrator are addressing the problem with respect to their
own business operations, there can be no assurance that the "Year 2000" problem
will be properly or timely resolved, which could have a material adverse effect
on the Fund's results of operations and, in turn, cash available for
distribution.
MANAGEMENT OF THE FUND
The Manager. The Fund's Board of Directors, which is responsible for the overall
management and supervision of the Fund, has employed Lebenthal Asset Management,
Inc. to serve as Manager of the New York, New Jersey and Taxable Portfolios of
the Fund. The Manager, with its principal office at 120 Broadway, New York, New
York 10271-0005, is a wholly owned subsidiary of Lebenthal & Co., Inc. The
Manager, a registered investment adviser providing fixed-income investment
advisory services to individuals, institutions and other investment advisers, is
under the leadership of James L. Gammon, President and Director of the Manager.
James A. Lebenthal, Chairman and Director of the Manager, is a controlling
person of the Manager. The Manager was at November 30, 1997 manager, adviser or
supervisor with respect to assets aggregating in excess of $199 million. Mr.
Gammon is primarily responsible for the day-to-day management of the Fund's
portfolios. Mr. Gammon, President and Director of the Manager since February
1994, has over 25 years experience in municipal bond portfolio management. From
March 1984 to July 1993, Mr. Gammon was Senior Vice President and Senior
Portfolio Manager at Loews/CNA Holdings, Inc. with $12.5 billion under his
management. From 1977 to 1984 he managed the $221 million Elfun Tax Exempt
Income Fund. The Fund's Annual Report contains information regarding the Fund's
performance and is available, without charge, upon request.
Pursuant to the Management Contracts the Manager manages the portfolio of
securities of each of the Portfolios and makes decisions with respect to the
purchase and sale of investments, subject to the general control of the Fund's
Board of Directors. For its services under the Management Contracts, the Manager
is entitled to receive a management fee,
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calculated daily and payable monthly, equal to .25% of each of the Portfolio's
average daily net assets not in excess of $50 million, .225% of such assets
between $50 million and $100 million plus .20% of such assets in excess of $100
million. The Manager may, at its discretion, waive all or a portion of its fees
under the Management Contracts. There can be no assurance that such fees will be
waived in the future.
The Manager provides persons satisfactory to the Fund's Board of Directors to
serve as officers of the Fund. Such officers, as well as certain other employees
and directors of the Fund, may be directors, officers or employees of the
Manager or its affiliates. Due to the services performed by the Manager and the
Administrator, the Fund currently has no employees and its officers are not
required to devote full-time to the affairs of the Fund. The SAI contains
general background information regarding each Director and principal officer of
the Fund.
The Administrator. The Administrator for each Portfolio is State Street Bank and
Trust Company (the "Administrator"), a Massachusetts trust company, which has
its principal office at 225 Franklin Street, Boston, Massachusetts 02111. The
Administrator also serves as administrator of other mutual funds.
Pursuant to the Administration Agreement with each Portfolio, the Administrator
provides all administrative services reasonably necessary for the Portfolios,
other than those provided by the Manager, subject to the supervision of the
Fund's Board of Directors. These services include the day-to-day administration
of matters related to the operation of the Portfolios such as maintenance of
their records, preparation of reports, compliance testing of the Portfolios'
activities and supervision of the performance of accounting services and
calculation of net asset value and yield by Investors Fiduciary Trust Company,
the Portfolios' accounting agent. The personnel rendering such services may be
employees of the Administrator or its affiliates. Because of the services
rendered to the Portfolios by the Administrator, and the Manager, each Portfolio
itself may not require any employees other than its officers, none of whom
receive compensation from the Portfolio.
For the services rendered to each Portfolio by the Administrator, the Fund pays
the Administrator a fee, computed daily and payable monthly, equal to .08% per
annum of the average daily net assets of each of the Portfolios up to $125
million, .06% per annum of such assets of each of the Portfolios of the next
$125 million and .04% per annum of such assets in excess of $100 million. There
is a minimum annual fee payable of $165,000.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends equal to all its net investment income (excluding
capital gains and losses, if any, and amortization of market discount) daily and
pays dividends on the tenth day of each month or, if the tenth day is not a Fund
Business Day, on the preceding Fund Business Day. There is no fixed dividend
rate. In computing these dividends, interest earned and expenses are accrued
daily.
Net realized capital gains, if any, are distributed at least annually in
accordance with the Code, as amended, and other applicable statutory and
regulatory requirements. All dividends and distributions of capital gains are
automatically invested in additional shares of a Portfolio immediately upon
payment thereof, received in cash or can be deposited into one or more of the
Fund's other Portfolios. Shareholders will be permitted to elect the payment
option of their choice on the subscription form for share purchases.
HOW TO PURCHASE AND REDEEM SHARES
Investors who have accounts with Participating Organizations may invest in the
Fund through their Participating Organizations in accordance with the procedures
established by the Participating Organizations. (See "Investments Through
Participating Organizations" herein.) All other investors, and investors who
have accounts with Participating Organizations but who do not wish to invest in
the Fund through their Participating Organizations, may invest in the Fund
directly or through a Lebenthal & Co., Inc. brokerage account. (See "Direct
Purchase and Redemption Procedures" herein.) The minimum initial investment for
all investors in the Portfolio is $1,000. Initial investments may be made in any
amount in excess of the applicable minimum. The minimum amount for subsequent
investments is $100. The maximum purchase for Class B shares is $250,000.
Alternative Sales Arrangements. An investor who purchases Class A Shares may pay
an initial sales charge at the time of purchase. An investor who purchases Class
B Shares does not pay such an initial sales charge but may be subject to
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paying a contingent deferred sales charge ("CDSC") when shares are redeemed.
Certain purchases of Class A Shares only may be eligible for reduced sales
charges, as described below.
The decision as to which class of shares provides a more suitable investment for
an investor depends on a number of factors, including the amount and intended
length of the investment. Investors making investments that qualify for reduced
sales charges might consider Class A Shares. Investors who prefer not to pay an
initial sales charge might consider Class B Shares. For more information about
these sales arrangements, consult your broker or investment consultant or the
Distributor. Shares of one Portfolio may only be exchanged for shares of the
same class of another portfolio of the Fund.
See "Exchange Privilege."
Class A Shares
The price paid for Class A Shares of the Fund is the public offering price, that
is, the next determined net asset value of the shares plus a sales load. The
sales load is a one-time charge paid at the time of purchase of shares, most of
which ordinarily goes to the investor's broker-dealer to compensate him for the
services provided the investor.
Sales loads for the Class A Shares are determined in accordance with the
following sales load schedule:
<TABLE>
<CAPTION>
Sales Charge Dealer Discount
as % of as % of
Amount of Purchase Sales Load Net Amount Invested Offering Price
------------------ ---------- ------------------- --------------
<S> <C> <C> <C>
Less than $50,000....................................... 4.50% 4.71% 4.25%
$50,000 up to $99,999................................... 4.00% 4.17% 3.75%
$100,000 up to $249,999................................. 3.50% 3.63% 3.25%
$250,000 up to $499,999................................. 2.75% 2.83% 2.50%
$500,000 up to $999,999................................. 2.00% 2.04% 1.75%
$1,000,000 and over..................................... None None .25%
</TABLE>
Class B Shares
Class B Shares are sold without an initial sales charge, but are subject to a
CDSC if redeemed within a specified period after purchase. Class B Shares also
bear a higher 12b-1 fee than Class A Shares. Class B shares automatically
convert into Class A shares, based on relative net asset value, approximately
eight years after purchase. For more information about the conversion of Class B
Shares, see the Statement of Additional Information. This discussion includes
information about how shares acquired through reinvestment of distributions are
treated for conversion purposes. The discussion also notes certain circumstances
under which a conversion may not occur. Class B Shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made. Until conversion, Class B Shares will have a higher expense
ratio and pay lower dividends than Class A Shares because of the higher 12b-1
fee and other related expenses.
Class B Shares are sold without an initial sales charge, although a CDSC will be
imposed if you redeem shares within a specified period after purchase, as shown
in the table below. The following types of shares may be redeemed without charge
at any time: (i) shares acquired by reinvestment of distributions, and (ii)
shares otherwise exempt from the CDSC, as described below. For other shares, the
amount of the charge is determined as a percentage of the lesser of the current
market value or the cost of the shares being redeemed.
The CDSC for the Class B Shares are determined in accordance with the following
schedule.
Period Shares Held Contingent Deferred Sales Charge
------------------ --------------------------------
0 through 11 months 5%
12 through 23 months 4%
24 through 47 months 3%
48 through 59 months 2%
60 through 71 months 1%
72 months and longer 0%
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In determining whether a CDSC is payable on any redemption, shares not subject
to any charge will be redeemed first, followed by shares held longest during the
CDSC period. For this purpose, the amount of any increase in a share's value
above its initial purchase price is not regarded as a share exempt from the
CDSC. Thus, when a share that has appreciated in value is redeemed during the
CDSC period, a CDSC is assessed only on its initial purchase price.
In addition, the New York Portfolio may sell shares at net asset value without a
CDSC in connection with the acquisition by the Portfolio of assets of an
investment company or personal holding company. The CDSC will be waived on
redemptions of shares arising out of the death or post-purchase disability of a
shareholder or settlor of a living trust account, and on redemptions in
connection with certain withdrawals from IRA or other retirement plans. Up to
12% of the value of shares subject to a systematic withdrawal plan may also be
redeemed each year without a CDSC.
REDUCTION OR ELIMINATION OF SALES LOADS
Volume Discounts. Volume discounts are provided if the total amount being
invested in Shares of the Portfolio reaches the levels indicated in the above
sales load schedules. Volume discounts are also available to investors making
sufficient additional purchases of Portfolio Class A Shares. The applicable
sales charge may be determined by adding to the total current value of shares
already owned in the Portfolio the value of new purchases computed at the
offering price on the day the additional purchase is made. For example, if an
investor previously purchased, and still holds, Class A shares of the Portfolio
worth $95,000 at the current offering price and purchases an additional $5,000
worth of Class A shares of the Portfolio, the sales charge applicable to the new
purchase would be that applicable to the $100,000 to $249,999 bracket in the
above sales load schedule.
Reinvestment of Dividends and Distributions. There is no sales load on purchases
of Portfolio shares made by reinvestment of dividends and distributions paid by
the Portfolio. Reinvestment will be made at net asset value (i.e., without the
imposition of a sales load) on the day on which the dividend or distribution is
payable.
Unit Investment Trusts. Unit holders of any unit investment trust who hold
certificates of such trusts in a Lebenthal & Co. account may invest
distributions received from such unit investment trusts in Shares of the
Portfolio at no sales load or CDSC. Unit holders of the Empire State Municipal
Exempt Trust Series co-sponsored by Glickenhaus & Co. and Lebenthal & Co., Inc.
may elect to invest distributions received from such unit investment trusts in
shares of the Portfolio at no sales load regardless of where such certificates
are actually held. The absence of a sales load reflects the reduced sales effort
required to sell shares to this group of investors. The minimum initial
investment of $1,000 and the minimum subsequent investment of $100 will be
waived for such purchases.
Letter of Intent. Any investor may sign a Letter of Intent, enclosed in this
Prospectus, stating an intention to make purchases of Class A Shares totaling a
specified amount within a period of thirteen months. Purchases within the
thirteen-month period can be made at the reduced sales load applicable to the
total amount of the intended purchase noted in the Letter of Intent. If a larger
purchase is actually made during the period, then a downward adjustment will be
made to the sales charge based on the actual purchase size. Any shares purchased
within 90 days preceding the actual signing of the Letter of Intent are eligible
for the reduced sales charge and the appropriate price adjustment will be made
on those share purchases. A number of shares equal to 4.50% of the dollar amount
of intended purchases specified in the Letter of Intent is held in escrow by the
Distributor until the purchases are completed. Dividends and distributions on
the escrowed shares are paid to the investor. If the intended purchases are not
completed during the Letter of Intent period, the investor is required to pay
the Distributor an amount equal to the difference between the regular sales load
applicable to a single purchase of the number of shares actually purchased and
the sales load actually paid. If such payment is not made within 20 days after
written request by the Distributor, then the Distributor has the right to redeem
a sufficient number of escrowed shares to effect payment of the amount due. Any
remaining escrowed shares are released to the investor's account. Agreeing to a
Letter of Intent does not obligate you to buy, or the Fund to sell, the
indicated amount of shares. You should read the Letter of Intent carefully
before signing.
Mutual Funds. Shareholders of any open-end, load, management investment company
can utilize the redemption or sales proceeds from the redemption or sale of such
shares to purchase Shares of the Portfolio at no sales load or CDSC for a period
of 12 months from the date of this Prospectus. Investment of the redemption or
sales proceeds into shares of the Portfolio must occur within 60 calendar days
from the date of redemption or sale.
Investors 35 Years of Age or Younger. Investors purchasing their Shares through
Lebenthal & Co., Inc., and who are 35 years of age or younger will be offered a
0.50% discount off the applicable sales load or CDSC set forth in the preceding
Shares sales load schedules for single investments of at least $1,000. For
example, an investor purchasing Class A Shares
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<PAGE>
in the amount of $10,000 will be charged a reduced sales load of 4.00% and an
investor purchasing shares in the amount of $100,000 will be charged a reduced
sales load of 3.00% and an investor purchasing Class B Shares in those amounts
that sells those shares within one year of purchase will be subject to a CDSC of
4.5% and 5%, respectively. The reduction of a sales load reflects the Fund's
interest to offer a savings vehicle for investors in this age bracket.
IRA Account Holders. Investors holding individual retirement accounts ("IRAs")
either directly or through a custodian with Lebenthal & Co., Inc. may elect to
reinvest the interest earned on securities in these accounts, in Shares of the
Taxable Portfolio at net asset value, without an initial sales charge. The
minimum initial investment of $1,000 and the minimum subsequent investment of
$100 will be waived. In addition, for those individuals who wish to purchase
shares of the Taxable Portfolio in an IRA, the Fund offers an IRA plan through
State Street Bank & Trust Company at full sales load but with no minimum
investment and an annual custodial fee of $12.
Financial Planners. Investors purchasing their Shares through certain financial
planners and intermediaries that assess a charge and have accounts with such
clients will not be charged an initial sales load or CDSC. The absence of a
sales load reflects the reduced sales effort required to sell shares to this
group of investors.
Employees of the Distributor and Participating Organizations. Employees (and
their immediate families) of Lebenthal & Co., Inc. or any Participating
Organization may purchase Shares of the Portfolio at no initial sales load or
CDSC. The absence of a sales load reflects the reduced sales effort required to
sell shares to this group of investors.
Lebenthal Account Holders. Investors holding any security in a Lebenthal & Co.
account including, but not limited to, municipal bonds and equity securities may
elect to invest interest, dividends and distributions earned on such securities
in Shares of the Fund at net asset value (i.e. without the imposition of an
initial sales load or CDSC). The minimum initial investment of $1,000 and the
minimum subsequent investment of $100 will be waived for such purchases.
Sales and Redemptions
The Fund sells and redeems its shares on a continuing basis based on their net
asset value and does not impose a charge for redemptions. The Class B Shares of
the New York Portfolio may charge a CDSC on early redemptions from this
Portfolio. All transactions in Fund shares are effected through State Street
Bank & Trust Company, the Fund's transfer agent, which accepts orders for
purchases and redemptions from Participating Organizations and from the
Distributor.
Orders received as of the earlier of 4:00 p.m., New York City time, or the close
of business of the NYSE on any Fund Business Day will be executed at the public
offering price determined on that day. Orders received after the earlier of 4:00
p.m., New York City time, or the close of the NYSE on any Fund Business Day,
will be executed at the public offering price determined on the next Fund
Business Day. Shares will be issued upon receipt of payment by the Fund. Fund
shares begin accruing income on the day after the shares are issued to an
investor. The Fund reserves the right to reject any subscription for its shares.
Certificates for Fund shares will not be issued to those who invest in the Fund.
There is no redemption charge, no minimum period of investment, no minimum
amount for a redemption, and no restriction on frequency of withdrawals. The
Class B Shares of the New York Portfolio may charge a CDSC on early redemptions
from this Portfolio. Unless other instructions are given in proper form to the
Fund as transfer agent, a check for the proceeds of a redemption will be sent to
the shareholder's address of record. For shareholders investing through a
Lebenthal & Co., Inc., brokerage account, redemption proceeds will be credited
to their brokerage account.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after the shares are tendered for
redemption, except for any period during which the NYSE is closed (other than
customary weekend and holiday closings) or during which the Securities and
Exchange Commission determines that trading thereon is restricted, or for any
period during which an emergency (as determined by the Securities and Exchange
Commission) exists as a result of which disposal by the Fund of its portfolio
securities is not reasonably practicable or as a result of which it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or for such other period as the Securities and Exchange Commission may
by order permit for the protection of the shareholders of the Fund.
Redemption orders received before the earlier of 4:00 p.m., New York City time,
or the close of the NYSE on any Fund Business Day will be executed at the net
asset value per share determined on that day. Redemption of the Class B Shares
of the New York Portfolio may be subject to a CDSC as stated above. Redemption
orders received after such time will be executed at the net asset value
determined on the following Fund Business Day. Fund shares continue to receive
dividends through the day of redemption. Normally redemption proceeds will be
paid within seven days.
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467596.5
<PAGE>
The Fund has reserved the right to redeem the shares of any shareholder if the
net asset value of all the remaining shares in the shareholder's or his
Participating Organization's account after a withdrawal is less than $1,000.
Written notice of a proposed mandatory redemption will be given at least 30 days
in advance to any shareholder whose account is to be redeemed. For Participant
Investor accounts, notice of a proposed mandatory redemption will be given only
to the appropriate Participating Organization, and the Participating
Organization will be responsible for notifying the Participant Investor of the
proposed mandatory redemption. During the notice period a shareholder or
Participating Organization who receives such a notice may avoid mandatory
redemption by purchasing sufficient additional shares to increase his total net
asset value to at least $1,000.
The redemption of shares may result in the Investor's receipt of more or less
than he paid for his shares and, thus, in a taxable gain or loss to the
investor.
Direct Purchase and Redemption Procedures. The following purchase and redemption
procedures apply to investors who wish to invest in the Fund directly or through
a brokerage account maintained at Lebenthal & Co., Inc. and not through
Participating Organizations. These investors may obtain a current prospectus and
Lebenthal & Co., Inc. account application necessary to open an account by
telephoning Lebenthal & Co., Inc. at the following numbers:
Within New York City (212) 425-6116
Outside New York City (toll free) (800) 221-5822
Initial Purchases of Shares. Checks are accepted subject to collection at full
value in United States currency.
Mail: To purchase shares of the Fund, send a check made payable to "Lebenthal &
Co., Inc., Agent" including the Lebenthal account number _ _ _ _ _ _ to:
Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund
120 Broadway
New York, New York 10271-0005
Bank Wire: To purchase shares of the Fund using the wire system for transmittal
of money among banks, investors should first telephone the Fund at (212)
425-6116 to obtain a Fund account number. The investors should then instruct a
member commercial bank to wire their money immediately to:
Chase Manhattan Bank
ABA# 021-000021
f/a/o Donaldson, Lufkin & Jenrette Securities Corp.
Pershing Division
Acct# 930-1-032992
For Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund A/C Name__________________
Lebenthal A/C # _ _ _ _ _ _
Investors planning to wire funds should instruct their bank early in the day so
the wire transfer can be accomplished before the earlier of 4:00 p.m., New York
City time, or the close of the NYSE on that same day. There may be a charge by
the investor's bank for transmitting the money by bank wire. The Fund does not
charge investors in the Fund for its receipt of wire transfers.
Subsequent Purchases of Shares. Subsequent purchases can be made by bank wire,
as indicated above, or by mailing a check to:
Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund
120 Broadway
New York, New York 10271-0005
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467596.5
<PAGE>
The minimum amount for subsequent purchases of shares is $100. All payments
should clearly indicate the shareholder's account number.
Redemption of Shares. A redemption order is executed immediately following, and
at a price determined in accordance with, the next determination of net asset
value per share following receipt by the Fund of the redemption order (and any
supporting documentation which it may require). Redemption payments will not be
effected unless the check (including a certified or cashier's check) used for
investment has been cleared for payment by the investor's bank, which may take
up to 10 days after investment.
Written Requests. Shareholders may make a redemption in any amount by sending a
written request addressed to:
Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund
c/o Lebenthal & Co., Inc.
120 Broadway
New York, New York 10271-0005
All requests for redemption should clearly indicate the Lebenthal account number
_ _ _ _ _. Normally the redemption proceeds are credited to the shareholder's
Lebenthal brokerage account.
Investment through Participating Organizations. Participant Investors may, if
they wish, invest in the Fund through the Participating Organizations with which
they have accounts. "Participating Organizations" are securities brokers, banks
and financial institutions or other industry professionals or organizations
which have entered into shareholder servicing agreements with the Distributor
with respect to investment of their customer accounts in the Fund. When
instructed by its customer to purchase or redeem Fund shares, the Participating
Organization, on behalf of the customer, transmits to the Fund as transfer agent
a purchase or redemption order.
Participating Organizations may confirm to their customers who are shareholders
in the Fund each purchase and redemption of Fund shares for the customers
accounts. Also Participating Organizations may send their customers periodic
account statements showing the total number of Fund shares owned by each
customer as of the statement closing date, purchases and redemptions of the Fund
shares by each customer during the period covered by the statement and the
income earned by Fund shares of each customer during the statement period
(including dividends paid in cash or reinvested in additional Fund shares).
Participant Investors whose Participating Organizations have not undertaken to
provide such confirmations and statements will receive them from the Fund
directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. Therefore, an investor may consider
investing in the Fund directly. A Participant Investor should read this
Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
The Glass-Steagall Act limits the ability of a depository institution to become
an underwriter or distributor of securities. However, it is the Manager's
position that banks are not prohibited from acting in other capacities for
investment companies, such as providing administrative and shareholder account
maintenance services and receiving compensation from the Distributor for
providing such services. However, this is an unsettled area of the law and if a
determination contrary to the Manager's position is made by a bank regulatory
agency or court concerning shareholder servicing and administration payments to
banks from the Distributor, any such payments will be terminated and any shares
registered in the banks names, for their underlying customers, will be
reregistered in the name of the customers at no cost to the Fund or its
shareholders. In addition, state securities laws on this issue may differ from
the interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
In the case of qualified Participating Organizations, orders received by the
Fund before the earlier of 4:00 p.m., New York City time, or the close of the
NYSE on a Fund Business Day, will be executed on that day. Orders received after
such time
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467596.5
<PAGE>
will not result in execution until the following Fund Business Day.
Participating Organizations are responsible for instituting procedures to insure
that purchase orders by their respective clients are processed expeditiously.
The following purchase and redemption procedures now apply to Participant
Investors who wish to invest in the Fund through the Participating Organizations
with which they have accounts. Participant Investors should refer to the general
procedures applicable to direct investors contained in this prospectus. Requests
for assistance or additional information should be directed to the Fund at (800)
828-3246.
Bank Wire: To purchase shares of the Fund using the wire system for transmittal
of money among banks, Participant Investors should instruct a member commercial
bank to wire their money immediately to:
State Street Bank & Trust Co.
ABA# 01100028 For Credit to Account 99051971
FAO: [ ]/Lebenthal Funds Inc.
Lebenthal__________Municipal Bond Fund
A/C Name____________________
Lebenthal A/C #____________
Purchase By Check: For Participant Investors subsequent purchases can be made by
bank wire, as indicated above, or by mailing a check to:
Lebenthal Funds Inc.
Lebenthal__________Municipal Bond Fund
P.O. Box 419722
Kansas City, MO 64141-9722
Systematic Investment Plan. Shareholders may elect to purchase shares of the
Fund through the establishment of an Automatic Investment Plan of a specified
amount of $100 or more automatically, on a monthly basis. The minimum investment
required to open an Automatic Investment Plan account is $1,000. An Automatic
Investment Authorization Form (available on request from the transfer agent or
the Distributor) provides for funds to be automatically drawn on a shareholder's
bank account and deposited in his or her Fund account ($100 per month minimum).
The shareholder's bank may charge a nominal fee in connection with the
establishment and use of automatic deposit services. Accordingly, the net yield
to investors who invest through the Systematic Investment Plan may be less than
by investing in the Fund directly. The election may also be made, changed or
terminated at any later time by the participant by sending a written request to
the Fund's transfer agent or Distributor.
EXCHANGE PRIVILEGE
Shareholders of each Portfolio are entitled to exchange some or all of their
shares in the same class of shares for shares in any of the Fund's portfolios:
Lebenthal New York Municipal Bond Fund, Lebenthal New Jersey Bond Fund or
Lebenthal Taxable Municipal Bond Fund. In the future, the exchange privilege
program may be extended to other investment companies managed by Lebenthal &
Co., Inc. The Class B Shares of the New York Portfolio are currently not
eligible to participate in this Exchange Privilege.
There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000, except that shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the portfolio into which the
exchange is being made. Shares are exchanged at their respective net asset
values.
The exchange privilege provides shareholders of any Portfolio with a convenient
method to shift their investment among different portfolios when they feel such
a shift is desirable. The exchange privilege is available to shareholders
residing in any state in which shares of the portfolios being acquired may
legally be sold. Shares may be exchanged only between portfolio accounts
registered in identical names. Before making an exchange, the investor should
review the current prospectus of the portfolio into which the exchange is to be
made. An exchange pursuant to the exchange privilege is treated for Federal
income tax purposes as a sale on which a shareholder may realize a taxable gain
or loss. An additional Prospectus may be obtained by contacting Lebenthal Funds,
Inc. at the address or telephone number set forth on the cover page of this
Prospectus.
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<PAGE>
Instructions for exchanges may be made by sending a signature guaranteed written
request to:
Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund
c/o Lebenthal & Co., Inc.
120 Broadway
New York, New York 10271-0005
or, for shareholders who have elected that option, by telephone. The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time.
Dollar Cost Averaging Program. Shareholders may elect to have a specified amount
automatically exchanged, either monthly or quarterly, from one of their accounts
through Lebenthal & Co., Inc. into one or more of the Class A Shares of the
Lebenthal Fund portfolios. The account from which exchanges are to be made must
have a value of at least $10,000 when a shareholder elects to begin this
program, and the exchange minimum is $100 per transaction. The net asset value
of shares purchased under this program may vary, and may be more or less
advantageous than if shares were purchased directly on dates other than the date
specified in the program. There is no charge for entering the Dollar Cost
Averaging program, and exchanges made pursuant to this program are not subject
to an exchange fee. Sales charges may apply, as described under the caption "How
to Purchase and Redeem Shares."
Telephone Exchanges and Redemptions. Arrangements have been made for the
acceptance of instructions by telephone to exchange or redeem shares in
book-entry form if certain preauthorizations or indemnifications are accepted
and are on file. Shareholders who elect the telephone exchange or redemption
option bear the risk of any loss, damages, expense or cost arising from their
election of the telephone exchange option, including risk of unauthorized use,
provided however, that the Fund shall employ reasonable procedures to confirm
that all telephone instructions are genuine. For this purpose, the Fund will
employ such procedures to confirm that telephone or telecopy exchange or
redemption instructions are genuine, and will require that shareholders electing
such options provide a form of personal identification. The failure of the Fund
to employ such procedures may cause the Fund to be liable for losses incurred by
investors due to telephone or telecopy exchange or redemption based upon
unauthorized or fraudulent instructions. Further information and telephone
exchange or redemption forms are available from the transfer agent or
Distributor.
Shareholders holding shares in book-entry form may redeem their shares by
telephoning the transfer agent prior to 4:00 p.m. Eastern time. Redemption
proceeds must be payable to the record holder of the shares and mailed to the
shareholder's address of record or wire transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System,
normally within one business day, but in no event longer than seven days after
the request. The minimum amount for a wire transfer is $1,000. If at any time
the Fund determines it necessary to terminate or modify this method of
redemption, shareholders would be promptly notified. Information on this service
is included in the application and is available from the transfer agent or the
Distributor.
DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of Directors has adopted a distribution and service plan on behalf
of each Portfolio (the "Plan") and, pursuant to the Plan, the New York Portfolio
and the Distributor have entered into a Distribution Agreement and the New
Jersey and Taxable Portfolios and the Distributor have entered into a
Distribution Agreement and a Shareholder Servicing Agreement.
The New York Portfolio. Under the Distribution Agreement, the Distributor, as
agent for the Fund, will solicit orders for the purchase of the New York
Portfolio's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal. Under the
Distribution Agreement, the Distributor receives from each of the Class A and
Class B Shares of the Portfolio a service fee equal to .25% per annum of the New
York Portfolio's average daily net assets (the "Service Fee") for providing
shareholder servicing and the maintenance of shareholder accounts and that
provides that the Distributor may make payments from time to time from the
Service Fee received to pay the costs of, and to compensate others, including
Participating Organizations for performing such shareholder servicing functions
on behalf of the New York Portfolio. The Class B Shares of the New York
Portfolio also pays the Distributor an asset based sales charge ("Asset Based
Sales Charge") equal to 0.75% per annum of the Class B Shares' average daily net
assets to be used by the Distributor to pay sales commissions for sales of the
Class B Shares of this Portfolio. The fees are accrued daily
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<PAGE>
and paid monthly. The total amounts payable under the Plan by the Class B Shares
of the New York Portfolio may not exceed 1.00% per annum.
The Plan and the Distribution Agreement provide that, in addition to the Asset
Based Sales Charge (with respect to the Class B shares only) described above and
the Service Fee (with respect to the Class A and Class B shares), the New York
Portfolio will pay for (i) telecommunications expenses including the cost of
dedicated lines and CRT terminals, incurred by the Distributor in carrying out
its obligations under the Distribution Agreement and (ii) preparing, printing
and delivering the Fund's Prospectus to existing shareholders of the Fund and
preparing and printing subscription application forms for shareholder accounts.
