Rule 497(c)
Registration No. 33-36784
LEBENTHAL FUNDS, INC.
PROSPECTUS 120 Broadway, New York, NY 10271
March 31, 1999 212-425-6116
OUTSIDE NYC TOLL FREE 1-800-221-5822
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Lebenthal New York Municipal Bond Fund - Class A and Class B Shares
Lebenthal New Jersey Municipal Bond Fund
Lebenthal Taxable Municipal Bond Fund
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TABLE OF CONTENTS
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Risk/Return Summary................................... 2 Distribution Arrangements........................24
Investment Objectives, Principal Investment More Information on the Municipal Market..........i
Strategies and Related Risks....................... 9 Letter of Intent...............................viii
Management, Organization and Capital Structure........14 Financial Highlights.............................29
Shareholder Information...............................14
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The Securities and Exchange Commission has not approved or disapproved the
shares described in this prospectus or determined whether this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
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RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE
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INVESTMENT OBJECTIVES LEBENTHAL NEW YORK MUNICIPAL BOND FUND - The
New York Portfolio is a municipal bond fund
whose investment objective is 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, with consideration
given to opportunities for capital gain.
LEBENTHAL NEW JERSEY MUNICIPAL BOND FUND -
The New Jersey Portfolio is a municipal bond
fund whose investment objective is to
maximize income exempt from regular Federal
income taxes and personal New Jersey gross
income tax, consistent with preservation of
capital, with consideration given to
opportunities for capital gain.
LEBENTHAL TAXABLE MUNICIPAL BOND FUND - The
Taxable Portfolio is a municipal bond fund
whose investment objective is to maximize
income consistent with preservation of
capital, with consideration given to
opportunities for capital gain.
PRINCIPAL INVESTMENT STRATEGIES The Portfolios invest primarily in Municipal
Obligations. Municipal Obligations refer to
municipal bonds and notes. These bonds and
notes represent an obligation by a local
government entity or agency to repay a debt,
the proceeds of which is used for a public
purpose. The Portfolios invest in Municipal
Obligations that are long-term (i.e. average
maturity is 15 to 25 years) and are
investment grade.
/ / The New York Portfolio intends to
concentrate (i.e. 25% or more of the
Portfolio's net assets) primarily in
tax-exempt New York Municipal
Obligations.
/ / The New Jersey Portfolio intends to
concentrate (i.e. 25% or more of the
Portfolio's net assets) primarily in
tax-exempt New Jersey Municipal
Obligations.
/ / The Taxable Portfolio intends to
concentrate (i.e. 25% or more of the
Portfolio's net assets) primarily in
taxable Municipal Obligations.
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PRINCIPAL INVESTMENT RISKS o There can be no assurance that the
Portfolios' investment objectives will
be achieved.
o You may lose money by investing in
the Portfolios.
o 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.
o The types and maturities of the
securities in the Portfolios and the
credit quality of the issuers will
affect the Fund's reaction to changes in
interest rates. Interest rates impact
the yield and share price of a bond
fund. Bond prices generally rise when
interest rates fall and fall when
interest rates rise. Bonds with longer
maturities are usually more sensitive to
interest rate changes. In other words,
the longer the maturity of a bond, the
greater the impact a change in interest
rates is likely to have on the bond's
price. In addition, short and long-term
interest rates do not necessarily move
in the same increments or in the same
directions. Short-term bonds usually
react more to changes in short-term
interest rates while long-term bonds
usually react more to changes in
long-term interest rates.
o The Portfolios may invest in lower-rated
investment grade securities which may
have speculative characteristics that
can lead to a greater degree of market
fluctuations than higher-rated
investment grade securities with similar
maturities.
o The New York Portfolio and the New
Jersey Portfolio are non-diversified
funds. This means that, compared to
other mutual funds, these portfolios may
each invest a greater percentage of
their assets in a particular issuer. The
risk of investing in a non-diversified
fund is that the fund may be more
sensitive to changes in the market value
of a single issuer.
o Investors of each Portfolio should
consider the greater risk of the
Portfolio's concentration versus the
safety that comes with a less
concentrated portfolio.
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o Each Portfolio is concentrated in
Municipal Obligations. The value of
Municipal Obligations may be affected by
uncertainties in the municipal debt
market related to taxation. In addition,
the 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 these payment
obligations.
o An investment in the Portfolios is not a
deposit in a bank and is not insured or
guaranteed by the Federal Deposit
Insurance Corporation or any other
government agency.
WHO MAY WANT TO INVEST? / / NEW YORK PORTFOLIO: New York taxpayers
who seek income from a portfolio of
professionally managed municipal bonds
that are exempt from New York City, New
York State, and regular Federal income
taxes.
/ / NEW JERSEY PORTFOLIO: New Jersey
taxpayers who seek income from a
portfolio of professionally managed
municipal bonds that are exempt from New
Jersey State and regular Federal income
taxes.
/ / TAXABLE PORTFOLIO: Because the interest
earned on taxable Municipal Obligations
is included in gross income for Federal
income tax purposes and may be subject
to personal state and local income
taxes, an investment in the Portfolio
may be appropriate for investment plans,
such as tax deferred IRA's, 401(K) and
other retirement plans. This portfolio
is also recommended for families and
individuals in low-to-no tax brackets.
Investors should compare the yields and
returns available on portfolios of New York,
New Jersey and taxable issues with those of a
more diversified portfolio including
out-of-state issues before making an
investment decision.
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PERFORMANCE BAR CHARTS AND TABLES
The charts and tables below reflect the risks of investing in the Portfolios by
how the Portfolios have performed and how their performance has fluctuated from
year to year. The bar chart shows the average annual total returns for each
Portfolio for the life of the Portfolio. The table shows how the New York and
New Jersey Portfolio's average annual total return for a one-year period
compares with that of the Lehman Brothers Municipal Bond Index and how the
Taxable Portfolio's average annual total returns for a one-year period compares
with that of the Lehman Brothers Long Term Corporate Bond Index. The Portfolios'
yields appear in the Wall Street Journal each Thursday. Of course, past
performance does not indicate how the Portfolios will perform in the future.
Investors purchasing or redeeming shares through a Participating Organization
may be charged a fee in connection with such service. Therefore, the net return
to such investors may be less than the net return by investing in the Fund
directly. Returns do not include fees and expenses and, if those amounts were
included, returns would be less than those shown.
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YEAR-BY-YEAR TOTAL RETURN AS OF 12/31
Lebenthal New York Municipal
Bond Fund-Class A Shares
[BAR CHART INSERTED HERE]
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Average Annual Total Returns
(for the periods ending 12/31/98) Past Five Years Past One Year Since Inception
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New York Portfolio - Class A 6.32% 6.50% 7.99%*
Lehman Municipal Bond Index 6.28% 6.90% 7.85%*
New York Portfolio- Class B NA 5.76% 5.68%**
Lehman Municipal Bond Index NA 6.90% 8.36%**
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Average annual total return is a measure of the Fund's performance over time.
The Fund's average annual return is compared with the Lehman Municipal Bond
Index. While the Fund does not seek to match the returns of the Lehman Municipal
Bond Index, this index is a good indicator of general bond market performance.
You may not invest in the Lehman Municipal Bond Index and, unlike the Fund, it
does not incur fees or charges.
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* June 24, 1991
** December 1, 1997
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YEAR-BY-YEAR TOTAL RETURN AS OF 12/31
Lebenthal New Jersey
Municipal Bond Fund
[BAR CHART INSERTED HERE]
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Average Annual Total Returns Since Inception
(for the periods ending 12/31/98) Past Five Years Past One Year (December 1, 1993)
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New Jersey Portfolio 5.09% 6.65% 5.26%
Lehman Municipal Bond Index 6.28% 6.90% 6.59%
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Average annual total return is a measure of the Fund's performance over time.
The Fund's average annual return is compared with the Lehman Municipal Bond
Index. While the Fund does not seek to match the returns of the Lehman Municipal
Bond Index, this index is a good indicator of general bond market performance.
You may not invest in the Lehman Municipal Bond Index and, unlike the Fund, it
does not incur fees or charges.
YEAR-BY-YEAR TOTAL RETURN AS OF 12/31
Lebenthal Taxable
Municipal Bond Fund
[BAR CHART INSERTED HERE]
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Average Annual Total Returns Since Inception
(for the periods ending 12/31/98) Past Five Years Past One Year (December 1, 1993)
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Taxable Portfolio 8.65% 10.06% 8.79%
Lehman Long Term Corporate Bond Index 8.76% 9.18% 9.03%
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Average annual total return is a measure of the Fund's performance over time.
The Fund's average annual return is compared with the Lehman Long Term Corporate
Bond Index. While the Fund does not seek to match the returns of the Lehman Long
Term Corporate Bond Index, this index is a good indicator of general bond market
performance. You may not invest in the Lehman Long Term Corporate Bond Index
and, unlike the Fund, it does not incur fees or charges.
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FEE TABLE
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
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Shareholder Fees
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(fees paid directly from your investment)
New York Portfolio New Jersey Portfolio Taxable Portfolio
Class A Shares Class B Shares Class A Shares Class A Shares
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Maximum Sales Load Imposed on
Purchases (a percentage of offering price)... 4.50% None 4.50% 4.50%
Maximum Deferred Sales Charge (as a
percentage of the lesser or original
purchase price or redemption proceeds)....... None 5%(1) None None
Maximum Sales Load on Reinvestment
Dividends.................................... None None None None
Redemption Fees................................. None None None None
Exchange Fees................................... None None None None
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Annual Fund Operating Expenses
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(expenses that are deducted from Fund assets)
New York Portfolio New Jersey Portfolio Taxable Portfolio
Class A Shares Class B Shares Class A Shares Class A Shares
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Management Fees................................. 0.23% 0.23% 0.25% 0.25%
Distribution and/or Service 12b-1 Fees.......... 0.25% 1.00% 0.25% 0.25%
Other Expenses.................................. 0.28% 3.35% 1.10% 0.65%
Total Fund Operating Expenses................... 0.76% 4.58% 1.60% 1.15%
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(1) The deferred sales charge is 5% in the first year, declining to 1% in the
sixth year, and is eliminated thereafter.
For the New York-Class B and New Jersey Portfolios, the Manager has voluntarily
reimbursed the Management Fee of .23% and .25%, respectively, of average net
assets, and reimbursed 1.80% and .50% in certain Other Expenses. For the Taxable
Portfolio, the Manager has voluntarily reimbursed .20% of the Management Fee.
Including such reimbursement and waivers, Total Fund Operating Expenses were
1.55%, .60% and .70% for the New York-Class B, New Jersey and Taxable
Portfolios, respectively. The Manager can terminate these voluntary waivers and
reimbursements at any time.
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EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. You would pay the following
expenses on a $10,000 investment, assuming a 5% annual return each year and
redemption at the end of each time period and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
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1 year 3 years 5 years 10 years
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New York Portfolio (Class A Shares) $524 $682 $853 $1,350
(Class B Shares) $959 $1,683 $2,514 $4,677
New Jersey Portfolio $605 $932 $1,282 $2,265
Taxable Portfolio $562 $799 $1,054 $1,785
You would pay the following expenses if you did not redeem your shares:
1 year 3 years 5 years 10 years
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New York Portfolio (Class B Shares) $459 $1,383 $2,314 $4,677
This example does not reflect sales loads on reinvested dividends and other
distributions. If these sales loads were included, your costs would be higher.
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INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS
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The investment objectives and policies for each Portfolio 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. There can be no assurance
that the Portfolios' investment objectives will be achieved.
The New York and The New Jersey Portfolios. The New York and the New Jersey
Portfolios are municipal bond funds whose investment objective is 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, with consideration
given to opportunities for capital gain.
The New York and New Jersey Portfolios' invest principally in long-term,
investment grade, tax-exempt Municipal Obligations 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. The New
York Portfolio will invest at least 80%, although it will attempt to invest
100%, of its net assets in Municipal Obligations that are exempt from Federal
income tax and from the personal income tax of New York State and New York City
and that have remaining maturities of one year or more. The New Jersey Portfolio
will also invest at least 80%, although it will attempt to invest 100%, of its
net assets in Municipal Obligations that are exempt from Federal income tax and
from New Jersey gross income tax that have remaining maturities of one year or
more. Bond counsel to the issuer at the date of issuance will determine whether
a Municipal Obligation is considered tax exempt.
The Portfolios reserve the right to invest up to 20% of their net assets in (i)
Municipal Obligations that are exempt from regular Federal income tax but that
are subject to (a) New York State and City personal income taxes with respect to
the New York Portfolio and (b) New Jersey gross income tax with respect to the
New Jersey Portfolio and (ii) other taxable obligations, including securities
whose interest income may be subject to the Federal alternative minimum tax.
Municipal Obligations refer to various types of debt, including municipal bonds
and notes. Municipal debt 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. Such interest is free of Federal income tax and free in most states
where issued from state and local taxes in that state. See "Taxation of the
Fund" and the Statement of Additional Information for more information regarding
the types of Municipal Obligations that the Fund may invest in.
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 will invest principally, without
percentage limitations, in tax-exempt securities that on the date of investment
are investment grade. Investment grade means that the securities fall within the
four highest credit ratings of nationally recognized rating agencies as set
forth below. The
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Fund will not necessarily dispose of a security that falls below investment
grade if the Manager determines that retention of the security is consistent
with the Fund's investment objectives. The New York and New Jersey Portfolios
may invest in tax-exempt securities that are not rated or that do not fall into
the credit ratings noted above if the Manager's credit analysis reflects that
the securities are of comparable credit quality.
