As filed with the Securities and Exchange Commission on January 29, 1999
Registration No. 33-36784
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20449
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 16 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 18 [X]
(Check appropriate box or boxes)
LEBENTHAL FUNDS, INC.
---------------------
(Exact Name of Registrant as Specified in Charter)
c/o Lebenthal Asset Management, Inc.
120 Broadway
New York, New York 10271
------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 425-6116
--------------
Alexandra Lebenthal Copy to: MICHAEL ROSELLA, ESQ.
Lebenthal & Co., Inc. Battle Fowler LLP
120 Broadway 75 East 55th Street
New York, New York 10271 New York, New York 10022
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering _______________
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on [ ] pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
798318.1
<PAGE>
LEBENTHAL FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 404(c)
Part A
Item No. Prospectus Heading
- -------- ------------------
1. Front and Back Cover Pages........... Cover Page; Back Page
2. Risk/Return Summary; Investments,.... Risk/Return Summary; Investments,
Risks, and Performance............... Risks, and Performance
3. Risk/Return Summary: Fee Table....... Fee Table
4. Investment Objectives, Principal Investment Objectives, Principal
Investment Strategies, and Investment Strategies, and Related
Related Risks........................ Risks
5. Management's Discussion of
Fund Performance..................... Not Applicable
6. Management, Organization, and Management, Organization and Capital
Capital Structure.................... Structure
7. Shareholder Information.............. Shareholder Information
8. Distribution Arrangements............ Distribution Arrangements
9. Financial Highlights
Information.......................... Financial Highlights
798318.1
ii
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Part B Caption in Statement of
Item No. Additional Information
- -------- -----------------------
10. Cover Page and Table of
Contents.............................. Cover Page and Table of Contents
11. Fund History.......................... Fund History
12. Description of the Fund and Description of the Fund and Its
Its Investments and Risks............. Investments and Risks
13. Management of the Fund................ Management of the Fund
14. Control Persons and Principal Control Persons and Principal
Holders of Securities................. Holders of Securities
15. Investment Advisory and Investment Advisory and Other
Other Services........................ Services
16. Brokerage Allocation and Brokerage Allocation and Other
Other Practices....................... Practices
17. Capital Stock and Other
Securities............................ Capital Stock and Other Securities
18. Purchase, Redemption and Pricing Purchase, Redemption and Pricing of
of Shares............................. Shares
19. Taxation of the Fund.................. Taxation of the Fund
20. Underwriters.......................... Underwriters
21. Calculations of Performance
Data.................................. Calculations of Performance Data
22. Financial Statements.................. Financial Statements
798318.1
iii
<PAGE>
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
Lebenthal New Jersey Municipal Bond Fund
Lebenthal Taxable Municipal Bond Fund
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary........................... Distribution Arrangements.....................
Investment Objectives, Principal Investment Letter of Intent..............................
Strategies and Related Risks............... More Information on the Municipal Market......
Management, Organization and Capital Financial Highlights..........................
Structure..................................
Shareholder Information.......................
Tax Consequences...........................
</TABLE>
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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.
<PAGE>
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RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
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 long-term, investment grade,
domestic municipal debt obligations usually referred to as
Municipal Obligations.
/ / The New York Portfolio intends to concentrate
(e.g. 25% or more of the Portfolio's net assets) primarily
in tax-exempt New York Municipal Obligations.
/ / The New Jersey Portfolio intends to concentrate (e.g.
25% or more of the Portfolio's net assets) primarily in
tax-exempt New Jersey Municipal Obligations.
/ / The Taxable Portfolio intends to concentrate (e.g. 25%
or more of the Portfolio's net assets) primarily in taxable
Municipal Obligations.
PRINCIPAL INVESTMENT RISKS * There can be no assurance that the Portfolios'
investment objectives will be achieved.
* You may lose money by investing in this Fund.
* The Portfolios are subject to market risk.
* Securities with longer maturities are more likely to
lead to a greater degree of market fluctuations in the value
of such securities than do securities with shorter
maturities.
* The 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.
* 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.
* 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.
* Investors of each Portfolio should consider the greater
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
risk of the Portfolio's concentration versus the safety that
comes with a less concentrated portfolio.
* Each Portfolio is concentrated in Municipal
Obligations. 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.
* 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 resident
individual investors who may be looking for special tax
treatment.
/ / NEW JERSEY PORTFOLIO: New Jersey resident individual
investors who may be looking for special tax treatment.
/ / 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
IRA's.
These Portfolios may not be appropriate for anyone seeking high
total returns.
</TABLE>
PERFORMANCE BAR CHART AND TABLE
The charts and tables below show how the Portfolios have performed and how their
performance has varied from year to year. The bar charts show changes in the
Portfolios' yearly performance since inception to demonstrate that the
Portfolios have gained and lost value at differing times. 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. In addition, the table shows 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.
3
<PAGE>
LEBENTHAL NEW YORK MUNICIPAL BOND YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FUND
[insert bar chart here]
----------------------------------------
Best quarter:
Worst quarter:
----------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------- -------------------- -------------------- ---------------------
Average Annual Total Returns Past Five Years Past One Year Since Inception
(for the periods ending 12/31/98) (June 24, 1991)
- ---------------------------------------------------------- -------------------- -------------------- ---------------------
- ---------------------------------------------------------- -------------------- -------------------- ---------------------
<S> <C> <C> <C>
New York Portfolio ____% ____% ____%
Lehman Index ____% ____% ____%
- ---------------------------------------------------------- -------------------- -------------------- ---------------------
</TABLE>
LEBENTHAL NEW JERSEY MUNICIPAL YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
BOND FUND
[insert bar chart here]
----------------------------------------
Best quarter:
Worst quarter:
----------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------- --------------------- -------------------- -------------------------
Average Annual Total Returns Past Five Years Past One Year Since Inception
(for the periods ending 12/31/98) (December 1, 1993)
- ----------------------------------------------------- --------------------- -------------------- -------------------------
- ----------------------------------------------------- --------------------- -------------------- -------------------------
<S> <C> <C> <C>
New Jersey Portfolio ____% ____% ____%
Lehman Index ____% ____% ____%
- ----------------------------------------------------- --------------------- -------------------- -------------------------
</TABLE>
4
<PAGE>
LEBENTHAL TAXABLE MUNICIPAL BOND YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
FUND
[insert bar chart here]
----------------------------------------
Best quarter:
Worst quarter:
----------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------- --------------------- -------------------- -------------------------
Average Annual Total Returns Past Five Years Past One Year Since Inception
(for the periods ending 12/31/98) (December 1, 1993)
- ----------------------------------------------------- --------------------- -------------------- -------------------------
- ----------------------------------------------------- --------------------- -------------------- -------------------------
<S> <C> <C> <C>
Taxable Portfolio ____% ____% ____%
Lehman Index ____% ____% ____%
- ----------------------------------------------------- --------------------- -------------------- -------------------------
</TABLE>
5
<PAGE>
FEE TABLE
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Shareholder Fees
- ------------------------------------------------------------------------------------------------------------------------
(fees paid directly from your investment)
<S> <C> <C> <C> <C>
New York Portfolio New Jersey Portfolio Taxable Portfolio
Class A Shares Class B Shares Class A Shares Class A Shares
-------------- -------------- -------------- --------------
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 offering price)......... 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
Annual Fund Operating Expenses
- ------------------------------------------------------------------------------------------------------------------------
(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
-------------- -------------- -------------- --------------
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%
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:
1 year 3 years 5 years 10 years
------ ------- ------- --------
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
------ ------- ------- --------
New York Portfolio (Class B Shares) $469 $1,412 $2,361 $4,760
This example does not reflect sales loads on reinvested dividends and other distributions. If these sales loads were
included, your costs would be higher.