The Plan and the Management Contract provide that the Manager may make payments
from time to time from its own resources, which may include the Management Fee
and past profits for the following purposes: (i) to defray the costs of, and to
compensate others, including Participating Organizations with whom the
Distributor has entered into written agreements, for performing shareholder
servicing and related administrative functions on behalf of the New York
Portfolio, (ii) to compensate certain Participating Organizations for providing
assistance in distributing the New York Portfolio's shares, (iii) to pay the
cost of printing and distributing the New York Portfolio's prospectus to
prospective investors, and (iv) to defray the cost of the preparation and
printing of brochures and other promotional materials, mailings to prospective
shareholders, advertising, and other promotional activities, including the
salaries and/or commissions of sales personnel in connection with the
distribution of the New York Portfolio's shares. The Distributor may also make
payments from time to time from its own resources which may include the Service
Fee and past profits for the purposes enumerated in (i) above. With respect to
the Class B shares only the Distributor may also make payments for the purposes
enumerated in (ii), (iii), and (iv) from the Asset Based Sales Charges received
by the Distributor.
The Distributor, in its sole discretion, will determine the amount of such
payments made pursuant to the Plan, provided that such payments will not
increase the amount which the New York Portfolio is required to pay to the
Distributor for any fiscal year under the Distribution Agreement and the
Management Contract in effect for that year.
The New Jersey Portfolio and The Taxable Portfolio. For its services under the
Shareholder Servicing Agreements, the Distributor receives from the New Jersey
and Taxable Portfolios a fee equal to .25% per annum of the Portfolios' average
daily net assets (the "Shareholder Servicing Fee"). The fee is accrued daily and
paid monthly and any portion of the fee may be deemed to be used by the
Distributor for purposes of (i) shareholder servicing and maintenance of
shareholder accounts and (ii) for payments to participating organizations with
respect to servicing their clients or customers who are shareholders of the New
Jersey and Taxable Portfolios.
Under the Distribution Agreements, the Distributor, as agent for the New Jersey
and Taxable Portfolios, will solicit orders for the purchase of the New Jersey
and Taxable Portfolios' shares, provided that any subscriptions and orders will
not be binding on a Portfolio until accepted by the Portfolio as principal. In
addition, the Distribution Agreements provide for reimbursement to the
Distributor by the New Jersey and Taxable Portfolios for its distribution,
promotional and advertising costs incurred in connection with the distribution
of the New Jersey and Taxable Portfolios' shares in an amount not to exceed .10%
per annum of each of the New Jersey and Taxable Portfolios' average daily net
assets. To the extent the Distributor does not take reimbursement for such
expenses in a current fiscal year, it is precluded from taking any reimbursement
for such amounts in a future fiscal year. The Plans, the Shareholder Servicing
Agreements and the Distribution Agreements provide that, in addition to the
Shareholder Servicing Fee and advertising reimbursement, the New Jersey and
Taxable Portfolios will pay for (i) telecommunications expenses including the
cost of dedicated lines and CRT terminals incurred by the Distributor in
carrying out its obligations under the Shareholder Servicing Agreements, and
(ii) typesetting, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing the printing subscription application
forms for shareholder accounts. The expenses enumerated in this paragraph shall
not exceed an amount equal to .05% per annum of each of the New Jersey and
Taxable Portfolio's average daily net assets.
The Plans and the Management Contracts provide that the Manager may make
payments from time to time from its own resources, which may include the
management fee and past profits for the following purposes: to defray the costs
of and to compensate others, including participating organizations with whom the
Distributor has entered into written agreements, for performing shareholder
servicing and related administrative functions on behalf of the New Jersey and
Taxable Portfolios, to compensate certain Participating Organizations for
providing assistance in distributing the Portfolios' shares; to pay the costs of
printing and distributing the Fund's prospectus to prospective investors; and to
defray the cost of the preparation and printing of brochures and other
promotional materials, mailings to prospective shareholders, advertising, and
other promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Portfolios' shares. The
Distributor, in its sole discretion, will determine the amount of such payments
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made pursuant to the Plans, provided that such payments made pursuant to the
Plans will not increase the amount which the New Jersey and Taxable Portfolios
are required to pay to the Distributor or the Manager for any fiscal year under
the Shareholder Servicing Agreements or the Management Contracts in effect for
that year.
FEDERAL INCOME TAXES
The New York Portfolio and the New Jersey Portfolio have elected to qualify
under the Code as regulated investment companies that distribute
"exempt-interest dividends" as defined in the Code. The Taxable Portfolio has
also elected to qualify as a regulated investment company, but will distribute
taxable, not tax-exempt, dividends. The policy of each Portfolio is to
distribute as dividends each year 100% (and in no event less than 90%) of its
tax-exempt interest income, net of certain deductions (in the case of the New
York and New Jersey Portfolios), and its investment company taxable income (if
any). If distributions are made in this manner, dividends designated as derived
from the interest earned on Municipal Obligations are "exempt-interest
dividends" and are not subject to regular Federal income tax, although such
"exempt-interest dividends" may be subject to Federal alternative minimum tax.
Dividends paid from taxable income, if any, and distributions of any realized
short-term capital gains (whether from tax-exempt or taxable obligations) are
taxable to shareholders as ordinary income for Federal income tax purposes,
whether received in cash or reinvested in additional shares of the Fund. The
Fund may realize long-term capital gains, and may distribute "capital gain
dividends" or have undistributed capital gain income within the meaning of the
Code. The Fund will inform shareholders of the amount and nature of its income
and gains in a written notice mailed to shareholders not later than 60 days
after the close of the Fund's taxable year. For Social Security recipients,
interest on tax-exempt bonds, including tax-exempt interest dividends paid by
the Fund, is to be added to adjusted gross income for purposes of computing the
amount of Social Security benefits includible in gross income. Interest on
certain "private activity bonds" (generally, a bond issue in which more than 10%
of the proceeds are used for a non-governmental trade or business and which
meets the private security or payment test, or a bond issue which meets the
private loan financing test) issued after August 7, 1986 will constitute an item
of tax preference subject to the individual alternative minimum tax.
Corporations will be required to include as an item of tax preference for
purposes of the alternative minimum tax, 75% of the amount by which their
adjusted current earnings (including generally, tax-exempt interest) exceeds
their alternative minimum taxable income (determined without this tax item). In
addition, in certain cases Subchapter S corporations with accumulated earnings
and profits from Subchapter C corporations will be subject to a tax on "passive
investment income," including tax-exempt interest.
With respect to variable rate demand instruments, including participation
certificates herein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner and that the interest thereon will be exempt from regular Federal
income taxes to the Fund to the same extent as the interest on such underlying
Municipal Obligations. Counsel has pointed out that the Internal Revenue Service
has announced that it will not ordinarily issue advance rulings on the question
of the ownership of securities or participation interests therein subject to a
put and could reach a conclusion different from that reached by counsel. (See
"Federal Income Taxes" in the SAI.)
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
may subject the interest on such bonds to Federal tax if not registered, and the
Court further held 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 Municipal Obligations and to
tax such bonds in the future. The decision does not, however, affect the current
exemption from taxation of the interest earned on Municipal Obligations in
accordance with Section 103 of the Code.
NEW YORK INCOME TAXES
The exemption of interest income for Federal income tax purposes does not
necessarily result in an exemption under the income or other tax laws of any
state or local taxing authority. However, to the extent that dividends are
derived from interest on New York Municipal Obligations, the dividends will also
be excluded from a New York resident shareholder's gross income for New York
State and New York City personal income tax purposes. This exclusion does not
result in a corporate shareholder being exempt for New York State and New York
City franchise or income tax purposes. Shareholders should consult their own tax
advisers about the status of distributions from the New York Portfolio in their
own states and localities.
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NEW JERSEY INCOME TAXES
The exemption of interest income for Federal income tax purposes does not
necessarily result in an exemption under the income or other tax laws of any
state or local taxing authority. The New Jersey Portfolio intends to be a
"qualified investment fund" within the meaning of the New Jersey gross income
tax. The primary criteria for constituting a "qualified investment fund" are
that (1) such fund is an investment company registered with the SEC which, for
the calendar year in which the distribution is paid, has no investments other
than interest-bearing obligations, obligations issued at a discount, and cash
and cash items, including receivables and financial options, futures, forward
contracts, or other similar financial instruments relating to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto
and (2) at the close of each quarter of the taxable year, such fund has not less
than 80% of the aggregate principal amount of all of its investments, excluding
financial options, futures, forward contracts, or other similar financial
instruments relating to interest-bearing obligations, obligations issued at a
discount or bond indexes related thereto to the extent such instruments are
authorized under the regulated investment company rules under the Code, cash and
cash items, which cash items shall include receivables, in New Jersey Municipal
Obligations. Additionally, a qualified investment fund must comply with certain
continuing reporting requirements.
In the opinion of McCarter & English, LLP, special New Jersey tax counsel to the
New Jersey Portfolio, assuming that the New Jersey Portfolio constitutes a
qualified investment fund and that the New Jersey Portfolio complies with the
reporting obligations under New Jersey law with respect to qualified investment
funds, (a) distributions paid by the New Jersey Portfolio to a New Jersey
resident individual shareholder will not be subject to the New Jersey gross
income tax to the extent that the distributions are attributable to income
received as interest on or gain from New Jersey Municipal Obligations, and (b)
gain from the sale of shares in the New Jersey Portfolio by a New Jersey
resident individual shareholder will not be subject to the New Jersey gross
income tax. Shareholders should consult their own tax Advisers about the status
of distributions from the New Jersey Portfolio in their own states and
localities.
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on August 17, 1990. The authorized capital
stock of the Fund consists of twenty billion shares of stock having a par value
of one tenth of one cent ($.001) per share. The Fund's Board of Directors is
authorized to divide the unissued shares into separate series of stock, each
series representing a separate, additional investment portfolio. The Board
currently has authorized the division of the unissued shares into four series.
One of such series, the New York Portfolio, is also divided into two classes of
shares, the Class A Shares and the Class B Shares. Shares of all series or
classes will have identical voting rights, except where, by law, certain matters
must be approved by a majority of the shares of the affected series or class.
Each share of any series or class of shares when issued has equal dividend,
distribution, liquidation and voting rights within the series for which it was
issued, and each fractional share has those rights in proportion to the
percentage that the fractional share represents of a whole share. Shares will be
voted in the aggregate. There are no conversion or preemptive rights in
connection with any shares of the Fund. All shares, when issued in accordance
with the terms of the offering, will be fully paid and nonassessable. Shares are
redeemable at net asset value, at the option of the shareholder. As of February
28, 1998, the amount of shares owned by all officers and directors of the Fund,
as a group, was less than 1% of the outstanding shares of each of the
Portfolios.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. The Fund does not issue
certificates evidencing Fund shares.
GENERAL INFORMATION
The Fund is registered with the SEC as an open-end, management investment
company. The Fund prepares semi-annual unaudited and annual audited reports
which include a list of investment securities held by the Fund and which are
sent to shareholders.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
meetings only (a) for the election of directors, (b) for approval of the Fund's
revised investment advisory agreement with respect to a particular class or
series of stock, (c) for approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of stock, and (d) upon
the written request of holders or
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shares entitled to cast not less than 25% of all the votes entitled to be cast
at such meeting. Annual and other meetings may be required with respect to such
additional matters relating to the Fund as may be required by the Act, including
the removal of Fund director(s) and communication among shareholders, any
registration of the Fund with the Securities and Exchange Commission or any
state, or as the directors may consider necessary or desirable. Each director
serves until the next meeting of the shareholders called for the purpose of
considering the election or reelection of such director or of a successor to
such director, and until the election and qualification of his or her successor,
elected at such a meeting, or until such director sooner dies, resigns, retires
or is removed by the vote of the shareholders.
For further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement filed with the SEC,
including the exhibits thereto. The Registration Statement and the exhibits
thereto may be examined at the SEC and copies thereof may be obtained upon
payment of certain duplicating fees.
FUND PERFORMANCE
Each Portfolio may from time to time include its yield, total return, and
average annual total return in advertisements or information furnished to
present or prospective shareholders. Each Portfolio may also from time to time
include in advertisements the ranking of those performance figures relative to
such figures for groups of mutual funds categorized by Lipper Analytical
Services as having the same investment objectives.
Average annual total return is a measure of the average annual compounded rate
of return of $1,000 invested at the maximum public offering price over a
specified period, which assumes that any dividends or capital gains
distributions are automatically reinvested in the Portfolio rather than paid to
the investor in cash. Total return is calculated with the same assumptions and
shows the aggregate return on an investment over a specified period. CDSCs, in
the case of the Class B Shares, are reflected in the calculation of the New York
Portfolio's performance information.
The formula for total return used by each Portfolio includes three steps: (1)
adding to the total number of shares purchased by the hypothetical investment in
the portfolio of $1,000 (assuming the investment is made at a public offering
price that includes the current maximum sales load of 4.50%) all additional
shares that would have been purchased if all dividends and distributions paid or
distributed during the period had been automatically reinvested; (2) calculating
the value of the hypothetical initial investment as of the end of the period by
multiplying the total number of shares owned at the end of the period by the net
asset value per share on the last trading day of the period; and (3) dividing
this account value for the hypothetical investor by the amount of the initial
investment and annualizing the result for periods of less than one year.
Each Portfolio computes yield by annualizing net investment income per share for
a recent 30-day period and dividing that amount by a Portfolio's share's maximum
public offering price (reduced by any undeclared earned income expected to be
paid shortly as a dividend) on the last trading day of that period. CDSCs, in
the case of the Class B Shares, are reflected in the calculation of the New York
Portfolio's performance information. The Portfolio's yield will vary from time
to time depending upon market conditions, the composition of the Portfolio and
operating expenses of the Portfolio.
The New York Portfolio may also advertise a tax equivalent yield for residents
of the State of New York wherein all or substantially all of the Portfolio's
dividends are not subject to New York income tax. The advertisement of a tax
equivalent yield reflects the taxable yield that a New York investor subject to
that state's or municipality's stated tax rate would have had to receive in
order to realize the same level of after-tax yield as an investment in the
Portfolio would have produced.
The New Jersey Portfolio may also advertise a tax equivalent yield for residents
of the State of New Jersey wherein all or substantially all of the New Jersey
Portfolio's dividends are not subject to New Jersey gross income tax. The
advertisement of a tax equivalent yield reflects the taxable yield that a New
Jersey investor subject to that state's or municipality's stated tax rate would
have had to receive in order to realize the same level of after-tax yield as an
investment in the New Jersey Portfolio would have produced.
Total return and yield may be stated with or without giving effect to any
expense limitations in effect for the Portfolio.
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NET ASSET VALUE
The net asset value of the Fund's shares is determined as of the earlier of 4:00
p.m., New York City time, or the close of the NYSE on each Fund Business Day.
Fund Business Day means weekdays (Monday through Friday) except customary
business holidays and Good Friday. It is computed by dividing the value of the
Fund's net assets (i.e., the value of its securities and other assets less its
liabilities, including expenses payable or accrued but excluding capital stock
and surplus) by the total number of shares outstanding.
Municipal Obligations are priced on the basis of valuations provided by a
pricing service approved by the Board of Directors, which uses information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. The valuations provided by such pricing service
will be based upon fair market value determined most likely on the basis of the
factors listed above. If a pricing service is not used, Municipal Obligations
will be valued at quoted prices provided by municipal bond dealers.
Non-tax-exempt securities for which transaction prices are readily available are
stated at market value (determined on the basis of the last reported sales
price, or a similar means). Short-term investments that will mature in 60 days
or less are stated at amortized cost, which approximates market value. All other
securities and assets are valued at their fair market value as determined in
good faith by the Board of Directors.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105-1716, is custodian for the Fund's cash and securities. The Fund's
custodian does not assist in, and is not responsible for, investment decisions
involving assets of the Fund. The Fund has retained State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02111, to provide personnel
and facilities to perform transfer agency related services for the Fund.
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<PAGE>
MORE INFORMATION ON THE MUNICIPAL MARKET
Individuals considering an investment in the Fund should be aware that the
municipal securities market is "large, dynamic, and increasingly complex," to
quote an SEC Staff Report. Many diverse factors affect the yield, security, and
suitability of one's investment in the Fund. Among them:
Municipal Bonds raise money for public works. These are the indispensable roads,
sewers, schools, subways, airports, public buildings and facilities -
"Built-by-Bonds" - that provide the physical infrastructure for communal life
and the underpinnings for long range economic development of the community.
A Municipal Bond is evidence of collective debt. It shows that a local
governmental entity or authority needed money for a public purpose. It
represents the obligation of the borrower to repay a fixed sum of money on a
definite future date at a fixed rate of interest. And that interest is free of
federal income tax and free in most states where issued from state and local
taxes in that state.
Investors are willing to lend, issuers are able to borrow at lower rates of
interest in the tax free bond market. Exemption from taxes reduces the interest
rate local governments must pay on their debt, because investors are willing to
accept a lower rate of interest on tax exempt debt than on taxable debt. PSA The
Bond Market Trade Association has estimated that the saving in borrowing costs
on $992 billion of Municipal Bonds issued between 1992 and 1996 will add up to
$297 billion by the year 2008, versus what it would have cost the states, their
political subdivisions, agencies, and authorities to borrow at prevailing
corporate interest rates.
Individuals investing their savings in municipal securities help improve the
rate of savings and investment in America. Economists believe that the root of
such economic ills as the deficit, low dollar, U.S. balance of payments problem,
poor productivity and crumbling infrastructure lies in the sharp decline in the
nation's savings rate in the 1980s and 1990s. Saving is the seedcorn of an
economy. You plant it, that is you invest it, it grows, and reproduces itself.
Through the lending/borrowing process your savings are converted into factories,
housing, roads, airports - productive investments that create jobs and real
wealth. All investment - public, private, municipal, corporate-begins with
savings. In advertising municipal securities as the "workhorse of investments,"
Lebenthal & Co., Inc. is alluding to municipal securities as a tool both for
building one's own future - and for digging roads, building schools, laying
sewers, producing power, providing housing, putting up hospitals, moving
commuters, paving runways, boring tunnels and rebuilding a more productive
America.
Tax exempt securities are owned primarily by individuals. There are
approximately $1.3 trillion of Municipal Bonds outstanding, approximately $953
billion of them owned by individual investors, either through the direct
purchase of individual bonds or through their ownership of shares in mutual
funds like the Lebenthal Municipal Bond Funds. According to the Internal Revenue
Service, 5.1 million (4.3% out of 116.1 million tax returns) reported receiving
$48.4 billion of tax exempt income in 1994. Filers with adjusted gross incomes
of less than $100,000 accounted for 77% of all filers reporting tax exempt
income and 49.6% of all tax exempt income reported. Filers with adjusted gross
incomes of less than $50,000 accounted for 47% of returns reporting tax exempt
income and 28.6% of the tax exempt income reported. The municipal securities
market is increasingly dominated by the individual investor. Households are the
largest holders of municipal debt.
Low borrowing cost for infrastructure has public policy implications. Until 1988
state and local bonds enjoyed constitutional protection from federal taxation.
In overruling the constitutional argument for the federal tax immunity in 1988,
the Supreme Court in South Carolina v. Baker said that now "states must find
their protection from congressional regulation through the national political
process." As a result, public policy considerations must justify the
preservation of tax exemption. Low cost of borrowing for indispensable public
works, saving citizens money in their capacity as local taxpayers are arguments
for tax exemption. The preservation of tax exemption is also served when
municipal securities are accessible to the average investor, and not perceived
as benefitting only the very wealthy. To quote the SEC Staff Report, "with the
changing income tax rates, persons of more moderate means increasingly have
invested in municipal securities." For the long term saving goals of a great and
growing number of individuals and families, tax exempt securities are a viable
alternative to taxable savings instruments.
Comparing a tax free return to a taxable return is only one test of suitability.
From time to time, the Fund will show how much taxable investments, such as bank
CDs, would have to yield for the after-tax return to equal yields in the tax
free bond market. Tax free to taxable yield comparisons are made on the basis of
arithmetic alone and do not take into account
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significant differences of security, liquidity, and suitability that may exist
between the instruments being compared. For example bank CDs are federally
insured. And there is a penalty, but no market risk, for early redemption,
whereas the resale value of Fund shares will rise or fall with changes in
interest rates in general or with changes in the creditworthiness of the
underlying bonds in the Fund portfolio.
There is "market risk" in selling before maturity. The words "safe," "safety,"
and "secure" as used in bonds apply to creditworthiness: the assuredness of
receiving your interest right along and getting your principal back at the end.
But anyone considering an investment in municipal securities must accept market
fluctuation - and possible loss in resale value before maturity - as facts of
life. This is because the resale value of a fixed income security will adjust to
changing interest rates and the yields available from comparable new issues in
the market. As a rule of thumb, generally if interest rates are higher when you
go to sell than they were when you bought your bond, you will get less than you
paid. ("Yields up, price down.") Also generally, if interest rates are lower
when you sell than when you bought, you will make money. ("Yields down, price
up.")
There are two broad categories of creditworthiness: general obligation bonds and
revenue bonds. General obligations are secured by tax collections, revenue bonds
by earnings. When a bond is secured by the power of a governmental issuer to
levy taxes on real estate without limitation as to rate or amount, and when the
issuer pledges all its resources to pay principal and interest, the bond is said
to be a full faith and credit general obligation. The laws governing the
issuance of general obligation bonds intend for the bondholder to be paid in
full and on time. And such bonds have earned for all Municipal Bonds their
reputation for safety. There is another type of Municipal Bond - the revenue
bond. As the name implies, revenue bonds are secured by tolls, rentals, mortgage
payments, tuitions, fees, that is by earnings of the project so financed. Their
strength is the commercial viability of the project and power of the issuer to
levy user charges. Tax collections or earnings, they are both cashflow. And
cashflow is the collateral behind municipal securities.
Municipal securities are creatures of law. They depend on law. They must conform
to statutory requirements, the most desirable of which is that the people voted
for the issue. The issuer must not exceed the legal debt limit, and every law
governing the birth of a bond must be carefully followed when a municipality is
borrowing money. All this must be attested to by the legal opinion of reputable
and recognized attorneys specializing in municipal law.
There are over one million combinations of issuer, issue, interest rate, and
maturity to choose from. Moody's Investors Service puts out a 19-pound,
three-volume manual rating 16,472 states and local entities whose bonds are in
the hands of the public. An issuer generally has more than one issue of bonds
outstanding. And each issue is like many in one, made up of "maturities"-blocks
of bonds that come due in staggered years from now to the year 2027 and longer.
The possible combinations provide flexibility in tailoring a Municipal Bond
portfolio to the needs of the individual - or, for some people - result in the
decision to buy a fund of bonds and let the fund manager do the picking and
choosing.
Boiling choice down to four investment decisions. Before recommending specific
municipal securities, an investment adviser does some digging. Are you likely to
jump in and out of your bonds? Do you really need the income now? When do you
plan to retire? What about heirs? How much is the peace and comfort of a
triple-A rating worth to you in cold cash? Are you investing for children's
education? Are you using municipals to build up an estate? Are you living on the
interest and leaving your principal to your survivors? Should you reduce your
estate and your estate taxes through an orderly invasion of your capital? These
personal characteristics and financial objectives translate into the four basic
investment decisions: (1) Long versus short; (2) high coupon rate versus low or
even zero coupon rate; (3) rating versus yield; and (4) individual bonds versus
packages of bonds, like unit investment trusts or mutual funds.
Individual Municipal Bonds have a fixed maturity. A mutual fund of Municipal
Bonds does not. A Municipal Bond is a contract for the future delivery of money
- - a fixed sum at a definite date in the future. Like any fixed income security,
individual bonds fluctuate in market value with interest rates and changing
market conditions. But hold your bond to maturity, cash it in at the end, and
you are promised getting back full face value - in 2, 5, 10, 30 years - whatever
the due date engraved on the books of the issuer. On the other hand, the bonds
in a fund portfolio are candidates for buy, sell, and hold every day. The
Lebenthal New York Municipal Bond Fund is nominally a portfolio of long term
bonds. But a 30-year bond in the portfolio may have an effective "maturity" no
longer than the number of days, weeks, months, the Adviser decides to hold it in
the portfolio. The Adviser does not sit there waiting for bonds in the portfolio
to mature. He or she trades them in and out of the Fund portfolio
opportunistically, seeking to maximize tax free income consistent with the
preservation of capital, and to take gains or, in falling markets, to minimize
losses. There can be no guarantee of any level of Fund performance. And in
selling their shares which fluctuate, shareholders may make money or lose money,
depending on when they bought their shares, market conditions, and Fund
performance.
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Your own needs determine which is better for you. The buyer of individual bonds
targets a maturity, is quoted a yield to that maturity, and the price the buyer
pays locks in that return to maturity. If the buyer holds to maturity,
fluctuating interest rates and changing prices in the resale market prior to
maturity are not a factor in the yield to maturity. Between getting interest
right along and cashing in the bond for full face value at the end, the
individual bond buyer winds up with the yield to maturity originally bargained
for.
In a mutual fund, the shareholder seeks a higher total return than might be
currently available in the targeted maturity, fixed yield-to-maturity market -
as a result of reinvestment of dividends, interest being earned on interest, and
portfolio management, i.e. active bond trading in the Fund portfolio. There can
be no assurance of a particular Fund yield, because the bonds in the portfolio
change. They are being added to, or disposed or and replaced with other bonds,
when the portfolio manager sees an opportunity to realize gains or, in a
declining market, minimize losses. Nor can there be any guarantee the Fund will
achieve its objectives. When you sell your shares you may get more for them than
you paid. You may get less. It depends on current market conditions, whether
interest rates are higher or lower than when you bought your shares, and the
ability of Management to anticipate markets and know when to buy, sell, or hold.
An open end fund for open end savings goals. If you know you are going to need
your money for a specific purpose on a specific date in the future, buy a fixed
income security and target the maturity date. The Lebenthal New York Municipal
Bond Fund is for more general open-ended objectives like building up an estate
or saving for retirement. The Fund can pay out interest every month, free of New
York and regular federal income tax. Or, it can reinvest your monthly interest
in additional Fund shares...so your interest earns interest...and each month
that interest earns still more tax free interest, and builds upon itself.
Monthly income, or automatic reinvestment - the option is yours.
The principle of "total return". With automatic reinvestment in the Lebenthal
New York Municipal Bond Fund, you measure investment return by adding up the
coupon interest from the underlying bonds in the Fund plus the value of that
interest being reinvested in additional shares every month plus (or minus) any
ups (or downs) in the market value of your accumulating shares.
Price down, yield up. In the infamous 1994 bond market decline, nothing was
spared. Not individual bonds. Not the Lebenthal New York Municipal Bond Fund.
But all is not lost when the market declines. Bond prices down means that bond
yields are up. Buying new shares at the lower price is called dollar cost
averaging. The Fund takes your new money and invests it for you at higher rates.
As for old bonds in the portfolio, the interest being spun off and reinvested
right along now buys more Fund shares than if the price were higher. So that if,
as, and when - and should the price go up again - you now have that many more
shares to go along for the ride and move up in market value. As events have
shown, compounding does not protect against fluctuating bond prices and losses
in the resale value of your shares. A decline in the value of the underlying
bonds in the Fund portfolio could more than offset the positive impact of any
gains from compounding. But your thinking when you buy the Fund should be the
philosophy of the long haul: dollar cost averaging, plus interest on interest,
plus time will conspire to build growth. If you invest when you have the funds,
over the long haul you will hit some markets, you will miss some markets. Your
bet is that time and regular investing will smooth out the bumps. No guarantee,
just a fighting chance.
Count The Shares, Give It Time. With automatic dividend reinvestment, every
month your shares spin off new shares which means that the amount of shares you
own is growing all the time.
Here are two graphs showing the hypothetical growth of $10,000 over a 17+ year
period. For the first 5 years, 9 months up to the dotted line, the graphs depict
the actual performance record of the Lebenthal New York Municipal Bond Fund.
Beyond the dotted line, the graphs seemingly step through the looking glass and
hypothesize through March 12, 2008 a mirror image of the Fund's past, in order
to show the hypothetical effects of compounding for two additional 5-year,
9-month periods. Past isn't prologue, and the graphs should not be construed as
an indication of anticipated performance of the Fund in the future. Their sole
purpose is to illustrate how monthly dividends, plowed back into additional fund
shares, build and rebuild on themselves over time.
-27-
467596.5
<PAGE>
In our example, $10,000 Without Reinvestment would grow to $20,430 by March 12,
2008: $9,773 representing straight interest, $10,657 the new net asset value of
the shares originally acquired. With Reinvestment that same $10,000 would grow
to $27,455*--an additional $7,025 (34% more return on investment), when straight
interest is reinvested and allowed to accumulate and build.
Compounding does not protect against fluctuating bond prices and a decline in
value per share could negate the positive effect of any growth in the number of
shares owned. Whether you make money or lose money down the road when you sell
your shares will depend on the going resale price per share times the number of
shares you then own. It stands to reason that the more shares you have
accumulated through reinvestment over time, the bigger the multiplier that will
be working for you when you do decide to sell.
So, if you go into a fund and sign up for reinvestment for long term saving
goals, don the mantel of the long term saver. When you get your statement every
month showing current share value, count the growing number of shares you own,
not just price. And give it time. Time is the soulmate of automatic
reinvestment--and the best friend a long term saver's got.
- --------
* Reflects maximum 4 1/2% load which reduces the amount of the $10,000 purchase
price that is actually working for you to $9,550.
-28-
467596.5
<PAGE>
LEBENTHAL FUNDS, INC.
LETTER OF INTENT (L.O.I.)
Although I am not obligated to invest and Lebenthal Funds Inc. (the "Fund") is
not obligated to sell, it is my intention to invest over a 13 month period (the
"L.O.I. Period") in an aggregate amount of shares of the Fund at least equal to
that which is checked below, thereby entitling me to the reduced sales load
applicable to such aggregate amount.
<TABLE>
<CAPTION>
Lebenthal New York Municipal Bond Fund
Sales Sales
Aggregate Amount Load Aggregate Amount Load
---------------- ---- ---------------- ----
<S> <C> <C> <C>
/ / $50,000.00 - $99,999.99 4.00% / / $100,000.00 - $249,999.99 .50%
/ / $250,000.00 - $499,999.99 2.75% / / $500,000.00 - $999,999.99 .00%
/ / $1,000,000.00 - $2,499,999.00 1.00% / / $2,500,000.00 or more .50%
Lebenthal New Jersey Municipal Bond Fund
Sales Sales
Aggregate Amount Load Aggregate Amount Load
---------------- ---- ---------------- ----
/ / $50,000.00 - $99,999.99 4.00% / / $100,000.00 - $249,999.99 3.50%
/ / $250,000.00 - $499,999.99 2.75% / / $500,000.00 - $999,999.99 2.00%
/ / $1,000,000.00 - $2,499,999.00 1.00% / / $2,500,000.00 or more .50%
Lebenthal Taxable Municipal Bond Fund
Sales Sales
Aggregate Amount Load Aggregate Amount Load
---------------- ---- ---------------- ----
/ / $50,000.00 - $99,999.99 4.00% / / $100,000.00 - $249,999.99 3.50%
/ / $250,000.00 - $499,999.99 2.75% / / $500,000.00 - $999,999.99 2.00%
/ / $1,000,000.00 - $2,499,999.00 1.00% / / $2,500,000.00 or more .50%
</TABLE>
I understand that purchases made within the last 90 days will be included as
part of my intended investment.