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Variable &
Commercial Floating Demand
Bonds Notes Paper Notes
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Moody's Investors Service Aaa MIG-1 P-1 VMIG-1
Aa MIG-2 P-2 VMIG-2
A MIG-3 P-3 VMIG-3
Baa MIG-4 VMIG-4
Standard & Poor's Rating Service, a division of The McGraw Hill Cos. AAA SP-1 A-1 SP-1
AA SP-2 A-2 SP-2
A SP-3 A-3 SP-3
BBB SP-4 B SP-4
Fitch Investors Service AAA F-1 F-1 F-1
AA F-2 F-2 F-2
A F-3 F-3 F-3
BBB
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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 meets 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 "Description of the Fund and its
Investments and Risks" in the SAI.
During adverse market conditions caused by rising interest rates or other
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. The Manager may also decide to invest in taxable
fixed-income securities, the interest on which is subject to regular Federal,
state and local income tax.
Investments in taxable securities will be substantially in (i) securities issued
or guaranteed by the United States government (such as bills, notes and bonds),
its agencies, instrumentalities or authorities, (ii) highly-rated corporate debt
securities (rated AA or better by S&P or Fitch, or Aa3 or better by Moody's),
(iii) prime commercial paper (rated A-1+ by S&P, P-1 by Moody's or F-1+ by
Fitch), and (iv) 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 foreign
certificates of deposit 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 result of employing
a temporary defensive strategy, as described above,
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is that the New York or New Jersey Portfolio may not achieve its investment
objective.
The Taxable Portfolio. The Taxable Portfolio is a diversified municipal bond
fund whose investment objective is to maximize income to the extent consistent
with the preservation of capital, with consideration given to opportunities for
capital gain. The classification to be diversified is a fundamental policy and
may be changed only with the approval of the majority holders of the Taxable
Portfolio's outstanding shares.
As a diversified investment company, 75% of the assets of the Taxable Portfolio
are subject to the following limitations: (i) 5% of its total assets may not be
invested in the securities of any one issuer, except obligations of the United
States government and its agencies and instrumentalities, and (ii) the Taxable
Portfolio may not own more than 10% of the outstanding voting securities of any
one issuer.
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.
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 nationally recognized rating agencies as set forth above. The Fund
will not necessarily dispose of a security that falls below investment grade if
the Manager determines that retention of the security is consistent with the
Fund's investment objectives. The Taxable Portfolio may invest in securities
that are not rated or that do not fall into the credit ratings noted above if
the Manager's credit analysis reflects that the securities are of comparable
credit quality.
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 up to 100% of the value of its net assets on a
temporary basis in (i) securities issued or guaranteed by the United States
Government (such as bills, notes and bonds), its agencies, instrumentalities or
authorities, (ii) tax-exempt securities, (iii) highly-rated corporate debt
securities (rated AA or better by S&P, or Aa3 or better by Moody's), (iv) prime
commercial paper (rated A-1+ by S&P or P-1 by Moody's), and (v) 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, or 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. The result of employing a temporary
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defensive strategy, as described above, is that the Taxable Portfolio may not
achieve its investment objective.
Portfolios--Generally. 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. These
securities are subject to market fluctuation during this period and no interest
accrues to the Portfolio until settlement. Each Portfolio maintains a separate
account with the custodian, 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.
The Manager determines when to make purchases and sales for each Portfolio based
on the Manager's opinion on whether these actions are necessary to meet each
Portfolio's objective. The Manager considers the following factors when buying
and selling securities for the Portfolios: (i) availability of cash, (ii)
redemption requests, (iii) yield management, (iv) credit management, and (v)
duration.
For the fiscal year ended November 30, 1998, the annual portfolio turnover rate
was 66.04%, 31.81% and 23.75% 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. A higher portfolio
turnover rate involves greater transaction expenses which must be borne directly
by a Portfolio (and thus, indirectly by its shareholders), and affect Fund
performance. In addition, a high rate of portfolio turnover may result in the
realization of larger amounts of capital gains which, when distributed to that
Portfolio's shareholders, are taxable to them.
Risks of Investing in the Fund:
o Concentration in Municipal Obligations: Investors should consider the
greater risk of the Portfolios' 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.
o Interest Rate Risk: The types and maturities of the securities in the
Portfolios and the credit quality of the issuers will affect the Fund's
reaction to changes in interest rates. Interest rates impact the yield
and share price of a bond fund. Bond prices generally rise when interest
rates fall and fall when interest rates rise. Bonds with longer
maturities are usually more sensitive to interest rate changes. In other
words, the longer the maturity of a bond, the greater the impact a change
in interest rates is likely to have on the bond's price. In addition,
short and long-term interest rates do not necessarily move in the same
increments or in the same directions. Short-term bonds usually react more
to changes in short-term interest rates while long-term bonds usually
react more to changes in long-term interest rates.
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o Investment Grade Securities: 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. 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.
o 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 that 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 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 a more
complete description of these risk factors, see "New York Risk Factors"
in the Statement of Additional Information.
o 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 a more
complete description of these risk factors, see "New Jersey Risk Factors"
in the Statement of Additional Information.
o 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 can have a material
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adverse effect on the Fund's results of operations and, in turn, cash
available for distribution. The "Year 2000" problem may also
adversely affect issuers of the securities contained in the Fund, to
varying degrees based on various factors, and this may have a
corresponding adverse affect on the Fund's performance. The Manager is
unable to predict what affect, if any, the "Year 2000" problem will
have on such issuers. At this time, it is generally believed that
municipal issuers may be more vulnerable to Year 2000 issues or problems
than will other issuers.
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
- --------------------------------------------------------------------------------
The Manager. The Fund has employed Lebenthal Asset Management, Inc. to serve as
Investment 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. As of November
30, 1998, the Manager was manager, adviser or supervisor of assets aggregating
in excess of $199 million. The Manager is a registered investment adviser
providing fixed-income investment advisory services to individuals, institutions
and other investment advisers. The Manager 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.
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. Pursuant to the Investment Management Contracts, the Fund
pays the Manager a Management Fee for its services under the Management
Contract, calculated daily and payable monthly. The management fee is 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 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.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
The Fund sells and redeems its shares on a continuing basis based on their net
asset value. All transactions in Fund shares are effected through State Street
Bank & Trust Company, the Fund's transfer agent.
Pricing Of Fund Shares. 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 divid-
14
<PAGE>
ing 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 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 by 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 value as determined in good faith
by the Board of Directors.
Dividends And Distributions. The Fund declares dividends equal to all its net
investment income daily (excluding capital gains and losses, if any, and
amortization of market discount). The Fund 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 Internal Revenue Code (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 are
permitted to elect the payment option of their choice on the subscription form
for share purchases.
How To Purchase And Redeem Shares.
- ----------------------------------
You may invest in the Fund directly or through a Lebenthal & Co., Inc. brokerage
account.
Minimum and Maximum Investments:
o Initial investment $1,000
o Subsequent investments $100
o Maximum purchase of Class B shares $250,000
o No maximum purchase for Class A shares
Alternative Sales Arrangements.
<TABLE>
What Classes of Shares Can You Buy: What Sales Charges Will You Pay:
----------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
o New York Class A and B shares o Class A shares You will pay an initial sales
o New Jersey Class A shares charge at time of purchase and
o Taxable Class A shares will also be eligible for a
reduced sales charge (described
below).
o Class B shares There is no initial sales
charge but you will be subject
to paying a contingent deferred
sales charge ("CDSC") when you
redeem the shares (see below).
</TABLE>
15
<PAGE>
Your decision to buy Class A or B shares depends on a number of factors
including (i) the amount and intended length of your investment, (ii) whether
you qualify for reduced sales charges applicable to Class A Shares only, or
(iii) whether you prefer not to pay an up-front sales charge. For more
information about these sales arrangements, consult your broker or the
Distributor.
Sales and Redemptions.
- ---------------------
Charges and Other Information on Redeeming Shares:
--------------------------------------------------
o no redemption charge by the Fund
o no minimum period of investment
o no minimum amount for a redemption
o no restrictions on the frequency of withdrawals
Class B Shares of the New York Portfolio may charge a CDSC on early redemptions
from this Portfolio.
Purchase and redemption 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. Fund shares continue to receive dividends through the day
of redemption. 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.
Unless alternate instructions are given in proper form to the Fund, 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.
Normally, redemption proceeds will be paid within seven days.
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: (i) the NYSE is closed (other
than customary weekend and holiday closings), (ii) the Securities and Exchange
Commission determines that trading thereon is restricted, (iii) 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 to fairly determine the value of its net assets, or (iv) the Securities and
Exchange Commission may by order permit for the protection of the shareholders
of the Fund.
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
16
<PAGE>
avoid mandatory redemption by purchasing sufficient additional shares to
increase his total net asset value to at least $1,000.
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 Procedures. If you wish to invest in the Fund directly or
through a brokerage account maintained at Lebenthal & Co., Inc. and not through
Participating Organizations you may use the following procedures. You may obtain
a current prospectus and a 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 and Subsequent Purchases of Shares: By Mail:
- ------------------------------------------ ---------------
Checks are accepted subject to Send a check made payable to
collection at full value in United "Lebenthal & Co., Inc., Agent"
States currency. All payments should including Lebenthal account
clearly state a shareholder's existing number __ __ __ __ __ __ to:
account number, if any.
Lebenthal Funds, Inc.
Lebenthal ________ Municipal
Bond Fund 120 Broadway New
York, New York 10271-0005
- --------------------------------------------------------------------------------
By Bank Wire:
- --------------------------------------------------------------------------------
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:
<TABLE>
<S> <C>
Chase Manhattan Bank Investors planning to wire funds should
ABA23 021-000021 instruct their bank so the wire transfer
f/a/o Donaldson, Lufkin & Jenrette Securities Co can be accomplished before the earlier of
Pershing Division 4:00 p.m., New York City time, or the
Acct# 930-1-032992 close of the NYSE on that same day. There
For Lebenthal Funds, Inc. may be a charge by the investor's bank
Lebenthal ________ Municipal Bond Fund for transmitting the money by bank wire.
A/C Name__________________ The Fund does not charge investors in the
Lebenthal A/C # __ __ __ __ __ __ Fund for its receipt of wire transfers.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Direct Redemption Procedures. 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. All requests for
redemption should clearly indicate the Lebenthal account number __ __ __ __ __.
17
<PAGE>
Written Redemption 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
Investment through Participating Organizations. Investors who invest 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. Participating Organizations may also 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.
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 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 procedures apply to Participant Investors who wish to invest in
the Fund through the Participating Organizations with which they have accounts.
Requests for assistance or additional information should be directed to the Fund
at (800) 828-3246.
18
<PAGE>
<TABLE>
<S> <C>
By Bank Wire: By Mail:
- ----------------------------- ---------------------------------
Participant Investors should instruct a member commercial bank to wire For Participant Investors subsequent purchases
their money immediately to: can be made by mailing a check to:
State Street Bank & Trust Co. Lebenthal Funds Inc.
ABA26 01100028 For Credit to Account Lebenthal__________Municipal Bond Fund
99051971 P.O. Box 419722
FAO: [ ]/Lebenthal Funds Inc. Kansas City, MO 64141-9722
Lebenthal__________Municipal Bond Fund
A/C Name____________________
Lebenthal A/C 27____________
</TABLE>
Additional Investor Programs.
- -----------------------------
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
through 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.
Systematic Withdrawal Plan. Shareholders may elect to redeem shares and receive
payment from the Fund of a specified amount of $50 or more automatically on a
monthly basis. A specified amount plan payment is made by the Fund on the
twelfth day of each month. Whenever such twelfth day of a month is not a Fund
Business Day, the payment date is the Fund Business Day immediately preceding
the twelfth day of the month. In order to make a payment, a number of shares
equal in aggregate net asset value to the payment amount are redeemed at their
net asset value on the Fund Business Day three days prior to the date of
payment. To The Extent That The Redemptions To Make Plan Payments Exceed The
Number Of Shares Purchased Through Reinvestment Of Dividends And Distributions,
The Redemptions Reduce The Number Of Shares Purchased On Original Investment,
And May Ultimately Liquidate A Shareholder's Investment. A Shareholder May
Recognize A Gain Or A Loss Upon Redemption Of Shares To The Extent The Amount
Received Upon Redemption Exceeds Or Is Less Than His Basis In The Shares
Redeemed. This election is only available to investors who at time of election
own shares with a net asset value of $10,000. The election to receive automatic
withdrawal payments may be made at the time of the original subscription by so
indicating on the subscription order form. 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.
19
<PAGE>
Exchange Privilege.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
You can exchange your shares into Charges and Minimums for exchanging your shares:
the following Portfolios:
- ------------------------------------------------------------------------------------------------------------------------------------
o Lebenthal New York Municipal Bond Fund o There is no charge for the exchange privilege or limitation
o Lebenthal New Jersey Municipal Bond Fund as to frequency of exchange.
o Lebenthal Taxable Municipal Bond Fund o The minimum amount for an exchange is $1,000, except that
You must exchange shares in same class as you shareholders who are establishing a new account with an
currently hold. investment company through the exchange privilege must
In the future, the exchange program may be ensure that a sufficient number of shares are exchanged to
extended to other companies managed by Lebenthal & Co., meet the minimum initial investment required for the
Inc. portfolio into which the exchange is being made.