- ---------------------------------------------------------------------------------------------------------------------
(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.
</TABLE>
6
<PAGE>
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS
- --------------------------------------------------------------------------------
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' assets will be invested primarily (i.e.,
at least 80%) 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 average maturity of the Municipal Obligations in which the New
York and New Jersey Portfolios invest is expected to be 15 to 25 years.
Although the New York and New Jersey Portfolios will attempt to invest 100% of
their total assets in New York and New Jersey Municipal Obligations,
respectively, the Portfolios reserve the right to invest up to 20% of the value
of their net assets in (i) Municipal Obligations, 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 (ii) other taxable obligations
including securities whose interest income may be subject to the Federal
alternative minimum tax.
The New York and New Jersey Portfolios will invest principally, without
percentage limitations, in tax-exempt securities that, on the date of
investment, are within the four highest credit ratings of nationally recognized
rating agencies as set forth below. 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. 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, based upon credit analysis by the Manager, it is believed that such
securities are of comparable credit quality.
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Variable &
Commercial Floating Demand
Bonds Notes Paper Notes
----- ----- ---------- ----------------
<S> <C> <C> <C> <C>
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 AAA SP-1 A-1 SP-1
Hill Cos. 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
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
In unusual circumstances, during adverse market conditions, as determined by
Lebenthal Asset Management, Inc., the Portfolios' investment manager (the
"Manager"), the New York and New Jersey Portfolios may invest up to 100% of the
value of their net assets on a temporary basis in securities, the interest on
which is exempt from regular Federal income tax, but not New York State and City
personal income taxes and New Jersey gross income tax, respectively, and in
taxable fixed-income securities, the interest on which is subject to regular
Federal, state and local income tax. Such circumstances include the pending
investment or reinvestment in tax-exempt securities of proceeds of sales of
shares or sales of portfolio securities or in order to avoid the necessity of
liquidating portfolio investments to meet redemptions of shares by investors or
where market conditions due to rising interest rates or other adverse factors
warrant temporary investing for defensive purposes. Investments in taxable
securities will be substantially in securities issued or guaranteed by the
United States government (such as bills, notes and bonds), its agencies,
instrumentalities or authorities; highly-rated corporate debt securities (rated
AA or better by S&P or Fitch, or Aa3 or better by Moody's); prime commercial
paper (rated A-1+ by S&P, P-1 by Moody's or F-1+ by Fitch); and certificates of
deposit of the 100 largest domestic banks (in terms of assets) that are subject
to regulatory supervision by the United States government or state governments
and the 50 largest foreign banks (in terms of assets) with branches or agencies
in the United States. Investments in certificates of deposit of foreign banks
and foreign branches of United States banks may involve certain risks, including
different regulation, use of different accounting procedures, political or other
economic developments, exchange controls, or possible seizure or nationalization
of foreign deposits. The result of employing a temporary defensive strategy, as
described above, is that the New York or New Jersey Portfolio may not achieve
its investment objective.
The New York Portfolio may also purchase Municipal Obligations consisting of
general obligation bonds, revenue bonds and private activity bonds (also known
as industrial revenue bonds). A general discussion of these types of bonds is
set forth in "Municipal Obligations" in the SAI.
The New York and New Jersey Portfolios may invest in participation interests
purchased from banks in variable rate tax-exempt securities owned by banks.
Participations are frequently backed by an irrevocable letter of credit or
guarantee of a bank that the Manager has determined 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 the SAI.
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.
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
based upon the Manager's determination as to whether retention of such a
security is consistent with the Fund's investment objectives. The
8
<PAGE>
Taxable Portfolio may invest in securities which are not rated or which do not
fall into the credit ratings noted above if, based upon credit analysis by the
Manager, it is believed that such securities are of comparable credit quality.
In unusual circumstances during adverse market conditions, as determined by the
Manager, the Taxable Portfolio may assume a temporary defensive position in
which the Taxable Portfolio may also invest 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, or Aa3 or better by Moody's); prime
commercial paper (rated A-1+ by S&P or P-1 by Moody's); and certificates of
deposit of the 100 largest domestic banks (in terms of assets) that are subject
to regulatory supervision by the U.S. Government or state governments, 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 defensive strategy, as
described above, is that the Taxable Portfolio may not achieve its investment
objective.
As a diversified investment company, 75% of the assets of the Taxable Portfolio
is 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.
Portfolios--Generally. Each Portfolio may purchase floating rate and variable
rate put option securities including participation interests therein. Floating
and variable rate put option securities bear a variable interest rate which
generally is determined by the bond remarketing agent based on current market
conditions, although certain issuers may set rates using a designated base rate
or a specified percentage thereof. The rate of interest used will be that rate
which would enable the securities to be remarketed. These securities have a put
feature which allows the holder to demand payment of the obligation on short
notice at par plus accrued interest. Frequently, these securities are backed by
letters of credit or similar liquidity facilities provided by banks.
Each Portfolio may purchase securities on a when-issued or delayed-delivery
basis. Delivery of and payment for these securities may occur a month or more
after the date of the purchase commitment. The securities are subject to market
fluctuation during this period and no interest accrues to the Portfolio until
settlement. Each Portfolio maintains 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.
Purchases and sales are made for each Portfolio whenever necessary, in the
Manager's opinion, to meet each Portfolio's objectives. 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:
* 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
9
<PAGE>
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.
* 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.
* 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.
* 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.
* 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 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.