In addition, I understand that a number of shares with a value equal to 4.50% of
the dollar amount of intended purchases specified herein will be held in escrow
(the "Escrowed Shares") by Lebenthal & Co., Inc. (the "Distributor") until the
purchases are completed and that dividends and distributions on the Escrowed
Shares will be paid to me. During the escrow period, I grant to the Distributor
a security interest in the Escrowed Shares. If the intended purchases are not
completed during the L.O.I. Period, I understand that I will be required to pay
the Distributor an amount equal to the difference between the regular sales load
applicable to a single purchase of the number of shares actually purchased and
the sales load actually paid. If such payment is not made within 20 days after
written request to me by the Distributor, I agree that the Distributor has the
right to redeem a sufficient number of Escrowed Shares to effect payment of the
amount due. Any remaining Escrowed Shares will be released to my account.
<TABLE>
<S> <C> <C>
Lebenthal New York Municipal Bond Fund
---------------- --------------
Shareholder Name Account Number
Lebenthal New Jersey Municipal Bond Fund
---------------- --------------
Shareholder Name Account Number
Lebenthal Taxable Municipal Bond Fund
---------------- --------------
Shareholder Name Account Number
</TABLE>
-29-
467596.5
<PAGE>
LEBENTHAL 120 Broadway, New York, NY 10271
FUNDS, INC. (212) 425-6116
OUTSIDE NYC TOLL FREE 1-800-221-5822
STATEMENT OF ADDITIONAL INFORMATION
March 31, 1998
This Statement of Additional Information, although not in itself a prospectus,
expands upon and supplements the information contained in the current Prospectus
of Lebenthal Funds, Inc. (the "Fund"). Lebenthal New York Municipal Bond Fund
(the "New York Portfolio"), Lebenthal Taxable Municipal Bond Fund (the "Taxable
Portfolio") and Lebenthal New Jersey Municipal Bond Fund (the "New Jersey
Portfolio") (the New York Portfolio, the Taxable Portfolio and the New Jersey
Portfolio together are referred to herein as the "Portfolio" or the
"Portfolios"), dated March 31, 1998, and should be read in conjunction with the
Prospectus. The Portfolios' Prospectus may be obtained from any Participating
Organization or by writing or calling the Fund. This Statement of Additional
Information is incorporated by reference into the Prospectus in its entirety.
<TABLE>
Table of Contents
<S> <C> <C> <C>
The Portfolios and Their Objectives.............................2 Net Asset Value..........................25
Investment Objectives, Policies and Fund Performance.........................25
Risks of the New York and New Jersey Portfolios...........2 Manager .................................26
Investment Objectives, Policies Management of the Fund...................28
and Risks of the Taxable Portfolio........................3 Distribution and Service Plans...........30
Description of the Portfolios' Description of Common Stock..............32
Investment Securities.....................................4 Federal Income Taxes.....................33
Municipal Obligations.....................................4 New York Income Taxes....................36
Floating Rate and Variable Rate Securities................5 New Jersey Income Taxes..................36
When-Issued Securities....................................6 Custodian, Transfer Agent and
Stand-by Commitments......................................6 Dividend Agent........................36
Taxable Securities........................................7 Description of Security Ratings
Repurchase Agreements.....................................7 and Notes.............................37
New York Risk Factors........................................8 Advertising Material.......................
New Jersey Risk Factors.....................................12 Tax Equivalent Yield Tables................
Investment Restrictions........................................23 Independent Auditor's Report...............
Portfolio Transactions.........................................24 Financial Statements.......................
How to Purchase and Redeem Shares..............................24
</TABLE>
467599.3
<PAGE>
THE PORTFOLIOS AND THEIR OBJECTIVES
The New York Portfolio and the New Jersey Portfolio are non-diversified
portfolios, whereas the Taxable Portfolio is a diversified portfolio. The New
York Portfolio currently offers two classes of shares to investors, the Class A
Shares and the Class B Shares. The investment objectives of the Portfolios
described in this section may not be changed unless approved by the holders of a
majority of the outstanding shares of the respective Portfolio that would be
affected by such a change. As used in this Prospectus, the term "majority of the
outstanding shares" of the Portfolio means the vote of the lesser of (i) 67% or
more of the shares of the Portfolio present at a meeting, if the holders of more
than 50% of the outstanding shares of the Portfolio are present or represented
by proxy or (ii) more than 50% of the outstanding shares of the Portfolio.
As non-diversified investment companies, the New York Portfolio and the New
Jersey Portfolio are not subject to any statutory restriction under the
Investment Company Act of 1940 (the "1940 Act") with respect to investing their
assets in one or relatively few issuers. This non-diversification may present
greater risks than in the case of a diversified company. As a diversified
investment company, 75% of the assets of the Taxable Portfolio is subject to the
following limitations: (a) the Portfolio may not invest more than 5% of its
total assets in the securities of any one issuer, except obligations of the
United States government and its agencies and instrumentalities, and (b) the
Portfolio may not own more than 10% of the outstanding voting securities of any
one issuer. The classification of the Taxable Portfolio as a diversified
investment company is a fundamental policy of the Portfolio and may be changed
only with the approval of the holders of a majority of such Portfolio's
outstanding shares.
The Fund intends to maintain its qualification as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). The Fund will be restricted in that at the close of each quarter
of the taxable year, at least 50% of the value of the assets of each Portfolio
must be represented by cash, government securities, investment company
securities and other securities limited in respect of any one issuer to not more
than 5% in value of the assets of each Portfolio and to not more than 10% of the
outstanding voting securities of such issuer. In addition, at the close of each
quarter of its taxable year, not more than 25% in value of each Portfolio's
total assets may be invested in securities of one issuer other than U.S.
government securities. The limitations described in this paragraph regarding
qualification as a "regulated investment company" are not fundamental policies
and may be revised to the extent applicable Federal income tax requirements are
revised. (See "Federal Income Taxes" herein.)
Investment Objectives, Policies and Risks of the New York and New Jersey
Portfolios
The New York and New Jersey Portfolios are each a municipal bond fund. The New
York and New Jersey Portfolios' investment objectives are to maximize income,
exempt from regular Federal income tax and from New York State and New York City
personal income taxes (the "New York Income Tax"), with respect to the New York
Portfolio, and from New Jersey gross income tax, with respect to the New Jersey
Portfolio, consistent with preservation of capital and with consideration given
to opportunities for capital gain. No assurance can be given that these
objectives will be achieved. The following discussion expands upon the
description of the New York and New Jersey Portfolios' investment objectives,
policies and risks in the Prospectus. The New York and New Jersey Portfolios
each provide tax free income that when reinvested into additional shares of the
New York and New Jersey Portfolios, respectively, provide investors growth by
increasing the value of their total investment.
The New York and New Jersey Portfolios' assets will be invested primarily in
long term investment grade tax-exempt securities issued by or on behalf of the
State of New York with respect to the New York Portfolio, and the State of New
Jersey, with respect to the New Jersey Portfolio and other states, Puerto Rico
and other United States territories and possessions, and their authorities,
agencies, instrumentalities and political subdivisions ("Municipal
Obligations"). The average maturity of the Municipal Obligations in which the
New York and New Jersey Portfolios will invest is 15-25 years. The New York and
New Jersey Portfolios each attempts to invest 100%, and as a matter of
fundamental policy invests at least 80%, of the value of its net assets in
securities with remaining maturities of one year or more the interest on which
is, in the opinion of bond counsel to the issuer at the date of issuance, exempt
from regular Federal income tax and from New York State and New York City
personal income taxes ("New York Municipal Obligations") with respect to the New
York Portfolio, and from New Jersey gross income tax ("New Jersey Municipal
Obligations") with respect to the New Jersey Portfolio. The New York and New
Jersey Portfolios may each also invest in tax-exempt securities of issuers
outside New York State or the State of New Jersey, respectively, if such
securities bear interest which is exempt from regular Federal income tax and New
York State and City personal income taxes or New Jersey gross income tax,
respectively. The New York and New Jersey Portfolios each also reserves the
right to invest up to 20% of the value of its net assets in securities, the
interest on which is exempt from regular Federal income tax but not New York
State and City personal income taxes with respect to the New York Portfolio, and
New Jersey gross income tax with respect to the New Jersey Portfolio, and other
taxable obligations. Although the Supreme Court has determined that Congress has
the authority to subject the interest on municipal bonds to Federal income
taxation, existing law excludes such interest from regular Federal income tax.
However, such tax-exempt interest may be subject to the Federal alternative
minimum tax. Securities, the interest income on which may be subject to the
Federal alternative minimum tax, may be purchased by the New York and New Jersey
Portfolios without limit. (See "Federal Income Taxes" herein.)
2
467599.3
<PAGE>
The New York and New Jersey Portfolios will invest principally, without
percentage limitations, in tax-exempt securities which on the date of investment
are within the four highest credit ratings of Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A, Baa for bonds; MIG-1, MIG-2, MIG-3, MIG-4 for notes;
P-1, P-2, P-3 for commercial paper; VMIG-1, VMIG-2, VMIG-3, VMIG-4 for variable
and floating demand notes), Standard & Poor's Corporation ("S&P") (AAA, AA, A,
BBB for bonds; SP-1, SP-2, SP-3 for notes and for variable and floating demand
notes; A-1, A-2, A-3, B for commercial paper) or Fitch Investors Service, Inc.
("Fitch") (AAA, AA, A, BBB for bonds; F-1, F-2, F-3 for notes, variable and
floating demand notes and commercial paper). Although bonds and notes rated in
the fourth credit rating category are commonly referred to as investment grade
they may have speculative characteristics. In addition, changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds. The Fund will not necessarily dispose of a security that falls below
investment grade upon the Manager's determination as to whether retention of
such a security is consistent with the Fund's investment objectives. A detailed
discussion of such characteristics and circumstances and their effect upon the
New York and New Jersey Portfolios appears under the heading "Description of the
New York and New Jersey Portfolios' Investment Securities." A description of the
credit ratings appears under the heading "Description of Ratings". The New York
and New Jersey Portfolios may invest in tax-exempt securities which are not
rated or which do not fall into the credit ratings noted above if, based upon
credit analysis by the Adviser, it is believed that such securities are of
comparable quality.
In unusual circumstances during adverse market conditions, as determined by the
Manager, the New York and New Jersey Portfolios may each assume a temporary
defensive position in which the New York or New Jersey Portfolio, respectively,
may invest up to 100% of the value of its net assets on a temporary basis in
securities, the interest on which is exempt from regular Federal income tax, but
not New York State and City personal income taxes, with respect to the New York
Portfolio, and New Jersey gross income tax, with respect to the New Jersey
Portfolio, and in fixed-income securities, the interest on which is subject to
regular Federal, state or local income tax, pending the investment or
reinvestment in tax-exempt securities of proceeds of sales of shares or sales of
portfolio securities or in order to avoid the necessity of liquidating portfolio
investments to meet redemptions of shares by investors or where market
conditions due to rising interest rates or other adverse factors warrant
temporary investing for defensive purposes. Investments in taxable securities
will be substantially in securities issued or guaranteed by the United States
government (such as bills, notes and bonds), its agencies, instrumentalities or
authorities, highly-rated corporate debt securities (rated AA or better by S&P
and Fitch, or Aa3 or better by Moody's); prime commercial paper (rated A-1+ by
S&P, F-1+ by Fitch or P-1 by Moody's) and certificates of deposit of the 100
largest domestic banks in terms of assets which are subject to regulatory
supervision by the United States government or state governments and the 50
largest foreign banks in terms of assets with branches or agencies in the United
States. Investments in certificates of deposit of foreign banks and foreign
branches of United States banks may involve certain risks, including different
regulations, use of different accounting procedures, political or other economic
developments, exchange controls, or possible seizure or nationalization of
foreign deposits.
Investment in the Portfolios should be made with an understanding of the risk
which an investment in New York Municipal Obligations or New Jersey Municipal
Obligations, as the case may be, may entail. Payment of interest and
preservation of capital are dependent upon the continuing ability of New York
and New Jersey issuers and/or obligors of state, municipal and public authority
debt obligations to meet their obligations thereunder. Investors should consider
the greater risk of the Portfolio's concentration versus the safety that comes
with a less concentrated investment portfolio.
Investment Objectives, Policies and Risks of the Taxable Portfolio
The Taxable Portfolio is a taxable municipal bond fund. The Taxable Portfolio's
investment objectives are to maximize income consistent with preservation of
capital and with consideration given to opportunities for capital gain. No
assurance can be given that these objectives will be achieved. The following
discussion expands upon the description of the Taxable Portfolio's investment
objectives, policies and risks in the Prospectus.
The Taxable Portfolio's assets will be invested primarily in long term
investment grade taxable securities issued by or on behalf of states and
municipal governments, other United States territories and possessions of the
United States, and their authorities, agencies, instrumentalities and political
subdivisions ("Taxable Municipal Obligations"). The average maturity of the
Taxable Municipal Obligations in which the Taxable Portfolio will invest is over
10 years. The Taxable Portfolio attempts to invest 100%, and as a matter of
fundamental policy invests at least 65%, of the value of its total assets in
taxable securities with remaining maturities of one year or more. The interest
on the Taxable Municipal Obligations is includable in gross income for federal
income tax purposes and may be subject to personal income taxes imposed by any
state of the United States or any political subdivision thereof, or by the
District of Columbia. (See "Federal Income Taxes" herein.)
The Taxable Portfolio will invest principally, without percentage limitations,
in securities which on the date of investment are within the four highest credit
ratings of Moody's (Aaa, Aa, A, Baa for bonds; MIG-1, MIG-2, MIG-3, MIG-4 for
notes; P-1, P-2, P-3 for commercial paper; VMIG-1, VMIG-2, VMIG-3, VMIG-4 for
variable and floating demand notes), S&P (AAA, AA, A, BBB for bonds;
3
467599.3
<PAGE>
SP-1, SP-2, SP-3 for notes and for variable and floating demand notes; A-1, A-2,
A-3, B for commercial paper) or Fitch (AAA, AA, A, BBB for bonds; F-1, F-2, F-3
for notes, variable and floating demand notes and commercial paper). Although
bonds and notes rated in the fourth credit rating category are commonly referred
to as investment grade they may have speculative characteristics. In addition,
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds. The Fund will not necessarily dispose of a security
that falls below investment grade upon the Manager's determination as to whether
retention of such a security is consistent with the Fund's investment
objectives. A detailed discussion of such characteristics and circumstances and
their effect upon the Taxable Portfolio appears under the heading "Description
of the Taxable Portfolio's Investment Securities." A description of the credit
ratings appears under the heading "Description of Ratings." The Taxable
Portfolio may invest in securities which are not rated or which do not fall into
the credit ratings noted above if, based upon credit analysis by the Manager, it
is believed that such securities are of comparable quality.
In unusual circumstances during adverse market conditions, as determined by the
Manager, the Taxable Portfolio may assume a temporary defensive position in
which the Taxable Portfolio may invest up to 100% of the value of its net assets
on a temporary basis in securities issued or guaranteed by the United States
government (such as bills, notes and bonds), its agencies, instrumentalities or
authorities, tax-exempt securities, highly-rated corporate debt securities
(rated AA or better by S&P and Fitch, or Aa3 or better by Moody's); prime
commercial paper (rated A-1+ by S&P, F-1+ by Fitch or P-1 by Moody's) and
certificates of deposit of the 100 largest domestic banks in terms of assets
which are subject to regulatory supervision by the United States government or
state governments and the 50 largest foreign banks in terms of assets with
branches or agencies in the United States. Investments in certificates of
deposit of foreign banks and foreign branches of United States banks may involve
certain risks, including different regulations, use of different accounting
procedures, political or other economic developments, exchange controls, or
possible seizure or nationalization of foreign deposits.
Investment in the Portfolio should be made with an understanding of the risks
which an investment in Municipal Obligations may entail. However, payment of
interest and preservation of principal are dependent upon the continuing ability
of the obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder.
DESCRIPTION OF THE PORTFOLIOS' INVESTMENT SECURITIES
Municipal Obligations
(1) Municipal Bonds include long term, and for the Taxable Portfolio, taxable,
obligations that are rated Baa or better at the date of purchase by
Moody's, or BBB or better by S&P or Fitch or, if not rated, are of
comparable quality as determined by the Manager on the basis of the
Manager's credit evaluation of the obligor or credit enhancement issued in
support of the obligation. Municipal Bonds are debt obligations of states,
cities, counties, municipalities and municipal agencies (all of which are
generally referred to as "municipalities") which generally have a maturity
at the time of issue of one year or more and which are issued to raise
funds for various public purposes such as construction of a wide range of
public facilities, to refund outstanding obligations and to obtain funds
for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" 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. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The
principal of and interest on revenue bonds are payable from the income of
specific projects or authorities and generally are not supported by the
issuer's general power to levy taxes. In some cases, revenues derived from
specific taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by
public authorities to provide funding for various privately operated
industrial facilities (hereinafter referred to as "industrial revenue
bonds" or "IRBs"). Interest on the IRBs contained in the New York
Portfolio and New Jersey Portfolio is generally exempt, with certain
exceptions, from regular Federal income tax pursuant to Section 103(a) of
the Code, provided the issuer and corporate obligor thereof continue to
meet certain conditions. (See "Federal Income Taxes" herein.) IRBs are, in
most cases, revenue bonds and do not generally constitute the pledge of
the credit of the issuer of such bonds. The payment of the principal and
interest on IRBs usually depends solely on the ability of the user of the
facilities financed by the bonds or the other guarantor to meet its
financial obligations and, in certain instances, the pledge of real and
personal property as security for payment. If there is no established
secondary market for a particular IRB, the IRB or the participation
certificates in the IRB purchased by the Portfolio will be supported by
letters of credit, guarantees or insurance that meet the quality criteria
of the respective Portfolio and provide the demand feature which may be
exercised by the Portfolios at any time to provide liquidity. Shareholders
should note that the Portfolios may invest in IRBs acquired in
transactions involving a Participating Organization.
4
467599.3
<PAGE>
(2) Municipal Notes include notes with remaining maturities of one year or
less that are rated MIG-1, MIG-2, MIG-3 or MIG-4 at the date of purchase
by Moody's, SP-1, SP-2 or SP-3 by S&P or F-1, F-2 or F-3 by Fitch or, if
not rated, are of comparable quality as determined by the Board of
Directors of the Fund. The principal kinds of Municipal Notes include tax
anticipation notes, bond anticipation notes, revenue anticipation notes
and project notes. Notes sold in anticipation of collection of taxes, a
bond sale or receipt of other revenues are usually general obligations of
the issuing municipality or agency. Project notes are issued by local
agencies and are guaranteed by the United States Department of Housing and
Urban Development. Project notes are also secured by the full faith and
credit of the United States.
(3) Municipal Commercial Paper includes commercial paper that is rated Prime-1
or Prime-2 by Moody's, A-1 or A-2 by S&P or F-1 or F-2 by Fitch or, if not
rated, is of comparable quality as determined by the Board of Directors of
the Fund. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or
to provide interim construction financing and are paid from general
revenues of municipalities or are refinanced with long-term debt. In most
cases Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the Commercial Paper.
(4) Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. These types of municipal leases are
considered illiquid and are subject to the 15% limitation on investments
in illiquid securities as set forth under "Investment Restrictions"
herein. (See "Investment Restrictions" herein.) Municipal leases
frequently have special risks not normally associated with general
obligation or revenue bonds. Leases and installment purchase or
conditional sale contracts (which normally provide for title to the leased
asset to pass eventually to the governmental issuer) have evolved as a
means for governmental issuers to acquire property and equipment without
meeting the constitutional and statutory requirements for the issuance of
debt. The debt-issuance limitations of many state constitutions and
statutes are deemed to be inapplicable because of the inclusion in many
leases or contracts of "non- appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. To
reduce this risk, the Portfolios will only purchase municipal leases
subject to a non-appropriation clause where the payment of principal and
accrued interest is backed by an unconditional irrevocable letter of
credit, a guarantee, insurance or other comparable undertaking of an
approved financial institution. These types of municipal leases may be
considered illiquid and are subject to the 15% limitation of investments
in illiquid securities set forth under "Investment Restrictions" herein.
The Board of Directors may adopt guidelines and delegate to the Adviser or
the Manager of the Portfolios, as the case may be, the daily function of
determining and monitoring the liquidity of municipal leases. In making
such determination, the Board and the Adviser or the Manager of the
Portfolios, as the case may be, may consider such factors as the frequency
of trades for the obligation, the number of other potential buyers and the
nature of the marketplace for the obligations, including the time needed
to dispose of the obligations and the method of soliciting offers. If the
Board determines that any municipal leases are illiquid, such leases will
be subject to the 15% limitation on investments in illiquid securities.
(5) Each Portfolio may also purchase any other Federal tax-exempt and, where
applicable, New York or New Jersey income tax-exempt obligations issued by
or on behalf of states and municipal governments and their authorities,
agencies, instrumentalities and political subdivisions, whose inclusion in
a Portfolio would be consistent with such Portfolio's investment
objectives and policies. Subsequent to its purchase by a Portfolio, a
rated Municipal Obligation may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Portfolio. Neither
event will require sale of such Municipal Obligation by the applicable
Portfolio but the Adviser (as defined below) will consider such event in
determining whether such Portfolio should continue to hold the Municipal
Obligation. To the extent that the ratings given to the Municipal
Obligation or other securities held by such Portfolios are altered due to
changes in either the Moody's, S&P's or Fitch's ratings systems (see
"Description of Ratings" herein for an explanation of S&P, Moody and Fitch
ratings), the Adviser will adopt such changed ratings as standards for its
future investments in accordance with the investment policies contained in
the Prospectus.
Floating Rate and Variable Rate Securities
The Portfolios may purchase floating rate and variable rate put option
securities including participation interests therein. Floating and variable rate
put option securities bear a variable interest rate which generally is
determined by the bond remarketing agent based on current market conditions,
although certain issuers may set rates using a designated base rate or a
specified percentage thereof. The rate of interest used will be that rate which
would enable the securities to be remarketed. These securities have a put
feature which allows the holder to demand payment of the obligation on short
notice at par plus accrued interest. Frequently, these securities are backed by
letters of credit or similar liquidity facilities provided by banks.
5
467599.3
<PAGE>
The New York Portfolio and the New Jersey Portfolio may invest in participation
interests purchased from banks in variable rate tax-exempt securities owned by
banks. A participation interest gives the purchaser an undivided interest in the
tax-exempt security in the proportion that such Portfolio's participation
interest bears to the total principal amount of the tax-exempt security and
provides a demand repurchase feature described above. Participations are
frequently backed by an irrevocable letter of credit or guarantee of a bank that
the Manager has determined meets the prescribed quality standards for the
Portfolio. The Portfolio has the right to sell the instrument back to the bank
and draw on the letter of credit on demand, on seven days' notice, for all or
any part of such Portfolio's participation interest in the tax-exempt security,
plus accrued interest. The New York Portfolio and the New Jersey Portfolio
intend to exercise the demand under the letter of credit only (1) upon a default
under the terms of the documents of the tax-exempt security, (2) as needed to
provide liquidity in order to meet redemptions, or (3) to maintain the
investment quality of the portfolio. Banks will retain a service and letter of
credit fee and a fee for issuing repurchase commitments in an amount equal to
the excess of the interest paid on the tax-exempt securities over the negotiated
yield at which the instruments are purchased by the Portfolio.
The Manager will monitor the pricing, quality and liquidity of the variable rate
demand instruments held by the Portfolios, on the basis of published financial
information, reports of rating agencies and other analytical services to which
the Manager may subscribe. Participation interests will be purchased only if, in
the opinion of counsel, interest income on such interests will be tax-exempt
when distributed as dividends to shareholders.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Portfolio's
commitment to purchase. Although each Portfolio will only make commitments to
purchase when-issued Municipal Obligations with the intention of actually
acquiring them, each Portfolio may sell these securities before the settlement
date if deemed advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in a Portfolio are subject to changes in value (both generally changing in the
same way, that is, both experiencing appreciation when interest rates decline
and depreciation when interest rates rise) based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Purchasing Municipal Obligations on a when-issued basis
can involve a risk that the yields available in the market when the delivery
takes place may actually be higher or lower than those obtained in the
transaction itself. A segregated account of the Fund consisting of cash or
liquid high-grade debt securities equal to the amount of the when-issued
commitments will be established at the respective Portfolio's custodian banks.
For the purpose of determining the adequacy of the securities in the account,
the deposited securities will be valued at market value. If the market value of
such securities declines, additional cash or highly liquid securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Portfolio. On the settlement date of the
when-issued securities, the Portfolio will meet its obligations from then-
available cash flow, sale of securities held in the separate account, sale of
other securities or, although it would not normally expect to do so, from sale
of the when-issued securities themselves (which may have a value greater or
lesser than the Portfolio's payment obligations). Sale of securities to meet
such obligations may result in the realization of capital gains or losses, which
are not exempt from Federal income tax.
Stand-by Commitments
When each Portfolio purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Portfolio's option a specified Municipal Obligation at
a specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by one of the Portfolios with respect to a
particular Municipal Obligation held in such Portfolio.
The amount payable to a Portfolio upon its exercise of a stand-by commitment
normally would be (1) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Portfolio paid on the acquisition),
less any amortized market premium or plus an amortized market or original issue
discount during the period the Portfolio owned the security, plus (2) all
interest accrued on the security since the last interest payment date during the
period the security was owned by the Portfolio. Absent unusual circumstances
relating to a change in market value, the Portfolio would value the underlying
Municipal Obligation at amortized cost. Accordingly, the amount payable by a
bank or dealer during the time a stand-by commitment is exercisable would be
substantially the same as the market value of the underlying Municipal
Obligation.
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The right of each Portfolio to exercise a stand-by commitment would be
unconditional and unqualified. A stand-by commitment would not be transferable
by the Portfolio although it could sell the underlying Municipal Obligation to a
third party at any time.
Each Portfolio expects that stand-by commitments generally will be available
without the payment of any direct or indirect consideration. However, if
necessary and advisable, the Portfolio may pay for stand-by commitments either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to such a commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held in each Portfolio would not
exceed 1/2 of 1% of the value of such Portfolio's total assets calculated
immediately after each stand-by commitment was acquired.
Each Portfolio would enter into stand-by commitments only with banks and other
financial institutions that, in the Adviser's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not have a
sufficient quality rating, only where the issuer of the stand-by commitment has
received a sufficient quality rating from an unaffiliated nationally recognized
rating organization or, if not rated, presents a minimal risk of default as
determined by the Board of Directors. Each Portfolio's reliance upon the credit
of these banks and broker-dealers would be supported by the value of the
underlying Municipal Obligations held by such Portfolio that were subject to the
commitment.
Each Portfolio intends to acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The purpose of this practice is to permit a Portfolio to be
fully invested in securities the interest on which, excluding the Taxable
Portfolio, is exempt from regular Federal income taxes while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions and to purchase at a later date securities other
than those subject to the stand-by commitment.
The acquisition of a stand-by commitment would not affect the valuation or
assumed maturity of the underlying Municipal Obligations which will continue to
be valued in accordance with the amortized cost method. Stand-by commitments
acquired by each Portfolio would be valued at zero in determining net asset
value. In those cases in which one of the Portfolios paid directly or indirectly
for a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment is held by such
Portfolio. Stand-by commitments would not affect the dollar-weighted average
maturity of the Portfolio. The maturity of a security subject to a stand-by
commitment is longer than the stand-by repurchase date.
The stand-by commitments that each Portfolio may enter into are subject to
certain risks, which include the ability of the issuer of the commitment to pay
for the securities at the time the commitment is exercised, the fact that the
commitment is not marketable by such Portfolio, and that the maturity of the
underlying security will generally be different from that of the commitment.
In addition, a Portfolio may apply to the Internal Revenue Service for a ruling,
or seek from its counsel an opinion, that interest on Municipal Obligations
subject to stand-by commitments will be exempt from regular Federal income
taxation (see "Federal Income Taxes" herein). In the absence of a favorable tax
ruling or opinion of counsel, a Portfolio will not engage in the purchase of
securities subject to stand-by commitments. The New Jersey Portfolio may apply
to the New Jersey Division of Taxation for a ruling that income from the
stand-by commitments will be exempt from the New Jersey Gross Income Tax.
Taxable Securities
Although the New York Portfolio and the New Jersey Portfolio will attempt to
invest 100% of their net assets in tax-exempt Municipal Obligations, the New
York Portfolio and the New Jersey Portfolio may invest up to 100% of the value
of its net assets on a temporary basis, and the Money Fund may invest up to 20%
of the value of its net assets, in securities of the kind described below, the
interest income on which is subject to Federal and New Jersey income tax, as
determined by the Manager that the Portfolio may assume a temporary defensive
position due to adverse market conditions. The Taxable Portfolio will attempt to
invest 100% and as a matter of fundamental policy invests at least 65% of its
total assets in Taxable Municipal Obligations.
For purposes of the New York Portfolio and the New Jersey Portfolio, investments
in taxable securities will be substantially in securities issued or guaranteed
by the United States government (such as bills, notes and bonds), its agencies,
instrumentalities or authorities, highly-rated corporate debt securities (rated
AA, or better, by S&P or Fitch or Aa3, or better, by Moody's); prime commercial
paper (rated A-1+ by S&P, P-1 by Moody's or F-1+ by Fitch) and certificates of
deposit of the 100 largest domestic banks in terms of assets which are subject
to regulatory supervision by the United States government or state governments
and the 50 largest foreign banks in terms of assets with branches or agencies in
the United States. Investments in certificates of deposit of foreign banks and
foreign branches of United States banks may involve certain risks, including
different regulations, use of different accounting procedures, political or
other economic developments, exchange controls, or possible seizure or
nationalization of foreign
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deposits. (See "Federal Income Taxes.") For purposes of the Taxable Portfolio,
taxable securities will be substantially in Taxable Municipal Obligations as
well as the securities described in this paragraph.