The Class B shares of the New York Portfolio are o Shares are exchanged at their respective net asset
currently not eligible to participate in this values.
Exchange Privilege.
</TABLE>
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 as a sale on
which a shareholder may realize a taxable gain or loss for Federal and,
generally, state income tax purposes. An additional Prospectus may be obtained
by contacting the Fund at the address or telephone number set forth on the cover
page of this Prospectus.
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
20
<PAGE>
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 (see "Distribution Arrangements.")
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 will be promptly notified. Information on this service
is included in the application and is available from the transfer agent or the
Distributor.
Tax Consequences.
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
21
<PAGE>
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 therein, 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 of an interest in the underlying Municipal Obligations 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.
Each Portfolio intends to maintain qualification as a "regulated investment
company" under Subchapter M of the Code. Each Portfolio 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
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.)
22
<PAGE>
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's 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.
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 (i) 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 (ii) 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 obligations issued by or on behalf of the State of New Jersey or any county,
municipality or other political subdivision of the State of New Jersey ("New
Jersey-Specific Obligations") or obligations which are statutorily free from New
Jersey state or local taxation under the laws of the United States ("U.S.
Government 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, (i) 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 State-Specific Obligations or
U.S. Government Obligations, and (ii) 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 to the extent that the gain is
attributable to investments in New Jersey State-Specific Obligations or U.S.
Government Obligations. Shareholders should consult their own tax Advisers about
the status of distributions from the New Jersey Portfolio in their own states
and localities.
23
<PAGE>
DISTRIBUTION ARRANGEMENTS
- --------------------------------------------------------------------------------
Sales Charges
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.
The sales load for the Class A shares and applicable volume discounts is:
<TABLE>
Sales Charge as % of Net Dealer Discount as %
Amount of Purchase Sales Load Amount Invested of 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 0.25%
</TABLE>
Class B Shares (for New York Portfolio only). Class B shares are sold without an
initial sales charge, but are subject to a CDSC if redeemed 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 is:
Period Class B Shares Held CDSC
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%
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.
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 SAI. The SAI includes information about
how shares acquired through reinvestment of distributions are treated for
conversion purposes and 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
24
<PAGE>
lower dividends than Class A shares because the Class B shares bear a higher
12b-1 fee than the Class A Shares and because of other related expenses.
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 a Portfolio reaches the levels indicated in the above
sales load schedules. Volume discounts are not available for Class B shares.
Investors may add onto the total current value of shares already owned in order
to qualify for a volume discount. 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
a Portfolio. Reinvestment will be made at net asset value (i.e., at no 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 semi-annual 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 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.
25
<PAGE>
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.
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 for single investments of
at least $1,000. For example, an investor purchasing Class A shares in the
amount of $10,000 will be charged a reduced sales load of 4.00% and an investor
purchasing Class A shares in the amount of $100,000 will be charged a reduced
sales load of 3.00%. 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
5.0%. The reduction of a sales load reflects the Fund's interest in offering a
savings vehicle for investors in this age bracket. The reduction in sales charge
will be in effect until the day prior to the investor's 36th birthday.
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.
Employees of the Distributor and Participating Organizations. Employees (and
their immediate families) of Lebenthal & Co., Inc. or any Participating
Organization may purchase shares of a Portfolio at net asset value.
Rule 12b-1 Fees.
The Fund pays fees in connection with the distribution of shares and for
services provided to the shareholders. The Fund pays these fees from its assets
on an ongoing basis. Therefore, overtime, the payment of these fees will
increase the costs of your investment and may cost you more than paying other
types of sales charges.
The Fund's Board of Directors has adopted a Rule 12b-1 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 following
paragraphs describe the fees paid by each Portfolio pursuant to the Plan and its
related agreements.
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 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 maintenance of shareholder accounts. The Distributor
may make payments, from time to time, from the Service Fee it received to pay
the costs of,
26
<PAGE>
and to compensate others, including Participating Organizations, for performing
shareholder servicing functions. Under the Distribution Agreement, the
Distributor receives from the Class B shares of the Portfolio 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. The fees are accrued daily 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 described above (with respect to the Class B Shares only) 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 both 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. Any portion of the Shareholder Servicing 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.
27
<PAGE>
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: (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
Jersey and Taxable Portfolios; (ii) to compensate certain Participating
Organizations for providing assistance in distributing the Portfolios' shares;
(iii) to pay the costs of printing and distributing the Fund'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 Portfolios' shares. The Distributor, in its sole discretion,
will determine the amount of such payments 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 Distribution Agreements, Shareholder
Servicing Agreements or the Management Contracts in effect for that year.
28
<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 savings in borrowing
costs on $957 billion of Municipal Bonds issued between 1994 and 1998 will add
up to $291 billion by the year 2011, versus what it would have cost the states,
their political subdivisions, agencies, and authorities to borrow at prevailing
corporate interest rates.
i
<PAGE>
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 deficits, imbalance of payments, 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. It
grows. 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 $1.4 trillion of Municipal Bonds outstanding, approximately 71.3%
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
million (4.2% out of 118.2 million tax returns) reported receiving $48.5 billion
of tax exempt income in 1995. Filers with adjusted gross incomes of less than
$100,000 accounted for 74% of all filers reporting tax exempt income and 45% of
all tax exempt income reported. The municipal securities market is dominated by
the individual investor. Households are the largest holders of municipal debt.
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 significant differences of
security, liquidity, and suitability that may
ii
<PAGE>
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.
iii
<PAGE>
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 state 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 2028 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.
iv
<PAGE>
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 assurance of a particular Fund yield, because the bonds in the
portfolio change. They are being added to, disposed of and replaced with other
bonds opportunistically. 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. On the other hand, the Lebenthal
New York and New Jersey Municipal Bond Funds are for more general open-ended
objectives like building up an estate or saving for retirement. The Funds can
pay out interest every month, free of New York or New Jersey and regular Federal
income tax. Or, it can reinvest
v
<PAGE>
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." In buying individual bonds to hold to maturity,
one might tend to dismiss ups and downs in market value with a mantra, "I didn't
buy to sell. I didn't buy to sell." But investing in an open-end mutual fund of
bonds with automatic reinvestment, one holds their portfolio to a different
standard. One measures portfolio performance by the concept of "total return."
Total return takes into account 1) interest income being spun off by the bonds
in the portfolio, 2) that cashflow being reinvested in additional fund shares,
3) the impact of gains or losses in net asset value per share multiplied by the
growing number of shares being accumulated through reinvestment. One goes into a
fund seeking a higher total return than just the stated yield to maturity to be
had from individual bonds. But one can lose money, too. How you fare will depend
on whether the price you receive upon selling your shares is more than your
original cost or less, owing to fluctuating interest rates in general and the
performance of the fund Adviser in particular.
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
vi
<PAGE>
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, may
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. And the next month those shares do the
same thing. So the number of shares you own accumulates and builds.
The accumulation of shares by itself is no guarantee of investment success. But
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 decide to sell.
So, if you go into a fund and sign up for reinvestment for long term saving
goals, don the mantle 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.
vii
<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>
Sales Sales
Aggregate Amount Load Aggregate Amount Load
Lebenthal New York Municipal Bond Fund
<S> <C> <C> <C> <C> <C>
/ / $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 0.00%
Lebenthal New Jersey Municipal Bond Fund
/ / $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 0.00%
Lebenthal Taxable Municipal Bond Fund
/ / $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 0.00%
</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>
<CAPTION>
Lebenthal New York Municipal Bond Fund
<S> <C> <C> <C>
- -------------------------------------- ------------------------------------- ----------------------------- -----------------
Shareholder Name Authorized Signature Account Number Date
Lebenthal New Jersey Municipal Bond Fund
- -------------------------------------- ------------------------------------- ----------------------------- -----------------
Shareholder Name Authorized Signature Account Number Date
Lebenthal Taxable Municipal Bond Fund
- -------------------------------------- ------------------------------------- ----------------------------- -----------------
Shareholder Name Authorized Signature Account Number Date
</TABLE>
viii
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
This financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers, LLP, Independent
Certified Public Accountants, whose report thereon appears in the Fund's Annual
Report to Shareholders which is available upon request.
<TABLE>
<CAPTION>
NEW YORK PORTFOLIO (Class A Shares only)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
1998 1997 1996 1995 1994###
-------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding
throughout the period)
Net asset value, beginning of
period........................... $ 8.32 $ 8.09 $ 7.99 $ 6.84 $ 8.03
-------- -------- -------- ---------- -----------
Income from investment operations:
Net investment income............ 0.42 0.42 0.41 0.43 0.41
Net realized and unrealized
gain (loss) on investments.... 0.21 0.23 0.10 1.15 (1.15)
------------ -------- -------- ----------- ------------
Total from investment
operations.................... 0.63 0.65 0.51 1.58 (0.74)
Less distributions: ------------ -------- -------- ----------- -----------
Dividends from net investment
income.......................... (0.42) (0.42) (0.41) (0.43) (0.41)
Distributions from net realized
gain on investments........... - - - - (0.04)
Total distributions.............. (0.42) (0.42) (0.41) (0.43) (0.45)
------------ --------- ----------- ----------- ------------
Net asset value, end of period...... $ 8.53 $ 8.32 $ 8.09 $ 7.99 $ 6.84
============ ========= ========== =========== ============
Total Return (without deduction
of sales load):.................. 7.69% 8.27% 6.63%** 23.56% (9.62%)
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted).................. $ 147,673 $ 134,144 $ 122,611 $ 105,579 $ 75,326
Ratios to average net assets:
Expenses......................... 0.76% 0.89%+ 1.09% 0.99% 0.64%##
Net investment income............ 4.92% 5.16% 5.17% 5.63% 5.44%
Portfolio turnover rate............. 66.04% 60.80% 45.92% 148.88% 192.91%
</TABLE>
** Includes the effect of a capital contribution from the Fund's Manager.
Without the capital contribution the total return would have been 6.24%.
## 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% for the year
ended November 30, 1994.
### Effective August 15, 1994, the investment advisor changed to Lebenthal
Asset Management, Inc.
+ Includes fees paid indirectly of less than 0.01% of average net assets.
29
<PAGE>
<TABLE>
<CAPTION>
NEW YORK PORTFOLIO (Class B Shares only)*
- ------------------------------------------------------------------------------------------------------------------------
Year ended November 30, 1998
<S> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period............................................ $ 8.34
=========
Income from Investment operations:
Net investment income........................................................ 0.33
Net realized and unrealized
gain on investments....................................................... 0.20
---------
Total from investment operations............................................. 0.53
---------
Less distributions:
Dividends from net investment income......................................... (0.33)
Distributions from net realized gain on investments.......................... --
Total distributions............................................................. (0.33)
---------
Net asset value, end of period.................................................. $ 8.54
=========
Total Return (1):
(without deduction of sales load)............................................ 6.48%
Ratios/Supplemental Data:
Net assets, end of period (000's omitted)....................................... $2,801
Ratios to average net assets:
Expenses++(2)................................................................ 1.55%**
Net investment income (2).................................................... 3.95%
Portfolio turnover rate:........................................................ 66.04%
</TABLE>
* Class commenced operations on December 3, 1997.
++ 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 4.58%.
** Includes fees paid indirectly of less than .01% of average net assets.
(1) Not annualized for periods less than one year.
(2) Annualized for periods less than one year.
30
<PAGE>
<TABLE>
<CAPTION>
NEW JERSEY PORTFOLIO
Year Ended November 30,
------------------------------------------------------------
1998 1997 1996 1995 1994##+
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of
period........................................................ $ 6.97 $ 6.74 $ 6.70 $ 5.95 $ 7.16
-------- ------- -------- ------- -------
Income from investment operations:
Net investment income......................................... 0.35 0.35 0.36 0.36 0.32
Net realized and unrealized
gain (loss) on investments................................. 0.23 0.23 0.04 0.75 (1.21)
-------- ------- -------- ------- -------
Total from investment operations........................... 0.58 0.58 0.40 1.11 (0.89)
-------- ------- -------- ------- -------
Less distributions:
Dividends from net investment
income..................................................... (0.35) (0.35) (0.36) (0.36) (0.32)
Distributions from net realized
gain on investments........................................ -- -- -- -- --
-------- ------- -------- ------- -------
Total distributions........................................ (0.35) (0.35) (0.36) (0.36) (0.32)
-------- ------- -------- ------- -------
Net asset value, end of period................................... $7.20 $ 6.97 $ 6.74 $ 6.70 $ 5.95
======== ======= ======== ======== =======
Total Return (without deduction
of sales load)................................................ 8.47% 8.84% 6.18% 19.10% (12.70%)
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted)............................................... $ 9,042 $ 6,122 $ 5,182 $ 3,358 $ 2,145
Ratios to average net assets:
Expenses## 0.60%* 0.70%* 0.63%* 0.60% 0.60%
Net investment income......................................... 4.87% 5.12% 5.37% 5.64% 4.97%
Portfolio turnover rate.......................................... 31.81% 57.19% 28.56% 61.69% 291.60%
</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 1.60%, 2.57%,
3.20%, 4.13% and 4.83% for the years ended November 30, 1998, 1997,
1996, 1995, and 1994.
* Includes fees paid indirectly of 0.02%, 0.02% and 0.03% of average net
assets for 1998, 1997 and 1996, respectively.