10
<PAGE>
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. The Manager
was, at November 30, 1998, 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, for its
services under the Management Contracts, the Fund pays the Manager a management
fee, 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 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
- -------------------------------------------------------------------------------
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 dividing
the value of the Fund's net assets (i.e., the value of its securities and other
assets less its liabilities, including expenses payable or accrued but excluding
capital stock and surplus) by the total number of shares outstanding.
Municipal Obligations are priced on the basis of valuations provided by a
pricing service approved by the Board of Directors, which uses information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities, in determining value. The valuations provided by such pricing
service will be based upon fair market value determined most likely on the basis
of the factors listed above. If a pricing service is not used, Municipal
Obligations will be valued at quoted prices provided by municipal bond dealers.
Non-tax-exempt securities for which transaction prices are readily available are
stated at market value (determined on the basis of the last reported sales
price, or 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 market 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
11
<PAGE>
distributions of capital gains are automatically invested in additional shares
of a Portfolio immediately upon payment thereof, received in cash or can be
deposited into one or more of the Fund's other Portfolios. Shareholders will be
permitted to elect the payment option of their choice on the subscription form
for share purchases.
How To Purchase And Redeem Shares.
- ---------------------------------
All investors may invest in the Fund directly or through a Lebenthal & Co., Inc.
brokerage account as described below. The minimum initial investment for all
investors is $1,000. The minimum amount for subsequent investments is $100. The
maximum purchase for Class B Shares is $250,000. There is no maximum purchase
for Class A shares.
Alternative Sales Arrangements. The New York Portfolio offers both Class A and
Class B Shares. The New Jersey and Taxable Portfolio only offers Class A Shares.
Investors who purchase Class A Shares pay an initial sales charge at the time of
purchase. Only purchasers of Class A Shares may be eligible for reduced sales
charges as described below. However, an investor who purchases Class B Shares
does not pay an initial sales charge, but, will be subject to paying a
contingent deferred sales charge ("CDSC") when shares are redeemed.
The decision as to which class of shares provides a more suitable investment for
an investor depends on a number of factors, including (i) the amount and
intended length of the investment, (ii) whether an investor qualifies for
reduced sales charges applicable to Class A Shares only, or (iii) if an investor
prefers not to pay an up front sales. For more information about these sales
arrangements, consult your broker or the Distributor.
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
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.
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>
<CAPTION>
Sales Charge as % of Net Dealer Discount as % of
Amount of Purchase Sales Load Amount Invested Offering Price
------------------ ---------- ------------------------ -----------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.25%
$50,000 up to $99,999 4.00% 4.17% 3.75%
$100,000 up to $249,999 3.50% 3.63% 3.25%
$250,000 up to $499,999 2.75% 2.83% 2.50%
$500,000 up to $999,999 2.00% 2.04% 1.75%
$1,000,000 and over None None 0.25%
</TABLE>
12
<PAGE>
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.
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 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.
13
<PAGE>
Letter of Intent. Any investor may sign a Letter of Intent, enclosed in this
Prospectus, stating an intention to make purchases of Class A Shares totaling a
specified amount within a period of thirteen months. Purchases within the
thirteen-month period can be made at the reduced sales load applicable to the
total amount of the intended purchase noted in the Letter of Intent. If a larger
purchase is actually made during the period, then a downward adjustment will be
made to the sales charge based on the actual purchase size. Any shares purchased
within 90 days preceding the actual signing of the Letter of Intent are eligible
for the reduced sales charge, and the appropriate price adjustment will be made
on those share purchases. A number of shares equal to 4.50% of the dollar amount
of intended purchases specified in the Letter of Intent is held in escrow by the
Distributor until the purchases are completed. Dividends and distributions on
the escrowed shares are paid to the investor. If the intended purchases are not
completed during the Letter of Intent period, the investor is required to pay
the Distributor an amount equal to the difference between the regular sales load
applicable to a single purchase of the number of shares actually purchased and
the sales load actually paid. If such payment is not made within 20 days after
written request by the Distributor, then the Distributor has the right to redeem
a sufficient number of escrowed shares to effect payment of the amount due. Any
remaining escrowed shares are released to the investor's account. Agreeing to a
Letter of Intent does not obligate you to buy, or the Fund to sell, the
indicated amount of shares. You should read the Letter of Intent carefully
before signing.
Mutual Funds. Shareholders of any open-end, load, management investment company
may utilize their redemption or sales proceeds of such shares to purchase shares
of a Portfolio at no sales load or CDSC for a period of 12 months from the date
of this Prospectus. Investments must occur within 60 calendar days from the date
of redemption or sale of their mutual fund shares.
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.
IRA Account Holders. Investors holding individual retirement accounts ("IRAs"),
either directly or through a custodian, with Lebenthal & Co., Inc. may elect to
reinvest the interest earned on securities in these accounts in shares of the
Taxable Portfolio at net asset value, without an initial sales charge. The
minimum initial investment of $1,000 and the minimum subsequent investment of
$100 will be waived. In addition, for those individuals who wish to purchase
shares of the Taxable Portfolio in an IRA, the Fund offers an IRA plan through
State Street Bank & Trust Company at full sales load but with no minimum
investment and an annual custodial fee of $12.
Financial Planners. Investors purchasing their shares through certain financial
planners and intermediaries that assess a charge and have accounts with such
clients will not be charged an initial sales load or CDSC. The absence of a
sales load reflects the reduced sales effort required to sell shares to this
group of investors.
Employees of the Distributor and Participating Organizations. Employees (and
their immediate families) of Lebenthal & Co., Inc. or any Participating
Organization may purchase shares of a Portfolio at no initial sales load or
CDSC.
Lebenthal Account Holders. Investors holding any security in a Lebenthal & Co.
account including, but not limited to, municipal bonds and equity securities may
elect to invest interest, dividends and distributions earned on such securities
in shares of the Fund at net asset value (i.e. without the imposition of an
initial sales load or CDSC). The minimum initial investment of $1,000 and the
minimum subsequent investment of $100 will be waived for such purchases.
14
<PAGE>
Sales and Redemptions.
- ---------------------
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. There is no redemption charge,
no minimum period of investment, no minimum amount for a redemption, and no
restriction on frequency of withdrawals. The Class B Shares of the New York
Portfolio may charge a CDSC on early redemptions from this Portfolio.
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 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 and Redemption Procedures. The following purchase and redemption
procedures apply to investors who wish to invest in the Fund directly or through
a brokerage account maintained at Lebenthal & Co., Inc. and not through
Participating Organizations. These investors may obtain a current prospectus and
Lebenthal & Co., Inc. account application necessary to open an account by
telephoning Lebenthal & Co., Inc. at the following numbers:
Within New York City: (212) 425-6116
Outside New York City (toll free): (800) 221-5822
Initial and Subsequent Purchases of Shares. Checks are accepted subject to
collection at full value in United States currency. All payments should clearly
state a shareholder's existing account number, if any.