Repurchase Agreements
Each Portfolio may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Portfolio would acquire an
underlying debt instrument for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase and the Portfolio
to resell the instrument at a fixed price and time, thereby determining the
yield during the Portfolio's holding period. This results in a fixed rate of
return insulated from market fluctuation during such period. A repurchase
agreement is subject to the risk that the seller may fail to repurchase the
security. Repurchase agreements may be deemed to be loans under the 1940 Act.
All repurchase agreements entered into by each Portfolio shall be fully
collateralized at all times during the period of the agreement in that the value
of the underlying security shall be at least equal to the amount of the loan,
including the accrued interest thereon, and the Portfolio or its custodian shall
have possession of the collateral, which the Fund's Board of Directors believes
will give it a valid, perfected security interest in the collateral. In the
event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Portfolio
but only constitute collateral for the seller's obligation to pay the repurchase
price. Therefore, the Portfolio may suffer time delays and incur costs in
connection with the disposition of the collateral. The Fund's Board of Directors
believes that the collateral underlying repurchase agreements may be more
susceptible to claims of the seller's creditors than would be the case with
securities owned by the Portfolio. It is expected that repurchase agreements
will give rise to income which will not qualify as tax-exempt income when
distributed by the Portfolio. Each Portfolio will not invest in a repurchase
agreement maturing in more than seven days if any such investment together with
illiquid securities held by such Portfolio exceeds 15% of such Portfolio's net
assets. (See Investment Restriction Number 6 herein.) Repurchase agreements are
subject to the same risks described herein for stand-by commitments.
NEW YORK RISK FACTORS
This summary is included for the purpose of providing a general description of
New York State's (the "State") and New York City (the "City") credit and
financial condition. 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 State and City municipal bonds. The Fund has 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.
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 printing.
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.
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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. After noticeable
improvements in the City's economy during calendar year 1994, economic growth
slowed in calendar year 1995, and thereafter improved during calendar year 1996,
reflecting improved securities industry earnings and employment in other
sectors. The City's current four-year financial plan assumes that moderate
economic growth will continue through calendar year 2001, with moderating job
growth and wage increases.
For each of the 1981 through 1996 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City has been required to close substantial budget gaps
between forecast revenues and forecast expenditures in order to maintain
balanced operating results. 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 additional reductions in City
services or entitlement programs, which could adversely affect the City's
economic base.
Pursuant to the New York State Financial Emergency Act for the City of New York,
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's current four-year financial plan projects a
surplus in the 1998 fiscal year (before discretionary transfers) and substantial
budget gaps for each of the 1999, 2000 and 2001 fiscal years. This pattern of
current year surplus and projected subsequent year budget gaps has been
consistent through virtually the entire period since 1982, during which the City
has achieved balanced operating results for each fiscal year. The City is
required to submit its financial plans to review bodies, including the New York
State Financial Control Board ("Control Board").
The City depends on 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. In addition, the Federal Budget negotiation
process could result in a reduction in or a delay in the receipt of Federal
grants which could have additional adverse effects on the City's cash flow or
revenues.
The Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan for the 1998 through 2001 fiscal
years (the "1998-2001 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 ability to implement proposed
reductions in City personnel and other cost reduction initiatives, the ability
of the New York City Health and Hospitals Corporation ("HHC") and the Board of
Education ("BOE") to take actions to offset potential budget shortfalls, the
ability to complete revenue generating transactions, provision of State and
Federal aid and mandate relief and the impact on City revenues and expenditures
of Federal and State welfare reform and any future legislation affecting
Medicare or other entitlements.
Implementation of the Financial Plan is also dependent upon the City's ability
to market its securities successfully. The City's financing program for fiscal
years 1998 through 2001 contemplates the issuance of $4.9 billion of general
obligation bonds and $7.1 billion of bonds to be issued by the proposed New York
City Infrastructure Finance Authority ("Finance Authority") to finance City
capital projects. The Finance Authority was created as part of the City's effort
to assist in keeping the City's indebtedness within the forecast level of the
constitutional restrictions on the amount of debt the City is authorized to
incur. 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, New York Municipal Water Finance Authority
("Water Authority") bonds and Finance Authority bonds will be subject to
prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation bonds and
notes, and the Water Authority and Finance Authority bonds. Future developments
concerning the City and public discussion of such developments, as well as
prevailing market conditions, may affect the market for outstanding City general
obligation bonds and notes.
The City's operating results for the 1996 fiscal year were balanced in
accordance with GAAP, after taking into account a discretionary transfer of $224
million, the sixteenth consecutive year of GAAP balanced results.
On June 10, 1997, the City submitted to the Control Board the Financial Plan for
the 1998 through 2001 fiscal years, which relates to the City, BOE and the City
University of New York ("CUNY") and reflects the City's expense and capital
budgets for the 1998 fiscal year, which were adopted on June 6, 1997. The
Financial Plan projects revenues and expenditures for the 1998 fiscal year
balanced in accordance with GAAP. The Financial Plan includes increased tax
revenue projections; reduced debt service costs; the assumed
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restoration of Federal funding for programs assisting certain legal aliens;
additional expenditures for textbooks, computers, improved education programs
and welfare reform, law enforcement, immigrant naturalization, initiatives
proposed by the City Council and other initiatives; and a proposed discretionary
transfer to the 1998 fiscal year of $300 million of debt service due in the 1999
fiscal year for budget stabilization purposes. In addition, the Financial Plan
reflects the discretionary transfer to the 1997 fiscal year of $1.3 billion of
debt service due in the 1998 and 1999 fiscal years, and includes actions to
eliminate a previously projected budget gap for the 1998 fiscal year. These gap
closing actions include (i) additional agency actions totaling $621 million;
(ii) the proposed sale of various assets; (iii) additional State aid of $294
million, including a proposal that the State accelerate a $142 million revenue
sharing payment to the City from March 1999; and (iv) entitlement savings of
$128 million which would result from certain of the reductions in Medicaid
spending proposed in the Governor's 1997-1998 Executive Budget and the State
making available to the City $77 million of additional Federal block grant aid,
as proposed in the Governor's 1997-1998 Executive Budget. The Financial Plan
also sets forth projections for the 1999 through 2001 fiscal years and projects
gaps of $1.8 billion, $2.8 billion and $2.6 billion for the 1999 through 2001
fiscal years, respectively.
The Financial Plan assumes approval by the State Legislature and the Governor of
(i) a tax reduction program proposed by the City totaling $272 million, $435
million, $465 million and $481 million in the 1998 through 2001 fiscal years,
respectively, which includes a proposed elimination of the 4% City sales tax on
clothing items under $500 as of December 1, 1997, and (ii) a proposed State tax
relief program, which would reduce the City property tax and personal income
tax, and which the Financial Plan assumes will be offset by proposed increased
State aid totaling $47 million, $254 million, $472 million and $722 million in
the 1998 through 2001 fiscal years, respectively.
The Financial Plan also assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999 and the extension of which is projected
to provide revenue of $166 million and $494 million in the 2000 and 2001 fiscal
years, respectively, and of the extension of the 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998 and the extension
of which is projected to provide revenue of $188 million, $527 million and $554
million in the 1999 through 2001 fiscal years, respectively; (ii) collection of
the projected rent payments for the City's airports, totaling $385 million, $175
million, and $170 million in the 1999, 2000 and 2001 fiscal years, respectively,
which may depend on the successful completion of negotiations with the Port
Authority or the enforcement of the City's rights under the existing leases
through pending legal actions; and (iii) State approval of the cost containment
initiatives and State aid proposed by the City for the 1998 fiscal year, and
$115 million in State aid which is assumed in the Financial Plan but was not
provided for in the Governor's 1997-1998 Executive Budget. The Financial Plan
reflects the increased costs which the City is prepared to incur as a result of
welfare legislation recently enacted by Congress. The Financial Plan provides no
additional wage increases for City employees after their contracts expire in
fiscal years 2000 and 2001. In addition, the economic and financial condition of
the City may be affected by various financial, social, economic and political
factors which could have a material effect on the City.
The City annually prepares a modification to its financial plan in October or
November which amends the financial plan to accommodate any revisions to
forecast revenues and expenditures and to specify any additional gap-closing
initiatives to the extent required to offset decreases in projected revenues or
increases in projected expenditures. The Major is expected to publish the first
quarter modification (the "Modification") for the 1998 fiscal year in November.
Since the preparation of the Financial Plan, the State has adopted its budget
for the 1997-1998 fiscal year. The State budget enacted a smaller sales tax
reduction than the tax reduction program assumed by the City in the Financial
Plan, which will increase projected City sales tax revenues; provided for State
aid to the City which was less than assumed in the Financial Plan; and enacted a
State funded tax relief program which begins a year later than reflected in the
Financial Plan. In addition, the net effect of tax law changes made in the
Federal Balanced Budget Act of 1997 are expected to increase tax revenues in the
1998 fiscal year. These changes will be reflected in the Modification.
The projections for the 1998 through 2001 fiscal years reflect the costs of the
settlements with the United Federation of Teachers ("UFT") and a coalition of
unions headed by District Council 37 of the American Federation of State, County
and Municipal Employees ("District Council 37"), which together represent
approximately two-thirds of the City's workforce, and assume that the City will
reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements. The settlement provides for a wage
freeze in the first two years, followed by a cumulative effective wage increase
of 11% by the end of the five year period covered by the proposed agreements,
ending in fiscal years 2000 and 2001. Additional benefit increases would raise
the total cumulative effective increase to 13% above present costs. Costs
associated with similar settlements for all City- funded employees would total
$49 million, $459 million and $1.2 billion in the 1997, 1998 and 1999 fiscal
years, respectively, and exceed $2 billion in each fiscal year after the 1999
fiscal year. Subsequently, the City reached settlements, through agreements or
statutory impasse procedures, with bargaining units which, together with the UFT
and District Council 37, represent approximately 86% of the City's workforce.
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In 1975, Standard & Poor's suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from Standard & Poor's. On July 2, 1985, Standard
& Poor's revised its rating of City bonds upward to BBB+ and on November 19,
1987, to A-. On July 10, 1995, Standard & Poor's revised its rating of City
bonds downward to BBB+.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1. On July 17, 1997, Moody's changed
its outlook on City bonds to positive from stable. Since July 15, 1993, Fitch
has rated City bonds A-. Since July 8, 1997, IBCA Limited has rated City bonds
A.
New York State and its Authorities. The State's budget for the State's 1997-1998
fiscal year, commencing on April 1, 1997, was adopted by the Legislature on
August 4, 1997. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements for its 1997-1998 fiscal year considered to be
necessary for State operations and other purposes. The State Financial Plan for
the 1997-1998 fiscal year was formulated on August 11, 1997 and is based on the
State's budget as enacted by the Legislature, as well as actual results for the
first quarter of the current fiscal year. The 1997-1998 State Financial Plan is
expected to be updated in October and January. The 1997-1998 State Financial
Plan is projected to be balanced on a cash basis. Total General Fund receipts
and transfers from other funds are projected to be $35.09 billion, while total
General Fund disbursements and transfers to other funds are projected to be
$34.60 billion. The adopted 1997-1998 budget projects a year-over-year increase
in General Fund disbursements of 5.2 percent. As compared to the Governor's
proposed budget amended in February 1997, the State's adopted budget for
1997-1998 increases General Fund spending by $1.7 billion, primarily due to
increases for local assistance ($1.3 billion). Resources used to fund these
additional expenditures include increased revenues projected for the 1997- 1998
fiscal year, increased resources produced in the 1996-1997 fiscal year that will
be utilized in 1997-1998, reestimates of social service, fringe benefit and
other spending, and certain non-recurring resources.
The 1997-1998 adopted budget includes multi-year tax reductions, including a
State funded property and local income tax reduction program, estate tax relief,
utility gross receipts tax reductions, permanent reductions in the State sales
tax on clothing, and elimination of assessments on medical providers. The
various elements of the State and local tax and assessment reductions have
little or no impact on the 1997-1998 Financial Plan, and do not begin to
materially affect the out-year projections until the State's 1999-2000 fiscal
year.
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. In addition, 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. Actual results could differ materially and
adversely from projections and those projections may be changed materially and
adversely from time to time.
The State closed projected budget gaps of $5.0 billion, $3.9 billion and $2.3
billion for its 1995-1996, 1996-1997 and 1997-1998 fiscal years, respectively.
The 1998-1999 budget gap was projected at $1.68 billion (before the application
of any assumed efficiencies) in the out-year projections submitted to the
Legislature in February 1997. As a result of changes made in the adopted budget,
the 1998-1999 gap is now expected by the State to be about the same or smaller
than the amount previously projected, after application of the $530 million
reserve for future needs. The Governor has indicated that he will propose to
close any potential imbalance primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. The revised expectations for the 1998-1999 fiscal year reflect the
loss of $1.4 billion in surplus resources from 1996-1997 operations that are
being utilized to finance current year spending, an incremental effect of
approximately $300 million in legislated State and local tax reductions in the
out-year and other factors.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the Federal government and other factors have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurrent revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any 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.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or 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.
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Other actions taken in the 1997-1998 adopted budget add further pressure to
future State budget balance. For example, the fiscal effects of tax reductions
adopted in the 1997-1998 budget are projected to grow more substantially beyond
the 1998-1999 fiscal year. The full annual cost of the enacted tax reduction
package is estimated by the State at approximately $4.8 billion when fully
effective in State fiscal year 2001-2002. In addition, the 1997-1998 budget
included multi-year commitments for school aid and pre- kindergarten early
learning programs which could add as much as $1.4 billion in costs when fully
annualized in fiscal year 2001-2002. These spending commitments are subject to
annual appropriation.
On September 11, 1997, the New York State Comptroller issued a report which
noted that the ability to deal with future budget gaps could become a
significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000- 2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
In recent years, the State has failed to adopt a budget prior to the beginning
of this fiscal year. A prolonged delay in the adoption of the State's budget
beyond the statutory April 1 deadline without interim appropriations 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.
On August 28, 1997, Standard & Poor's revised its ratings on the State's general
obligation bonds from A- to A and, in addition, revised its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 10, 1997, Moody's confirmed its A2 rating on the State's
general obligation long-term indebtedness.
Litigation. The court actions in which the State is a defendant generally
involve State programs and miscellaneous tort, real property, and contract
claims. While the ultimate outcome and fiscal impact, if any, on the State of
those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
State's ability to maintain a balanced 1997-98 State Financial Plan.
The claims involving the City other than routine litigation incidental to the
performance of their governmental and other functions and certain other
litigation arise out of alleged constitutional violations, torts, breaches of
contract and other violations of law and condemnation proceedings. While the
ultimate outcome and fiscal impact, if any, on the City of those proceedings and
claims are not currently predictable, adverse determinations in certain of them
might have a material adverse effect upon the City's ability to carry out the
1998-2001 Financial Plan. The City has estimated that its potential future
liability on account of outstanding claims against it as of June 30, 1996
amounted to approximately $2.8 billion.
NEW JERSEY RISK FACTORS
The information summarized below describes some of the more significant aspects
relating to New Jersey's credit and financial condition. The sources of such
information are the official statements of issuers located in New Jersey as well
as other publicly available documents.
Certain Economic Information. New Jersey is the ninth largest state in
population and the fifth smallest in land area. With an average of 1,077 people
per square mile, it is the most densely populated of all the states. The State's
economic base is diversified consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas with selective
commercial agriculture. Historically, New Jersey's average per capita income has
been well above the national average, and in 1996 the State ranked second among
the states in per capita personal income ($31,053).
The Fund is susceptible to political, economic or regulatory factors affecting
issuers of the New Jersey securities. The following information provides only a
brief summary of some of the complex factors affecting the financial situation
in New Jersey (the "State") and is derived from sources that are generally
available to investors and is believed to be accurate. It is based in part on
information obtained from various State and local agencies in New Jersey. No
independent verification has been made of any of the following information.
The onset of the national recession (which officially began in July 1990
according to the National Bureau of Economic Research) caused an acceleration of
New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
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warehousing. Reflecting the downturn, the rate of unemployment in the State rose
from a low of 3.6% during the first quarter of 1989 to a recessionary peak of
8.5% during 1992. Since then, the unemployment rate fell to 5.5% for the
six-month period from January 1997 through June 1997.
New Jersey's Budget and Appropriation System. The State operates on a fiscal
year beginning July 1 and ending June 30. Pursuant to the State Constitution, no
money may be drawn from the State Treasury except for appropriations made by
law. In addition, all monies for the support of State government and all other
State purposes, as far as can be ascertained or reasonably foreseen, must be
provided for in one general appropriation law covering one and the same fiscal
year. No general appropriations law or other law appropriating money for any
State purpose shall be enacted if the amount of money appropriated therein,
together with all other prior appropriations made for the same fiscal year,
exceeds the total amount of revenue on hand and anticipated to be available for
such fiscal year, as certified by the Governor.
In addition to the Constitutional provisions, the New Jersey Statutes contain
provisions concerning the budget and appropriation system. On or before October
1 in each year, each department, board, commission, officer or other agency of
the State must file with the Budget Director a request for appropriation or
permission to spend specifying all expenditures proposed to be made by such
spending agency during the following fiscal year. The Budget Director then
examines each request and determines the necessity or advisability of the
appropriation request. On or before December 31 of each year, the Budget
Director submits the requests, together with her findings, comments and
recommendations, to the Governor. It is then the responsibility of the Governor
to examine and consider all requests and formulate her budget recommendations.
The Governor's Budget Message must embody the proposed complete financial
program of the State government for the next ensuing fiscal year and must set
forth in detail each source of anticipated revenue and the purposes of
recommended expenditures for each spending agency. After a process of
legislative committee review, the budget, in the form of an appropriations bill,
must be approved by the Senate and Assembly and must be submitted to the
Governor for review. Upon such submissions, the Governor may approve the bill,
revise the estimate of anticipated revenues contained therein, delete or reduce
appropriation items contained in the bill through the exercise of her line-item
veto power, or veto the bill in its entirety. Like any gubernatorial veto, such
action may be reversed by a two-thirds vote of each House of the State
Legislature.
During the course of the fiscal year, the Governor may take steps to reduce
State expenditures if it appears that revenues have fallen below those
originally anticipated. There are additional means by which the Governor may
ensure that the State does not incur a deficit. Under the State Constitution, no
supplemental appropriation may be enacted after adoption of an appropriations
act except where there are sufficient revenues on hand or anticipated, as
certified by the Governor, to meet such appropriation.
General Obligation Bonds. The State finances certain capital projects through
the sale of the general obligation bonds of the State. These bonds are backed by
the full faith and credit of the State. Certain State tax revenues and certain
other fees are pledged to meet the principal and interest payments and, if
provided, redemption premium payments, if any, required to repay the bonds. As
of June 30, 1997, there was a total authorized bond indebtedness of
approximately $10.315 billion, of which $3.44 billion was issued and
outstanding, $5.002 billion was retired (including bonds for which provision for
payment has been made through the sale and issuance of refunding bonds) and
$1.88 billion was unissued. The recommended appropriation for debt service
obligation on outstanding projected indebtedness is $506.1 million for Fiscal
Year 1999. In addition to payment from bond proceeds, capital construction can
also be funded by appropriation of current revenues on a pay-as-you go basis. In
Fiscal Year 1999, the amount appropriated to this purpose is $617.9 million.
All appropriations for capital projects and all proposals for State bond
authorizations are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning. This permanent commission was
established in November 1975, and is charged with the preparation of the State
Capital Improvement Plan, which contains proposals for State spending for
capital projects.
Tax and Revenue Anticipation Notes. In fiscal year 1992 New Jersey initiated a
program under which it issued tax and revenue anticipation notes to aid in
providing effective cash flow management to fund imbalances which occur in the
collection and disbursement of the General Fund and Property Tax Relief Fund
revenues. There are presently $800 million of tax and revenue anticipation notes
outstanding. These notes shall mature on June 15, 1998. Such tax and revenue
anticipation notes do not constitute a general obligation of New Jersey or a
debt or liability within the meaning of the New Jersey Constitution. Such notes
constitute special obligations of New Jersey payable solely from moneys on
deposit in the General Fund and Property Tax Relief Fund and legally available
for such payment.
Lease Financing. The State has entered into a number of leases relating to the
financing of certain real property and equipment. The State leases the Richard
J. Hughes Justice Complex in Trenton from the Mercer County Improvement
Authority (the "Authority").
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On August 8, 1991 the Authority defeased outstanding lease bonds originally
issued to finance construction of the Richard J. Hughes Justice Complex through
the issuance of custody receipts (the "Custody Receipts") in the aggregate
principal amount of $98,760,000. The rental is sufficient to cover the debt
service on the Authority's Custody Receipts. The State's obligation to pay the
rentals is subject to appropriations being made by the State Legislature.
The State has also entered into a lease agreement, as lessee, with the New
Jersey Economic Development Authority (the "EDA"), as lessor to lease (i) office
buildings that house the New Jersey Division of Motor Vehicles, New Jersey
Network (the State's public television station), a branch of the United States
Postal Service and a parking facility and (ii) approximately 13 acres of real
property and certain infrastructure improvements thereon located in the City of
Newark. In addition, in December 1995, the State entered into lease agreements,
as lessee, with the EDA, as lessor, to lease (i) an office building and (ii)
certain energy saving equipment which shall be installed in various buildings
used by the State. The State has also, in July 1996, entered into a lease
agreement, as lessee, with the EDA, as lessor, to lease the New Jersey
Performing Arts Facility in the City of Newark. The rental payments required to
be made by the State under such lease agreements are sufficient to cover debt
service on bonds issued by the EDA to finance the acquisition and construction
of such projects and other amounts payable to the EDA, including certain
administrative expenses of the EDA, and such rental payments are subject to
annual appropriation by the State Legislature.
The State has also entered into a sublease with the EDA to lease two parking
lots, certain infrastructure improvements and related elements located at
Liberty State Park in the City of Jersey City. The rental payments required to
be made by the State under such sublease agreement will be sufficient to cover
debt service on bonds issued by the EDA and other amounts payable to the EDA,
and such rental payments are subject to appropriation by the State Legislature.
The State also leases several office buildings, facilities and improvements from
the New Jersey Building Authority (the "Building Authority") on a basis similar
to that described above. The Building Authority bonds are secured by annual
rentals from the State which are subject to and dependent upon annual
appropriations by the State legislature.
Beginning in April 1984, the State, acting through the Director of the Division
of Purchase and Property, entered into a series of lease purchase agreements
which provide for the acquisition of equipment, services and real property to be
used by various departments and agencies of the State. To date, the State has
completed eleven lease purchase agreements which have resulted in the issuance
of Certificates of Participation totaling $749,350,000. A Certificate of
Participation evidences a proportionate interest of the owner thereof in the
lease payments to be made by the State under the terms of the agreement. The
agreements relating to these transactions provide for semi-annual rental
payments. The State's obligation to pay rentals due under these leases is
subject to annual appropriations being made by the State Legislature. The
majority of proceeds from these transactions have been or will be used to
acquire equipment or services for the State and its agencies. The State intends
to continue to use this financing technique for a substantial portion of its
future equipment requirements.
State Supported School and County College Bonds. Legislation provides for future
appropriations for State aid to local school districts equal to debt service on
a maximum principal amount of $280,000,000 of bonds issued by such local school
districts for construction and renovation of school facilities and for State aid
to counties equal to debt service on up to $80,000,000 of bonds issued by
counties for construction of county college facilities. The New Jersey
Legislature is not legally bound to make such future appropriations, but has
done so to date on all outstanding obligations issued under these laws.
"Moral Obligation" Financing. The authorizing legislation for certain New Jersey
entities provides for specific budgetary procedures with respect to certain
obligations issued by such entities. Pursuant to such legislation, a designated
official is required to certify any deficiency in a debt service reserve fund
maintained to meet payments of principal of and interest on the obligations, and
a State appropriation in the amount of the deficiency is to be made. However,
the New Jersey Legislature is not legally bound to make such an appropriation.
Bonds issued pursuant to authorizing legislation of this type are sometimes
referred to as "moral obligation" bonds. There is no statutory limitation on the
amount of "moral obligation" bonds which may be issued by eligible New Jersey
entities.
The following table sets forth the "moral obligation" bonded indebtedness issued
by New Jersey entities as of June 30, 1997:
Maximum Annual Debt Service
Outstanding Subject to Moral Obligation
----------- ---------------------------
New Jersey Housing and Mortgage $399,224,305.59 $37,344,151.04
Finance Agency
South Jersey Port Corporation 78,715,000.00 7,002,815.00
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Higher Education Assistance 136,385,000.00 23,155,400.00
--------------- --------------
$614,324,305.59 $67,502,366.04
Higher Education Assistance Authority. The Higher Education Assistance Authority
("HEAA") has issued $149,996,064 aggregate principal amount of revenue bonds. It
is anticipated that the HEAA's revenues will be sufficient to cover debt service
on its bonds.
New Jersey Housing and Mortgage Finance Agency. Neither the New Jersey Housing
and Mortgage Finance Agency nor its predecessors, the New Jersey Housing Finance
Agency and the New Jersey Mortgage Finance Agency, have had a deficiency in a
debt service reserve fund which required New Jersey to appropriate funds to meet
its "moral obligation." It is anticipated that this agency's revenues will
continue to be sufficient to cover debt service on its bonds.
South Jersey Port Corporation. New Jersey has periodically provided the South
Jersey Port Corporation (the "Corporation") with funds to cover all debt service
and property tax requirements, when earned revenues are anticipated to be
insufficient to cover these obligations. For calendar years 1986 through 1993,
the State has made appropriations totaling $18,137,565 to pay property taxes and
for calendar years 1989 through 1997, the State has made appropriations totaling
$31,485,971.25 to pay debt service.
New Jersey Sports and Exposition Authority. On March 2, 1992, the New Jersey
Sports and Exposition Authority ("Sports Authority") issued $147,490,000 in New
Jersey guaranteed bonds and defeased all previously outstanding New Jersey
guaranteed bonds of the Sports Authority. New Jersey officials have stated the
belief that the revenue of the Sports Authority will be sufficient to provide
for the payment of debt service on these obligations without recourse to New
Jersey's guarantee.
Legislation enacted in 1992 authorizes the Sports Authority to issue bonds for
various purposes payable from New Jersey appropriations. Pursuant to this
legislation, the Sports Authority and the New Jersey Treasurer have entered into
an agreement (the "State Contract") pursuant to which the Sports Authority will
undertake certain projects, including the refunding of certain outstanding bonds
of the Sports Authority, and the New Jersey Treasurer will credit to the Sports
Authority Fund amounts from the General Fund sufficient to pay debt service and
other costs related to the bonds. The payment of all amounts under the State
Contract is subject to and dependent upon appropriations being made by the New
Jersey Legislature. As of June 30, 1997 there were approximately $458,890,000
aggregate principal amount of Sports Authority bonds outstanding the debt
service on which is payable from amounts under the State Contract.
New Jersey Transportation Trust Fund Authority. In July 1984, New Jersey created
the New Jersey Transportation Trust Fund Authority (the "TTFA"), an
instrumentality of New Jersey organized and existing under the New Jersey
Transportation Trust Fund Authority Act of 1984, as amended (the "TFA Act") for
the purpose of funding a portion of New Jersey's share of the cost of
improvements to New Jersey's transportation system. Pursuant to the TFA Act, the
TTFA, the New Jersey Treasurer and the Commissioner of Transportation executed a
contract (the "Contract") which provides for the payment of certain amounts to
the TTFA. The payment of all such amounts is subject to and dependent upon
appropriations being made by the New Jersey Legislature and there is no legal
obligation that the Legislature make such appropriations.
Pursuant to the TFA Act, the aggregate principal amount of the TTFA's bonds,
notes or other obligations which may be issued in any one fiscal year generally
may not exceed $700 million plus amounts carried over from prior fiscal years.
These bonds are special obligations of the TTFA payable from the payments made
by New Jersey pursuant to the Contract.
Economic Recovery Fund Bonds. Legislation enacted during 1992 by New Jersey
authorizes the EDA to issue bonds for various economic development purposes.
Pursuant to that legislation, EDA and the New Jersey Treasurer have entered into
an agreement (the "ERF Contract") through which EDA has agreed to undertake the
financing of certain projects and the New Jersey Treasurer has agreed to credit
to the Economic Recovery Fund from the General Fund amounts equivalent to
payments due to New Jersey under an agreement with the Port Authority of New
York and New Jersey. The payment of all amounts under the ERF Contract is
subject to and dependent upon appropriations being made by the New Jersey
Legislature.
Market Transition Facility Bonds. Legislation enacted in June 1994 authorizes
the EDA to issue bonds to pay the current and anticipated liabilities and
expenses of the Market Transition Facility, which issued private passenger
automobile insurance policies for drivers who could not be insured by private
insurance companies on a voluntary basis. On July 26, 1994 the EDA issued
$705,270,000 aggregate principal amount of Market Transition Facility Senior
Lien Revenue Bonds. The EDA and the New Jersey Treasurer have entered into an
agreement which provides for the payment to the EDA of amounts on deposit in the
DMV Surcharge
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Fund to pay debt service on the bonds. Such payments are subject to and
dependent upon appropriations being made by the New Jersey Legislature.
Educational Facilities Authority. Legislation enacted in 1993 authorizes the
Educational Facilities Authority ("EFA") to issue bonds to finance the purchase
of equipment to be leased to institutions of higher learning. On August 17, 1994
the EFA issued $100,000,000 aggregate principal amount of Higher Education
Leasing Fund Program bonds. The EFA and the New Jersey Treasurer have entered
into an agreement which provides to the EFA amounts required to pay debt service
on the bonds. Such payments are subject to and dependent upon appropriations
being made by the State Legislature. Other legislation enacted in 1993 created
the Higher Education Facilities Trust Fund from which the EFA makes grants to
institutions of higher education. The legislation authorizes the EFA to issue
bonds to finance the grants, and limits the total outstanding principal amount
of such bonds of $220,000,000. On November 29, 1995 the EFA issued $220,000,000
aggregate principal amount of Higher Education Facilities Trust Fund Bonds.
These bonds are secured by payments made to the EFA by the State, which are
subject to annual appropriation by the State Legislature.