31
<PAGE>
<TABLE>
<CAPTION>
TAXABLE PORTFOLIO
-------------------------------------------------------------
Year Ended November 30,
1998 1997 1996 1995 1994#*
------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding
throughout the period)
Net asset value, beginning of period $7.37 $7.13 $7.22 $6.34 $ 7.16
------- ----- ------ ------ ---------
Income from investment operations:
Net investment income............................. 0.49 0.50 0.52 0.53 0.44
Net realized and unrealized
gain (loss) on investments...................... 0.36 0.24 (0.09) 0.88 (0.82)
------- ----- ------ ------ ---------
Total from investment operations.................. 0.85 0.74 0.43 1.41 (0.38)
------- ----- ------ ------ ---------
Less distributions:
Dividends from net investment income.............. (0.49) (0.50) (0.52) (0.53) (0.44)
Distributions from net realized
gain on investments............................. -- -- -- -- --
------- ----- ------ ------ ---------
Total distributions............................... (0.49) (0.50) (0.52) (0.53) (0.44)
------- ----- ------ ------ ---------
Net asset value, end of period........................ $7.73 $7.37 $7.13 $7.22 $6.34
======= ===== ====== ====== =========
Total Return (without deduction
of sales load).................................... 11.85% 10.89% 6.35% 23.11% (5.45%)
Ratios/Supplemental Data:
Net assets, end of period
(000's omitted)................................... $17,789 $14,994 $14,607 $8,686 $2,990
Ratios to average net assets:
Expenses##........................................ 0.70%** 0.79%** 0.61%** 0.60% 0.60%
Net investment income............................. 6.45% 7.06% 7.34% 7.57% 6.74%
Portfolio turnover rate............................... 23.75% 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 1.15%, 1.42%,
1.63%, 2.59% and 3.60% for the years ended November 30, 1998, 1997, 1996,
1995, and 1994, respectively.
* Fund commenced operations on December 1, 1993.
** Includes fees paid indirectly of 0.01% of average net assets.
32
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
For more information about the Fund, the following documents are available free
upon request:
Annual/Semiannual Reports:
The Fund's semi-annual and audited annual reports to shareholders contain
detailed information on the Fund's investments. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
- --------------------------------------------------------------------------------
You can get free copies of Reports and SAI, or request other information and
discuss your questions about the Fund by contacting:
Lebenthal & Co., Inc.
120 Broadway
New York, New York 10271
212-425-6116
www.lebenthal.com
- --------------------------------------------------------------------------------
You can review the Fund's reports and SAI at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
o For a fee, by writing the Public Reference Section of the
Securities and Exchange Commission, Washington, D.C.
20549-6009 or calling 10-800-SEC-0330.
o Free from the Securities and Exchange Commission's
Website at http://www.sec.gov.
SEC. File No. 811-6170
<PAGE>
LEBENTHAL
FUNDS, INC.
120 Broadway, New York, NY 10271
212-425-6116
OUTSIDE NYC TOLL FREE 1-800-221-5822
- --------------------------------------------------------------------------------
Lebenthal New York Municipal Bond Fund - Class A and Class B Shares
Lebenthal New Jersey Municipal Bond Fund
Lebenthal Taxable Municipal Bond Fund
STATEMENT OF ADDITIONAL INFORMATION
March 31, 1999
This Statement of Additional Information (SAI) is not a prospectus. It
supplements the information contained in the current Prospectus dated March 31,
1999, and should be read in conjunction with the Prospectus. The Prospectus may
be obtained from any Participating Organization or by writing or calling the
Fund.
Table of Contents
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fund History................................................ 2 CapitalStock and Other Securities.........................27
Description of the Fund and Its Investments and Purchase, Redemption, and Pricing of Fund Shares..........28
Risks.................................................... 2 Taxation of the Fund......................................28
Management of the Fund...................................... 21 Underwriters..............................................32
Control Persons and Principal Holders of Calculation of Performance Data...........................32
Securities............................................... 22 Financial Statements......................................33
Investment Advisory and Other Services...................... 22 Description of Security Ratings and Notes.................33
Brokerage Allocation and Other Practices.................... 27 Taxable Equivalent Yield Tables...........................37
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FUND HISTORY
- --------------------------------------------------------------------------------
The Fund was incorporated on August 17, 1990 in the State of Maryland.
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
The Fund is an open-end management investment company currently consisting of
two non-diversified portfolios, the New York Portfolio and the New Jersey
Portfolio, and a diversified Portfolio, the Taxable Portfolio. 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 will 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 are subject to
the following limitations: (i) 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 (ii) 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 following discussion expands upon the description of the Portfolios'
investment objectives, policies and risks in the Prospectus.
DESCRIPTION OF THE PORTFOLIOS' INVESTMENT SECURITIES
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 objective is 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, 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 objective, 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, provides 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.
2
<PAGE>
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, 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 Rating Services, a division of The
McGraw-Hill Companies ("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 herein. A description of the credit ratings appears
under the heading "Description of Security Ratings and Notes." 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 objective is to maximize income consistent with preservation of
capital, with consideration given to opportunities for capital gain. No
assurance can be given that this objective will be achieved. The following
discussion expands upon the description of the Taxable Portfolio's investment
objective, 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.)
3
<PAGE>
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; 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 herein. A description of the
credit ratings appears under the heading "Description of Security Ratings and
Notes." 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.
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 Lebenthal Asset Management, Inc. (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. For example, in some
cases, revenues derived from specific taxes are pledged to support payments on a
revenue bond. Revenue bonds are secured by tolls, rentals, mortgage payments,
tuitions, fees, that is, by earnings. Among the projects financed by revenue
bonds are housing projects, turnpikes, hospitals, power plants, airports,
colleges, water and sewer systems, resource recovery and solid waste disposal
systems - in fact, any municipal enterprise that sustains itself by the sale of
a service to the public.
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 of 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, on 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 Portfolios will be supported by letters
of credit, guarantees or insurance that
4
<PAGE>
meet the quality criteria of the portfolio and provide a 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.
(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.
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.
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 or Fitch ratings systems (see "Description
of Security Ratings and Notes" 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.
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Floating Rate and Variable Rate Securities.
The Portfolios may purchase floating rate and variable rate put option
securities, or 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 is 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.
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 the 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 (i) upon a default
under the terms of the documents of the tax-exempt security, (ii) as needed to
provide liquidity in order to meet redemptions, or (iii) 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. The Portfolios will purchase participation interests
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 are frequently 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 change in the
same way--experiencing appreciation when interest rates decline and depreciation
when interest rates rise. These fluctuations in value are 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 (i) 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,
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plus (ii) 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.
The right of each Portfolio to exercise a stand-by commitment is unconditional
and unqualified. A stand-by commitment is not transferable by the Portfolio
although it can 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 will 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 will 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 if 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 will be supported by the value of the
underlying Municipal Obligations held by such Portfolio that is 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 will 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 will 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 will be reflected as unrealized depreciation
for the period during which the commitment is held by such Portfolio. Stand-by
commitments will 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.
The New York Portfolio and the New Jersey Portfolio will attempt to invest 100%
of their net assets in tax-exempt Municipal Obligations. However, if the Manager
determines that the Portfolios should assume a temporary defensive position due
to adverse market conditions, the New York Portfolio and the New Jersey
Portfolio may invest up to 100% of the value of their net assets 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. 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 govern-
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ment 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. (See "Federal Income
Taxes.") For purposes of the Taxable Portfolio, taxable securities will be
substantially in Taxable Municipal Obligations as well as in 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 will 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, at all times during the
period of the agreements, shall be fully collateralized as follows: (i) the
value of the underlying security shall be at least equal to the amount of the
loan, including the accrued interest thereon, and (ii) 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.
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 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) 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
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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 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 is 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 is 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 is considered
a separate security and will be treated as an issue of such
government, other entity or bank.
(11) Invest in securities of other investment companies, except (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' 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.
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's (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.
Economic Trends. Over the long term, the State of New York (the "State") and the
City of New York (the "City") face serious 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.
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New York City. The City, with a population of approximately 7.4 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.
For each of the 1981 through 1998 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating results
as reported in accordance with then applicable generally accepted accounting
principles ("GAAP"), after discretionary transfers. The City has been required
to close substantial 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 balanced operating results as required by State
law without tax or other revenue increases or reductions in City services or
entitlement programs, which could adversely affect the City's economic base.
As required by law, the City prepares a four-year annual 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 financial plan
projects a surplus in the 1999 fiscal year, before discretionary transfers, and
budget gaps for each of the 2000, 2001 and 2002 fiscal years. This pattern of
current year surplus operating results and projected subsequent year budget gaps
has been consistent through the entire period since 1982, during which the City
has achieved surplus operating results, before discretionary transfers, for each
fiscal year.
The City depends on aid from the State 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; that State budgets will be adopted by the April 1 statutory deadline,
or interim appropriations enacted; or that any 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 financial plan, including the
City's current financial plan for the 1999 through 2002 fiscal years (the
"1999-2002 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. Such assumptions and
contingencies include the condition of the regional and local economies, the
provision of State and Federal aid and the impact on City revenues and
expenditures of any future Federal or State policies affecting the City.
Implementation of the Financial Plan is dependent upon the City's ability to
market its securities successfully. The City's financing program for fiscal
years 1999 through 2002 contemplates the issuance of $5.2 billion of general
obligation bonds and $5.4 billion of bonds to be issued by the New York City
Transitional Finance Authority (the "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 City 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.
For the 1998 fiscal year, the City had an operating surplus, before
discretionary and other transfers, and achieved balanced operating results,
after discretionary and other transfers, in accordance with GAAP. The 1998
fiscal year is the eighteenth year that the City has achieved an operating
surplus, before discretionary and other transfers, and balanced operating
results, after discretionary and other transfers.
On November 18, 1998, the City released the Financial Plan for the 1999 through
2002 fiscal years, which relates to the City and certain entities which receive
funds from the City. The Financial Plan is a modification to the financial plan
submitted to the Control Board on June 26, 1998 (the "June Financial Plan"). The
Financial Plan projects revenues and expenditures for the 1999 fiscal year
balanced in accordance with GAAP, and projects gaps of $2.2 billion, $2.9
billion and $2.4 billion for the 2000 through 2002 fiscal years, respectively,
after implementation of a gap closing program to reduce agency expenditures by
$200 million in the 1999 fiscal year and approximately $80 million in each of
fiscal years 2000 through 2002.
Changes since the June Financial Plan include: (i) an increase in projected tax
revenues of $288 million and $8 million in fiscal years 1999 and 2000,
respectively, and a decrease in projected tax revenues of $23 million and $66
million in fiscal years 2001 and 2002, respectively; (ii) an increase in planned
expenditures for health insurance of approximately $60 million in each of fiscal
years 1999 through 2002; (iii) a decrease in projected pension expenditures due
to higher than
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planned increases in the value of the assets of the retirement systems of $67
million, $171 million, $264 million and $372 million in the fiscal years 1999
through 2002, respectively; (iv) other agency spending increases of $76 million,
$101 million, $78 million, and $70 million in fiscal years 1999 through 2002,
respectively; and (v) an increase in agency expenditures of $227 million, $295
million, $295 million and $294 million in fiscal years 1999 through 2002,
respectively, due to a reduction in the agency gap closing program.
The 1999-2002 Financial Plan includes a proposed discretionary transfer in the
1999 fiscal year of $465 million to pay debt service due in fiscal year 2000. In
addition, the Financial Plan reflects enacted and proposed tax reduction
programs totaling $429 million, $604 million and $606 million in fiscal years
2000 through 2002, respectively, including the elimination of the City sales tax
on all clothing as of December 1, 1999, the extension of current tax reductions
for owners of cooperative and condominium apartments starting in fiscal year
2000 and a personal income tax credit for child care and for resident holders of
Subchapter S corporations starting in fiscal year 2000, which are subject to
State legislative approval, and reduction of the commercial rent tax commencing
in fiscal year 2000.
The Financial Plan 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 which is projected to provide
revenue of $183 million, $524 million and $544 million in the 2000, 2001 and
2002 fiscal years, respectively; and (ii) collection of the projected rent
payments for the City's airports, totaling $6 million, $365 million, $155
million and $185 million in the 1999 through 2002 fiscal years, respectively, a
substantial portion of which may depend on the successful completion of
negotiations with The Port Authority of New York and New Jersey (the "Port
Authority") or the enforcement of the City's rights under the existing leases
through pending legal actions. 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.
In January, the Mayor is expected to publish a Modification (the "January
Modification") to the Financial Plan for the City's 1999 through 2003 fiscal
years and a preliminary budget for the City's fiscal year 2000. The January
Modification will include changes since the Financial Plan and the City's
program to address the currently forecast $2.2 billion gap in fiscal year 2000.
As in prior years, the City's gap-closing program could include a program to
substantially reduce projected agency spending and City proposals for increased
Federal and State aid and other non-tax revenues.
The 1998 modification of the City's financial plan and the 1999-2002 Financial
Plan include a proposed discretionary transfer in the 1998 fiscal year of
approximately $2.0 billion to pay debt service due in the 1999 fiscal year, and
a proposed discretionary transfer in the 1999 fiscal year of $416 million to pay
debt service due in fiscal year 2000, included in the Budget Stabilization
Accounts for the 1998 and 1999 fiscal years, respectively. In addition, the
Financial Plan reflects proposed tax reduction programs totaling $237 million,
$537 million, $657 million and $666 million in fiscal years 1999 through 2002,
respectively, including the elimination of the City sales tax on all clothing as
of December 1, 1999, a City-funded acceleration of the State funded personal
income tax reduction for the 1999 through 2001 fiscal years, the extension of
current tax reductions for owners of cooperative and condominium apartments
starting in fiscal year 2000 and a personal income tax credit for child care and
for resident holders of Subchapter S corporations, which are subject to State
legislative approval, and reduction of the commercial rent tax commencing in
fiscal year 2000.