15
<PAGE>
By Mail: Send a check made payable to "Lebenthal & Co., Inc., Agent"
including the Lebenthal account number __ __ __ __ __ __ to:
Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund
120 Broadway
New York, New York 10271-0005
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:
Chase Manhattan Bank
ABA23 021-000021
f/a/o Donaldson, Lufkin & Jenrette Securities Corp.
Pershing Division
Acct# 930-1-032992
For Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund
A/C Name__________________
Lebenthal A/C # __ __ __ __ __ __
Investors planning to wire funds should instruct their bank early in the
day so the wire transfer can be accomplished before the earlier of 4:00
p.m., New York City time, or the close of the NYSE on that same day. There
may be a charge by the investor's bank for transmitting the money by bank
wire. The Fund does not charge investors in the Fund for its receipt of
wire transfers.
Redemption of Shares. A redemption order is executed immediately following, and
at a price determined in accordance with, the next determination of net asset
value per share following receipt by the Fund of the redemption order (and any
supporting documentation which it may require). Redemption payments will not be
effected unless the check (including a certified or cashier's check) used for
investment has been cleared for payment by the investor's bank, which may take
up to 10 days after investment. All requests for redemption should clearly
indicate the Lebenthal account number __ __ __ __ __.
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. 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
16
<PAGE>
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.
By Bank Wire: Participant Investors should instruct a member
commercial bank to wire their money immediately to:
State Street Bank & Trust Co.
ABA26 01100028 For Credit to Account
99051971
FAO: [ ]/Lebenthal Funds Inc.
Lebenthal__________Municipal Bond Fund
A/C Name____________________
Lebenthal A/C 27____________
By Mail: For Participant Investors subsequent purchases can be made by
mailing a check to:
Lebenthal Funds Inc.
Lebenthal__________Municipal Bond Fund
P.O. Box 419722
Kansas City, MO 64141-9722
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
17
<PAGE>
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.
Exchange Privilege. Shareholders of each Portfolio are entitled to exchange some
or all of their shares in the same class of shares for shares in any of the
Fund's portfolios: Lebenthal New York Municipal Bond Fund, Lebenthal New Jersey
Municipal Bond Fund or Lebenthal Taxable Municipal Bond Fund. In the future, the
exchange privilege program may be extended to other investment companies managed
by Lebenthal & Co., Inc. The Class B Shares of the New York Portfolio are
currently not eligible to participate in this Exchange Privilege.
There is no charge for the exchange privilege or limitation as to frequency of
exchange. The minimum amount for an exchange is $1,000, except that shareholders
who are establishing a new account with an investment company through the
exchange privilege must ensure that a sufficient number of shares are exchanged
to meet the minimum initial investment required for the portfolio into which the
exchange is being made. Shares are exchanged at their respective net asset
values.
The exchange privilege provides shareholders of any Portfolio with a convenient
method to shift their investment among different portfolios when they feel such
a shift is desirable. The exchange privilege is available to shareholders
residing in any state in which shares of the portfolios being acquired may
legally be sold. Shares may be exchanged only between portfolio accounts
registered in identical names. Before making an exchange, the investor should
review the current prospectus of the portfolio into which the exchange is to be
made. An exchange pursuant to the exchange privilege is treated for Federal
income tax purposes as a sale on which a shareholder may realize a taxable gain
or loss. An additional Prospectus may be obtained by contacting Lebenthal Funds,
Inc. at the address or telephone number set forth on the cover page of this
Prospectus.
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.
18
<PAGE>
Dollar Cost Averaging Program. Shareholders may elect to have a specified amount
automatically exchanged, either monthly or quarterly, from one of their accounts
through Lebenthal & Co., Inc. into one or more of the Class A Shares of the
Lebenthal Fund portfolios. The account from which exchanges are to be made must
have a value of at least $10,000 when a shareholder elects to begin this
program, and the exchange minimum is $100 per transaction. The net asset value
of shares purchased under this program may vary, and may be more or less
advantageous than if shares were purchased directly on dates other than the date
specified in the program. There is no charge for entering the Dollar Cost
Averaging program, and exchanges made pursuant to this program are not subject
to an exchange fee. Sales charges may apply (see "How to Purchase and Redeem
Shares.")
Telephone Exchanges and Redemptions. Arrangements have been made for the
acceptance of instructions by telephone to exchange or redeem shares in
book-entry form if certain preauthorizations or indemnifications are accepted
and are on file. Shareholders who elect the telephone exchange or redemption
option bear the risk of any loss, damages, expense or cost arising from their
election of the telephone exchange option, including risk of unauthorized use,
provided, however, that the Fund shall employ reasonable procedures to confirm
that all telephone instructions are genuine. For this purpose, the Fund will
employ such procedures to confirm that telephone or telecopy exchange or
redemption instructions are genuine, and will require that shareholders electing
such options provide a form of personal identification. The failure of the Fund
to employ such procedures may cause the Fund to be liable for losses incurred by
investors due to telephone or telecopy exchange or redemption based upon
unauthorized or fraudulent instructions. Further information and telephone
exchange or redemption forms are available from the transfer agent or
Distributor.
Shareholders holding shares in book-entry form may redeem their shares by
telephoning the transfer agent prior to 4:00 p.m. Eastern time. Redemption
proceeds must be payable to the record holder of the shares and mailed to the
shareholder's address of record or wire transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System,
normally within one business day, but in no event longer than seven days after
the request. The minimum amount for a wire transfer is $1,000. If at any time
the Fund determines it necessary to terminate or modify this method of
redemption, shareholders 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 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
19
<PAGE>
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 intend 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.)
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 New Jersey Municipal Obligations. Additionally, a qualified investment fund
must comply with certain continuing reporting requirements.
20
<PAGE>
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 Municipal 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. Shareholders should consult their own tax Advisers about the status
of distributions from the New Jersey Portfolio in their own states and
localities.
DISTRIBUTION ARRANGEMENTS
- -------------------------------------------------------------------------------
Rule 12b-1 Fees.