State Pension Funding Bonds. Legislation enacted in June 1997 authorizes the EDA
to issue bonds to pay a portion of the State's unfunded accrued pension
liability for the State's retirement systems (the "Unfunded Accrued Pension
Liability"), which, together with amounts derived from the revaluation of
pension assets pursuant to companion legislation enacted at the same time, will
be sufficient to fully fund the Unfunded Accrued Pension Liability. The Unfunded
Accrued Pension Liability represents pension benefits earned in prior years
which, pursuant to standard actuarial practices, are not yet fully funded. On
June 30, 1997, the EDA issued $2,803,042,498.56 aggregate principal amount of
State Pension Funding Bonds, Series 1997A-1997C. The EDA and the State Treasurer
have entered into an agreement which provides for the payment to the EDA of
monies sufficient to pay debt service on the bonds. Such payments are subject to
and dependent upon appropriations being made by the State Legislature.
Municipal Finance. New Jersey's local finance system is regulated by various
statutes designed to assure that all local governments and their issuing
authorities remain on a sound financial basis. Regulatory and remedial statutes
are enforced by the Division of Local Government Services (the "Division") in
the State Department of Community Affairs.
Counties and Municipalities. The Local Budget Law (N.J.S.A. 4OA: 4-1 et seq.)
imposes specific budgetary procedures upon counties and municipalities ("local
units"). Every local unit must adopt an operating budget which is balanced on a
cash basis, and items of revenue and appropriation must be examined by the
Director of the Division (the "Director"). The accounts of each local unit must
be independently audited by a registered municipal accountant. State law
provides that budgets must be submitted in a form promulgated by the Division
and further provides for limitations on estimates of tax collection and for
reserves in the event of any shortfalls in collections by the local unit. The
Division reviews all municipal and county annual budgets prior to adoption for
compliance with the Local Budget Law. The Director is empowered to require
changes for compliance with law as a condition of approval; to disapprove
budgets not in accordance with law; and to prepare the budget of a local unit,
within the limits of the adopted budget of the previous year with suitable
adjustments for legal compliance, if the local unit fails to adopt a budget in
accordance with law. This process insures that every municipality and county
annually adopts a budget balanced on a cash basis, within limitations on
appropriations or tax levies, respectively, and making adequate provision for
principal of and interest on indebtedness falling due in the fiscal year,
deferred charges and other statutory expenditure requirements. The Director also
oversees changes to local budgets after adoption as permitted by law, and
enforces regulations pertaining to execution of adopted budgets and financial
administration. In addition to the exercise of regulatory and oversight
functions, the Division offers expert technical assistance to local units in all
aspects of financial administration, including revenue collection and cash
management procedures, contracting procedures, debt management and
administrative analysis.
The Local Government Cap Law (N.J.S.A. 4OA: 4-45.1 et seq.) (the "Cap Law")
generally limits the year-to-year increase of the total appropriations of any
municipality and the tax levy of any county to either 5% or an index rate
determined annually by the Director, whichever is less. However, where the index
percentage rate exceeds 5%, the Cap Law permits the governing body of any
municipality or county to approve the use of a higher percentage rate up to the
index rate. Further, where the index percentage rate is less than 5%, the Cap
Law also permits the governing body of any municipality or county to approve the
use of a higher percentage rate up to 5%. Regardless of the rate utilized,
certain exceptions exist to the Cap Law's limitation on increases in
appropriations. The principal exceptions to these limitations are: municipal and
county appropriations to pay debt service requirements; to comply with certain
other State or federal mandates; appropriations of private and public dedicated
funds; amounts approved by referendum; and, in the case of municipalities only,
to fund the preceding year's cash deficit with the approval of the Local Finance
Board or to reserve for shortfalls in tax collections, and amounts required
pursuant to contractual obligations for specified services. The Cap Law was
re-enacted in 1990 with amendments and made a permanent part of the Municipal
Finance System.
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State law also regulates the issuance of debt by local units. The Local Budget
Law limits the amount of tax anticipation notes that may be issued by local
units and requires the repayment of such notes within 120 days of the end of the
fiscal year (six months in the case of the counties) in which issued. The Local
Bond Law (N.J.S.A. 4OA: 2-1 et seq.) governs the issuance of bonds and notes by
the local units. No local unit is permitted to issue bonds for the payment of
current expenses (other than Fiscal Year Adjustment Bonds described more fully
below). Local units may not issue bonds to pay outstanding bonds, except for
refunding purposes, and then only with the approval of the Local Finance Board.
Local units may issue bond anticipation notes for temporary periods not
exceeding in the aggregate approximately ten years from the date of first issue.
The debt that any local unit may authorize is limited to a percentage of its
equalized valuation basis, which is the average of the equalized value of all
taxable real property and improvements within the geographic boundaries of the
local unit, as annually determined by the Director of the Division of Taxation,
for each of the three most recent years. In the calculation of debt capacity,
the Local Bond Law and certain other statutes permit the deduction of certain
classes of debt ("statutory deductions") from all authorized debt of the local
unit ("gross capital debt") in computing whether a local unit has exceeded its
statutory debt limit. Statutory deductions from gross capital debt consist of
bonds or notes (i) authorized for school purposes by a regional school district
or by a municipality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations set
forth in the School Bond Law (as hereinafter defined); (ii) authorized for
purposes which are self liquidating, but only to the extent permitted by the
Local Bond Law; (ii) authorized by a public body, other than the local unit the
principal of and interest on which is guaranteed by the local unit, but only to
the extent permitted by law; (iv) that are bond anticipation notes; (v) for
which provision for payment has been made; or (vi) authorized for any other
purpose for which a deduction is permitted by law. Authorized net capital debt
(gross capital debt minus statutory deductions) is limited to 3.5% of the
equalized valuation basis in the case of municipalities and 2% of the equalized
valuation basis in the case of counties. The debt limit of a county or
municipality, with certain exceptions, may be exceeded only with the approval of
the Local Finance Board.
Chapter 75 of the Pamphlet Laws of 1991 signed into law on March 28, 1991
required certain municipalities and permits all other municipalities to adopt
the State fiscal year in place of the existing calendar fiscal year.
Municipalities that change fiscal years must adopt a six month transition year
budget funded by Fiscal Year Adjustment Bonds. Notes issued in anticipation of
Fiscal Year Adjustment Bonds, including renewals, can only be issued for up to
one year unless the Local Finance Board permits the municipality to renew them
for a further period of time. The Local Finance Board must confirm the actual
deficit experienced by the municipality. The municipality then may issue Fiscal
Year Adjustment Bonds to finance the deficit on a permanent basis.
State law authorizes State officials to supervise fiscal administration in any
municipality which is in default on its obligations; which experiences severe
tax collection problems for two successive years; which has a deficit greater
than 4% of its tax levy for two successive years; which has failed to make
payments due and owing to the State, county, school district or special district
for two consecutive years; which has an appropriation in its annual budget for
the liquidation of debt which exceeds 25% of its total operating appropriations
(except dedicated revenue appropriations) for the previous budget year; or which
has been subject to a judicial determination of gross failure to comply with the
Local Bond Law, the Local Budget Law or the Local Fiscal Affairs Law which
substantially jeopardizes its fiscal integrity. State officials are authorized
to continue such supervision for as long as any of the conditions exist and
until the municipality operates for a fiscal year without incurring a cash
deficit. In September 1996, the Township of Irvington requested supervision
which was approved by the Local Finance Board and is expected to continue for at
least one year.
There are 567 municipalities and 21 counties in New Jersey. During 1993, 1994
and 1995 no county exceeded its statutory debt limitations or incurred a cash
deficit in excess of 4% of its tax levy. Only two municipalities had a cash
deficit greater than 4% of their tax levies for 1994 and 1995. The number of
municipalities which exceeded statutory debt limits was six as of December 31,
1995. No New Jersey municipality or county has defaulted on the payment of
interest or principal on any outstanding debt obligation since the 1930's.
School Districts. All New Jersey school districts are coterminous with the
boundaries of one or more municipalities. They are characterized by the manner
in which the board of education, the governing body of the school district,
takes office. Type I school districts, most commonly found in cities, have a
board of education appointed by the mayor or the chief executive officer of the
municipality constituting the school district. In a Type II school district, the
board of education is elected by the voters of the district.
Nearly all regional and consolidated school districts are Type II school
districts.
The State Department of Education has been empowered with the necessary and
effective authority to abolish an existing school board and create a
State-operated school district where the existing school board has failed or is
unable to take the corrective actions necessary to provide a thorough and
efficient system of education in that school district pursuant to N.J.S.A.
18A:7A-15 et seq. (the "School Act"). The State operated school district
operated under the direction of a State-appointed superintendent has all of the
powers and authority of the local board of education and of the local district
superintendent. Pursuant to the authority granted under the School Act, on
October 4, 1989, the State Board of Education ordered the creation of a State
operated school district in the City of Jersey City. Similarly, on August 7,
1991, the State Board of Education ordered the creation of a State operated
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school district in the City of Paterson and on July 5, 1995 ordered the creation
of a State-operated school district in the City of Newark.
School Budgets. In every school district having a board of school estimate, the
board of school estimate examines the budget request and fixes the appropriation
amounts for the next year's operating budget after a public hearing at which the
taxpayers and other interested persons shall have an opportunity to raise
objections and to be heard with respect to the budget. This board, whose
composition is fixed by statute, certifies the budget to the municipal governing
bodies and to the local board of education. If the local board of education
disagrees, it must appeal to the State Commissioner of Education (the
"Commissioner") to request changes.
In Type II school districts without a board of school estimate, the elected
board of education develops the budget proposal and, after public hearing,
submits it to the voters of such district for approval. Previously authorized
debt service is not subject to referendum in the annual budget process. If
approved, the budget goes into effect. If defeated, the governing body of each
municipality in the school district must determine the amount necessary to be
appropriated for each item appearing in such budget. Should the governing body
fail to certify an amount determined by the board of education to be necessary,
the board of education may appeal the action to the Commissioner.
The State laws governing the distribution of State aid to local school districts
limit the annual increase of a school district's net current expense budget. The
Commissioner certifies the allowable amount of increase for each school district
but may grant a higher level of increase in certain limited instances. A school
district may also submit a proposal to the voters to raise amounts above the
allowable amount of increase. If defeated, such a proposal is subject to further
review or appeal to the Commission only if the County Superintendent determines
that additional funds are required to provide a thorough and efficient
education.
In Type I or Type II school districts which have failed monitoring over a period
of time by the State because of continued educational deficiencies, and are
implementing an approved corrective action plan, the Commissioner is required to
determine the cost to the school district of the implementation of those
portions of the corrective action plan which are directly responsive to the
district's deficiencies as identified in the monitoring process. Where
appropriate, the Commissioner is required to reallocate funds within the
district's budget to support the corrective action plan. The Commissioner is
also required to determine the amount of additional revenue needed to implement
the corrective action plan, and to recertify the budget for the district.
In State operated school districts, the State District Superintendent has the
responsibility for the development of the budget subject to appeal by the
governing body of the municipality to the Commissioner and the Director of the
Division of Local Government Services in the State Department of Community
Affairs. Based upon his review, the Director is required to certify the amount
of revenues which can be raised locally to support the budget of the State
operated district. Any difference between the amount which the Director
certifies, and the total amount of local revenues required by the budget
approved by the Commissioner, is to be paid by the State in the fiscal year in
which the expenditures are made subject to the availability of appropriations.
School District Bonds. School district bonds and temporary notes are issued in
conformity with N.J.S.A 18A: 24-1 et seq. (the "School Bond Law") which closely
parallels the Local Bond Law. Although school districts are exempted from the 5%
down payment provision generally applied to bonds issued by municipalities and
counties, they are subject to debt limits (which vary depending on the type of
school system provided) and to State regulation of their borrowing. The debt
limitation on school district bonds depends upon the classification of the
school district but may be as high as 4% of the average equalized valuation
basis of the constituent municipality. In certain cases involving school
districts in cities with populations exceeding 100,000, the debt limit is 8% of
the average equalized valuation basis of the constituent municipality, and in
cities with population in excess of 80,000 the debt limit is 6% of the aforesaid
average equalized valuation.
School bonds are authorized by (i) an ordinance adopted by the governing body of
a municipality within a Type I school district; (ii) adoption of a proposal by
resolution by the board of education of a Type II school district having a board
of school estimate; (iii) adoption of a proposal by resolution by the board of
education and approval of the proposal by the legal voters of any other Type II
school district; or (iv) adoption of a proposal by resolution by a capital
project control board for projects in a State operated school district. If
school bonds will exceed the school district borrowing capacity, a school
district (other than a regional school district) may use the balance of the
municipal borrowing capacity. If the total amount of debt exceeds the school
district's borrowing capacity and any available remaining municipal borrowing
capacity, the Commissioner and the Local Finance Board must approve the proposed
authorization before it is submitted to the voters. All authorizations of debt
in a Type II school district without a board of school estimate require an
approving referendum, except where, after hearing, the Commissioner and the
State Board of Education determine that the issuance of such debt is necessary
to meet the constitutional obligation to provide a thorough and efficient system
of public schools. When such obligations are issued, they are issued by, and in
the name of, the school district.
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In Type I and II school districts with a board of school estimate, that board
examines the capital proposal of the board of education and certifies the amount
of bonds to be authorized. When it is necessary to exceed the borrowing capacity
of the municipality, the approval of a majority of the legally qualified voters
of the municipality is required, together with the approval of the Commissioner
and the Local Finance Board. When such bonds are issued for a Type I school
district, they are issued by the municipality and identified as school bonds.
When bonds are issued by a Type II school district having a board of school
estimate, they are issued by, and in the name of, the school district.
All authorizations of debt must be reported to the Division of Local Government
Services by a supplemental debt statement prior to final approval.
School District Lease Purchase Financings. In 1982, school districts were given
an alternative to the traditional method of bond financing capital improvements
pursuant to N.J.S.A. 18A: 20-4.2(f) (the "Lease Purchase Law"). The Lease
Purchase Law permits school districts to acquire a site and school building
through a lease purchase agreement with a private lessor corporation. The lease
purchase agreement does not require voter approval. The rent payments
attributable to the lease purchase agreement are subject to annual appropriation
by the school district and are required, pursuant to N.J.A.C. 6: 22A-1.2(h), to
be included in the annual current expense budget of the school district.
Furthermore, the rent payments attributable to the lease purchase agreement do
not constitute debt of the school district and therefore do not impact on the
school district's debt limitation. Lease purchase agreements in excess of five
years require the approval of the Commissioner and the Local Finance Board.
Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c. 38 and c. 39)
which provides for the issuance by municipalities and school districts of
"qualified bonds." Whenever a local board of education or the governing body of
a municipality determines to issue bonds, it may file an application with the
Local Finance Board, and, in the case of a local board of education, the
Commissioner, to qualify bonds pursuant to P.L. 1976, c. 38 or c. 39. Upon
approval of such an application and after receipt of a certificate stating the
name and address of the paying agent for such bonds, the maturity schedule,
interest rates and payment dates, the State Treasurer shall, in the case of
qualified bonds for school districts, withhold from the school aid payable to
such municipality or school district and, in the case of qualified bonds for
municipalities, withhold from the amount of business personal property tax
replacement revenues, gross receipts tax revenues, municipal purposes tax
assistance fund distributions, State urban aid, State revenue sharing, and any
other funds appropriated as State aid and not otherwise dedicated to specific
municipal programs, payable to such municipalities, an amount sufficient to
cover debt service on such bonds. These "qualified bonds" are not direct,
guaranteed or moral obligations of the State, and debt service on such bonds
will be provided by the State only if the above mentioned appropriations are
made by the State. Total outstanding indebtedness for "qualified bonds" as of
June 30, 1996 consisted of $208,642,750 by various school districts and
$899,586,220 by various municipalities.
New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve Act
(N.J.S.A. 18A: 56-17 et seq.) establishes a school bond reserve within the
constitutionally dedicated Fund for the Support of Free Public Schools. Under
this law the reserve is maintained at an amount equal to 1.5% of the aggregate
outstanding bonded indebtedness of counties, municipalities or school districts
for school purposes (exclusive of bonds whose debt service is provided by State
appropriations), but not in excess of monies available in such Fund. If a
municipality, county or school district is unable to meet payment of the
principal of or interest on any of its school bonds, the trustee of the school
bond reserve will purchase such bonds at the face amount thereof or pay the
holders thereof the interest due or to become due. At June 30, 1996, the book
value of the Fund's assets aggregated $88,816,968 and the reserve, computed as
of June 30, 1996, amounted to $40,363,607. There has never been an occasion to
call upon this Fund.
Local Financing Authorities. The Local Authorities Fiscal Control Law (N.J.S.A.
4OA: 5A-l et seq.) provides for State supervision of the fiscal operations and
debt issuance practices of independent local authorities and special taxing
districts by the State Department of Community Affairs. The Local Authorities
Fiscal Control Law applies to all autonomous public bodies created by counties
or municipalities, which are empowered to issue bonds, to impose facility or
service charges, or to levy taxes in their districts. This encompasses most
autonomous local authorities (sewerage, municipal utilities, parking, pollution
control, improvement, etc.) and special taxing districts (fire, water, etc.).
Authorities which are subject to differing state or federal financial
restrictions are exempted, but only to the extent of that difference.
Financial control responsibilities over local authorities and special districts
are assigned to the Local Finance Board and the Director of the Division of
Local Government Services. The Local Finance Board exercises approval power over
the creation of new authorities and special districts as well as their
dissolution. The Local Finance Board also reviews, conducts public hearings and
issues findings and recommendations on any proposed project financing of an
authority or district, and on any proposed financing agreement between a
municipality or county and an authority or special district. The Local Finance
Board prescribes minimum audit requirements to be followed by authorities and
special districts in the conduct of their annual audits. The Director reviews
and approves annual budgets of authorities and special districts. As of June 30,
1995, there were 195 locally created authorities with a total outstanding
capital debt of $7.14 billion (figures do not include housing authorities and
redevelopment agencies). This amount
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reflects outstanding bonds, notes and loans payable by the authorities as of
their respective fiscal years ended nearest to June 30, 1995.
Litigation. The following are cases pending or threatened as of February 24,
1998 in which the State has the potential for either a significant loss of
revenue or a significant unanticipated expenditure.
Tort, Contract and Other Claims
At any given time, there are various numbers of claims and cases pending against
the State, State agencies and employees, seeking recovery of monetary damages
that are primarily paid out of the fund created pursuant to the New Jersey Tort
Claims Act (N.J.S.A. 59: 1-1, et seq.). The State does not formally estimate its
reserve representing potential exposure for these claims and cases. The State is
unable to estimate its exposure for these claims and cases. In addition, at any
given time, there are various numbers of contract and other claims against the
State and State agencies, including environmental claims asserted against the
State, among other parties, arising from the alleged disposal of hazardous
waste. Claimants in such matters are seeking recovery of monetary damages or
other relief which, if granted, would require the expenditure of funds. The
State is unable to estimate its exposure for these claims.
At any given time, there are various numbers of claims and cases pending against
the University of Medicine and Dentistry and its employees, seeking recovery of
monetary damages that are primarily paid out of the Self Insurance Reserve Fund
created pursuant to the New Jersey Tort Claims Act. An independent study
estimated an aggregate potential exposure of $90.8 million for tort and medical
malpractice claims pending as of June 30, 1997. In addition, at any given time,
there are various numbers of contract and other claims against the University of
Medicine and Dentistry, seeking recovery of monetary damages or other relief
which, if granted, would require the expenditure of funds. The State is unable
to estimate its exposure for these claims.
Interfaith Community Organization v. Shinn, et al. In late October, 1993, the
Interfaith Community Organization ("ICO") a coalition of churches and church
leaders in Hudson County, filed suit on behalf of the ICO's membership and the
citizens of Hudson County against the Governor, the Commissioner of the
Department of Environmental Protection ("DEP"), Commissioner of the Department
of Health ("DOH"), and Lance Miller, Assistant Commissioner of DEP. The
multicount complaint alleged violations of numerous laws, allegedly resulting
from the existence of chromium contamination in the State-owned Liberty State
Park in Jersey City. It also asserted the alleged failure by DEP and DOH to
properly conduct remediation and health screens in Hudson County concerning
chromium contamination. No immediate relief was sought, but injunctive and
monetary relief was asked for.
In June 1994, ICO hired a law firm to represent it in this matter. The firm
filed amended complaints, naming only Commissioner Shinn of DEP and Governor
Whitman as defendants and alleges only Clean Water Act and Resource Conservation
Recovery Act ("RCRA") violations at Liberty State Park. Under the "citizen suit"
provisions of these federal acts, plaintiff is seeking remediation, health
studies and attorneys' fees. The State is unable to estimate its exposure for
this claim. In March, 1995, ICO filed another lawsuit over the shipments of soil
from the I-287 Wetlands Mitigation Project to Liberty State Park. The defendants
in that suit are Commissioner Shinn, Governor Whitman, Commissioner Wilson of
the Department of Transportation ("DOT") and R.W. Vogel, Inc., the transporter
of the soil. The new suit seeks a declaration that the CWA is being violated and
demands cessation of all construction at Liberty State Park and penalties
against Vogel. The State intends to defend these suits vigorously.
American Trucking Associations, Inc. and Tri-State Motor Transit, Co. v. State
of New Jersey: The American Trucking Associations, Inc. ("ATA") and Tri-State
Motor Transit, Co. filed a complaint in the Tax Court on March 23, 1994 against
the State of New Jersey and certain state officials challenging the
constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection ("DEP"). A-901
refers to the Assembly bill number which was adopted in 1983 as an amendment to
the Solid Waste Management Act N.J.S.A. 13:1E-1 et seq., and codified at
N.J.S.A. 13:1E-126 et seq., establishing a requirement that all persons and
entities engaged in solid and hazardous waste activities in the State of New
Jersey be investigated prior to the issuance of a license. Plaintiffs are
alleging that the A-901 renewal fees discriminate against interstate commerce in
violation of the Commerce Clause of the United States Constitution; that the
fees are not used for the purposes for which they are levied; and that the fees
do not reflect the duration or complexity of the services rendered by the
government entities receiving the fees as required under the A-901 statute.
Plaintiffs are seeking a declaration that the fees are unconstitutional; a
permanent injunction enjoining the future collection of the fees; a refund of
all annual A-901 renewal fees and all fines and penalties collected pursuant to
enforcement of these provisions; and attorneys' fees and costs. Plaintiffs are
also seeking class certification of their action. On October 2, 1997, oral
argument was conducted on the parties' cross motions for summary judgment in the
Tax Court.
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The DEP currently collects approximately $3.5 to $4 million in A-901 fees
annually. In previous years, the total amount of fees collected was higher
because the number of applicants and licensees subject to the fees was much
larger. It is presently unknown what portion of the A-901 fees are paid by
haulers engaged in interstate commerce, and what percentage of the monies are
renewal fees as opposed to initial application fees. Consequently, the State is
unable to estimate its exposure for this claim and intends to defend this suit
vigorously.
Abbott v. Burke. On January 6, 1997, the Education Law Center filed a motion in
aid of litigants' rights with the Supreme Court of New Jersey in the Abbott v.
Burke matter. In 1994, the Supreme Court ruled in Abbott v. Burke that the State
had to enact a funding formula that would close the spending gap between poor
urban school districts and wealthy suburban districts by Fiscal Year 1998. On
December 20, 1996 the Comprehensive Education Improvement and Financing Act
("CEIFA") was enacted. CEIFA is a departure from the mechanisms of previous
funding formulas. CEIFA was challenged by the Education Law Center and on May
14, 1997, the Supreme Court rendered a decision in Abbott v. Burke and held that
CEIFA was unconstitutional as applied to the 28 Abbott districts. The Supreme
Court ordered the State to appropriate additional funds, beginning in the
1997-98 school year, so that each Abbott district would be able to spend at the
average of the wealthy suburban districts. In addition, the Supreme Court
remanded the matter to the Superior Court to oversee a directive to the
Commissioner of Education to study and report on the special educational needs
of students in the Abbott districts and the facilities needs in those districts.
The Superior Court issued its recommendations to the Supreme Court in its report
on January 22, 1998. In its Report, the Superior Court recommended additional
supplemental programs be implemented at an estimated cost of $312 million and
indicated that the facilities needs identified by the Department of Education
were estimated to require between $1.8-$2.4 billion in repairs and new
construction costs. The Supreme Court will hear argument on the matter on March
2, 1998. A related action, Buena Regional Commercial Township et al. v. New
Jersey Department of Education et al., was filed in Superior Court, Chancery
Division, Cumberland County. This lawsuit was filed on December 9, 1997, on
behalf of 17 rural school districts seeking the same type of relief as has been
mandated to be provided to the poor urban school districts in Abbott v. Burke.
The plaintiffs requested a declaratory judgment stating that the chancery court
retain jurisdiction, pending the remanding of the matter to the Commissioner of
Education for a hearing. The State and plaintiffs have entered into a consent
order to transfer the matter to the Commissioner of Education for resolution.
The chancery court will not retain jurisdiction. The State is unable at this
time to estimate its exposure for these claims and intends to defend both suits
vigorously.
Affiliated FM Insurance Company, et al. v. State of New Jersey, et al. The
plaintiffs in this action are insurers licensed or admitted to write property
and casualty insurance in the State of New Jersey pursuant to N.J.S.A. 17:17-1
et seq. and are all members of the New Jersey Property-Liability Insurance
Guaranty Association ("PLIGA"), a private, non-profit organization created to
cover claims against certain insolvent insurers. Plaintiffs have filed suit in
the Superior Court of New Jersey, Chancery Division, Mercer County against the
State of New Jersey, the Commissioner of Banking, the Department of Banking and
Insurance, PLIGA and the State Treasurer. Plaintiffs contend that their
assessments are being used to retire debt of the Market Transition Fund ("MTF").
The plaintiffs argue that they were never members of the MTF, are not
statutorily responsible for its losses, have not agreed to assume its losses and
did not relinquish any right to repayment of loan assessments to PLIGA. Under
the Fair Automobile Insurance Reform Act of 1990 ("FAIRA"), PLIGA is responsible
for assessing and collecting from its member insurers the amounts necessary to
make certain loans to the Auto Guaranty Fund (the "Auto Guaranty Fund"), a
special nonlapsing fund created pursuant to FAIRA. Plaintiffs contend that
assessments dating back to 1990 are in dispute and challenge the
constitutionality of the assessments and legislation which allow the assessments
to be redirected to the MTF and request declaratory relief and an order that the
monies assessed since 1990 be returned as well as an accounting. The State
intends to vigorously defend this action and has filed a motion to dismiss this
case. In a related matter, In the Matter of the 1997 Assessment Made by the New
Jersey Property Liability Insurance Guaranty Association pursuant to N.J.S.A.
17:30A-8, the American Insurance Association ("AIA") and the Alliance of
American Insurers ("Alliance") filed an appeal of administrative action in
Superior Court-Appellate Division, seeking an emergent stay of their obligation
to pay assessments to PLIGA. These assessments were due on July 28, 1997.
Pursuant to N.J.S.A. 17:30A-8a(9), PLIGA assesses its members in order that
PLIGA can then loan these monies to the Auto Guaranty Fund for use by the MTF to
pay its unfunded liabilities. PLIGA is required by N.J.S.A. 17:30A-8a(10) to
make loans in the amount of $160 million per calendar year to the Auto Guaranty
Fund. AIA and the Alliance allege that the assessment of $160 million for
calendar year 1997 is without statutory authority. On July 28, 1997, the court
denied plaintiff's application for emergent relief, denied the State's motion
for summary disposition and granted plaintiff's motion to accelerate. The State
intends to vigorously defend this action.
C.F., et al. v. Fauver, et al. This case is brought as a purported class action
consisting of prisoners with serious mental disorders who are confined within
the facilities of the Department of Corrections (the "Class") against the
Commissioner of the Department of Corrections and other officers of the
Department of Corrections. The Class alleges cruel and unusual punishment,
violation of the Americans with Disabilities Act of 1990, discrimination against
members of the Class, sex discrimination and violation of due process. The suit
was brought by the Class in the United States District Court of the District of
New Jersey. Through this action, the Class seeks injunctive relief in the form
of changes to the manner in which mental health services are provided to
inmates. The Class also seeks changes in the disciplinary process to the extent
that an inmate's mental health is taken into consideration by a hearing officer
when adjudicating a disciplinary charge. Discovery has commenced and is
continuing. The State intends to
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vigorously defend this action.
Cleary v. Waldman. This case involves the spousal impoverishment provisions of
the Medicare Catastrophic Coverage Act ("MCCA"). Under this provision, the
spouse of an institutionalized husband or wife is allowed to have sufficient
funds to live in the community, called the monthly needs allowance.
The State, in determining a spouse's monthly needs allowance, uses a system
called the "income first" rule. If a community spouse does not have sufficient
funds to meet the monthly needs allowance, an institutionalized spouse is
allowed to shift his or her income to the community spouse to make up the
difference. If the institutionalized spouse's income is insufficient to meet the
monthly needs allowance, then the institutionalized spouse is allowed to shift
resources to the community spouse to generate income to make up the difference.
A class action was brought in federal court in which plaintiffs argue that the
income first rule is disallowed under the MCCA. Rather plaintiffs claim that the
MCCA mandates the use of what is called the "resource-first" rule. Under this
scheme, before income is shifted from the institutionalized spouse to the
community spouse to meet the monthly needs allowance, resources must be shifted
first and income generated from these resources used to meet the monthly needs
allowance. Estimates of exposure if a court were to find that the MCAA only
allows the "resource-first" rule have been estimated in the area of $50 million
per year from both State and Federal sources combined.
Plaintiffs filed for a preliminary injunction arguing that, under federal law,
only the resource first rule was allowed under the MCCA. The State opposed the
motion and the New Jersey Association of Health Care Facilities and the New
Jersey Association for NonProfit Homes for the Aging moved for intervenor
status, opposing the plaintiffs' motion. The court granted the motion of
intervention and denied the motion for preliminary injunction, finding that
plaintiffs were unlikely to prevail on the merits since New Jersey's methodology
was at least a permissible application of the federal law. Subsequently,
plaintiffs filed for class certification which was granted on March 25, 1996. On
March 26, 1997, Plaintiffs filed a Notice of Appeal to the Court of Appeals for
the Third Circuit. Briefing on plaintiffs' application for preliminary
injunction has been completed and it is anticipated that the matter will be
argued during the first calendar quarter of 1998. The State intends to
vigorously defend this action.