On June 5, 1998, the City Council adopted a budget which re-allocated
expenditures from those provided in the Executive Budget in the amount of $409
million. The re-allocated expenditures, which include $116 million from the
Budget Stabilization Account, $82 million from debt service, $45 million from
pension contributions, $54 million from social services spending and $112
million from other spending, were re-allocated to uses set forth in the City
Council's adopted budget. Such uses include a revised tax reduction program at a
revenue cost in the 1999 fiscal year of $45 million, additional expenditures for
various programs of $199 million and provision of $165 million to retire high
interest debt. The revised tax reduction program in the City Council's adopted
budget assumes the expiration of the 12.5% personal income tax surcharge, rather
than the implementation of the personal income tax reduction program proposed in
the Executive budget. The changes reflected in the City Council's adopted budget
would increase the gaps forecast between revenues and expenditures in the future
years of the Financial Plan.
On June 5, 1998, in accordance with the City Charter, the Mayor certified to the
City Council revised estimates of the City's revenues (other than property tax)
for fiscal year 1999. Consistent with this certification, the property tax levy
was estimated by the Mayor to require an increase to realize sufficient revenue
from this source to produce a balanced budget within generally accepted
accounting principles. On June 8, 1998, the City Council adopted a property tax
levy that was $237.7 million lower than the levy estimated to be required by the
Mayor. The City Council, however, maintained that the revenue to be derived from
the levy it adopted would be sufficient to achieve a balanced budget because the
property tax reserve for uncollectibles could be reduced. Property tax bills for
fiscal year 1999 are expected to be mailed in the near future by the City's
Department of Finance at the rates adopted by the City Council for fiscal year
1998, subject to later adjustment.
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On July 16, 1998, Standard & Poor's revised its rating of City bonds upward from
BBB+ to A-. Moody's rating of City bonds was revised in February 1998 to A3 from
Baa1. Moody's, Standard & Poor's and Fitch currently rate the City's outstanding
general obligations bonds A3, A- and A-, respectively.
New York State and its Authorities. The State Financial Plan for the 1998-1999
fiscal year projects balance on a cash basis for the 1998-1999 fiscal year, as
modified on July 30, 1998, with a closing balance in the General Fund of $1.67
billion. The State Financial Plan contains projections of a potential imbalance
in the 1999-2000 fiscal year of $1.3 billion, assuming implementation of
unspecified efficiency actions, the receipt of funds from the tobacco settlement
and the application of certain reserves established in the 1998-1999 State
Financial Plan. The Executive Budget submitted in February 1998 contained
projections at that time of a potential imbalance in the 2000-2001 fiscal year
of $3.72 billion, assuming implementation of unspecified efficiency initiatives
and other actions in the 2000-2001 fiscal year.
The 1999-2002 Financial Plan is based on numerous assumptions, including the
condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1999-2002 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent, if
any, to which wage increases for City employees exceed the annual wage costs
assumed for the 1999 through 2002 fiscal years; continuation of projected
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required pension
fund contributions; the willingness and ability of the State to provide the aid
contemplated by the Financial Plan and to take various other actions to assist
the City; the ability of State agencies to maintain balanced budgets; the
willingness of the Federal government to provide the amount of Federal aid
contemplated in the Financial Plan; the impact on City revenues and expenditures
of Federal and State welfare reform and any future legislation affecting
Medicare or other entitlement programs; adoption of the City's budgets by the
City Council in substantially the forms submitted by the Mayor; the ability of
the City to implement cost reduction initiatives, and the success with which the
City controls expenditures; the impact of conditions in the real estate market
on real estate tax revenues; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.
The Legislature passed a State budget for the 1998-1999 fiscal year on April 18,
1998, and on April 26, 1998 the Governor vetoed certain of the increased
spending in the State budget passed by the Legislature. The Legislature did not
override any of the Governor's vetoes. The State Financial Plan for the
1998-1999 fiscal year, as modified on July 30, 1998, projects balance on a cash
basis for the 1998-1999 fiscal year, with a closing balance in the General Fund
of $1.67 billion. The State Financial Plan contains projections of a potential
imbalance in the 1999-2000 fiscal year of $1.3 billion, assuming implementation
of $600 million of unspecified efficiency actions, the receipt of $250 million
in funds from the tobacco settlement and the application of certain reserves
established in the 1998-1999 State Financial Plan. The Executive Budget
submitted in February 1998 contained projections at that time of a potential
imbalance in the 2000-2001 fiscal year of $3.72 billion, assuming implementation
of $800 million of unspecified efficiency initiatives in the 2000-2001 fiscal
year and $250 million in funds from the tobacco settlement. The State Financial
Plan for the 1998-1999 fiscal year includes multi-year tax reductions and
significant increases in spending which will affect the 2000-2001 fiscal year.
The various elements of the State and local tax and assessment reductions
enacted during the last several fiscal years will reduce projected revenues by
more than $4 billion in the 2002-2003 fiscal year as measured from the current
1998-1999 base.
On July 23, 1998, the New York State Comptroller issued a report which noted
that a significant cause for concern is the budget gaps in the 1999-2000 and
2000-2001 fiscal years, which the State Comptroller projected at $1.8 billion
and $5.5 billion, respectively, after excluding the uncertain receipt by the
State of $250 million of funds from the tobacco settlement assumed for each of
such fiscal years, as well as the unspecified actions assumed in the State's
projections. The State Comptroller also stated that if the securities industry
or economy slows, the size of the gaps would increase.
Standard & Poor's rates the State's general obligation bonds A, and Moody's
rates the State's general obligation bonds A2. On August 28, 1997, Standard &
Poor's revised its rating on the State's general obligation bonds from A- to A.
Litigation. A number of court actions have been brought involving State
finances. The court actions in which the State is a defendant generally involve
State programs and miscellaneous tort, real property, and contract claims. 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
carry out the 1999-2002 Financial Plan. The City has estimated that its
potential future liability on account of outstanding claims against it as of
June 30, 1998 amounted to approximately $3.5 billion.
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NEW JERSEY RISK FACOTRS
Special Considerations Regarding Investment In New Jersey State-Specific
Obligations.
The following information constitutes only a brief summary, does not purport to
be a complete description and is largely based on information drawn from
official statements relating to securities offerings of New Jersey municipal
obligations available as of the date of this Statement of Additional
Information. The accuracy and completeness of the information contained in such
offering statements has not been independently verified.
State Finance/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. New
Jersey's economic base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas with selective
commercial agriculture.
Business investment expenditures and consumer spending have increased
substantially in New Jersey. Capital and consumer spending may continue to rise
due to the sustained character of economic growth and the interest-sensitive
homebuilding industry may continue to provide stimulus in New Jersey. It is
expected that the employment and income growth that has and is taking place will
lead to further growth in consumer outlays. Reasons for continued optimism in
New Jersey include increasing employment levels and a higher-than-national level
of per capita personal income. Also, several expansions of existing
hotel-casinos and plans for several new casinos in Atlantic City will mean
additional job creation.
While growth is likely to be slower than in the nation, the locational
advantages that have served New Jersey well for many years will still be there.
Structural changes that have been going on for years can be expected to
continue, with job creation concentrated most heavily in the service industries.
New Jersey's Budget and Appropriation System. New Jersey operates on a fiscal
year ending on June 30. The General fund is the fund into which all New Jersey
revenues not otherwise restricted by statute are deposited and from which
appropriations are made. The largest part of the total financial operations of
New Jersey is accounted for in the General Fund, which includes revenues
received from taxes and unrestricted by statute, most Federal revenues, and
certain miscellaneous revenue items. The Appropriation Acts enacted by the New
Jersey Legislature and approved by the Governor provide the basic framework for
the operation of the General Fund. The undesignated General Fund balance at year
end for fiscal year 1995 was $569.2 million, for fiscal year 1996 was $442.0
million and for fiscal year 1997 was 280.5 million. For fiscal year 1998, the
balance in the undesignated General Fund is estimated to be $143.9 million,
subject to change upon completion of the year-end audit. The estimated balance
for fiscal year 1999 is $198.9 million, based on the amounts contained in the
fiscal year 1999 Appropriations Act. The fund balances are available for
appropriation in succeeding fiscal years.
Should revenues be less than the amount anticipated in the budget for a fiscal
year, the Governor may by statutory authority prevent any expenditure under any
appropriation. No supplemental appropriation may be enacted after adoption of an
appropriation act except where there are sufficient revenues on hand or
anticipated to meet such appropriation. In the past when actual revenues have
been less than the amount anticipated in the budget, the Governor has exercised
plenary powers leading to, among other actions, a hiring freeze for all New
Jersey departments and discontinuation of programs for which appropriations were
budgeted but not yet spent.
General Obligation Bonds. New Jersey finances capital projects primarily through
the sale of its general obligation bonds. These bonds are backed by the full
faith and credit of New Jersey. Tax revenues and certain other fees are pledged
to meet the principal and interest payments required to pay the debt fully.
The aggregate outstanding general obligation bonded indebtedness of New Jersey
as of June 30, 1998 was $3.5729 billion. The appropriation for the debt service
obligation on outstanding indebtedness is $501.1 million for fiscal year 1998.
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 $615.6 million.
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. 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 are legally available for such payment.
"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
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on the obligations, and a New Jersey 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 obligations" bonds
which may be issued by eligible New Jersey entities. As of June 30, 1998,
outstanding "moral obligation" bonded indebtedness issued by New Jersey entities
totaled $658,084,400 and maximum annual debt service subject to "moral
obligation" is $81,577,873.
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 previously 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 1990 through 1998,
New Jersey has made appropriations totalling $47,785,848.25 which covered
deficiencies in revenues of the Corporation, for debt service and property tax
payments.
Higher Education Assistance Authority. The Higher Education Assistance Authority
("HEAA") has not had a revenue deficiency which required New Jersey to
appropriate funds to meet its "moral obligation". It is anticipated that the
HEAA's revenues will be sufficient to cover debt service on its bonds.
Obligations Guaranteed by New Jersey. The New Jersey Sports and Exposition
Authority ("NJSEA") has issued New Jersey guaranteed bonds of which $111,910,000
are outstanding as of June 30, 1998. To date, the NJSEA has not had a revenue
deficiency requiring New Jersey to make debt service payments pursuant to its
guarantee. It is anticipated that the NJSEA's revenues will continue to be
sufficient to pay debt service on these bonds without recourse to New Jersey's
guarantee.
Obligations Supported by New Jersey Revenue Subject to Annual Appropriation. New
Jersey has entered into a number of leases and contracts described below
(collectively, the "Agreements") with several governmental authorities to secure
the financing of various New Jersey projects. Under the terms of the Agreements,
New Jersey has agreed to make payments equal to the debt service on, and other
costs related to, the obligations sold to finance the projects. New Jersey's
obligation to make payments under the Agreements is subject to and dependent
upon annual appropriations being made by the New Jersey Legislature for such
purposes. The New Jersey Legislature has no legal obligation to enact such
appropriations, but has done so to date for all such obligations.
New Jersey Economic Development Authority. Pursuant to legislation, the New
Jersey Economic Development Authority ("EDA") has been authorized to issue
Economic Recovery Bonds, State Pension Funding Bonds and Market Transition
Facility Bonds. The Economic Recovery Bonds have been issued pursuant to
legislation enacted during 1992 to finance various economic development
purposes. Pursuant to that legislation, the EDA and the New Jersey Treasurer
entered into an agreement through which the 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 subject to appropriation by the New Jersey Legislature.
The State Pension Funding Bonds have been issued pursuant to legislation enacted
in June 1997 to pay a portion of New Jersey's unfunded accrued pension liability
for its retirement system, 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 Market Transition Facility Bonds have been issued pursuant to legislation
enacted in June 1994 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.
In addition, New Jersey has entered into a number of leases with the EDA
relating to the financing of certain real property, office buildings and
equipment for (i) the New Jersey Performing Arts Center; (ii) Liberty State Park
in the City of Jersey City; (iii) various office buildings located in Trenton
known as the Trenton Office Complex; (iv) a facility located in Trenton; and (v)
certain energy saving equipment installed in various New Jersey office
buildings. The rental payments required to be made by New Jersey under these
lease agreements are sufficient to pay debt service on the 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.
New Jersey Building Authority. Legislation enacted in 1981 established the New
Jersey Building Authority ("NJBA") to undertake the acquisition, construction,
renovation and rehabilitation of various New Jersey office buildings, historic
build-
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ings, and correctional facilities. The NJBA finances the cost of such projects
through the issuance of bonds, the payment of debt service on which is made
pursuant to a lease between the NJBA and New Jersey.
New Jersey Educational Facilities Authority. The New Jersey Educational
Facilities Authority issues bonds pursuant to three separate legislative
programs, enacted in 1993 and 1997, to finance (i) the purchase of equipment to
be leased to institutions of higher learning; (ii) grants to New Jersey's public
and private institutions of higher education for the development, construction
and improvement of instructional, laboratory, communication and research
facilities; and (iii) grants to public and private institutions of higher
education to develop a technology infrastructure within and among the State's
institutions of higher education.