- ---------------
Investors may pay a sales load to purchase shares of the Fund as described in
the "Shareholder Information" section of this Prospectus. In addition, 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 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 received to pay the
costs of, and to compensate others, including Participating Organizations for
performing such shareholder servicing functions on behalf of the New York
Portfolio. The Class B Shares of the New York Portfolio also pay the Distributor
an asset based sales charge ("Asset Based Sales Charge") equal to 0.75% per
annum of the Class B Shares' average daily net assets to be used by the
Distributor to pay sales commissions for sales of the Class B Shares of this
Portfolio. The fees are accrued daily 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,
21
<PAGE>
including the salaries and/or commissions of sales personnel in connection with
the distribution of the New York Portfolio's shares. The Distributor may also
make payments from time to time from its own resources, which may include the
Service Fee and past profits, for the purposes enumerated in (i) above. With
respect to the Class B Shares only the Distributor may also make payments for
the purposes enumerated in (ii), (iii), and (iv) from the Asset Based Sales
Charges received by the Distributor.
The Distributor, in its sole discretion, will determine the amount of such
payments made pursuant to the Plan, provided that such payments will not
increase the amount which the New York Portfolio is required to pay to the
Distributor for any fiscal year under the Distribution Agreement and the
Management Contract in effect for that year.
The New Jersey Portfolio and The Taxable Portfolio. For its services under the
Shareholder Servicing Agreements, the Distributor receives from the New Jersey
and Taxable Portfolios a fee equal to .25% per annum of the Portfolios' average
daily net assets (the "Shareholder Servicing Fee"). The fee is accrued daily and
paid monthly and any portion of the fee may be deemed to be used by the
Distributor for purposes of (i) shareholder servicing and maintenance of
shareholder accounts and (ii) for payments to Participating Organizations with
respect to servicing their clients or customers who are shareholders of the New
Jersey and Taxable Portfolios.
Under the Distribution Agreements, the Distributor, as agent for the New Jersey
and Taxable Portfolios, will solicit orders for the purchase of the New Jersey
and Taxable Portfolios' shares, provided that any subscriptions and orders will
not be binding on a Portfolio until accepted by the Portfolio as principal. In
addition, the Distribution Agreements provide for reimbursement to the
Distributor by the New Jersey and Taxable Portfolios for its distribution,
promotional and advertising costs incurred in connection with the distribution
of the New Jersey and Taxable Portfolios' shares in an amount not to exceed .10%
per annum of each of the New Jersey and Taxable Portfolios' average daily net
assets. To the extent the Distributor does not take reimbursement for such
expenses in a current fiscal year, it is precluded from taking any reimbursement
for such amounts in a future fiscal year. The Plans, the Shareholder Servicing
Agreements and the Distribution Agreements provide that, in addition to the
Shareholder Servicing Fee and advertising reimbursement, the New Jersey and
Taxable Portfolios will pay for (i) telecommunications expenses including the
cost of dedicated lines and CRT terminals incurred by the Distributor in
carrying out its obligations under the Shareholder Servicing Agreements, and
(ii) typesetting, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing the printing subscription application
forms for shareholder accounts. The expenses enumerated in this paragraph shall
not exceed an amount equal to .05% per annum of each of the New Jersey and
Taxable Portfolio's average daily net assets.
The Plans and the Management Contracts provide that the Manager may make
payments from time to time from its own resources, which may include the
management fee and past profits for the following purposes: (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 Shareholder Servicing Agreements or
the Management Contracts in effect for that year.
22
<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 $970 billion of Municipal Bonds issued between 1993 and 1997 will add
up to $295 billion by the year 2010, versus what it would have cost the states,
their political subdivisions, agencies, and authorities to borrow at prevailing
corporate interest rates.
Individuals investing their savings in municipal securities help improve the
rate of savings and investment in America. Economists believe that the root of
such economic ills as 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--begin with
savings. In advertising municipal securities as the "workhorse of investments,"
Lebenthal & Co., Inc. is alluding to municipal securities as a tool both for
building one's own future and for digging roads, building schools, laying
sewers, producing power, providing housing, putting up hospitals, moving
commuters, paving runways, boring tunnels and rebuilding a more productive
America.
Tax exempt securities are owned primarily by individuals. There are
approximately $1.3 trillion of Municipal Bonds outstanding, approximately 73.5%
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 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.")
(i)
<PAGE>
There are two broad categories of creditworthiness: general obligation bonds and
revenue bonds. General obligations are secured by tax collections, revenue bonds
by earnings. When a bond is secured by the power of a governmental issuer to
levy taxes on real estate without limitation as to rate or amount, and when the
issuer pledges all its resources to pay principal and interest, the bond is said
to be a full faith and credit general obligation. The laws governing the
issuance of general obligation bonds intend for the bondholder to be paid in
full and on time. And such bonds have earned for all Municipal Bonds their
reputation for safety. There is another type of Municipal Bond--the revenue
bond. As the name implies, revenue bonds are secured by tolls, rentals, mortgage
payments, tuitions, fees--that is by earnings of the project so financed. Their
strength is the commercial viability of the project and power of the issuer to
levy user charges. Tax collections or earnings--they are both cashflow. And
cashflow is the collateral behind municipal securities.
Municipal securities are creatures of law. They depend on law. They must conform
to statutory requirements, the most desirable of which is that the people voted
for the issue. The issuer must not exceed the legal debt limit, and every law
governing the birth of a bond must be carefully followed when a municipality is
borrowing money. All this must be attested to by the legal opinion of reputable
and recognized attorneys specializing in municipal law.
There are over one million combinations of issuer, issue, interest rate, and
maturity to choose from. Moody's Investors Service puts out a 19-pound,
three-volume manual, rating 16,472 states and local entities whose bonds are in
the hands of the public. An issuer generally has more than one issue of bonds
outstanding. And each issue is like many in one, made up of "maturities"--blocks
of bonds that come due in staggered years from now to the year 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.
Individual Municipal Bonds have a fixed maturity. A mutual fund of Municipal
Bonds does not. A Municipal Bond is a contract for the future delivery of
money--a fixed sum at a definite date in the future. Like any fixed income
security, individual bonds fluctuate in market value with interest rates and
changing market conditions. But hold your bond to maturity, cash it in at the
end, and you are promised getting back full face value--in 2, 5, 10, 30
years--whatever the due date engraved on the books of the issuer. On the other
hand, the bonds in a fund portfolio are candidates for buy, sell, and hold every
day. The Lebenthal New York Municipal Bond Fund is nominally a portfolio of long
term bonds. But a 30-year bond in the portfolio may have an effective "maturity"
no longer than the number of days, weeks, months the Adviser decides to hold it
in the portfolio. The Adviser does not sit there waiting for bonds in the
portfolio to mature. He or she trades them in and out of the Fund portfolio
opportunistically, seeking to maximize tax free income consistent with the
preservation of capital, and to take gains, or, in falling markets, to minimize
losses. There can be no guarantee of any level of Fund performance. And in
selling their shares which fluctuate, shareholders may make money or lose money,
depending on when they bought their shares, market conditions, and Fund
performance.