United Hospitals et al. v. State of New Jersey and William Waldman. This case
represents a challenge by 18 New Jersey hospitals to Medicaid hospital
reimbursement since February 1995. The matter was filed in the Appellate
Division of the Superior Court of New Jersey in January 1997. The hospitals
challenge all of the following: (i) whether the State complied with certain
federal requirements for Medicaid reimbursement; (ii) whether the State's
reimbursement regulations, N.J.A.C. 10:52-1 et. seq., are arbitrary, capricious
and unreasonable; (iii) whether the Department of Human Services (DHS)
incorrectly calculated the rates; (iv) whether DHS denied hospitals a
meaningful appeal process; (v) whether the 1996-7 State Appropriations Act
(L.1996, c.42) violates the New Jersey Constitution with respect to the
provision for Medicaid reimbursement to hospitals; and (vi) whether DHS violated
the Medicaid State Plan, filed with the U.S. Department of Health and Human
Services, in implementing hospital rates in 1995 and 1996.
The State intends to vigorously defend this action.
Trump Hotels & Casino Resorts, Inc. ("Trump") v. Mirage Resorts Incorporated,
The State of New Jersey et al. An action was filed in Federal District Court to
enjoin and declare unlawful the actions of the Mirage Resorts Incorporated
("Mirage"), the State of New Jersey, the New Jersey Department of
Transportation, the South Jersey Transportation Authority, the Casino
Reinvestment Development Authority ("CRDA"), the New Jersey Transportation Trust
Fund Authority and certain officials of the aforesaid agencies and authorities
in their efforts to revitalize Atlantic City through the design and construction
of a highway and tunnel funded by Mirage, the New Jersey Transportation Trust
Fund Authority and $55,000,000 in bonds to be issued by the South Jersey
Transportation Authority and collateralized by future alternative investment
obligations of casinos to be located in the marina district of Atlantic City.
Plaintiffs claim that the highway and tunnel development funding violates a
provision of the New Jersey State Constitution that requires the State to
dedicate all State revenues derived from gambling to programs benefitting the
elderly and the disabled pursuant to the New Jersey State Constitution, Article
IV, Section 7, Paragraph 2. The plaintiffs further allege that (i) the failure
to disclose the constitutional infirmities alleged in the financing for the
highway and tunnel project will be material omissions within the meaning of Rule
10b-5 of the Securities and Exchange Act of 1934; (ii) the defendants have
sought to avoid the federal requirements of the Clean Water Act, the Federal
Highway Act, and the Clean Air Act; and (iii) the defendants have sought to
avoid the requirement of the New Jersey Coastal Area Facility Review Act. The
defendants filed a motion to dismiss the federal action. In an opinion filed
May 1, 1997, defendant's motion to dismiss the federal suit was granted. The
matter is now pending in the U.S. Court of Appeals for the Third Circuit.
While the Trump v. Mirage action was pending, the State and CRDA filed a
declaratory judgment action in Superior Court of New Jersey, Law Division -
Atlantic County, entitled, State of New Jersey and CRDA v. Trump Hotels & Casino
Resorts, Inc. In this action, the State and CRDA sought a declaratory judgment
that the alternative investment program established under N.J.S.A. 5:12- 144.1
of the CRDA legislation and the use of parking fees and sales tax revenues under
the CRDA legislation to fund eligible projects do not violate the New Jersey
State Constitution. In an opinion filed May 14, 1997, declaratory judgment was
granted in favor of
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the State and CRDA. Trump's application for direct certification of that
decision to the New Jersey Supreme Court was denied. The matter is now in the
Appellate Division.
United Senior Alliance et al. v. State of New Jersey. This matter was filed in
the Superior Court of New Jersey and represents a similar challenge as the Trump
Hotels v. Mirage Resorts case described above. The case alleges that the Casino
Reinvestment Development Authority funding mechanisms are illegal including the
gross receipts tax, the parking tax and the Atlantic City fund. The plaintiffs
in this action have been denied a motion to intervene in the Trump Hotels v.
Mirage Resorts matter in the Appellate Division but have been granted the right
to appear and participate as an amicus. The Superior Court has placed this
matter on the inactive list.
Five additional cases have been filed in opposition to the road and tunnel
project which also contain related challenges. The five matters, Bryant et al.
v. New Jersey Department of Transportation et al., Merolla and Brady v. The
Casino Reinvestment Development Authority et al., Middlesex County v. The Casino
Reinvestment Development Authority et al., Gallagher et al. v. The Casino
Reinvestment Development Authority et al. and George Harms v. State of New
Jersey et al. are also being vigorously defended by the State. In three of these
cases ("Merolla", "Middlesex" and "Gallagher"), the court granted summary
judgment in favor of the New Jersey Department of Transportation and the South
Jersey Transportation Authority on September 29, 1997. These plaintiffs have
filed an appeal. On February 17, 1998 the Federal District Court dismissed the
plaintiffs' claim of violation of the New Jersey Coastal Area Facility Review
Act in the "Bryant" case without prejudice, by declining to exercise
jurisdiction, and dismissed the other claims of the "Bryant" plaintiffs with
prejudice.
Blecker v. State of New Jersey. This is a class action lawsuit filed in Superior
Court-Law Division, Atlantic County, on behalf of all providers of Medicare Part
B services to Qualified Medicare Beneficiaries (QMB's) seeking reimbursement for
Medicare co-insurance and deductibles not paid by the State Medicaid program
from 1988 to February 10, 1995. QMB's are persons who are eligible for Medicare
and Medicaid and from whom Medicaid pays the premiums for Medicare Part B
benefits. From 1988 until February 10, 1995 the State did not pay providers for
co-insurance and deductibles unless the Medicare rate plus the co-insurance and
deductibles was equal to or less than the Medicaid reimbursement rate for the
service. Plaintiff alleges a breach of the contract between the State and
Federal governments intended to benefit providers, and a breach of a contract
between the State Medicaid program and its providers, as well as a claimed
violation of federal civil rights law. Plaintiff is seeking all co-insurance and
deductibles for Medicare Part B benefits provided to all QMB's for the period
from 1988 to 1995. On August 11, 1997, the State filed a motion to dismiss the
matter and on September 15, 1997, the State filed a motion for summary judgment.
The State intends to vigorously defend this lawsuit.
Spadoro v. New Jersey Economic Development Authority, Alan Steinberg, Brian W.
Clymer, Joseph Latoof and Elizabeth Randall. The Pension Bond Financing Act of
1997 authorized the New Jersey Economic Development Authority (the "Authority")
to issue bonds to fund the accrued unfunded liability in the State's pension
funds. Bonds in the amount of $2,803,042,498.56 were issued by the Authority on
June 30, 1997 for the purposes set forth in the Pension Bond Financing Act of
1997. This suit, a second attempt by this plaintiff to challenge the Pension
Bond Act, was brought in July 1997 to challenge the validity of the Authority's
resolution authorizing the issuance of the bonds. Fundamentally, the plaintiff
alleges that the resolution is invalid because (i) the State Treasurer and the
other ex officio members of the Authority had a conflict of interest, (ii) the
actions of the Authority violated the public policy of the State, and (iii)
there were various procedural defects in the conduct of the meeting. On
September 2, 1997, the defendants filed a motion for summary judgment. On
January 9, 1998, the trial court granted the State's motion for summary judgment
and dismissed the claim in its entirety. The time period for plaintiffs to
appeal has not yet run.
Camden County Energy Recovery Associates v. New Jersey Department of
Environmental Protection, Board of Chosen Freeholders of the County of Camden,
et al. Plaintiff, Camden County Energy Recovery Associates ("CCERA"), the owner
and operator of a resource recovery facility in South Camden since 1991, filed
suit on October 20, 1997 in Superior Court-Mercer County. Plaintiff CCERA sought
to have the county solid waste reprocurement process halted to clarify bid
specifications. On November 6, 1997, the court denied the claim to halt the
bidding process but did require that the bid specifications be clarified. In
responding to the complaint, the Pollution Control Financing Authority of Camden
County ("PCFFA") counterclaimed, seeking reformation of the contract between
CCERA and PCFFA. PCFFA has also cross-claimed against the State for contribution
and indemnification by the State to the extent PCFFA remains responsible for the
debt which was issued to finance the resource recovery facility. The State has
filed motions to dismiss the complaint and a cross-claim which are pending with
the court. The State intends to vigorously defend this action.
Sojourner A. et al. v. Dept. of Human Services. The plaintiffs in this action
filed a complaint and motion for preliminary injunction on September 4, 1997,
seeking damages and declaratory and injunctive relief overturning, on State
constitutional grounds, the "family cap" provisions of the State Work First New
Jersey Act N.J.S.A.44: 10-1 et seq. Damages sought are retroactive payment
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of benefits to all persons who did not obtain an increase in welfare benefits
because of the cap. The motion for preliminary injunction was denied on October
28, 1997 and the State has filed an answer to the complaint. The State intends
to defend this suit vigorously.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions which
apply to each Portfolio (except where application to only a particular Portfolio
is specified) and which may not be changed unless approved by a majority of the
outstanding shares of the Portfolio that would be affected by such a change. The
Portfolios may not:
(1) Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" of the respective Portfolio or any other
form of taxable or Federal tax-exempt investment, where applicable,
which meets the Portfolio's quality criteria, as determined by the Board
of Directors and which is consistent with the Portfolio's objectives and
policies.
(2) Borrow Money. This restriction shall not apply to borrowing from banks
for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Portfolio's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at the time
the borrowing was made. While borrowings exceed 5% of the value of a
Portfolio's total assets, such Portfolio will not make any investments.
Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets and only to
secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options, except to the extent that securities subject to a demand
obligation and stand-by commitments may be purchased as set forth under
"Investment Objectives, Policies and Risks" of the respective Portfolio.
(5) Underwrite the securities of other issuers, except insofar as the
Portfolio may be deemed an underwriter under the Securities Act of 1933
in disposing of a portfolio security.
(6) Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"). These Portfolios will
not invest more than an aggregate of 15% of their net assets in a
repurchase agreement maturing in more than seven days, variable rate
demand instruments exercisable in more than seven days and securities
that are not readily marketable.
(7) Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Portfolio from investing in Municipal Obligations
secured by real estate or interests in real estate.
(8) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Objectives, Policies and Risks" of the respective Portfolio.
(9) For purposes of the New York Portfolio and the New Jersey Portfolio,
purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
(10) Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided that there shall be no limitation on the New
York Portfolio to purchase New York Municipal Obligations or on the New
Jersey Portfolio to purchase New Jersey Municipal Obligations and other
obligations issued or guaranteed by the United States government, its
agencies or instrumentalities. When the assets and revenues of an
agency, authority, instrumentality or other political subdivision are
separate from those of the government creating the issuing entity and a
security is backed only by the assets and revenues of the entity, the
entity would be deemed to be the sole issuer of the security. Similarly,
in the case of an industrial revenue bond, if that bond is backed only
by the assets and revenues of the non-governmental user, then such
non-governmental user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity,
such as an insurance company or other corporate obligor, guarantees a
security or a bank issues a letter of credit, such a guarantee or letter
of credit would be considered a separate security and would be treated
as an issue of such government, other entity or bank.
(11) Invest in securities of other investment companies, except that (i) the
Portfolios may purchase unit investment trust securities where such unit
investment trusts meet the investment objectives of the Portfolios and
then only up to 5% of the Portfolios'
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467599.3
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net assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets and (ii) with respect to the New
York Portfolio, the New Jersey Portfolio and the Taxable Portfolio as
permitted by Section 12(d) of the 1940 Act.
(12) Issue senior securities, except insofar as the Fund may be deemed to
have issued a senior security in connection with any permitted
borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Portfolio's assets will not
constitute a violation of such restriction.
PORTFOLIO TRANSACTIONS
Each Portfolio's purchases and sales of portfolio securities usually are
principal transactions. Portfolio securities are normally purchased directly
from the issuer, from banks and financial institutions or from an underwriter or
market maker for the securities. There usually are no brokerage commissions paid
for such purchases. Neither Portfolio expects to pay brokerage commissions. Any
transaction for which a Portfolio pays a brokerage commission will be effected
at the best price and execution available. Purchases from underwriters of
portfolio securities include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. Each Portfolio purchases participation
certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the respective
Portfolio based on the applicable interest rate adjustment index for the
security. The interest received by the Portfolio is net of a fee charged by the
issuing institution for servicing the underlying obligation and issuing the
participation certificate, letter of credit, guarantee or insurance and
providing the demand repurchase feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the respective Portfolios rather than by any
formula. The primary consideration is prompt execution of orders in an effective
manner at the most favorable price. No preference in purchasing portfolio
securities will be given to banks or dealers that are Participating
Organizations. The Manager will seek the most favorable price and execution,
and, consistent with such policy, may give consideration to research,
statistical and other services furnished by brokers or dealers to the Manager
for its use.
Investment decisions for each Portfolio will be made independently from those
for any other investment companies or accounts that may be or become managed by
the Manager or its affiliates. If, however, the Fund and other investment
companies or accounts managed by the Manager are simultaneously engaged in the
purchase or sale of the same security, the transactions may be averaged as to
price and allocated equitably to each account. In some cases, this policy might
adversely affect the price paid or received by the Portfolio or the size of the
position obtainable for the Portfolio. In addition, when purchases or sales of
the same security for the Portfolio and for other investment companies managed
by the Manager occur contemporaneously, the purchase or sale orders may be
aggregated in order to obtain any price advantage available to large
denomination purchasers or sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, neither Portfolio will buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
HOW TO PURCHASE AND REDEEM SHARES
The material relating to the purchase and redemption of shares in the Prospectus
are herein incorporated by reference. This Statement of Additional Information
contains additional information which may be of interest to investors.
Class A Shares of each of the Portfolios are generally sold with a sales charge
payable at the time of purchase. As used herein and unless the context requires
otherwise, the term "Class A Shares" includes shares of Portfolios that offer
only one class of shares. The prospectus contains a table of applicable sales
charges. Certain purchases of Class A Shares may be exempt from a sales charge.
Class B Shares are sold subject to a contingent deferred sales charge ("CDSC")
payable upon redemption within a specified period after purchase. The prospectus
contains a table of applicable CDSCs. The maximum purchase of Class B shares is
$250,000.
Class B Shares will automatically convert into Class A Shares at the end of the
month eight years after the purchase date. Class B Shares acquired through
reinvestment of distributions will convert into Class A Shares based on the date
of the initial purchase to which such shares relate. For this purpose, Class B
Shares acquired through reinvestment of distributions will be attributed to
particular purchases of Class B Shares in accordance with such procedures as the
Directors may determine from time to time. The
25
467599.3
<PAGE>
conversion of Class B Shares to Class A Shares is subject to the condition that
such conversions will not constitute taxable events for federal tax purposes.
No CDSC is imposed on shares subject to a CDSC ("CDSC Shares") to the extent
that the CDSC Shares redeemed (i) are no longer subject to the holding period
therefor, (ii) resulted from reinvestment of distributions on CDSC Shares, or
(iii) if permitted in the future, were exchanged for shares of another
Portfolio, provided that the shares acquired in such exchange or subsequent
exchanges will continue to remain subject to the CDSC, if applicable, until the
applicable holding period expires. In determining whether the CDSC applies to
each redemption of CDSC Shares, CDSC Shares not subject to a CDSC are redeemed
first.
The New York Portfolio will waive any CDSC on redemptions, in the case of
individual, joint or Uniform Transfer to Minors Act accounts, in the event of
death or post-purchase disability of a shareholder, for the purpose of paying
benefits pursuant to taz- qualified retirement plans ("Benefit Payments"), or,
in the case of living trust accounts, in the event of the death or post-purchase
disability of the settlor of the trust). Benefit payments currently include,
without limitation, (1) distributions from an IRA due to death or disability,
(2) a return of excess contributions to an IRA or 401(k) plan, and (3)
distributions from retirement plans qualified under Section 401(a) of the Code
or from a 403(b) plan due to death, disability, retirement or separation from
service. These waivers may be changed at any time.
NET ASSET VALUE
The Fund does not determine net asset value per share on the following holidays:
New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the shares of the New York Portfolio, the Taxable
Portfolio and the New Jersey Portfolio is determined as of the earlier of 4:00
p.m., New York City time and the close of the New York Stock Exchange on each
Fund Business Day. It is computed by dividing the value of such Portfolio's net
assets (i.e., the value of its securities and other assets less its liabilities,
including expenses payable or accrued but excluding capital stock and surplus)
by the total number of shares outstanding.
Municipal Obligations, Taxable Municipal Obligations and New Jersey Municipal
Obligations are stated on the basis of valuations provided by a pricing service
approved by the directors, which uses information with respect to transactions
in bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in determining value.
The valuations provided by such pricing service will be based upon fair market
value determined most likely on the basis of the factors listed above. If a
pricing service is not used, municipal obligations will be valued at quoted
prices provided by municipal bond dealers. Non tax-exempt securities for which
transaction prices are readily available are stated at market value (determined
on the basis of the last reported sales price or a similar means). Short-term
investments that will mature in 60 days or less are stated at amortized cost
which approximates market value. All other securities and assets are valued at
their fair market value as determined in good faith by the Board of Directors.
FUND PERFORMANCE
Total Return and Average Annual Total Return. The Portfolios may from time to
time advertise a total return or average annual total return. Average annual
total return is a measure of the average annual compounded rate of return of
$1,000 invested at the maximum public offering price in such Portfolio over a
specified period, which assumes that any dividends or capital gains
distributions are automatically reinvested in such Portfolio rather than paid to
the investor in cash. Total return is calculated with the same assumptions and
shows the aggregate return on an investment over a specified period. With
respect to the Class B Shares of the New York Portfolio, CDSCs are not taken
into account when calculating this performance information. The formula for
total return used by the Portfolios includes three steps: (1) adding to the
total number of shares purchased by the hypothetical investment in a Portfolio
of $1,000 (assuming the investment is made at a public offering price that
includes the current maximum sales load of 4.50% for the New York Portfolio,
4.50% for the Taxable Portfolio or 4.50% for the New Jersey Portfolio) all
additional shares that would have been purchased if all dividends and
distributions paid or distributed during the period had been automatically
reinvested; (2) calculating the value of the hypothetical initial investment as
of the end of the period by multiplying the total number of shares owned at the
end of the period by the net asset value per share on the last trading day of
the period; and (3) dividing this account value for the hypothetical investor by
the amount of the initial investment. The average annual total return for the
specified period is then determined by calculating the annual rate required for
the hypothetical initial investment to grow to the account value at the end of
the specified period. Total return or average annual return may be stated with
or without giving effect to any expense limitations in effect for the Portfolio.
The New York Portfolio's total return for the twelve months ended November 30,
1997 was 3.41%. The New York Portfolio's average annual compounded total return
from June 24, 1991 (inception) to November 30, 1997 was 7.35%. The New Jersey
Portfolio's total return for the twelve months ended November 30, 1997, was
3.90% and the average annual compounded total return from December 1, 1993
(inception) to November 30, 1997, was 3.49%. The Taxable Portfolio's total
26
467599.3
<PAGE>
return for the twelve months ended November 30, 1997, was 5.84% and the average
annual compounded total return from December 1, 1993 (inception) to November 30,
1997, was 6.80%.
Yield. The Portfolios compute yield by annualizing net investment income per
share for a recent thirty-day period and dividing that amount by a Portfolio
share's maximum public offering price (reduced by any undeclared earned income
expected to be paid shortly as a dividend) on the last trading day of that
period. With respect to the Class B Shares of the New York Portfolio, CDSCs are
not taken into account when calculating this performance information. Net
investment income will reflect amortization of any market value premium or
discount of fixed income securities (except for obligations backed by mortgages
or other assets) and may include recognition of a pro rata portion of the stated
dividend rate of dividend paying portfolio securities. A Portfolio's yield will
vary from time to time depending upon market conditions, the composition of the
Portfolio and operating expenses of the Portfolio. These factors, possible
differences in the methods used in calculating yield and the tax exempt status
of distributions should be considered when comparing a Portfolio's yield to
yields published for other investment companies and other investment vehicles.
Yield should also be considered relative to changes in the value of the
Portfolio's shares and to the relative risks associated with the investment
objectives and policies of the Portfolio. Yield may be stated with or without
giving effect to any expense limitations in effect for the Portfolio. The New
York, New Jersey and Taxable Portfolios' yield for the thirty-day period ended
November 30, 1997 was 4.26%, 4.37% and 5.87%, respectively.
The New York Portfolio and the New Jersey Portfolio may also advertise a tax
equivalent yield for residents of the States of New York and New Jersey,
respectively, wherein all or substantially all of the Portfolio's dividends are
not subject to applicable state's income tax. The Portfolio's advertisement of a
tax equivalent yield reflects the taxable yield that a New York or New Jersey
investor subject to the highest Federal marginal tax rate and that state's or
municipality's highest marginal tax rate would have had to receive in order to
realize the same level of after-tax yield as an investment in such a Portfolio
would have produced. Tax equivalent yield is calculated by dividing the portion
of the Portfolio's yield that is not subject to New York State or municipal
taxes or New Jersey gross income tax (calculated as described above) by the
result of subtracting the sum of the highest Federal marginal tax rate and the
highest marginal state tax rate and assuming that the state taxes are fully
deductible for Federal tax purposes, the highest marginal tax rate from 1, and
adding the resulting figure to that portion, if any, of the Portfolio's yield
that is subject to state or municipal income tax. The New York and New Jersey
Portfolios' taxable equivalent yield for the period ended November 30, 1997 was
7.52% and 7.60%, respectively.
The New York Portfolio and the New Jersey Portfolio may also advertise a tax
equivalent yield for one or more states and municipalities wherein all or
substantially all of the Portfolio's dividends are not subject to Federal income
tax. The Portfolio's advertisement of a tax equivalent yield reflects the
taxable yield that an investor subject to the highest Federal marginal tax rate
would have had to receive in order to realize the same level of after-tax yield
as an investment in such Portfolio would have produced. Tax equivalent yield is
calculated by dividing that portion of the Portfolio's yield that is not subject
to regular Federal taxes (calculated as described above) by the result of
subtracting the highest Federal marginal tax rate from 1, and adding the
resulting figure to, that portion, if any, of the Portfolio's yield that is
subject to regular Federal income tax. The New York and New Jersey Portfolios
taxable equivalent yield for the period ended November 30, 1997 was 7.00% and
7.12% respectively.
General. At any time in the future, yields and total return may be higher or
lower than past yields and total return and there can be no assurance that past
results will continue. Investors in a Portfolio are specifically advised that
share prices, expressed as the net asset values per share, will vary just as
yields will vary. An investor's focus on the yield of the Portfolio to the
exclusion of the consideration of the share price of the Portfolio may result in
the investor's misunderstanding the total return he or she may derive from the
Portfolio.
A Portfolio may from time to time include its yield and total return in
advertisements or information furnished to present or prospective shareholders.
A Portfolio may also from time to time include in advertisements the ranking of
those performance figures relative to such figures for groups of mutual funds
categorized by Lipper Analytical Services as having the same investment
objectives. A Portfolio may also use total return and yield to compare its
performance against the U.S. Bureau of Labor Statistics Consumer Price Index,
which is a statistical measure of changes over time in the prices of goods and
services in major United States household expenditure groups.
MANAGER
The Manager of the Fund is Lebenthal Asset Management, Inc. The Manager, with
its principal office at 120 Broadway, New York, New York 10271, is a wholly
owned subsidiary of Lebenthal & Co., Inc. The Manager, a registered investment
adviser providing fixed-income investment advisory services to individuals,
institutions and other investment advisers, is under the leadership of James L.
Gammon, President and Director of the Manager. James A. Lebenthal, Chairman and
Director of the Manager, is a "controlling person" of the Manager. The Manager
was at November 30, 1996 manager, advisor or supervisor with respect to assets
aggregating
27
467599.3
<PAGE>
in excess of $176,125,595 million. James L. Gammon is primarily responsible for
the day-to-day management of the Fund's Portfolios. Mr. Gammon, President and
Director of the Manager since February 1994, has over 25 years' experience in
municipal bond portfolio management. From March 1984 to July 1993 Mr. Gammon was
Senior Vice President and Senior Portfolio Manager at Loews/CNA Holdings, Inc.
with $12.5 billion under his management. From 1977 to 1984 he managed the $221
million Elfun Tax Exempt Income Fund. The Fund's Annual Report contains
information regarding the Fund's performance and, is available, without charge,
upon request.
Pursuant to the Management Contracts, the Manager manages the portfolio of
securities of each of the Portfolios and makes decisions with respect to the
purchase and sale of investments, subject to the general control of the Fund's
Board of Directors. For its services under the Management Contracts, the Manager
is entitled to receive a management fee for its services, calculated daily and
payable monthly, equal to .25% of each of the Portfolios' average daily net
assets not in excess of $50 million, .225% of such assets between $50 million
and $100 million and .20% of such assets in excess of $100 million.
The Management Contracts for each Portfolio were approved by the Board of
Directors, including a majority of the directors who are not interested persons
(as defined in the Act) of the Fund or the Distributor, on July 25, 1996 for the
New York Portfolio, the Taxable Portfolio and the New Jersey Portfolio. The
Management Contracts for the New York Portfolio, the Taxable Portfolio and the
New Jersey Portfolio were approved by a majority of each of the Portfolio's
shareholders at a meeting held on August 9, 1994.
The Management Contract for each Portfolio has a term which extends to July 31,
1998, and may be continued in force thereafter for successive twelve-month
periods beginning each August 1, provided that such continuance is specifically
approved annually by majority vote of each of the Portfolio's outstanding voting
securities or by its Board of Directors, and in either case by a majority of the
directors who are not parties to the Management Contracts or interested persons
of any such party, by votes cast in person at a meeting for the purpose of
voting on such matter.
The Management Contract for each Portfolio is terminable without penalty by such
Portfolio on sixty days' written notice when authorized either by majority vote
of its outstanding voting shares or by a vote of a majority of its Board of
Directors, or by the Manager on sixty days' written notice, and will
automatically terminate in the event of its assignment. The Management Contract
for each Portfolio provides that in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Manager, or of reckless disregard
of its obligations thereunder, the Manager shall not be liable for any action or
failure to act in accordance with its duties thereunder.
For the New York Portfolio's fiscal year ended November 30, 1997, the fee
payable to the Manager was $288,050, none of which was waived. The New York
Portfolio's net assets at the close of business on November 30, 1997, totaled
$134,144,060. For the New York Portfolio's fiscal year ended November 30, 1996,
the fee payable to the Manager was $266,395, none of which was waived. The New
York Portfolio's net assets at the close of business on November 30, 1996,
totaled $122,611,313. For the New York Portfolio's fiscal year ended November
30, 1995, the fee payable to the Manager was $214,981, none of which was waived.
The New York Portfolio's net assets at the close of business on November 30,
1995, totaled $105,579,087. For the New Jersey Portfolio's fiscal year ended
November 30, 1997, the fee payable to the Manager was $13,639, all of which was
waived. The New Jersey Portfolio's net assets at the close of business on
November 30, 1997, totaled $6,121,584. For the New Jersey Portfolio's fiscal
year ended November 30, 1996, the fee payable to the Manager was $10,708, all of
which was waived. The New Jersey Portfolio's net assets at the close of business
on November 30, 1996, totaled $5,182,149. For the New Jersey Portfolio's fiscal
year ended November 30, 1995, the fee payable to the Manager was $5,987, all of
which was waived. The New Jersey Portfolio's net assets at the close of business
on November 30, 1995, totaled $3,357,883. For the Taxable Portfolio's fiscal
year ended November 30, 1997, the fee payable to the Manager was $35,804 all of
which was waived. The Taxable Portfolio's net assets at the close of business on
November 30, 1997, totaled $14,993,874. The Taxable Portfolio's net assets at
the close of business on November 30, 1996, totaled $14,607,185. For Taxable
Portfolio's fiscal year ended November 30, 1995, the fee payable to the Manager
was $11,647, all of which was waived. The Taxable Portfolio's net assets at the
close of business on November 30, 1995, totaled $8,685,957.
The Manager may, at its discretion, waive all or a portion of its fees under
each Management Agreement. There can be no assurance that such fees will be
waived in the future.
Expense Limitation
The Manager has agreed to reimburse the Taxable Portfolio and the New Jersey
Portfolio for their expenses (exclusive of interest, taxes, brokerage, and
extraordinary expenses) which in any year exceed the limits on investment
company expenses prescribed by any state in which such Portfolio's shares are
qualified for sale. For the purpose of this obligation to reimburse expenses, a
Portfolio's annual expenses are estimated and accrued daily, and any appropriate
estimated payments are made to it on a monthly
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467599.3
<PAGE>
basis. Subject to the obligations of the Manager to reimburse a Portfolio for
its excess expenses as described above, such Portfolio has, under its respective
Management Contract, confirmed its obligation for payment of all its other
expenses, including taxes, brokerage fees and commissions, commitment fees,
certain insurance premiums, interest charges and expenses of the custodian,
transfer agent and dividend disbursing agent's fees, telecommunications
expenses, costs and expenses of fund bookkeeping agent, auditing and legal
expenses, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the Manager
or its affiliates, or the Administrator, costs of investor services,
shareholders' reports and corporate meetings, Securities and Exchange Commission
registration fees and expenses, state securities laws registration fees and
expenses, expenses of preparing and printing the Fund's prospectus for delivery
to existing shareholders and of printing application forms for shareholder
accounts, the fees payable to the Manager under the Management Contract, the
fees payable to the Distributor under the Distribution Agreement and Shareholder
Servicing Agreement (where applicable) and the fees payable to the Administrator
under the Administration Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. A Portfolio's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above. As a result of the recent passage of the National
Securities Markets Improvement Act of 1996, all state expense limitations have
been eliminated at this time.
Administrator
The Administrator for the New York Portfolio, the Taxable Portfolio and the New
Jersey Portfolio is State Street Bank and Trust Company (the "Administrator"), a
Massachusetts trust company, which has its principal office at 225 Franklin
Street, Boston, Massachusetts 02111. The Administrator serves as administrator
of other mutual funds.
Pursuant to the Administration Agreement with the New York Portfolio, the
Taxable Portfolio and the New Jersey Portfolio, the Administrator provides all
administrative services reasonably necessary for such Portfolios, other than
those provided by the Manager, subject to the supervision of the Fund's Board of
Directors. Because of the services rendered to a Portfolio by the Administrator,
and the Manager, the Portfolio itself may not require any employees other than
its officers, none of whom receive compensation from the Portfolio.