New Jersey Sports and Exposition Authority. Legislation enacted in 1992
authorizes the New Jersey Sports and Exposition Authority (the "NJSEA") to issue
bonds for various purposes payable from a contract between the NJSEA and the New
Jersey Treasurer (the "NJSEA State Contract"). Pursuant to the NJSEA State
Contract, the NJSEA undertakes certain projects and the New Jersey Treasurer
credits to the NJSEA amounts from the General Fund sufficient to pay debt
service and other costs related to the bonds.
State Transportation System Bonds. In July 1994, New Jersey created the New
Jersey Transportation Trust Fund Authority (the "TTFA"), an instrumentality of
New Jersey pursuant to the New Jersey Transportation Trust Fund Authority Act of
1984, as amended (the "TTFA Act") for the purpose of funding a portion of New
Jersey's share of the cost of improvements to its transportation system.
Pursuant to the TTFA Act, the principal amount of the TTFA's bonds, notes or
other obligations which may be issued in any fiscal year generally may not
exceed $700 million plus amounts carried over from prior fiscal years. The debt
issued by the TTFA are special obligations of the TTFA payable from a contract
among the TTFA, the New Jersey Treasurer and the Commissioner of Transportation.
New Jersey Transit Corporation Hudson-Bergen Light Rail Transit System. The TTFA
has entered into a Standby Deficiency Agreement (the "Standby Deficiency
Agreement") with the trustee for grant anticipation notes (see "GANS") issued by
New Jersey Transit Corporation ("NJT") for the financing of the construction of
the Hudson-Bergen Light Rail Transit System. The GANS are primarily payable from
Federal grant monies. To the extent that the GANS are not paid by NJT from
Federal grant monies, the GANS are payable by the TTFA pursuant to the Standby
Deficiency Agreement. To date, Federal grant payments have been sufficient such
that the TTFA has not been required to make payments pursuant to the Standby
Deficiency Agreement.
State of New Jersey Certificates of Participation. Beginning in April 1984, New
Jersey, acting through the Director of the Division of Purchase and Property,
has 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 New Jersey. Certificates of Participation in such
lease purchase agreements have been issued. A Certificate of Participation
represents a proportionate interest of the owner thereof in the lease payments
to be made by New Jersey under the terms of the lease purchase agreement.
New Jersey Supported School and County College Bonds. Legislation provides for
future appropriations for New Jersey Aid to local school districts equal to debt
service on bonds issued by such local school districts for construction and
renovation of school facilities (P.L. 1968, c. 177; P.L. 1971, c. 10; and P.L.
1978, c. 74) and for New Jersey Aid to counties equal to debt service on bonds
issued by counties for construction of county college facilities (P.L. 1971, c.
12, as amended). The New Jersey Legislature has no legal obligations to make
such appropriations, but has done so to date for all obligations issued under
these laws.
Community Mental Health Loan Program. The EDA issues revenue bonds from time to
time on behalf of non-profit community mental health service providers. The
payment of debt service on these revenue bonds as well as the payment of certain
other provider expenses is made by New Jersey pursuant to service contracts
between the State Department of Human Services and these providers. The
contracts have one year terms, subject to annual renewal.
State Pension Funding Bonds. Legislation enacted in June 1997 authorizes the EDA
to issue bonds to pay a portion of New Jersey's unfunded accrued pension
liability for New Jersey's retirement system (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 New Jersey
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 New Jersey
Legislature.
Municipal Finance. New Jersey's local finance system is regulated by various
statutes designated to assure that all local governments and their issuing
authorities remain on a sound financial basis. Regulatory and remedial statutes
are
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enforced by the Division of Local Government Services (the "Division") in the
New Jersey State Department of Community Affairs.
Counties and Municipalities. The Local Budget Law (N.J.S.A. 40A: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 of Local Government Services in the Department of
Community Affairs (the "Director"). The accounts of each local unit must be
independently audited by a registered municipal accountant. New Jersey 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. 40A: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 percent or an index rate
determined annually by the Director, whichever is less. However, where the index
percentage rate exceeds 5 percent, 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 percent, 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 percent. 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 New Jersey 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 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.
New Jersey 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. 40A: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
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 deduction") 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; (iii) authorized by a public body other than a
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
percent of the equalized valuation basis in the case of municipalities and 2
percent 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 New Jersey fiscal year in place of the existing calendar fiscal year.
Municipalities that
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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 may then issue Fiscal Year
Adjustment Bonds to finance the deficit on a permanent basis.
School Districts. 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 New Jersey supervision of
school finance closely parallels that of local governments.
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 districts, 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 New Jersey 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 Intervention Act"). The State-operated school
district, under the direction of a New Jersey 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
Intervention Act, on October 4, 1989, the New Jersey Board of Education ordered
the creation of a State-operated school district in the city of Jersey City.
Similarly, on August 7, 1991, the New Jersey Board of Education ordered the
creation of a State-operated school district in the City of Paterson, and on
July 5, 1995 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 appropriate
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 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 New Jersey
Commissioner of Education (the "Commissioner") to request changes.
In a Type II school district 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 has until May 19 in any year to determine
the amount necessary to be appropriated for each item appearing in such budget.
Should the governing body fail to certify any 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 Commissioner only if the Commissioner determines that
additional funds are required to provide a thorough and efficient education.
In State-operated school districts the New Jersey 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 New Jersey 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 New Jersey 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 (for further information relating to the Local Bond
Law, see "Municipal Finance-Counties and Municipalities" herein). Although
school districts are exempted from the 5 percent 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 New Jersey 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 percent of the average equalized valuation basis on the
constituent municipality. In certain cases involving school districts in cities
with populations exceeding 150,000, the debt limit is 8 percent of the average
equalized valuation basis of
17
<PAGE>
the constituent municipality, and in cities with population in excess of 80,000
the debt limit is 6 percent 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, 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 New Jersey 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.
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 by 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 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, the New Jersey 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, New Jersey urban aid, New Jersey revenue sharing,
and any other funds appropriated as New Jersey 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 New Jersey, and debt service on such
bonds will be provided by New Jersey only if the above mentioned appropriations
are made by New Jersey. Total outstanding indebtedness for "qualified bonds"
consisted of $327,981,850 by various school districts as of June 30, 1998 and
$932,410,709 by various municipalities as of June 30, 1998.
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 percent of the
aggregate outstanding bonded indebtedness of counties, municipalities or school
districts for school purposes (exclusive of bonds whose debt service is provided
by New Jersey 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. There has never been an
occasion to call upon this Fund. New Jersey provides support of certain bonds of
counties, municipalities and school districts through various statutes.
Local Financing Authorities. The Local Authorities Fiscal Control Law (N.J.S.A.
40A:5A-1 et seq.) provides for state supervision of the fiscal operations and
debt issuance practices of independent local authorities and special taxing
dis-
18
<PAGE>
tricts by the New Jersey 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 New Jersey 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 over
creation of new authorities and special districts as well as their dissolution.
The Local Finance Board 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 of the Division of Local
Government Services reviews and approves annual budgets of authorities and
special districts.
Litigation. At any given time, there are various numbers of claims and cases
pending against the State of New Jersey, New Jersey 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.).
New Jersey does not formally estimate its reserve representing potential
exposure for these claims and cases. New Jersey is unable to estimate its
exposure for these claims and cases.
New Jersey routinely receives notices of claims seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against New Jersey must be preceded
by a notice of claim, which affords New Jersey the opportunity for a six-month
investigation prior to the filing of any suit against it. 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 $85,300,000 for tort and medical malpractice claims
pending as of December 31, 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. New Jersey is unable to
estimate its exposure for these claims.
Other lawsuits presently pending or threatened in New Jersey that have the
potential for either a significant loss of revenue or significant unanticipated
expenditures include the following:
Interfaith Community Organization v. Shinn, a suit filed by a coalition of
churches and church leaders in Hudson County against the Governor, the
Commissioners of the Department of Environmental Protection and the Department
of Health, concerning chromium contamination in Liberty State Park in Jersey
City.
American Trucking Associations, Inc. and Tri-State Motor Transit Co. v. State of
New Jersey, challenging the constitutionality of annual hazardous and solid
waste licensure fees collected by the Department of Environmental Protection,
seeking permanent injunction enjoining future collection of fees and refund of
all renewal fees, fines and penalties collected.
Buena Regional Commercial Township et al. v. New Jersey Department of Education
et al., a lawsuit filed 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 Abbot v. Burke, which included, without limitation, sufficient
funds to allow the school districts to spend at the average of wealthy suburban
school districts, to implement additional programs and to upgrade school
facilities. The Buena school districts are seeking to be treated as special
needs districts and to receive parity funding with the Abbot school districts as
a remedial measure. They also are seeking additional funding as may be necessary
to provide an educational equivalent to that being provided in the Abbot
districts.
Berner Stabaus, et al. v. State of New Jersey, et al. Plaintiffs, 25 middle
income school districts, have filed a complaint alleging that New Jersey's
system of funding for their schools is violative of the constitutional rights of
equal protection and a thorough and efficient education.
Affiliated FM Insurance Company v. State of New Jersey, an action by certain
members of the New Jersey Property-Liability Insurance Guaranty Association
challenging the constitutionality of assessments used for the Market Transition
Fund and seeking repayment of assessments paid since 1990. On July 28, 1997, the
court denied plaintiff's application for emergent relief, denied New Jersey's
motion for summary disposition and granted plaintiff's motion to accelerate. The
Appellate Division has affirmed the assessment. Appellant's petition for
certification to the New Jersey Supreme Court has been denied.
19
<PAGE>
C.F. v. Terhune (formerly Fauver), a class action in federal district court by
prisoners with serious mental disorders who are confined within the facilities
of the New Jersey Department of Corrections seeking injunctive relief in the
form of changes to the manner in which mental health services are provided to
inmates.
Cleary v. Waldman, the Medicare Catastrophic Coverage Act, which provides
spouses of institutionalized individuals sufficient funds to live in the
community, requires that a certain system be used to provide the funds.
Plaintiffs claim that another system is being used instead. Estimates of
exposure if the Court were to find for the plaintiffs are in the area of $50
million per year from both New Jersey and Federal sources combined. Plaintiffs'
motion for a preliminary injunction was denied and is being appealed.
Subsequently, plaintiffs filed for class certification which was granted.
United Hospitals v. State of New Jersey, 18 New Jersey hospitals are challenging
the Medicaid reimbursements made since February 1995 claiming that New Jersey
failed to comply with certain federal requirements, the reimbursements
regulations are arbitrary, capricious and unreasonable, rates were incorrectly
calculated, the hospitals were denied due process, the Medicaid reimbursement
provisions violate the New Jersey Constitution, and Medicaid State Plan was
violated by the New Jersey Department of Human Services implementation of
hospital rates in 1995 and 1996.
Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Incorporated, the
plaintiff is suing Mirage Resorts and New Jersey in an attempt to enjoin their
efforts to build a highway and tunnel funded by Mirage Resorts and $55 million
in bonds collateralized by future casino obligations, claiming that the project
violates the New Jersey Constitution provision that requires all revenues the
state receives from gaming operations to benefit the elderly and disabled. The
plaintiff also claims (i) the failure to disclose this constitutional infirmity
is a material omission within the meaning of Rule 10B-5 of the Securities and
Exchange Act of 1934, (ii) the defendants have sought to avoid the requirements
of the Clean Water Act, Clean Air Act, Federal Highway Act and the New Jersey
Coastal Area Facility Review Act. On May 1, 1997, the federal district court
granted the defendants' motion to dismiss and the Third Circuit has affirmed the
District Court's determinations. In a related action, State of New Jersey v.
Trump Hotels & Casino Resorts, Inc., New Jersey filed a declaratory judgment
action seeking a declaration that New Jersey statutory provisions existed that
permitted use of certain funds to be used for other purposes than the elderly or
disabled. Declaratory judgment was entered in favor of New Jersey on May 14,
1997 and the Appellate Division has affirmed the decision on April 8, 1998.
United Alliance v. State of New Jersey, plaintiffs allege that the Casino
Reinvestment Development Authority funding mechanisms are illegal including the
gross receipts tax, the parking tax, and the Atlantic City fund. This matter has
been placed on the inactive list. Five additional cases have been filed in
opposition to the road and tunnel project which also contain related challenges.
Merolla and Brandy v. Casino Reinvestment Development Authority, Middlesex
County v. Casino Reinvestment Development Authority, Gallagher v. Casino
Reinvestment Development Authority and George Harms v. State of New Jersey.
Summary judgment has been granted in favor of New Jersey or its agencies in
Merolla, Middlesex and Gallagher but the plaintiffs have filed an appeal.
Blecker v. State of New Jersey, a class action filed on behalf of providers of
Medicare Part B services to Qualified Medicare Beneficiaries seeking
reimbursement for Medicare co-insurance and deductibles not paid by the New
Jersey Medicaid program from 1988 to February 10, 1995. Plaintiffs claim a
breach of contract and violation of federal civil rights laws. On August 11,
1997, New Jersey filed a motion to dismiss the matter and on September 15, 1997,
it filed a motion for summary judgment. Both motions were granted on April 3,
1998 and the plaintiff has filed an appeal.
Camden County Energy Recovery Associates v. New Jersey Department of
Environmental Protection, the plaintiff owns and operates a resource facility in
Camden County and has filed suit seeking to have the solid waste reprocurement
process halted to clarify bid specification. The court did not halt the bid
process but did require clarifications. Co-defendant Pollution Control Financing
Authority of Camden County counterclaimed, seeking reformation of the contract
between it and the plaintiff and cross-claimed against New Jersey for
contribution and indemnification.
Communications Workers of America, et al. v. James A. DiEleuterio, Jr., et al.