Your own needs determine which is better for you. The buyer of individual bonds
targets a maturity, is quoted a yield to that maturity, and the price the buyer
pays locks in that return to maturity. If the buyer holds to maturity,
fluctuating interest rates and changing prices in the resale market prior to
maturity are not a factor in the yield to maturity. Between getting interest
right along and cashing in the bond for full face value at the end, the
individual bond buyer winds up with the yield to maturity originally bargained
for.
In a mutual fund, the shareholder seeks a higher total return than might be
currently available in the targeted maturity, fixed yield-to-maturity market --
as a result of reinvestment of dividends, interest being earned on interest, and
portfolio management, i.e. active bond trading in the Fund portfolio. There can
be no assurance of a particular Fund yield, because the bonds in the portfolio
change. They are being added to, disposed of and replaced with other bonds, when
the portfolio manager sees an opportunity to realize gains, or, in a declining
(ii)
<PAGE>
market, minimize losses. Nor can there be any guarantee the Fund will achieve
its objectives. When you sell your shares you may get more for them than you
paid. You may get less. It depends on current market conditions, whether
interest rates are higher or lower than when you bought your shares, and the
ability of Management to anticipate markets and know when to buy, sell, or hold.
An open end fund for open end savings goals. If you know you are going to need
your money for a specific purpose on a specific date in the future, buy a fixed
income security and target the maturity date. On the other hand, the Lebenthal
New York Municipal Bond Fund is for more general open-ended objectives like
building up an estate or saving for retirement. The Fund can pay out interest
every month, free of New York and regular Federal income tax. Or, it can
reinvest your monthly interest in additional Fund share.. so your interest earns
interest... and each month that interest earns still more tax free interest, and
builds upon itself. Monthly income, or automatic reinvestment--the option is
yours.
The principle of "total return." With automatic reinvestment in the Lebenthal
New York Municipal Bond Fund, you measure investment return by adding up the
coupon interest from the underlying bonds in the Fund plus the value of that
interest being reinvested in additional shares every month, plus (or minus) any
ups (or downs) in the market value of your accumulating shares.
Price down, yield up. In the infamous 1994 bond market decline, nothing was
spared. Not individual bonds. Not the Lebenthal New York Municipal Bond Fund.
But all is not lost when the market declines. Bond prices down means that bond
yields are up. Buying new shares at the lower price is called "dollar cost
averaging." The Fund takes your new money and invests it for you at higher
rates. As for old bonds in the portfolio, the interest being spun off and
reinvested right along now buys more Fund shares than if the price were higher.
So that if, as, and when--and should the price go up again--you now have that
many more shares to go along for the ride and move up in market value. As events
have shown, compounding does not protect against fluctuating bond prices and
losses in the resale value of your shares. A decline in the value of the
underlying bonds in the Fund portfolio could more than offset the positive
impact of any gains from compounding. But your thinking when you buy the Fund
should be the philosophy of the long haul: dollar cost averaging, plus interest
on interest, plus time, 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.
(iii)
<PAGE>
LEBENTHAL FUNDS, INC.
LETTER OF INTENT (L.O.I.)
- -------------------------------------------------------------------------------
Although I am not obligated to invest and Lebenthal Funds Inc. (the "Fund") is
not obligated to sell, it is my intention to invest over a 13-month period (the
"L.O.I. Period") in an aggregate amount of shares of the Fund at least equal to
that which is checked below, thereby entitling me to the reduced sales load
applicable to such aggregate amount.
<TABLE>
<CAPTION>
Sales Sales
Aggregate Amount Load Aggregate Amount Load
Lebenthal New York Municipal Bond Fund
<S> <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 1.00% / / $2,500,000.00 or more .50%
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 1.00% / / $2,500,000.00 or more .50%
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% / / $2,500,000.00 or more
</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.
Lebenthal New York Municipal Bond Fund
<TABLE>
<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>
786523.6
<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 - - - (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>
- -------------------------------------------------------------------------------
* Annualized
** Includes the effect of a capital contribution from the Fund's Manager.
Without the capital contribution the total return would have been 6.24%.
## 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.
+ Includes fees paid indirectly of less than .01% of average net assets.
<PAGE>
NEW YORK PORTFOLIO (Class B Shares only)*
- --------------------------------------------------------------------------------
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%
* 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.
<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)...................................... 8.74 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.
* Fund commenced operations on December 1, 1993.
** Includes fees paid indirectly of 0.02%, 0.02% and 0.01% of average
net assets for 1998, 1997 and 1996, respectively.
<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.
<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. [Add
disclosure of any financials incorporated by reference.]
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Fund, including their
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 SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
* For a fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009 or calling 10-800-SEC-0330.
* Free from the 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
STATEMENT OF ADDITIONAL INFORMATION
March 31, 1999
This Statement of Additional Information 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>
Fund History.................................. Capital Stock and Other Securities............
Description of the Fund and Its Investments and Purchase, Redemption and Pricing of Shares....
Risks...................................... Taxation of the Fund..........................
Management of the Fund........................ Underwriters..................................
Control Persons and Principal Holders of Calculation of Performance Data...............
Securities................................. Financial Statements..........................
Investment Advisory and Other Services........ Description of Ratings........................
Brokerage Allocation and Other Practices...... Corporate Taxable Equivalent Yield Table......
- --------------------------------------------------------------------- ------------------------------------------------------------
</TABLE>
786574.2
<PAGE>
FUND HISTORY
- --------------------------------------------------------------------------------
The Fund was incorporated on August 17, 1990.
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 the Taxable Portfolio, a diversified 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 is 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.
New York and New Jersey Portfolios.
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.
Description of The Portfolios' Investment Securities.
Municipal Obligations:
(1) Municipal Bonds include long term, and for the Taxable Portfolio, taxable,
obligations that are rated Baa or better at the date of purchase by Moody's, or
BBB or better by S&P or Fitch or, if not rated, are of comparable quality as
determined by the Manager on the basis of the Manager's credit evaluation of the
obligor, or credit enhancement issued in support of the obligation. Municipal
Bonds are debt obligations of states, cities, counties, municipalities and
municipal agencies (all of which are generally referred to as "municipalities")
which generally have a maturity at the time of issue of one year or more and
which are issued to raise funds for various public purposes such as construction
of a wide range of public facilities, to refund outstanding obligations and to
obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds include states, counties, cities, towns and
other governmental units. The principal of and interest on revenue bonds are
payable from the income of specific projects or authorities and generally are
not supported by the issuer's general power to levy taxes. In some cases,
revenues derived from specific taxes are pledged to support payments on a
revenue bond.