Under the Administration Agreement with the New York Portfolio, the Taxable
Portfolio and the New Jersey Portfolio, the Administrator provides
administrative services including, without limitation: (i) services of personnel
competent to perform such administrative and clerical functions as are necessary
to provide effective administration of the Portfolio; (ii) assisting Fund
officers in preparing Portfolio tax returns; (iii) in conjunction with Fund
counsel, preparing and filing all Blue Sky filings, reports and renewals; (iv)
coordinating the preparation and distribution of all materials for directors,
including the agenda for meetings and all exhibits thereto, and actual and
projected quarterly summaries; (v) coordinating the activities of the
Portfolio's Manager, Custodian, Legal Counsel and Independent Accountants; (vi)
monitoring daily and periodic compliance with respect to all requirements and
restrictions of the 1940 Act, the Internal Revenue Code and the Prospectus;
(vii) monitoring daily the Portfolio's accounting services agent's calculation
of all income and expense accruals, sales and redemptions of capital shares
outstanding; (viii) evaluating expenses, projecting future expenses, and
processing payments of expenses; (ix) monitoring and evaluating performance of
bookkeeping and related services by Investors Fiduciary Trust Company, the
bookkeeping agent for the Portfolio.
For the services rendered to such Portfolios by the Administrator, the Fund pays
the Administrator a fee, computed daily and payable monthly, equal to .08% per
annum of the average daily net assets of the respective Portfolio up to $125
million, .06% per annum of the average daily net assets of each of the
Portfolios of the next $125 million and .04% of such assets of each of the
Portfolios in excess of $250 million. There is a minimum annual fee payable of
$165,000. Fees paid to the Administrator were as follows: for the New York
Portfolio's fiscal year ended November 30, 1997, the fee payable was $143,014,
none of which was waived, for the New Jersey Portfolio's fiscal year ended
November 30, 1997 the fee payable was $6,213, none of which was waived, for the
Taxable Portfolio's fiscal year ended November 30,1997 the fee was $16,453, none
of which was waived, for the New York Portfolio's fiscal year ended November 30,
1996, the fee payable was $144,407, none of which was waived, for the New Jersey
Portfolio's fiscal year ended November 30, 1996, the fee payable was $5,398,
none of which was waived, for the Taxable Portfolio's fiscal year ended November
30, 1996, the fee payable was $15,311, none of which was waived. Fees paid to
Reich & Tang Asset Management L.P., the former Administrator under the then
current Administrative Services Agreement were as follows: for the New York
Portfolio's fiscal year ended November 30, 1995, the fee payable was $112,489,
none of which was waived, for the New Jersey Portfolio's fiscal year ended
November 30, 1995, the fee payable was $2,994, all of which was waived and for
the Taxable Portfolio's fiscal year ended November 30, 1995, the fee payable was
$5,824, all of which was waived.
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467599.3
<PAGE>
The Administration Agreement has an initial term which extends to December 1,
1998. Thereafter the Agreement is terminable at any time, without the payment of
any penalty, by the Fund or the Administrator on sixty days' written notice.
MANAGEMENT OF THE FUND
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Mr. Lebenthal may be deemed an
"interested person" of the Fund, as defined in the 1940 Act, on the basis of his
affiliation with Lebenthal Asset Management, Inc.
James A. Lebenthal, 69 - Chairman of the Board and Director of the Fund, has
been Chairman and Director of Lebenthal & Co., Inc. since 1978, Chairman and
Director of the Manager since 1994 and President of Lebenthal, The Ad Agency,
Inc. since 1978.
His address is 120 Broadway, New York, New York 10271.
Victor Chang, 59 - Director of the Fund, formed Victor Chang Associates and V.C.
Management Co., Inc. in 1980 and is President of both organizations which are in
the business of providing financial analysis and economic consulting. His
address is 30 Broad Street, New York, New York 10004.
Robert R. Godfrey, 49 - Director of the Fund is founder and Chairman of N/W
Capital, Inc., a principal and financial advisory firm since March, 1995. Prior
to that he was Executive Vice President of MBIA, Inc. and its predecessor
organization from December 1985 until March 1995. His address is 1177 High Ridge
Road, Stamford, CT 06905.
Alexandra Lebenthal, 33 - President of the Fund, has been President of Lebenthal
& Co., Inc. since 1995. Ms. Lebenthal was affiliated with Kidder Peabody from
1986 to 1988 where she worked in the unit investment trust department and the
municipal institutional sales department. She graduated from Princeton
University in 1986 with an A.B. in U.S. History. Her address is 120 Broadway,
New York, New York 10271.
Hiram Lazar, 32 - Secretary of the Fund, is Vice-President of Lebenthal & Co.,
Inc. where he has been employed since 1992. His address is 120 Broadway, New
York, New York 10271.
James E. McGrath, 46 - Treasurer of the Fund, has been Senior Vice President of
Lebenthal & Co., Inc. since 1990 and a director since 1994, and Executive Vice
President and Director of the Manager since 1995. Mr. McGrath was a Senior Vice
President of Kidder Peabody where he was affiliated since 1968. His address is
120 Broadway, New York, New York 10271.
The New York Portfolio, the New Jersey Portfolio and the Taxable Portfolio paid
an aggregate remuneration of $13,000 to its disinterested directors with respect
to the period ended November 30, 1997, pursuant to the terms of the Investment
Management Contract (See "Manager" herein).
<TABLE>
COMPENSATION TABLE
<CAPTION>
1) 2) 3) 4) 5)
Name of Person, Aggregate Pension or Retirement Estimated Annual Total
Position Compensation from Benefits Accrued as Part Benefits upon Compensation
Registrant for Fiscal of Fund Expenses Retirement from Fund
Year Complex Paid to
Directors*
<S> <C> <C> <C>
Victor Chang,
Director $4,000 0 0 $4,000
Robert F. Godfrey, $4,000 0 0 $4,000
Director
</TABLE>
* The total compensation paid to such persons by the Fund for the fiscal
year ending November 30, 1997. The Fund Complex consists of the three
Portfolios of the Fund. Mr. Donald Conrad and Mr. Francis Gallagher
received $1,000 and $4,000, respectively during the same period.
30
467599.3
<PAGE>
Counsel and Auditors
Legal matters in connection with the issuance of shares of stock of the Fund and
New York law are passed upon by Battle Fowler LLP, 75 East 55th Street, New
York, New York 10022.
Matters in connection with New Jersey law are passed upon by McCarter & English,
LLP, Four Gateway Center, 100 Mulberry Street, Newark, New Jersey 07101-0652.
Coopers & Lybrand L.L.P. 1100 Main Street, Suite 900, Kansas City, MO 64105,
independent public accountants, have been selected as auditors for the Fund.
DISTRIBUTION AND SERVICE PLANS
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission has required that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted
distribution and service plans on behalf of each Portfolio the "Plan" or
"Plans").
The New York Portfolio
Pursuant to its Plan, the New York Portfolio and the Distributor have entered
into a Distribution Agreement. Under the Distribution Agreement, the
Distributor, as agent for the Fund, will solicit orders for the purchase of the
New York Portfolio's shares, provided that any subscriptions and orders will not
be binding on the Fund until accepted by the Fund as principal. Under the
Distribution Agreement, the Distributor receives from the Class A Shares of the
New York Portfolio, a fee equal to 0.25% per annum of the average daily net
assets of the Class A Shares of the Portfolio as a service fee (the "Service
Fee"). Under the Distribution Agreement, the Distributor receives from the Class
B Shares of the New York Portfolio an aggregate fee equal to 1% per annum of
such Class B Shares' average daily net assets which includes (i) an asset based
sales charge (the "Asset Based Sales Charge") equal to 0.75% per annum of its
average daily net assets to compensate the Distributor for sales commissions
paid by the Distributor for sales of the Portfolio's Class B Shares and (ii)
0.25% of its average daily net assets as the Service Fee.
These fees are accrued daily and paid monthly. For providing shareholder
servicing and the maintenance of shareholder accounts and that provides that the
Distributor may make payment from time to time from the Service Fee received to
pay the costs of, and to compensate others, including Participating
Organizations for performers such shareholder servicing functions on behalf of
the Portfolio.
The Plan and the Distribution Agreement provide that, in addition to the Service
Fee, the New York Portfolio will pay for i) telecommunications expenses
including the cost of dedicated lines and CRT terminals, incurred by the
Distributor in carrying out its obligations under the Distribution Agreement and
ii) preparing, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing and printing subscription application
forms for shareholder accounts.
The Plan and the Management Agreement provide that the Manager may make payments
from time to time from its own resources, which may include the Management Fee
and past profits for the following purposes: i) to defray the costs of, and to
compensate others, including Participating Organizations with whom the
Distributor has entered into written agreements, for performing shareholder
servicing and related administrative functions on behalf of the New York
Portfolio, ii) to compensate certain Participating Organizations for providing
assistance in distributing the New York Portfolio's shares, iii) to pay the cost
of printing and distributing the New York Portfolio's prospectus to prospective
investors, and iv) to defray the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including the salaries and/or
commissions of sales personnel in connection with the distribution of the New
York Portfolio's shares. The Distributor may also make payments from time to
time from its own resources which may include the Service Fee and past profits
for the purposes enumerated in (i) above. With respect to the Class B shares
only, the Distributor may also make payments for the purposes enumerated in
(ii), (iii), and (iv) from the Asset Based Sales Charges received by the
Distributor. The Distributor, in its sole discretion, will determine the amount
of such payments made pursuant to the Plan, provided that such payments will not
increase the amount which the New York Portfolio is required to pay to the
Distributor for any fiscal year under the Distribution Agreement in effect for
that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the New York Portfolio or the
Distributor and Participating Organizations or other organizations must be in a
form satisfactory to the Fund's Board of Directors. In addition, the Plan
requires the Fund and the Distributor to prepare, at least quarterly, written
reports setting
31
467599.3
<PAGE>
forth all amounts expended for distribution purposes by the New York Portfolio
and the Distributor pursuant to the Plan and identifying the distribution
activities for which those expenditures were made.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Directors,
including a majority of directors who are not interested persons of the Fund and
who have no direct or indirect interest in the operation of the Plan or in the
agreements related to the Plan. The Board of Directors most recently approved
the Plan on April 24, 1997 to be effective until April 30, 1998. The Plan was
approved by the shareholders of the Portfolio at their first meeting held on
June 23, 1992. The Board of Directors most recently approved the Plan for the
Class B Shares of the New York Portfolio on October 30, 1997. The Directors
first approved the Plan for the Class B Shares of the New York Portfolio on July
31, 1997. The Plan further provides that it may not be amended to increase
materially the costs which may be spent by the Fund for distribution pursuant to
the Plan without shareholder approval, and the other material amendments must be
approved by the directors in the manner described in the preceding sentence. The
Plan may be terminated at any time by a vote of a majority of the disinterested
directors of the Fund or the New York Portfolio's shareholders.
For the New York Portfolio's fiscal year ended November 30, 1997, the total
amount spent pursuant to the Plan was $128,713 all of which was paid by the
Portfolio to the Distributor pursuant to the Distribution Agreement, and all of
which was paid by the Distributor which may be deemed an indirect payment by the
Portfolio. Of the total amount paid to the Distributor, the Distributor utilized
$123,133 on compensation to sales personnel, $-0- on advertising and $5,580 on
Prospectus printing. For the New York Portfolio's fiscal year ended November 30,
1996, the total amount spent pursuant to the Plan was $108,548 all of which was
paid by the Portfolio to the Distributor pursuant to the Distribution Agreement,
and all of which was paid by the Distributor which may be deemed an indirect
payment by the Portfolio. Of the total amount paid to the Distributor, the
Distributor utilized $100,282 on compensation to sales personnel and $4,856 on
advertising and $3,410 on Prospectus printing. For the New York Portfolio's
fiscal year ended November 30, 1995, the total amount spent pursuant to the Plan
was $69,789 all of which was paid by the Portfolio to the Distributor pursuant
to the Distribution Agreement, and all of which was paid by the Distributor
which may be deemed an indirect payment by the Portfolio). Of the total amount
paid to the Distributor, the Distributor utilized $58,172 on compensation to
sales personnel and $8,371 on advertising and $3,246 on Prospectus printing.
[The New York Portfolio had no unreimbursed expenses in a previous fiscal year
which were carried forward to a subsequent fiscal year].
The Taxable Portfolio and the New Jersey Portfolio
Pursuant to each Portfolio's Plan, the Taxable Portfolio and the New Jersey
Portfolio have each entered into a Distribution Agreement and a Shareholder
Servicing Agreement.
For its services under the respective Portfolio's Shareholder Servicing
Agreement, the Distributor receives from each of the Taxable Portfolio and the
New Jersey Portfolio a service fee equal to .25% per annum of the respective
Portfolio's average daily net assets the "Shareholder Servicing Fee"). The fee
is accrued daily and paid monthly and any portion of the fee may be deemed to be
used by the Distributor for purposes of i) shareholder servicing and maintenance
of shareholder accounts and ii) for payments to Participating Organizations with
respect to servicing their clients or customers who are shareholders of the
Portfolio.
Under each Portfolio's Distribution Agreement, the Distributor, for nominal
consideration and as agent for the respective Portfolio, will solicit orders for
the purchase of the respective Portfolio's shares, provided that any
subscriptions and orders will not be binding on the Portfolio until accepted by
the Portfolio as principal. In addition, the Distribution Agreement provides for
reimbursement to the Distributor by the Portfolio for its distribution,
promotional and advertising costs incurred in connection with the distribution
of the respective Portfolio's shares in an amount not to exceed .10% per annum
of the respective Portfolio's average daily net assets. To the extent the
Distributor does not take reimbursements for such expenses in a current fiscal
year, it is precluded from taking any reimbursement for such amounts in a future
fiscal year.
The Plan, the Shareholder Servicing Agreement and the Distribution Agreement
provide that, in addition to the Shareholder Servicing Fee and advertising
reimbursement, each Portfolio will pay for i) telecommunications expenses
including the cost of dedicated lines and CRT terminals incurred by the
Distributor in carrying out its obligations under the Shareholder Servicing
Agreement, and ii) typesetting, printing and delivering each Portfolio's
prospectus to existing shareholders of the Portfolio and preparing the printing
subscription application forms for shareholder accounts. The expenses enumerated
in this paragraph shall not exceed an amount equal to .05% per annum of the
Portfolio's average daily net assets.
Each Portfolio's Plan and Management Contract provide that the Manager may make
payments from time to time from its own resources, which may include the
management fee and past profits for the following purposes: i) to defray the
costs of and to compensate others, including participating organizations with
whom the Distributor has entered into written agreements, for performing
shareholder servicing and related administrative functions on behalf of the
Portfolio, ii) to compensate certain participating
32
467599.3
<PAGE>
organizations for providing assistance in distributing the Portfolio's shares;
iii) to pay the costs of printing and distributing the Portfolio's prospectus to
prospective investors; and iv) to defray the cost of the preparation and
printing of brochures and other promotional materials, mailings to prospective
shareholders, advertising, and other promotional activities, including the
salaries and/or commissions of sales personnel in connection with the
distribution of the Portfolio's shares. The Distributor, in its sole discretion,
will determine the amount of such payments made pursuant to the Plan, provided
that such payments made pursuant to the Plan will not increase the amount which
each Portfolio is required to pay to the Distributor or the Manager for any
fiscal year under the Shareholder Servicing Agreement or the Management Contract
in effect for that year.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Directors,
including a majority of directors who are not interested persons of the Fund and
who have no direct or indirect interest in the operation of the Plan or in the
agreements related to the Plan. The Board of Directors most recently approved
the Plan on April 24, 1997 to be effective until April 30, 1998. The Plan was
approved by the shareholders of each Portfolio at their first meetings each held
on November 10, 1994. The Plan further provides that it may not be amended to
increase materially the costs which may be spent by the Fund for distribution
pursuant to the Plan without shareholder approval, and the other material
amendments must be approved by the directors in the manner described in the
preceding sentence. The Plan may be terminated at any time by a vote of a
majority of the disinterested directors of the Fund or the shareholders of each
respective Portfolio.
For the New Jersey Portfolio's fiscal year ended November 30, 1997, the total
amount spent pursuant to the Plan was $5,444 all of which was paid by the
Portfolio to the Distributor pursuant to the Distribution Agreement, and all of
which was paid by the Distributor which may be deemed an indirect payment by the
Portfolio. Of the total amount paid to the Distributor, the Distributor utilized
$5,167 on compensation to sales personnel, $-0- on advertising and $277 on
Prospectus printing. For the New Jersey Portfolio's fiscal year ended November
30, 1996, the total amount spent pursuant to the Plan was $11,494, none of which
was paid by the Portfolio to the Distributor pursuant to the Distribution
agreement and all of which was paid by the Distributor which may be deemed an
indirect payment by the Portfolio. For the New Jersey Portfolio's fiscal year
ended November 30, 1995, the total amount spent pursuant to the Plan was $6,552,
none of which was paid by the Portfolio to the Distributor pursuant to the
Distribution agreement and all of which was paid by the Distributor which may be
deemed an indirect payment by the Portfolio). For the Taxable Portfolio's fiscal
year ended November 30, 1997, the total amount spent pursuant to the Plan was
$14,414, all of which was paid by the Portfolio to the Distributor pursuant to
the Distribution Agreement, and all of which was paid by the Distributor which
may be deemed an indirect payment by the Portfolio. Of the total amount paid to
the Distributor, the Distributor utilized $13,829 on compensation to sales
personnel, $-0- on advertising and $585 on Prospectus printing. For the Taxable
Portfolio's fiscal year ended November 30, 1996, the total amount spent pursuant
to the Plan was $53,012, none of which was paid by the Portfolio to the
Distributor pursuant to the Distribution agreement and all of which was paid by
the Distributor which may be deemed an indirect payment by the Portfolio). For
the Taxable Portfolio's fiscal year ended November 30, 1995, the total amount
spent pursuant to the Plan was $8,337, none of which was paid by the Portfolio
to the Distributor pursuant to the Distribution agreement and all of which was
paid by the Distributor which may be deemed an indirect payment by the
Portfolio). [The New Jersey and Taxable Portfolios had no unreimbursed expenses
in a previous fiscal year which were carried over to subsequent years.]
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Fund, which was incorporated on August 17,
1990 in Maryland, consists of twenty billion shares of stock having a par value
of one tenth of one cent $.001) per share. The Fund's Board of Directors
reclassified its authorized but unissued shares for the New Jersey Portfolio and
the Taxable Portfolio on August 25, 1993. The Fund's Board of Directors on July
31, 1997, approved the Fund's Rule 18f-3 Multi-Class Plan and the creation of
classes of shares for each of the series. Currently, only the New York Portfolio
offers for sale two classes of shares. Each share has equal dividend,
distribution, liquidation and voting rights and a fractional share has those
rights in proportion to the percentage that the fractional share represents a
whole share. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. All shares, when
issued in accordance with the terms of the offering, will be fully paid and
nonassessable. Shares are redeemable at net asset value at the option of the
shareholder. As of February 28, 1998, there were 16,920,992.980, 1,037,135.939
and 2,121,261.231 shares outstanding of the New York Portfolio, the New Jersey
Portfolio and the Taxable Portfolio respectively.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so, and,
in that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. The Fund does not issue
certificates evidencing Fund shares.
As a general matter, the Funds will not hold annual or other meetings of the
Funds' shareholders. This is because the By-laws of the Funds provide for annual
meetings only a) for the election of directors, b) for approval of the Funds'
revised investment advisory agreement with respect to a particular class or
series of stock, c) for approval of revisions to the Fund's distribution
agreement with
33
467599.3
<PAGE>
respect to a particular class or series of stock, and d) upon the written
request of holders of shares entitled to cast not less than 25% of all the votes
entitled to be cast at such meeting. Annual and other meetings may be required
with respect to such additional matters relating to the Fund as may be required
by the Act, including the removal of Fund directors) and communication among
shareholders, any registration of the Fund with the Securities and Exchange
Commission or any state, or as the Directors may consider necessary or
desirable. Each Director serves until the next meeting of the shareholders
called for the purpose of considering the election or reelection of such
Director or of a successor to such Director, and until the election and
qualification of his or her successor, elected at such a meeting, or until such
Director sooner dies, resigns, retires or is removed by the vote of the
shareholders.
FEDERAL INCOME TAXES
The following is a general discussion of certain of the Federal income tax
consequences of the purchase, ownership and disposition of shares of the
Portfolios. The summary is limited to investors who hold the shares as "capital
assets" generally, property held for investment), and to whom special categories
of rules do not apply, such as foreign investors. Shareholders should consult
their tax advisers in determining the Federal, state, local and any other tax
consequences of the purchase, ownership and disposition of shares.
The New York Portfolio and the New Jersey Portfolio
Each of the New York Portfolio and the New Jersey Portfolio, a "Tax-exempt Fund"
and collectively, the "Tax-exempt Funds") has elected to qualify under the
Internal Revenue Code of 1986, as amended the "Code"), and, with respect to the
New York Portfolio, under New York law as a "regulated investment company" that
distributes "exempt-interest dividends". Each Tax-exempt Fund intends to
continue to qualify for regulated investment company status so long as such
qualification is in the best interests of its shareholders. Such qualification
relieves the Tax-exempt Fund of liability for Federal income taxes to the extent
its earnings are distributed in accordance with the applicable provisions of the
Code.
Each Tax-exempt Fund's policy is to distribute as dividends each year 100% and
in no event less than 90% of its tax-exempt interest income, net of certain
deductions. Exempt-interest dividends, as defined in the Code, are dividends or
any part thereof other than capital gain dividends) paid by a Tax-exempt Fund
that are attributable to interest on obligations, the interest on which is
exempt from regular Federal income tax, and designated by the Tax-exempt Fund as
exempt-interest dividends in a written notice mailed to the Tax-exempt Fund's
shareholders not later than 60 days after the close of its taxable year. The
percentage of the total dividends paid by a Tax-exempt Fund during any taxable
year that qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends during the year.
Exempt-interest dividends are to be treated by a Tax-exempt Fund's shareholders
as items of interest excludable from their gross income under Section 103(a) of
the Code. If a shareholder receives an exempt-interest dividend with respect to
any share and then disposes of such share which has been held for six months or
less, then any loss on the sale or exchange of such share will be disallowed to
the extent of the amount of such exempt-interest dividend. The Code provides
that interest on indebtedness incurred, or continued, to purchase or carry
certain tax-exempt securities such as shares of a Tax-exempt Fund is not
deductible. Therefore, among other consequences, a certain proportion of
interest on indebtedness incurred, or continued, to purchase or carry securities
on margin may not be deductible during the period an investor holds shares of a
Tax-exempt Fund. For Social Security recipients, interest on tax-exempt bonds,
including exempt-interest dividends paid by a Tax-exempt Fund, is to be added to
adjusted gross income for purposes of computing the amount of Social Security
benefits includable in gross income. Under P.L. 99-514, the amount of such
interest received will have to be disclosed on the shareholders' Federal income
tax returns. Further, under P.L. 99-514, taxpayers other than corporations are
required to include as an item of tax preference for purposes of the Federal
alternative minimum tax all tax-exempt interest on "private activity" bonds
generally, a bond issue in which more than 10% of the proceeds are used in a
non-governmental trade or business) (other than Section 501(c)(3) bonds) issued
after August 7, 1986. Thus, this provision will apply to the portion of the
exempt-interest dividends from a Tax-exempt Fund that is attributable to such
post-August 7, 1986 private activity bonds, if any of such bonds are acquired by
the Tax-exempt Fund. Corporations are required to increase their alternative
minimum taxable income for purposes of calculating their alternative minimum tax
liability by 75% of the amount by which the adjusted current earnings (including
tax-exempt interest) of the corporation exceeds the alternative minimum taxable
income determined without this provision). In addition, in certain cases,
Subchapter S corporations with accumulated earnings and profits from Subchapter
C years are subject to a minimum tax on excess "passive investment income",
which includes tax-exempt interest. A shareholder is advised to consult its tax
advisers with respect to whether exempt-interest dividends retain the exclusion
under Section 103 of the Code if such shareholder would be treated as a
"substantial user" or "related person" under Section 147(a) of the Code with
respect to some or all of the "private activity bonds", if any, held by a
Tax-exempt Fund.
34
467599.3
<PAGE>
A Tax-exempt Fund may realize capital gains or losses from its portfolio
transactions and upon the maturity or disposition of securities acquired at
discounts resulting from market fluctuations. In the case of a Municipal
Obligation acquired at a market discount, gain on the disposition of the
Municipal Obligation generally will be treated as ordinary income to the extent
of accrued market discount. Short-term capital gains will be taxable to
shareholders as ordinary income when they are distributed. Any net capital gains
(the excess of net realized long-term capital gain over its net realized
short-term capital loss) will be distributed annually to the Tax-exempt Funds'
shareholders. A Tax-exempt Fund will have no tax liability with respect to
distributed net capital gains and the distributions will be taxable to
shareholders as long-term capital gains regardless of how long the shareholders
have held Tax-exempt Fund shares. However, Tax-exempt Fund shareholders who at
the time of such a net capital gain distribution have not held their Tax-exempt
Fund shares for more than 6 months, and who subsequently dispose of those shares
at a loss, will be required to treat such loss as a long-term capital loss to
the extent of the net capital gain distribution. Distributions of net capital
gain will be designated as a "capital gain dividend" in a written notice mailed
to the Tax-exempt Funds' shareholders not later than 60 days after the close of
the Tax-exempt Fund's taxable year. Under the Revenue Reconciliation Act of
1993, for fiscal years beginning after December 31, 1992, ordinary income is
subject to a maximum individual tax rate of 39.6% distribution of a Tax-exempt
Fund's net capital gain (designated as capital gain dividends by the Tax-exempt
Fund) will be taxable to shareholders as long-term capital gain, regardless of
the length of time the shares have been held by a shareholder. A shareholder may
recognize a taxable gain or loss if the shareholder sells or redeems its shares.
Any gain or loss arising from (or treated as arising from) the sale or
redemption of shares will be a capital gain or loss, except in the case of a
dealer in securities. Capital gains realized by corporations are generally taxed
at the same rate as ordinary income. However, capital gains are taxable at a
maximum rate of 28% to non-corporate shareholders who have a holding period of
more than 12 months, and 20% for non-corporate shareholders who have a holding
period of more than 18 months. Corresponding maximum rate and holding period
rules apply with respect to capital gains dividends distributed by a Tax-exempt
Fund, without regard to the length of time the shares have been held by the
shareholder. The deduction of capital losses is subject to limitations.
Each Tax-exempt Fund intends to distribute at least 90% of its investment
company taxable income (taxable income subject to certain adjustments and
exclusive of the excess of its net long-term capital gain over its net
short-term capital loss) for each taxable year. Each Tax-exempt Fund will be
subject to Federal income tax on any undistributed investment company taxable
income. To the extent such income is distributed it will be taxable to
shareholders as ordinary income. Expenses paid or incurred by the Tax- exempt
Fund will be allocated between tax-exempt and taxable income in the same
proportion as the amount of the Tax-exempt Fund's tax-exempt income bears to the
total of such exempt income and its gross income (excluding from gross income
the excess of capital gains over capital losses). If the Tax-exempt Fund does
not distribute at least 98% of its ordinary income and 98% of its capital gain
net income for a taxable year, the Tax-exempt Fund will be subject to a
nondeductible 4% excise tax on the excess of such amounts over the amounts
actually distributed.
A shareholder may recognize a taxable gain or loss if the shareholder sells or
redeems its shares. If the securities held by a Tax- exempt Fund appreciate in
value, purchasers of shares of the Tax-exempt Fund after the occurrence of such
appreciation will acquire such shares subject to the tax obligation that may be
incurred in the future when there is a sale of such shares.
If a shareholder fails to provide a Tax-exempt Fund with a current taxpayer
identification number, the Tax-exempt Fund generally is required to withhold 31%
of taxable interest, dividend payments, and proceeds from the redemption of
shares of the Tax-exempt Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of a Tax-exempt Fund.
With respect to the variable rate demand instruments, including participation
certificates therein, each Tax-exempt Fund has obtained and is relying on the
opinion of Battle Fowler LLP, counsel to the Tax-exempt Funds, that it will be
treated for Federal income tax purposes as the owner of the underlying Municipal
Obligations and the interest thereon will be tax-exempt to the Tax-exempt Fund
to the same extent as the interest in the underlying Municipal Obligations.
Counsel has pointed out that the Internal Revenue Service has announced that it
will not ordinarily issue advance rulings on the question of ownership of
securities or participation interests therein subject to a put and, as a result,
the Internal Revenue Service could reach a conclusion different from that
reached by counsel.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Tax-exempt Funds to pay exempt-interest dividends would be
adversely affected and each Tax-exempt Fund would reevaluate its investment
objectives and policies and consider changes in its structure.
35
467599.3
<PAGE>
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
may subject the interest on such bonds to Federal 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 Municipal Obligations and to tax such bonds in the future. The
decision does not, however, affect the current exemption from taxation of the
interest earned on the Municipal Obligations in accordance with Section 103 of
the Code.
The Taxable Portfolio
The Taxable Portfolio has elected to qualify under the Code as a "regulated
investment company", and intends to continue to qualify for regulated investment
company status as long as such qualification is in the best interest of its
shareholders. Such qualification relieves the Taxable Portfolio of liability for
Federal income taxes to the extent its earnings are distributed in accordance
with the applicable provisions of the Code.
The Taxable Portfolio intends to distribute at least 90% of its investment
company taxable income (taxable income subject to certain adjustments, exclusive
of the excess of its net long-term capital gain over its net short-term capital
loss) for each taxable year. The Taxable Portfolio will be subject to Federal
income tax on any undistributed investment company taxable income. To the extent
such income is distributed, it will be taxable to shareholders as ordinary
income. In the case of corporate shareholders, such distributions are not
expected to be eligible for the dividends-received deduction. If the Taxable
Portfolio does not distribute at least 98% of its ordinary income and 98% of its
capital gain net income for a taxable year, the Taxable Portfolio will be
subject to a nondeductible 4% excise tax on the excess of such amounts over the
amounts actually distributed.