Appellants in this case have filed an appeal from the decision of the New Jersey
Treasurer to award a contract for the design, construction, and operation and
maintenance of the New Jersey motor vehicle inspection system. New Jersey
estimates that unless the new inspection system is operational by December 12,
1999, New Jersey may be exposed to significant Federal sanctions, including the
loss of Federal transportation funds and the Federal imposition of stricter
pollution standards that will restrict economic development in New Jersey.
Sojourner A. et al. v. Dept. of Human Services. The plaintiffs in this action
filed a complaint and motion for preliminary injunction, seeking damages and
declaratory and injunctive relief overturning, on New Jersey Constitutional
grounds, the "family cap" provisions of the New Jersey Work First New Jersey Act
N.J.S.A. 44:10-1 et seq.
20
<PAGE>
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
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 investment manager of the Fund. 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 or officers of the Manager or employees of the Manager or its
affiliates.
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. James A. 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. Unless otherwise stated, the
address for each individual is 120 Broadway, New York, New York 10271.
James A. Lebenthal, 71 - 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, President of Lebenthal, The Ad Agency, Inc.
since 1978, and Chairman of Lebenthal the Insurance Agency.
Victor Chang, 61 - 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, 50 - Director of the Fund, is founder and Chairman since
March, 1995 of N/W Capital, Inc., a principal and financial advisory firm. 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, 35 - President of the Fund, President of Lebenthal & Co.,
Inc. since 1995, and President of Lebenthal the Insurance Agency. 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 a B.A. in U.S.
History.
Deirdre McCourt, 35 - Secretary of the Fund, has been employed by Lebenthal &
Co., Inc. since 1989.
James E. McGrath, 48 - 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.
The table below illustrates that the Portfolios paid an aggregate remuneration
of $8,000 to their disinterested directors with respect to the period ended
November 30, 1998, pursuant to the terms of the Investment Management Contract
(see "Investment Advisory and Other Services" herein).
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Name of Person, Aggregate Pension or Retirement Estimated Annual Total Compensation From
Position Compensation From Benefits Accrued as Benefits Upon Fund Complex Paid to
Registrant for Fiscal Part of Fund Expenses Retirement Directors*
Year
- ------------------------------------------------------------------------------------------------------------------------------------
Victor Chang, $4,000 0 0 $4,000
Director
- ------------------------------------------------------------------------------------------------------------------------------------
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, 1998. The Fund Complex consists of the three Portfolios of
the Fund.
21
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
On February 26, 1999 there were 17,758,760, 370,672, 1,346,186 and 2,291,448
shares of the New York - Class A Portfolio, New York - Class B Portfolio, New
Jersey Portfolio, and Taxable Portfolio outstanding, respectively. As of
February 26, 1999, the amount of shares owned by all officers and directors of
the Fund, as a group, was less than 1% of the outstanding shares. Set forth
below is certain information as to persons who owned 5% or more of the Fund's
outstanding shares as of February 26, 1999:
- --------------------------------------------------------------------------------
Nature of
Name and Address % of Class Ownership
- --------------------------------------------------------------------------------
Lebenthal New York Class B Shares
Paul Mastrangelo & Patricia Berardi
45-26 164th Street
Flushing, NY 11358 6.05% Beneficial
Munir Nader & Barbara Nader
80-14 41st Avenue
Apt 532
Elmhurst, NY 11373 7.88% Beneficial
Lebenthal Taxable Municipal Bond Fund
Barouh Eaton Allen Corp.
67 Kent Avenue
Brooklyn, New York 11211 9.40% Beneficial
INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------------------------------------------------
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 as of November 30, 1998 manager, advisor or supervisor with respect to
assets aggregating in excess of $252 million.
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 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.
The Management Contracts for each Portfolio were most recently approved by the
Board of Directors, including a majority of the directors who are not interested
persons (as defined in the 1940 Act) of the Fund or the Distributor, on July 30,
1998 for the New York Portfolio, the Taxable Portfolio and the New Jersey
Portfolio. The Management Contracts for each 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,
1999, 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. In either case, a majority of the
directors, who are not parties to the Management Contracts or interested persons
of any such party, must cast votes 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.
22
<PAGE>
FEES PAID TO THE MANAGER
- --------------------------------------------------------------------------------
Fiscal Year Ended November 30,
Portfolio 1998 1997 1996
- --------------------------------------------------------------------------------
New York
o Fee paid to Manager $327,319 $288,050 $266,395
o Net Assets $150,473,336 $134,144,060 $122,611,313
- --------------------------------------------------------------------------------
New Jersey
o Fee paid to Manager $19,473 $13,639(1) $10,708(1)
o Net Assets $9,042,143 $6,121,584 $5,182,149
- --------------------------------------------------------------------------------
Taxable
o Fee paid to Manager $40,186 $35,804(1) $30,632
o Net Assets $17,789,079 $14,993,874 $14,607,185
- --------------------------------------------------------------------------------
(1) Entire fee was waived.
Expense Limitation.
The Manager has agreed to reimburse the New Jersey Portfolio and the Taxable
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 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 New Jersey Portfolio and the
Taxable 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 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
23
<PAGE>
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, and (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
- --------------------------------------------------------------------------------
Fiscal Year Ended November 30,
Portfolio 1998 1997 1996
- --------------------------------------------------------------------------------
New York $139,816 $7,511 $15,642
New Jersey $143,014 $6,213 $16,453
Taxable $144,407 $5,398 $13,311
- --------------------------------------------------------------------------------
The Administration Agreement has an initial term which extends to December 1,
1999. 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.
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.
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO 64105, independent
accountants, have been selected as auditors for the Fund.
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 retains State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02111, to perform transfer agency related services
for the Fund.
DISTRIBUTION AND SERVICE PLANS
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission requires 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").
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Portfolios 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 forth all amounts expended for distribution purposes by the
Portfolio and the Distributor pursuant to the Plan and identifying the
distribution activities for which those expenditures were made.
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
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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 and can be used to provide
shareholder servicing and for the maintenance of shareholder accounts. The
Distribution Agreement also 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 performing 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.
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 for the Class A Shares on May 21, 1998 to be effective until April 30,
1999. The Plan was most recently approved by the shareholders of the Portfolio
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 27, 1998. 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, 1998, the total
amount spent pursuant to the Plan with respect to Class A Shares was $127,649,
all of which was paid by the Portfolio to the Distributor pursuant to the
Distribution Agreement. Of the total amount paid to the Distributor, the
Distributor utilized $118,619 on compensation to sales personnel and $9,030 on
Prospectus printing. With respect to Class B Shares, the total amount spent
pursuant to the Plan was $1,783, 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 to be an indirect payment by the
Portfolio). Of the total amount paid to the Distributor, the Distributor
utilized $1,783 on compensation to sales personnel. The New York Portfolio had
no unreimbursed expenses in a previous fiscal year which were carried forward to
a subsequent fiscal year. 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. 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. 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.
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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 (i) shareholder servicing and maintenance of
shareholder accounts and (ii) 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 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 October 27, 1998 to be effective until October 30, 1999. The Plan
was most recently approved by the shareholders of each Portfolio 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, 1998, the total
amount spent pursuant to the Plan was $6,194, all of which was paid by the
Portfolio to the Distributor pursuant to the Distribution agreement. Of the
total amount paid to the Distributor, the Distributor utilized $6,194 on
compensation to sales personnel. 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. 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 Taxable Portfolio's fiscal year ended November 30, 1998, the total
amount spent pursuant to the Plan was $14,363, all of which was paid by the
Portfolio to the Distributor pursuant to the Distribution Agreement. Of the
total
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<PAGE>
amount paid to the Distributor, the Distributor utilized $14,363 on compensation
to sales personnel. 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.
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).
The New Jersey and Taxable Portfolios had no unreimbursed expenses in a previous
fiscal year which were carried over to subsequent years.
BROKERAGE ALLOCATION AND OTHER PRACTICES
- --------------------------------------------------------------------------------
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.
CAPITAL STOCK AND OTHER SECURITIES
- --------------------------------------------------------------------------------
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 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.
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.
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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 (i) for the election of directors, (ii) for approval of the Funds'
revised investment advisory agreement with respect to a particular class or
series of stock, (iii) for approval of revisions to the Fund's distribution
agreement with respect to a particular class or series of stock, and (iv) 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.
PURCHASE, REDEMPTION, AND PRICING OF FUND SHARES
- --------------------------------------------------------------------------------
The material relating to the purchase and redemption of shares in the Prospectus
is herein incorporated by reference.
TAXATION OF THE FUND
- --------------------------------------------------------------------------------
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 who are not subject to
special tax treatment, such as securities dealers, financial institutions,
insurance companies and 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 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.
The New York Portfolio and the New Jersey Portfolio
The New York Portfolio and the New Jersey Portfolio (a "Tax-exempt Fund" and
collectively, the "Tax-exempt Funds") have each elected to qualify under the
Internal Revenue Code of 1986 as amended, (the "Code"), and the New York
Portfolio has elected to qualify 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 the share while it 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, including
interest on margin debt, is not deductible. 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
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<PAGE>
income for purposes of computing the amount of Social Security benefits
includable in gross income. The amount of tax exempt interest received will have
to be disclosed on the shareholders' Federal income tax returns. Further,
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 is 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 any post-August 7, 1986 private activity bonds 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 their adjusted current earnings
(including tax-exempt interest) exceeds their 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 will 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.
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. Ordinary income is
currently subject to a maximum individual tax rate of 39.6%. 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 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. 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 securities. 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. 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 20% to non-corporate shareholders
who have a holding period of more than 12 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.
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
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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 can 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 is introduced and enacted in the future, the
ability of the Tax-exempt Funds to pay exempt-interest dividends will be
adversely affected and each Tax-exempt Fund will reevaluate its investment
objectives and policies and consider changes in its structure.
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
interests 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 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. Ordinary income is currently subject to a maximum individual tax
rate of 39.6%. 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. 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 securities.
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. 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 20% to non-corporate shareholders who have a
holding period of more than 12 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.
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 Tax Reform Act of 1986 contains 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 provides 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.
30
<PAGE>
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.
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 (i) 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; (ii) whether the investment satisfies the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (iii) 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.
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 i) 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 ii) 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 obligations issued by or on behalf of the State of New
Jersey or any county, municipality or other political subdivision of the State
of New Jersey ("New Jersey State-Specific Obligations") or obligations which are
statutorily free from New Jersey state or local taxation under the laws of the
United States ("U.S. Government 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, i)
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 State-Specific Obligations or U.S.
Government Obligations and ii) 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 to the extent that the gain is attributable to
investments in New Jersey State-Specific Obligations or U.S. Government
Obligations. 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.
31
<PAGE>
UNDERWRITERS
- --------------------------------------------------------------------------------
The Fund sells and redeems its shares on a continuing basis at their net asset
value. In effecting sales of Fund shares under the Distribution Agreement, the
Distributor, as agent for the Fund, will solicit orders for the purchase of the
Fund's shares, provided that any subscriptions and orders will not be binding on
the Fund until accepted by the Fund as principal.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. In the opinion of the Manager,
however, based on the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Directors will
consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution will result in loss to shareholders or change in
the Fund's net asset value. 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.
CALCULATION OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
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. 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 New Jersey Portfolio or 4.50%
for the Taxable 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.
<TABLE>
<CAPTION>
PERFORMANCE DATA
- ------------------------------------------------------------------------------------------------------------------------------------
Average Annual
Total Return For Compounded Total
Twelve Months Return Since 30-day Taxable 30-day Taxable 30-day Taxable
Ended Inception to Equivalent Yield for Equivalent Yield
Portfolio November 30, 1998 November 30, 1998 State Residents (Federal only)
- ------------------------------------------------------------------------------------------------------------------------------------
New York
<S> <C> <C> <C> <C>
(inception June 24, 1991) 2.84% 7.46% 5.61% 5.22%
- ------------------------------------------------------------------------------------------------------------------------------------
New Jersey
(inception December 1, 1993) 3.59% 4.38% 6.68% 6.26%
- ------------------------------------------------------------------------------------------------------------------------------------
Taxable
(inception December 1, 1993) 6.82% 8.06% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
32
<PAGE>
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 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 the 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 will have to receive in
order to realize the same level of after-tax yield as an investment in such a
Portfolio will produce. 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.
Tax Equivalent Yield
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
will have to receive in order to realize the same level of after-tax yield as an
investment in such Portfolio will produce. 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.
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.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited financial statements for the Fund for the fiscal year ended November
30, 1998 are herein incorporated by reference.
DESCRIPTION OF SECURITY RATINGS AND NOTES
- --------------------------------------------------------------------------------
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.
33
<PAGE>
A: Bonds which are rated A possess many favorable investment attributes and are
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.
Standard & Poor's Rating Services, a division of The McGraw-Hill Companies
("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, in 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
34
<PAGE>
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 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
35
<PAGE>
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.
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 can cause these securities to be rated below
investment grade.