2
786574.2
<PAGE>
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 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. These types of municipal
leases may be considered illiquid and are subject to the 15% limitation of
investments in illiquid securities set forth under "Investment Restrictions"
herein. The Board of Directors may adopt guidelines and delegate to the Adviser
or the Manager of the Portfolios, as the case may be, the daily function of
determining and monitoring the liquidity of municipal leases. In making such
determination, the Board and the Adviser or the Manager of the Portfolios, as
the case may be, may consider such factors as the frequency of trades for the
obligation, the number of other potential buyers and the nature of the
marketplace for the obligations, including the time needed to dispose of the
obligations and the method of soliciting offers. If the Board determines that
any municipal leases are illiquid, such leases will be subject to the 15%
limitation on investments in illiquid securities.
3
786574.2
<PAGE>
(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.
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. Participation interests will be purchased only if, in
the opinion of counsel, interest income on such interests will be tax-exempt
when distributed as dividends to shareholders.
When-Issued Securities. New issues of certain Municipal Obligations frequently
are offered on a when-issued basis. The payment obligation and the interest rate
that will be received on the Municipal Obligations are each fixed at the time
the buyer enters into the commitment although delivery and payment of the
Municipal Obligations normally take place within 45 days after the date of the
Portfolio's commitment to purchase. Although each Portfolio will only make
commitments to purchase when-issued Municipal Obligations with the intention of
actually acquiring them, each Portfolio may sell these securities before the
settlement date if deemed advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in a Portfolio are subject to changes in value (both generally changing in the
same way, that is, both experiencing appreciation when interest rates decline
and depreciation when interest rates rise) based upon the public's perception of
the creditworthiness of the issuer and changes, real or anticipated, in the
level of interest rates. Purchasing Municipal Obligations on a when-issued basis
can involve a risk that the yields available in the market when the delivery
takes place may actually be higher or lower than those obtained in the
transaction itself. A segregated account of the Fund consisting of cash or
liquid high-grade debt securities equal to the amount of the when-issued
commitments will be established at the respective Portfolio's custodian banks.
For the purpose of determining the adequacy of the securities in the account,
the deposited securities will be valued at market value. If the market value of
such securities declines, additional cash or highly liquid securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by the Portfolio. On the settlement date of the
when-issued securities, the Portfolio will meet its obligations from
then-available cash flow, sale of securities held in the separate account, sale
of other securities or, although it would not normally expect to do so, from
sale of the
4
786574.2
<PAGE>
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, 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 [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 are 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.
5
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<PAGE>
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 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. (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
shall be fully collateralized at all times during the period of the agreement in
that the value of the underlying security shall be at least equal to the amount
of the loan, including the accrued interest thereon, and the Portfolio or its
custodian shall have possession of the collateral, which the Fund's Board of
Directors believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Portfolio but only constitute collateral for the seller's obligation to
pay the repurchase price. Therefore, the Portfolio may suffer time delays and
incur costs in connection with the disposition of the collateral. The Fund's
Board of Directors believes that the collateral underlying repurchase agreements
may be more susceptible to claims of the seller's creditors than would be the
case with securities owned by the Portfolio. It is expected that repurchase
agreements will give rise to income which will not qualify as tax-exempt income
when distributed by the Portfolio. Each Portfolio will not invest in a
repurchase agreement maturing in more than seven days if any such investment
together with illiquid securities held by such Portfolio exceeds 15% of such
Portfolio's net assets. (See Investment Restriction Number 6 herein.) Repurchase
agreements are subject to the same risks described herein for stand-by
commitments.
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.
6
<PAGE>
(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 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.
7
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State Economic Trends. Over the long term, the State and the City face serious
potential economic problems. The City accounts for approximately 41% of the
State's population and personal income, and the City's financial health affects
the State in numerous ways. The State historically has been one of the
wealthiest states in the nation. For decades, however, the State has grown more
slowly than the nation as a whole, gradually eroding its relative economic
affluence. Statewide, urban centers have experienced significant changes
involving migration of the more affluent to the suburbs and an influx of
generally less affluent residents. Regionally, the older Northeast cities have
suffered because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden relative
to other states. The State and its localities have used these taxes to develop
and maintain their transportation networks, public schools and colleges, public
health systems, other social services and recreational facilities. Despite these
benefits, the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, has contributed to the decision
of some businesses and individuals to relocate outside, or not locate within,
the State.
Notwithstanding the numerous initiatives that the State and its localities may
take to encourage economic growth and achieve balanced budgets, reductions in
Federal spending could materially and adversely affect the financial condition
and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.3 million, is an
international center of business and culture. Its non-manufacturing economy is
broadly based, with the banking and securities, life insurance, communications,
publishing, fashion design, retailing and construction industries accounting for
a significant portion of the City's total employment earnings. The City's
manufacturing activity is conducted primarily in apparel and printing.
Additionally, the City is the nation's leading tourist destination.
The national economic downturn which began in July 1990 adversely affected the
local economy, which had been declining since late 1989. As a result, the City
experienced job losses in 1990 and 1991 and real Gross City Product ("GCP") fell
in those two years. Beginning in calendar year 1992, the improvement in the
national economy helped stabilize conditions in the City. Employment losses
moderated toward year-end and real GCP increased, boosted by strong wage gains.
After noticeable improvements in the City's economy during calendar year 1994,
economic growth slowed in calendar year 1995, and thereafter improved during
calendar year 1996, reflecting improved securities industry earnings and
employment in other sectors. The City's current four-year financial plan assumes
that moderate economic growth will continue through calendar year 2001, with
moderating job growth and wage increases.
For each of the 1981 through 1996 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP"). The City has been required to close substantial budget gaps
between forecast revenues and forecast expenditures in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or additional reductions in City
services or entitlement programs, which could adversely affect the City's
economic base.
Pursuant to the New York State Financial Emergency Act for the City of New York,
the City prepares an annual four-year financial plan, which is reviewed and
revised on a quarterly basis and includes the City's capital, revenue and
expense projections and outlines proposed gap-closing programs for years with
projected budget gaps. The City's current four-year financial plan projects a
surplus in the 1998 fiscal year (before discretionary transfers) and substantial
budget gaps for each of the 1999, 2000 and 2001 fiscal years. This pattern of
current year surplus and projected subsequent year budget gaps has been
consistent through virtually the entire period since 1982, during which the City
has achieved balanced operating results for each fiscal year. The City is
required to submit its financial plans to review bodies, including the New York
State Financial Control Board ("Control Board").