The Taxable Portfolio may realize gains or losses from its portfolio transaction
and upon the maturity or disposition of securities acquired at discounts
resulting from market fluctuations. A portion of such gains may be taxable as
ordinary income to the extent of accrued market discount. Short-term capital
gains will be taxable to shareholders as ordinary income when they are
distributed. Any net capital gains (the excess of net realized long-term capital
gain over net realized short-term capital loss) will be distributed annually to
the Taxable Portfolio's shareholders. The Taxable Portfolio will have no tax
liability with respect to distributed net capital gains and the distributions
will be taxable to shareholders as long-term capital gains regardless of how
long the shareholders have held Taxable Portfolio shares. However, Taxable
Portfolio shareholders who at the time of such a net capital gain distribution
have not held their Taxable Portfolio shares for more than 6 months, and who
subsequently dispose of those shares at a loss, will be required to treat such
loss as a long-term capital loss to the extent of the net capital gain
distribution. Distributions of net capital gain will be designated as a "capital
gain dividend" in a written notice mailed to the Taxable Portfolio's
shareholders not later than 60 days after the close of the Taxable Portfolio's
taxable year. Under the Revenue Reconciliation Act of 1993, for fiscal years
beginning after December 31, 1992, ordinary income is subject to a maximum
individual tax rate of 39.6% distribution of a Taxable Portfolio's net capital
gain (designated as capital gain dividends by the Taxable Portfolio) will be
taxable to shareholders as long-term capital gain, regardless of the length of
time the shares have been held by a shareholder. A shareholder may recognize a
taxable gain or loss if the shareholder sells or redeems its shares. Any gain or
loss arising from (or treated as arising from) the sale or redemption of shares
will be a capital gain or loss, except in the case of a dealer in securities.
Capital gains realized by corporations are generally taxed at the same rate as
ordinary income. However, capital gains are taxable at a maximum rate of 28% to
non-corporate shareholders who have a holding period of more than 12 months, and
20% for non-corporate shareholders who have a holding period of more than 18
months. Corresponding maximum rate and holding period rules apply with respect
to capital gains dividends distributed by a Taxable Portfolio, without regard to
the length of time the shares have been held by the shareholder. The deduction
of capital losses is subject to limitations.
A shareholder may recognize a taxable gain or loss if the shareholder sells or
redeems his shares. If the securities held by the Taxable Portfolio appreciate
in value, purchasers of shares of the Taxable Portfolio after the occurrence of
such appreciation will acquire such shares subject to the tax obligation that
may be incurred in the future when there is a sale of such shares.
The Tax Reform Act of 1986 contained a provision limiting miscellaneous itemized
deductions for individuals and certain other shareholders, such as estates and
trusts, to the extent such miscellaneous itemized deductions do not exceed 2% of
adjusted gross income for a taxable year. However, the Revenue Reconciliation
Act of 1989 provided an exemption from the limitation for publicly-offered
regulated investment companies. The Taxable Portfolio currently qualifies and
expects to continue to qualify as a publicly-offered regulated investment
company.
If a shareholder fails to provide the Taxable Portfolio with a current taxpayer
identification number, the Taxable Portfolio generally is required to withhold
31% of taxable interest, dividend payments and proceeds from the redemption of
shares of the Taxable Portfolio.
36
467599.3
<PAGE>
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Taxable Portfolio.
Entities that generally qualify for an exemption from Federal income tax, such
as many pension trusts and retirement plans, are nevertheless taxed under
Section 511 of the Code on "unrelated business taxable income." Unrelated
business taxable income is income from a trade or business regularly carried on
by the tax-exempt entity that is unrelated to the entity's exempt purpose.
Unrelated business taxable income generally does not include dividend or
interest income or gain from the sale of investment property, unless such income
is derived from property that is debt-financed or is dealer property. A
tax-exempt entity's dividend income from the Taxable Portfolio and gain from the
sale of shares in the Taxable Portfolio or the Taxable Portfolio's sale of
securities is not expected to constitute unrelated business taxable income to
such tax-exempt entity unless the acquisition of the share itself is
debt-financed or constitutes dealer property in the hands of the tax-exempt
entity.
Before investing in the Taxable Portfolio, the trustee or investment manager of
an employee benefit plan (e.g., a pension or profit sharing retirement plan)
should consider among other things (a) whether the investment is prudent under
the Employee Retirement Income Security Act of 1974 "ERISA"), taking into
account the needs of the plan and all of the facts and circumstances of the
investment in the Taxable Portfolio; (b) whether the investment satisfies the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
the assets of the Portfolio are deemed "plan assets" under ERISA and the
Department of Labor regulations regarding the definition of "plan assets."
Prospective tax-exempt investors are urged to consult their own tax advisers
prior to investing in the Taxable Portfolio.
NEW YORK INCOME TAXES
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. However, to the extent that dividends are derived from interest on
New York Municipal Obligations, the dividends will also be excluded from a New
York shareholder's gross income for New York State and New York City personal
income tax purposes. This exclusion will not result in a corporate shareholder
being exempt for New York State and New York City franchise tax purposes.
Shareholders are urged to consult their tax advisers with respect to the
treatment of distributions from each Portfolio and ownership of shares of each
Portfolio in their own states and localities.
NEW JERSEY INCOME TAXES
The exemption of interest income for Federal income tax purposes does not
necessarily result in an exemption under the income or other tax laws of any
state or local taxing authority. The New Jersey Portfolio intends to be a
"qualified investment fund" within the meaning of the New Jersey gross income
tax. The primary criteria for constituting a "qualified investment fund" are
that 1) such fund is an investment company registered with the Securities and
Exchange Commission which, for the calendar year in which the distribution is
paid, has no investments other than interest-bearing obligations, obligations
issued at a discount, and cash and cash items, including receivables and
financial options, futures, forward contracts, or other similar financial
instruments relating to interest-bearing obligations, obligations issued at a
discount or bond indexes related thereto and 2) at the close of each quarter of
the taxable year, such fund has not less than 80% of the aggregate principal
amount of all of its investments, excluding financial options, futures, forward
contracts, or other similar financial instruments relating to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto to
the extent such instruments are authorized under the regulated investment
company rules under the Code, cash and cash items, which cash items shall
include receivables, in New Jersey Municipal Obligations. Additionally, a
qualified investment fund must comply with certain continuing reporting
requirements.
In the opinion of McCarter & English, special New Jersey tax counsel to the New
Jersey Portfolio, assuming that the New Jersey Portfolio constitutes a qualified
investment fund and that the New Jersey Portfolio complies with the reporting
obligations under New Jersey law with respect to qualified investment funds, a)
distributions paid by the New Jersey Portfolio to a New Jersey resident
individual shareholder will not be subject to the New Jersey gross income tax to
the extent that the distributions are attributable to income received as
interest on or gain from New Jersey Municipal Obligations and b) gain from the
sale of shares in the New Jersey Portfolio by a New Jersey resident individual
shareholder will not be subject to the New Jersey gross income tax. Shareholders
should consult their own tax advisers about the status of distributions from the
New Jersey Portfolio in their own states and localities.
37
467599.3
<PAGE>
CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
Investors Fiduciary Trust Company 801 Pennsylvania, Kansas City, Missouri
64105-1716, is custodian for the Fund's cash and securities. The custodian does
not assist in, and is not responsible for, investment decisions involving assets
of the Fund. The Fund has retained State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02111, to perform transfer agency related
services for the Fund.
FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended November
30, 1997 are herein incorporated by reference.
38
467599.3
<PAGE>
DESCRIPTION OF SECURITY RATINGS AND NOTES1
Moody's Investors Service, Inc. (Moody's)
Bonds
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements may 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 Aaa bonds because margins of protection may not
be as large 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.
Moody's applies numerical modifiers 1, 2 and 3) in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; modifier 2 indicates a mid-range ranking; and modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Notes
Moody's ratings for state and tax-exempt notes and short-term loans are
designated Moody's Investment Grade MIG). The distinction is in recognition of
the difference between short-term and long-term credit risk. Loans bearing the
designation MIG-1 are of the best quality, enjoying strong protection by
established cash flows of funds for their servicing or by established and
broadbased access to the market for refinancing, or both. Loans bearing the
designation MIG-2 are of high quality, with margins of protection ample although
not as large as in the preceding group. Loans bearing the designation MIG-3 are
of favorable quality, with all security elements accounted for but lacking the
strength of the preceding grades. Market access for refinancing, in particular,
is likely to be less well established. Notes bearing the designation MIG-4 are
judged to be of adequate quality, carrying specific risk but having protection
commonly regarded as required of an investment security and not distinctly or
predominantly speculative.
Commercial Paper
Moody's Commercial Paper Ratings are opinions of the ability of issuers to repay
punctually promissory senior debt obligations not having an original maturity in
excess of one year. The designation Prime-1 or P-1 indicates the highest quality
repayment capacity of the rated issue.
The designation Prime-2 or P-2 indicates that the issuer has a strong capacity
for repayment of senior short-term promissory obligations. Earnings trends and
coverage ratios, while sound, may be subject to some variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Issuers rated "Not Prime" do not fall within any of the Prime rating categories.
- --------
1. As described by the rating agencies.
39
467599.3
<PAGE>
Standard & Poor's Corporation ("S&P")
Bonds
AAA: Bonds rated AAA are highest grade obligations. They possess the ultimate
degree of protection as to principal and interest.
AA: Bonds rated AA also qualify as high-grade obligations and, to a the majority
of instances, differ from AAA issues only to a small degree.
A: Bonds rated A are regarded as upper medium grade. They have considerable
investment strength but are not entirely free from adverse effects of changes in
economic and trade conditions. Interest and principal are regarded as safe. They
predominantly reflect money rates in their market behavior and, to some extent,
economic conditions.
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.
Municipal Notes
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.
Commercial Paper
S&P Commercial Paper ratings are current assessments of the likelihood of timely
payment of debts having an original maturity of no more than 365 days. Issues
assigned A have the highest rating and are regarded as having the greatest
capacity for timely payment. The A-1 designation indicates that the degree of
safety regarding timely payment is very strong.
The ratings assigned by S&P may be modified by the addition of a plus +) or
minus -) sign to show relative standing within its major rating categories.
Description of Tax-Exempt Notes
Tax-Exempt Notes generally are used to provide for short-term capital needs and
generally have maturities of one year or less. Tax- Exempt Notes include:
Tax Anticipation Notes: Tax Anticipation Notes are issued to finance working
capital needs of municipalities. Generally, they are issued in anticipation of
various seasonal tax revenue, such as income, sales, use and business taxes, and
are payable from these specific future taxes.
Revenue Anticipation Notes: Revenue Anticipation Notes are issued in expectation
of receipt of other kinds of revenue, such as Federal revenues available under
the Federal Revenue Sharing Programs.
Bond Anticipation Notes: Bond Anticipation Notes are issued to provide interim
financing until long-term financing can be arranged. In most cases the long-term
bonds then provide the money for the repayment of the Notes.
Construction Loan Notes: Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association "GNMA") to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan.
Tax-Exempt Commercial Paper
Issues of Tax-Exempt Commercial Paper typically represent short-term, unsecured,
negotiable promissory notes. These obligations are issued by agencies of state
and local governments to finance seasonal working capital needs of
municipalities, or to provide
40
467599.3
<PAGE>
interim construction financing and are paid from general revenues of
municipalities, or are refinanced with long-term debt. In most cases, Tax-Exempt
Commercial Paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
Fitch Investors Services, Inc. ("Fitch")
Tax-Exempt Bonds
Fitch investment grade bond ratings provide a guide to investors in determining
the credit risk associated with a particular security. The ratings represent
Fitch's assessment of the issuer's ability to meet the obligations of a specific
debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell or hold any security. Ratings
do not comment on the adequacy of market price, the suitability of any security
for a particular investor, or the tax-exempt nature or taxability of payments
made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA: Bonds considered to be investment grade and of the highest grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be strong
but may be more vulnerable to adverse economic conditions and circumstances than
bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Plus +) Minus -): Plus and minus signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA category.
Tax-Exempt Notes and Commercial Paper
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existences of liquidity necessary to meet the issuer's obligations in a timely
manner.
41
467599.3
<PAGE>
F-1+: Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than F-1+ issues.
F-2: Good credit quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
F-3: Fair credit quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate; however,
near-term adverse changes could cause these securities to be rated below
investment grade.
42
467599.3
<PAGE>
Let it be said loud and clear there can be no assurance the Fund will achieve
its objectives. But if you've come into a lump sum of money and want
professionals to invest it, tend it, trade it and nurture it in Municipal Bonds,
the Lebenthal Municipal Bond Funds could be for you.
CONVERSATIONS FROM A DAY IN THE LIFE OF A MUNICIPAL BOND SALESMAN
A businessman calls and actually says he doesn't need more income. He can hardly
spend what he earns now. Here's money he wants to put away, not touch the
interest, and let it accumulate and build.
A father calls and says he's doing better than his parents, but only wishes he
could say the same for his kids. He wants to do something for them. He doesn't
want to see the interest chipped away by taxes. "Mitts off" he says. "This is my
kids' social security."
A grandfather calls. It's Peter's birthday. He could get Peter a fire truck. Any
sensible four year old would prefer a fire truck. But he wants to take care of
Peter's education and watch the interest pile up and earn more tax free
interest, month after month, year after year.
A man calls with the fruits of a life's work. He's just sold his business and
has an employment contract with the new owner into the next century. This is
money he'll probably never have to touch. But his heirs might. He wants to build
an estate for the future and let little acorns grow.
Not everyone is concerned with the amount of income an investment can provide
now. Many want to know about an investment's long term benefits. For example,
how much purchasing power will my money have tomorrow? How much will I be able
to leave my children? If you are as concerned with your net worth tomorrow as
you are with your cashflow today, instead of spending your interest, consider
reinvesting it in a Lebenthal Municipal Bond Fund -- and receiving your interest
every month or any distributions of principal or gains) in additional fund
shares.
When you opt for automatic reinvestment, instead of taking your distributions in
cash, they are being used to buy you more shares. The number of shares you own
accumulates and builds on a quantity that is growing all the time.
For example, between October 12, 1993 and November 11, 1994 -- one of the
"worst" bond markets on record -- net asset value per share of the Lebenthal New
York Municipal Bond Fund fell from $8.26 to $6.69, a decline of $1.57 or a
decline of $1.96 from the Public Offering Price of $8.65 that prevailed on
October 12, 1993). And yet, $25,000 invested in the Fund at the P.O.P. of $8.65
on October 12, 1993 would have grown from 2889.565 shares to 3077.762, an
increase of 188.1966 shares for the period.
OTHER IMPORTANT FACTS ABOUT THE FUND
The Lebenthal Municipal Bond Funds are integrated with the Lebenthal & Co., Inc.
account system. All activity in your Fund account and your month-end balance
will appear on a monthly statement you get from Lebenthal & Co., Inc. If you are
already a Lebenthal bond customer, the Fund can automatically receive payments
of interest and principal from any bonds in your Lebenthal Workhorse Account and
put them to work instantly in the Fund. In other words you can use the Fund for
investment of new money or as an automatic reinvestment vehicle for payments
from bonds you already own.
Past performance is no guarantee of future results, and no particular level of
fund performance can be assured. But to further illustrate how shares grow
through reinvestment over time, at say, a hypothetical five percent (5%) a year
compounded monthly, every 1000 shares would become 1283 shares in five years,
1647 shares in ten years, 2114 shares in fifteen years.
Compounding does not protect against fluctuating bond prices, and a decline in
value per share could negate the positive effect of growth in the number of
shares owned. But time can mitigate loss, because it stands to reason: the more
shares you have accumulated through reinvestment over time, the bigger the
multiple that will be working for you when you decide to sell.
Whether you make money or lose money down the road when you do sell your shares,
will depend on the number of shares you then own as well as the going resale
price per share. So count the shares. And give it time.
Time is the soulmate of compound interest -- and the best friend a would-be
saver's got.
43
467599.3
<PAGE>
Lebenthal New York Municipal Bond Fund
TAXABLE EQUIVALENT YIELD TABLE
(New York State and Federal)
<TABLE>
<CAPTION>
1. If Your Taxable Income Bracket Is . . .
<S> <C> <C> <C> <C>
Single $25,351 61,401 128,101 278,451
Return 61,400 128,100 278,450 and over
Joint 42,351 102,301 155,951 278,451
Return 102,300 155,950 278,450 and over
2. Then Your Combined Income Tax Bracket Is . . .
Federal 15.00% 28.00% 36.00% 39.60%
Tax Rate
State
Tax Rate
Combined 32.93% 35.73% 40.38% 43.74%
Marginal
Tax Rate
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields . . .
Tax Exempt Equivalent Taxable Investment Yield
Yield With Taxable Income Yields
3.25% 4.8% 5.1% 5.5% 5.8%
3.50% 5.2% 5.4% 5.9% 6.2%
4.00% 6.0% 6.2% 6.7% 7.1%
4.25% 6.3% 6.6% 7.1% 7.6%
4.50% 6.7% 7.0% 7.5% 8.0%
4.75% 7.1% 7.4% 8.0% 8.4%
5.00% 7.5% 7.8% 8.4% 8.9%
5.25% 7.8% 8.2% 8.8% 9.3%
5.50% 8.2% 8.6% 9.2% 9.8%
5.75% 8.6% 8.9% 9.6% 10.2%
6.00% 8.9% 9.3% 10.1% 10.7%
6.25% 9.3% 9.7% 10.5% 11.1%
6.50% 9.7% 10.1% 10.9% 11.6%
</TABLE>
44
467599.3
<PAGE>
Lebenthal New York Municipal Bond Fund
TAXABLE EQUIVALENT YIELD TABLE
(Federal, New York State and New York City)
<TABLE>
<CAPTION>
1. If Your Taxable Income Bracket Is . . .
<S> <C> <C> <C> <C>
Single $25,361 61,401 128,101 278,451
Return 61,400 128,100 278,450 and over
Joint 42,351 102,301 155,951 278,451
Return 102,300 155,950 278,450 and over
2. Then Your Combined Income Tax Bracket Is . . .
Federal 28.00% 31.00% 36.00% 39.60%
Tax Rate
State
Tax Rate
City
Tax Rate
Combined 36.10% 38.80% 43.24% 46.43%
Marginal
Tax Rate
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields . . .
Tax Exempt Equivalent Taxable Investment Yield
Yield With Taxable Income Yields
3.25% 5.1% 5.3% 5.7% 6.1%
3.50% 5.5% 5.7% 6.2% 6.5%
4.00% 6.3% 6.5% 7.0% 7.5%
4.25% 6.7% 6.9% 7.5% 7.9%
4.50% 7.0% 7.4% 7.9% 8.4%
4.75% 7.4% 7.8% 8.4% 8.9%
5.00% 7.8% 8.2% 8.8% 9.3%
5.25% 8.2% 8.6% 9.2% 9.6%
5.50% 8.6% 9.0% 9.7% 10.3%
5.75% 9.0% 9.4% 10.1% 10.7%
6.00% 9.4% 9.8% 10.6% 11.2%
6.25% 9.8% 10.2% 11.0% 11.7%
6.50% 10.2% 10.6% 11.5% 12.1%
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
467599.3
45
<PAGE>
Lebenthal New Jersey Municipal Bond Fund
TAXABLE EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
1. If Your Taxable Income Bracket Is . . .
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single $24,651 -- 35,001 40,001 59,751 75,001 124,651 271,051
Return 35,000 -- 40,000 59,750 75,000 124,650 271,050 and over
Joint 41,201 50,001 70,001 80,001 99,601 150,001 151,751 271,051
Return 50,000 70,000 80,000 99,600 150,000 151,750 271,050 and over
2. Then Your Combined Income Tax Bracket Is . . .
Federal
Tax Rate
State
Tax Rate
Combined
Tax Rate
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields . . .
Tax Exempt Equivalent Taxable Investment Yield Required to Match Tax Exempt Yield
Yield
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
467599.3
46
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(A) Financial Statements.
Included in Prospectus Part A:
(1) Financial Highlights
(2) Table of Fees and Expenses
Included in Statement of Additional Information Part B:
(1) Report of Coopers & Lybrand LLP, independent certified
public accountants, dated January __, 1998.
(2) Statements of Assets and Liabilities (audited), dated
November 30, 1997.
(3) Statements of Investments (audited).
(4) Statements of Operations (audited).
(5) Statements of Changes in Net Assets (audited).
(6) Notes to Financial Statements.
(7)
(B) Exhibits.
++ (1) Articles of Incorporation of the Registrant.
++ (2) By-laws of the Registrant.
(3) Not applicable.
++ (4) Form of certificate for shares of Common
Stock, par value $.001 per share, of the
Registrant.
- --------------
++ Filed with Post-Effective Amendment No. 12 to the Registration
Statement on March 31, 1997 and is incorporated herein by reference.
466160.2
<PAGE>
***** (5.2) Management Agreement between the Registrant and
Lebenthal Asset Management, Inc., for the Lebenthal New
York Municipal Bond Fund portfolio.
***** (5.2.1) Management Agreement between the Registrant and
Lebenthal Asset Management, Inc., for the Lebenthal New
Jersey Municipal Bond Fund portfolio.
***** (5.2.2) Management Agreement between the Registrant and
Lebenthal Asset Management, Inc., for the Lebenthal
Taxable Municipal Bond Fund portfolio.
(6) See Distribution Agreement filed as Exhibits 15.2.1,
15.2.2 and 15.2.3.
(7) Not applicable.
***** (8.1) Custody Agreement between the Registrant and IFTC.
***** (8.2) Investment Accounting Agreement between the Registrant
and IFTC.
***** (8.3) Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company.
***** (9) Administration Agreement between the Registrant and
State Street Bank and Trust Company.
++ (10.1) Opinion of Battle Fowler LLP, as to the legality of the
securities being registered, including their consent to
the filing thereof and to the use of their name under
the heading "Federal Income Taxes" and "New York Income
Taxes" in the Prospectus and Statement of Additional
Information, and under the heading "Counsel and
Auditors" in the Statement of Additional Information.
++ (10.2) Opinion of McCarter & English, as to the New Jersey
law, including their consent to the filing thereof and
to the use of their name under the heading "New Jersey
Income Taxes" in the Prospectus.
- --------------------
***** Filed with Post-Effective Amendment No. 11 to said Registration
Statement on March 29, 1996 and is incorporated herein by
reference.
++ Filed with Post-Effective Amendment No. 12 to the Registration
Statement on March 31, 1997 and is incorporated herein by
reference.
C-2
466160.2
<PAGE>
o (11.1) Consent of McGladrey & Pullen LLP.
o (11.2) Consent of Coopers & Lybrand L.L.P.
(12) Not applicable.
++ (13) Written assurance of Reich & Tang Asset Management L.P.
that its purchase of shares of the Registrant was for
investment purposes without any present intention of
redeeming or reselling.
(14) Not applicable.
++ (15.1.1) Distribution and Service Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 for the
Lebenthal New York Municipal Bond Fund portfolio of the
Registrant.
+ (15.1.1.1) Distribution and Service Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1990 for
the Class B shares of the Lebenthal New York Municipal
Bond Fund Portfolio of the
Registrant.
++ (15.1.2) Distribution and Service Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 for the
Lebenthal New Jersey Municipal Bond Fund portfolio of
the Registrant.
++ (15.1.3) Distribution and Service Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 for the
Lebenthal Taxable Municipal Bond Fund portfolio of the
Registrant.
++ (15.2.1) Distribution Agreement between the Registrant and
Lebenthal & Co., Inc. for the Lebenthal New York
Municipal Bond Fund portfolio of the Registrant.
+ (15.2.1.1) Distribution Agreement between the Registrant and
Lebenthal & Co., Inc. for the Class B shares of the
Lebenthal New York Municipal Bond Fund portfolio of the
Registrant.
++ (15.2.2) Distribution Agreement between the Registrant and
Lebenthal & Co., Inc. for the Lebenthal New Jersey
Municipal Bond Fund portfolio of the Registrant.
++ (15.2.3) Distribution Agreement between the Registrant and
Lebenthal & Co., Inc. for the Lebenthal Taxable
Municipal Bond Fund portfolio of the Registrant.
++ (15.3.1) Shareholder Servicing Agreement between the Lebenthal
New Jersey Municipal Bond Fund and Lebenthal & Co.,
Inc.
++ (15.3.2) Shareholder Servicing Agreement between the Lebenthal
Taxable Municipal Bond Fund and Lebenthal & Co., Inc.
- -----------------------
++ Filed with Post-Effective Amendment No. 12 to the Registration
Statement on March 31, 1997 and is incorporated herein by
reference.
o Filed herewith
+ Filed with Post-Effective Amendment No. 14 to the Registration
Statement on November 3, 1997 and is incorporated herein by
reference.
C-3
466160.2
<PAGE>
**** (16) Powers of Attorney.
o (17) Financial Data Schedule (for EDGAR filing only.)
+ (18) Form of Rule 18F-3 Multi-Class Plan.
Item 25. Persons Controlled by or Under Common Control with
Registrant.
None.
Item 26. Number of Holders of Securities.
Number of Record Holders
Title of Class as of January 31, 1998
-------------- ----------------------
Common Stock (par value $.001)
- Lebenthal New Jersey Municipal Class A 306
Bond Fund portfolio
- Lebenthal New York Municipal Class A 4664
Bond Fund portfolio Class B 8
- Lebenthal Taxable Municipal Class A 596
Bond Fund portfolio
Item 27. Indemnification.
Registrant incorporates herein by reference to response to Item 27
of Pre-Effective Amendment No. 1 of this Registration Statement filed with the
Commission on December 18, 1990.
Item 28. Business and Other Connections of Investment Adviser.
Registrant's investment adviser is Lebenthal Asset Management, Inc.,
a Delaware corporation and a registered investment adviser. The description of
Lebenthal Asset Management, Inc. under the caption "Management of the Fund" in
the Prospectus and in the Statement of Additional Information constituting parts
A and B, respectively, of the Registration Statement, are incorporated herein by
reference.
- --------------------
***** Filed with Post-Effective Amendment No. 11 to said Registration
Statement on March 29, 1996, and is incorporated herein by reference.
# Filed herewith.
++ Filed with Post-Effective Amendment No. 12 to the Registration
Statement on March 31, 1997 and is incorporated herein by reference.
+ Filed with Post-Effective Amendment No. 14 to the Registration
Statement on November 3, 1997 and is incorporated herein by reference.
C-4
466160.2
<PAGE>
Item 29. Principal Underwriters.
(a) Lebenthal & Co., Inc., the Registrant's distributor. Lebenthal
is also a depositor for the Empire State Municipal Exempt Trust series of unit
investment trusts.
(b) The following are the directors and officers of Lebenthal & Co.,
Inc. The principal business address of each of these persons is 120 Broadway,
New York, NY 10271.
Positions and Offices Position and Offices
Name With Distributor With Registrant
---- ---------------- ---------------
James A. Lebenthal Chairman and Director Director
D. Warren Kaufman Senior Managing Director
and Director None
Jeffrey Michael James Executive Vice President
and Director None
James E. McGrath Senior Vice President Treasurer
Alexandra Lebenthal President and Director President
Duncan Kimber Smith Senior Managing Director
and Director None
Hiram Lazar Vice President Secretary
Item 30. Location of Accounts and Records.
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained in the physical possession of the Registrant or
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64104-1716, the Fund's custodian; at State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, Massachusetts 02171-2197, the Fund's
Administrator; National Financial Data Services, the delegatee of State Street
Bank and Trust Company, 1004 Baltimore, Kansas City, MO 64105, the Fund's
Transfer Agent, and at Lebenthal & Co., Inc., 120 Broadway, New York, New York
10271, the Fund's distributor.
Item 31. Management Services.
Not applicable.
Item 32. Undertaking.
Not applicable.
C-5
466160.2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has met all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, and State of New York, on the 30th day of March, 1998.
LEBENTHAL FUNDS, INC.
By: /s/ Alexandra Lebenthal
-----------------------
Alexandra Lebenthal
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE & CAPACITY DATE
(1) Principal Executive Officer
/s/ Alexandra Lebenthal
-----------------------
Alexandra Lebenthal March 30, 1998
President
(2) Principal Financial
& Accounting Officer
/s/ James McGrath
-----------------
James McGrath March 30, 1998
Treasurer
(3) Majority of Directors
James A. Lebenthal}
Victor Chang}
Robert R. Godfrey}
By: /s/ Hiram Lazar
---------------
Hiram Lazar
*Attorney-in-Fact March 30, 1998
- -----------------
* Powers of Attorney were filed with Post-Effective Amendment No. 11
to said Registration Statement on March 29, 1996, and are
incorporated herein by reference.
466160.2
McGLADREY & PULLEN, LLP
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our report dated
January 10, 1997 on the financial statements of Lebenthal New
York Municipal Bond Fund, Lebenthal New Jersey Municipal Bond
Fund and Lebenthal Taxable Municipal Bond Fund, series of
Lebenthal Funds, Inc. incorporated by reference therein, in
Post-Effective Amendment No. 15 to the Registration Statement
on Form N-1A, File No. 33-36784, of Lebenthal Funds, Inc. as filed
with the Securities and Exchange Commission.
We also consent to the reference to our Firm in the
Prospectus under the caption "Financial Highlights" and in the Statement of
Additional Information under the caption "Counsel and Auditors".
McGladrey & Pullen, LLP
New York, New York
March 30, 1998
475231.1
Coopers Coopers & Lybrand L.L.P.
&Lybrand a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 17
to the Registration Statement of the Lebenthal New York Munucipal Bond Fund,
Lebenthal New Jersey Municipal Bond Fund and Lebenthal Taxable Munuciapal Bond
Fund (three of the Funds comprising Lebenthal Funds, Inc.) on Form N-1A of our
report dated January 14, 1997 on our audits of the financial statements and
financial highlights of the Lebenthal New York Municipal Bond Fund, Lebenthal
New Jersey Municipal Bond Fund and Lebenthal Taxable Municipal Bond Fund, which
reports are included in the Annual Report to Shareholders for the year ended
November 30, 1997 which is incorporated by reference in the Statement of
Additional Information. We also consent to the reference in the Statement of
Additional Information to our Firm under the caption "Counsel and Auditors."
COOPERS & LYBRAND L.L.P.
Kansas City, Missouri
March 30, 1998
Coopers & Lybrand L.L.P. a registered limited liability partnership, is a member
firm of Coopers & Lybrand (International).
474778.1
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