36
<PAGE>
<TABLE>
<CAPTION>
Table I- Federal tax exemption alone
If your net taxable Your TO MATCH A TAX FREE RETURN OF
Income in 1999 is Federal
Tax
Bracket is
----------- ------------- ------------ ------------ -----------
3.25% 3.50% 4.00% 4.50% 5.00%
----------- ------------- ------------ ------------ -----------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C> <C> <C> <C>
$0 - $43,050 $0-$25,750 15% 3.8% 4.1% 4.7% 5.3% 5.9%
$43,051 - $104,050 $25,751 - $62,450 28% 4.5% 4.9% 5.6% 6.3% 6.9%
$104,051 - $158,550 $62,451 - $130,250 31% 4.7% 5.1% 5.8% 6.5% 7.2%
$158,551 - $283,150 $130,251 - $283,150 36% 5.1% 5.5% 6.3% 7.0% 7.8%
$283,151- $283,151- 39.6% 5.4% 5.8% 6.6% 7.5% 8.3%
- ------------------------ --------------------- ------------- ----------- ------------- ------------ ------------ -----------
If your net taxable Your TO MATCH A TAX FREE RETURN OF
Income in 1999 is Federal
Tax
Bracket is
----------- --------- ---------- ---------- ---------- --------
5.25% 5.50% 5.75% 6.00% 6.25% 6.50%
----------- --------- ---------- ---------- ---------- --------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$0 - $43,050 $0-$25,750 15% 6.2% 6.5% 6.8% 7.1% 7.4% 7.6%
$43,051 - $104,050 $25,751 - $62,450 28% 7.3% 7.6% 8.0% 8.3% 8.7% 9.0%
$104,051 - $158,550 $62,451 - $130,250 31% 7.6% 8.0% 8.3% 8.7% 9.1% 9.4%
$158,551 - $283,150 $130,251 - $283,150 36% 8.2% 8.6% 9.0% 9.4% 9.8% 10.2%
$283,151- $283,151- 39.6% 8.7% 9.1% 9.5% 9.9% 10.3% 10.8%
- ------------------------ --------------------- ------------------------ --------- ---------- ---------- ---------- --------
<PAGE>
If your net taxable Your TO MATCH A TAX FREE RETURN OF
Income in 1999 is Federal
Tax
Bracket is
-------- --------
6.75% 7.00%
-------- --------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C>
$0 - $43,050 $0-$25,750 15% 7.9% 8.2%
$43,051 - $104,050 $25,751 - $62,450 28% 9.4% 9.7%
$104,051 - $158,550 $62,451 - $130,250 31% 9.8% 10.1%
$158,551 - $283,150 $130,251 - $283,150 36% 10.5% 10.9%
$283,151- $283,151- 39.6% 11.2% 11.6%
- ------------------------ --------------------- ------------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Table II - The value of a double exemption from Federal & New Jersey Income Tax
If your net taxable Your TO MATCH A TAX-FREE RETURN OF
Income in 1999 is Combined
Federal &
NJ Tax
Bracket is
---------- ------------- ------------ ------------ -----------
3.25% 3.50% 4.00% 4.50% 5.00%
---------- ------------- ------------ ------------ -----------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C> <C> <C> <C>
$20,001 - $43,050 $20,001 - $25,750 16.49% 3.9% 4.2% 4.8% 5.4% 6.0%
$43,051 - $50,000 $25,751 - $35,000 29.26% 4.6% 4.9% 5.7% 6.4% 7.1%
$50,001 - $70,000 -- 29.76% 4.6% 5.0% 5.7% 6.4% 7.1%
$70,001 - $80,000 $35,001 - $40,000 30.52% 4.7% 5.0% 5.8% 6.5% 7.2%
$80,001 - $104,050 $40,001 - $62,450 31.98% 4.8% 5.1% 5.9% 6.6% 7.4%
$104,051 - $150,000 $62,451 - $75,000 34.81% 5.0% 5.4% 6.1% 6.9% 7.7%
$150,001 - $158,550 $75,001 - $130,250 35.40% 5.0% 5.4% 6.2% 7.0% 7.7%
$158,551 - $283,150 $130,251 - $283,150 40.08% 5.4% 5.8% 6.7% 7.5% 8.3%
$283,151- $283,151- 43.45% 5.7% 6.2% 7.1% 8.0% 8.8%
If your net taxable Your TO MATCH A TAX-FREE RETURN OF
Income in 1999 is Combined
Federal &
NJ Tax
Bracket is
----------- --------- ---------- ---------- ---------- --------
5.25% 5.50% 5.75% 6.00% 6.25% 6.50%
----------- --------- ---------- ---------- ---------- --------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$20.001 - $43,050 $20,001 - $25,750 16.49% 6.3% 6.6% 6.9% 7.2% 7.5% 7.8%
$43,051 - $50,000 $25,751 - $35,000 29.26% 7.4% 7.8% 8.1% 8.5% 8.8% 9.2%
$50,001 - $70,000 -- 29.76% 7.5% 7.8% 8.2% 8.5% 8.9% 9.3%
$70,001 - $80,000 $35,001 - $40,000 30.52% 7.6% 7.9% 8.3% 8.6% 9.0% 9.4%
$80,001 - $104,050 $40,001 - $62,450 31.98% 7.7% 8.1% 8.5% 8.8% 9.2% 9.6%
$104,051 - $150,000 $62,451 - $75,000 34.81% 8.1% 8.4% 8.8% 9.2% 9.6% 10.0%
$150,001 - $158,550 $75,001 - $130,250 35.40% 8.1% 8.5% 8.9% 9.3% 9.7% 10.1%
$158,551 - $283,150 $130,251 - $283,150 40.08% 8.8% 9.2% 9.6% 10.0% 10.4% 10.8%
$283,151- $283,151- 43.45% 9.3% 9.7% 10.2% 10.6% 11.1% 11.5%
If your net taxable Your TO MATCH A TAX-FREE RETURN OF
Income in 1999 is Combined
Federal &
NJ Tax
Bracket is
-------- --------
6.75% 7.00%
-------- --------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C>
$20.001 - $43,050 $20,001 - $25,750 16.49% 8.1% 8.4%
$43,051 - $50,000 $25,751 - $35,000 29.26% 9.5% 9.9%
$50,001 - $70,000 -- 29.76% 9.6% 10.0%
$70,001 - $80,000 $35,001 - $40,000 30.52% 9.7% 10.1%
$80,001 - $104,050 $40,001 - $62,450 31.98% 9.9% 10.3%
$104,051 - $150,000 $62,451 - $75,000 34.81% 10.4% 10.7%
$150,001 - $158,550 $75,001 - $130,250 35.40% 10.4% 10.8%
$158,551 - $283,150 $130,251 - $283,150 40.08% 11.3% 11.7%
$283,151- $283,151- 43.45% 11.9% 12.4%
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Table III - The value of a double exemption from Federal & NYS Income Tax
If your net taxable Your TO MATCH A TAX FREE RETURN OF
Income in 1999 is Combined
Federal &
NYS Tax
Bracket is
---------- ------------- ------------ ------------ -----------
3.25% 3.50% 4.00% 4.50% 5.00%
---------- ------------- ------------ ------------ -----------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C> <C> <C> <C>
$26,001 - $40,000 $13,001 - $20,000 20.02% 4.1% 4.4% 5.0% 5.6% 6.3%
$40,001 - $43,050 $20,001 - $25,750 20.82% 4.1% 4.4% 5.1% 5.7% 6.3%
$43,051 - $104,050 $25,751 - $62,450 32.93% 4.8% 5.2% 6.0% 6.7% 7.5%
$104,051 - $158,550 $62,451 - $130,250 35.73% 5.1% 5.4% 6.2% 7.0% 7.8%
$158,551 - $283,150 $130,251 - $283,150 40.38% 5.5% 5.9% 6.7% 7.5% 8.4%
$283,151- $283,151 43.74% 5.8% 6.2% 7.1% 8.0% 8.9%
If your net taxable Your TO MATCH A TAX FREE RETURN OF
Income in 1999 is Combined
Federal &
NYS Tax
Bracket is
----------- --------- ---------- ---------- ---------- --------
5.25% 5.50% 5.75% 6.00% 6.25% 6.50%
----------- --------- ---------- ---------- ---------- --------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$26,001 - $40,000 $13,001 - $20,000 20.02% 6.6% 6.9% 7.2% 7.5% 7.8% 8.1%
$40,001 - $43,050 $20,001 - $25,750 20.82% 6.6% 6.9% 7.3% 7.6% 7.9% 8.2%
$43,051 - $104,050 $25,751 - $62,450 32.93% 7.8% 8.2% 8.6% 8.9% 9.3% 9.7%
$104,051 - $158,550 $62,451 - $130,250 35.73% 8.2% 8.6% 8.9% 9.3 9.7% 10.1%
$158,551 - $283,150 $130,251 - $283,150 40.38% 8.8% 9.2% 9.6% 10.1% 10.5% 10.9%
$283,151- $283,151 43.74% 9.3% 9.8% 10.2% 10.7% 11.1% 11.6%
If your net taxable Your TO MATCH A TAX FREE RETURN OF
Income in 1999 is Combined
Federal &
NYS Tax
Bracket is
-------- --------
6.75% 7.00%
-------- --------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C>
$26,001 - $40,000 $13,001 - $20,000 20.02% 8.4% 8.8%
$40,001 - $43,050 $20,001 - $25,750 20.82% 8.5% 8.8%
$43,051 - $104,050 $25,751 - $62,450 32.93% 10.1% 10.4%
$104,051 - $158,550 $62,451 - $130,250 35.73% 10.5% 10.9%
$158,551 - $283,150 $130,251 -$283,150 40.38% 11.3% 11.7%
$283,151- $283,151 43.74% 12.0% 12.4%
</TABLE>
<TABLE>
<CAPTION>
Table IV - The value of a triple exemption from Federal, NYS & NYC Taxes
If your net taxable Your Combined TO MATCH A TAX FREE RETURN OF
Income in 1999 is Federal,
NYS & NYC
Tax Bracket
is
----------- ------------- ------------ ------------ -----------
3.25% 3.50% 4.00% 4.50% 5.00%
----------- ------------- ------------ ------------ -----------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C> <C> <C> <C>
$26,001 - $40,000 $13,001 - $20,000 23.17% 4.2% 4.6% 5.2% 5.9% 6.5%
$40,001 - $43,050 $20,001 - $25,000 23.98% 4.3% 4.6% 5.3% 5.9% 6.6%
-- $25,001 - $25,750 24.03% 4.3% 4.6% 5.3% 5.9% 6.6%
$43,051 - $45,000 -- 35.61% 5.0% 5.4% 6.2% 7.0% 7.8%
$45,001 - $90,000 $25,751 - $50,000 35.65% 5.1% 5.4% 6.2% 7.0% 7.8%
$90,000 - $104,050 $50,001 - $62,450 35.69% 5.1% 5.4% 6.2% 7.0% 7.8%
$104,051 - $158,550 $62,451 - $130,250 38.37% 5.3% 5.7% 6.5% 7.3% 8.1%
$158,551 - $283,150 $130,251- $283,150 42.83% 5.7% 6.1% 7.0% 7.9% 8.8%
$283,151 - $283,151 - 46.05% 6.0% 6.5% 7.4% 8.3% 9.3%
If your net taxable Your Combined TO MATCH A TAX FREE RETURN OF
Income in 1999 is Federal, NYS &
NYC Tax
Bracket is
----------- --------- ---------- ---------- ---------- --------
5.25% 5.50% 5.75% 6.00% 6.25% 6.50%
----------- --------- ---------- ---------- ---------- --------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$26,001 - $40,000 $13,001 - $20,000 23.17% 6.8% 7.2% 7.5% 7.8% 8.1% 8.5%
$40,001 - $43,050 $20,001 - $25,000 23.98% 6.9% 7.2% 7.6% 7.9% 8.2% 8.6%
-- $25,001 - $25,750 24.03% 6.9% 7.2% 7.6% 7.9% 8.2% 8.6%
$43,051 - $45,000 -- 35.61% 8.2% 8.5% 8.9% 9.3% 9.7% 10.1%
$45,001 - $90,000 $25,751 - $50,000 35.65% 8.2% 8.5% 8.9% 9.3% 9.7% 10.1%
$90,000 - $104,050 $50,001 - $62,450 35.69% 8.2% 8.6% 8.9% 9.3% 9.7% 10.1%
$104,051 - $158,550 $62,451 - $130,250 38.37% 8.5% 8.9% 9.3% 9.7% 10.1% 10.6%
$158,551 - $283,150 $130,251 -$283,150 42.83% 9.2% 9.6% 10.1% 10.5% 10.9% 11.4%
$283,151 - $283,151 - 46.05% 9.7% 10.2% 10.7% 11.1% 11.6% 12.1%
If your net taxable Your Combined TO MATCH A TAX FREE RETURN OF
Income in 1999 is Federal, NYS &
NYC Tax
Bracket is
-------- --------
6.75% 7.00%
-------- --------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
<S> <C> <C> <C> <C>
$26,001 - $40,000 $13,001 - $20,000 23.17% 8.8% 9.1%
$40,001 - $43,050 $20,001 - $25,000 23.98% 8.9% 9.2%
-- $25,001 - $25,750 24.03% 8.9% 9.2%
$43,051 - $45,000 -- 35.61% 10.5% 10.9%
$45,001 - $90,000 $25,751 - $50,000 35.65% 10.5% 10.9%
$90,000 - $104,050 $50,001 - $62,450 35.69% 10.5% 10.9%
$104,051 - $158,550 $62,451 - $130,250 38.37% 11.0% 11.4%
$158,551 - $283,150 $130,251 -$283,150 42.83% 11.8% 12.2%
$283,151 - $283,151 - 46.05% 12.5% 13.0%
</TABLE>
38
<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.
Past performance is no guarantee of future results, and no particular level of
fund performance can be assured. But to 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 can 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.
(i)
<PAGE>