The City depends on State aid both to enable the City to balance its budget and
to meet its cash requirements. There can be no assurance that there will not be
reductions in State aid to the City from amounts currently projected or that
State budgets in future fiscal years will be adopted by the April 1 statutory
deadline and that such reductions or delays will not have adverse effects on the
City's cash flow or expenditures. In addition, the Federal Budget negotiation
process could result in a reduction in or a delay in the receipt of Federal
grants which could have additional adverse effects on the City's cash flow or
revenues.
8
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The Mayor is responsible for preparing the City's four-year financial plan,
including the City's current financial plan for the 1998 through 2001 fiscal
years (the "1998-2001 Financial Plan" or "Financial Plan"). The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies which are uncertain and which may not materialize. Changes in
major assumptions could significantly affect the City's ability to balance its
budget as required by State law and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the condition of the
regional and local economies, the impact on real estate tax revenues of the real
estate market, wage increases for City employees consistent with those assumed
in the Financial Plan, employment growth, the ability to implement proposed
reductions in City personnel and other cost reduction initiatives, the ability
of the New York City Health and Hospitals Corporation ("HHC") and the Board of
Education ("BOE") to take actions to offset potential budget shortfalls, the
ability to complete revenue generating transactions, provision of State and
Federal aid and mandate relief, and the impact on City revenues and expenditures
of Federal and State welfare reform and any future legislation affecting
Medicare or other entitlements.
Implementation of the Financial Plan is also dependent upon the City's ability
to market its securities successfully. The City's financing program for fiscal
years 1998 through 2001 contemplates the issuance of $4.9 billion of general
obligation bonds and $7.1 billion of bonds to be issued by the proposed New York
City Infrastructure Finance Authority ("Finance Authority") to finance City
capital projects. The Finance Authority was created as part of the City's effort
to assist in keeping the City's indebtedness within the forecast level of the
constitutional restrictions on the amount of debt the City is authorized to
incur. In addition, the City issues revenue and tax anticipation notes to
finance its seasonal working capital requirements. The success of projected
public sales of City bonds and notes, New York Municipal Water Finance Authority
("Water Authority") bonds and Finance Authority bonds will be subject to
prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation bonds and
notes and the Water Authority and Finance Authority bonds. Future developments
concerning the City and public discussion of such developments, as well as
prevailing market conditions, may affect the market for outstanding City general
obligation bonds and notes.
The City's operating results for the 1996 fiscal year were balanced in
accordance with GAAP, after taking into account a discretionary transfer of $224
million, the sixteenth consecutive year of GAAP-balanced results.
On June 10, 1997, the City submitted to the Control Board the Financial Plan for
the 1998 through 2001 fiscal years, which relates to the City, BOE and the City
University of New York ("CUNY") and reflects the City's expense and capital
budgets for the 1998 fiscal year, which were adopted on June 6, 1997. The
Financial Plan projects revenues and expenditures for the 1998 fiscal year
balanced in accordance with GAAP. The Financial Plan includes increased tax
revenue projections; reduced debt service costs; the assumed restoration of
Federal funding for programs assisting certain legal aliens; additional
expenditures for textbooks, computers, improved education programs and welfare
reform, law enforcement, immigrant naturalization, initiatives proposed by the
City Council and other initiatives; and a proposed discretionary transfer to the
1998 fiscal year of $300 million of debt service due in the 1999 fiscal year for
budget stabilization purposes. In addition, the Financial Plan reflects the
discretionary transfer to the 1997 fiscal year of $1.3 billion of debt service
due in the 1998 and 1999 fiscal years, and includes actions to eliminate a
previously projected budget gap for the 1998 fiscal year. These gap closing
actions include (i) additional agency actions totaling $621 million; (ii) the
proposed sale of various assets; (iii) additional State aid of $294 million,
including a proposal that the State accelerate a $142 million revenue sharing
payment to the City from March 1999; and (iv) entitlement savings of $128
million which would result from certain of the reductions in Medicaid spending
proposed in the Governor's 1997-1998 Executive Budget and from the State making
available to the City $77 million of additional Federal block grant aid, as
proposed in the Governor's 1997-1998 Executive Budget. The Financial Plan also
sets forth projections for the 1999 through 2001 fiscal years and projects gaps
of $1.8 billion, $2.8 billion and $2.6 billion for the 1999 through 2001 fiscal
years, respectively.
The Financial Plan assumes approval by the State Legislature and the Governor of
(i) a tax reduction program proposed by the City totaling $272 million, $435
million, $465 million, and $481 million, in the 1998 through 2001 fiscal years,
respectively, which includes a proposed elimination of the 4% City sales tax on
clothing items costing under $500 as of December 1, 1999, and (ii) a proposed
State tax relief program, which would reduce the City property tax and personal
income tax, and which the Financial Plan assumes will be offset by proposed
increased State aid totaling $47 million, $254 million, $472 million, and $722
million, in the 1998 through 2001 fiscal years, respectively.
9
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The Financial Plan also assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999, and which is projected to provide
revenue of $166 million and $494 million in the 2000 and 2001 fiscal years,
respectively, and of the extension of the 12.5% personal income tax surcharge,
which is scheduled to expire on December 31, 1998, and which is projected to
provide revenue of $188 million, $527 million, and $554 million, in the 1999
through 2001 fiscal years, respectively; (ii) collection of the projected rent
payments for the City's airports, totaling $385 million, $175 million, and $170
million, in the 1999, 2000 and 2001 fiscal years, respectively, which may depend
on the successful completion of negotiations with the Port Authority or on the
enforcement of the City's rights under the existing leases through pending legal
actions; and (iii) State approval of the cost containment initiatives and State
aid proposed by the City for the 1998 fiscal year, and $115 million in State aid
which is assumed in the Financial Plan but was not provided for in the
Governor's 1997-1998 Executive Budget. The Financial Plan reflects the increased
costs which the City is prepared to incur as a result of welfare legislation
recently enacted by Congress. The Financial Plan provides no additional wage
increases for City employees after their contracts expire in fiscal years 2000
and 2001. In addition, the economic and financial condition of the City may be
affected by various financial, social, economic and political factors which
could have a material effect on the City.
The City annually prepares a modification to its financial plan in October or
November which amends the financial plan to accommodate any revisions to
forecast revenues and expenditures and to specify any additional gap-closing
initiatives to the extent required to offset decreases in projected revenues or
increases in projected expenditures. The Major is expected to publish the first
quarter modification (the "Modification") for the 1998 fiscal year in November.
Since the preparation of the Financial Plan, the State has adopted its budget
for the 1997-1998 fiscal year. The State budget enacted a smaller sales tax
reduction than the tax reduction program assumed by the City in the Financial
Plan, which will increase projected City sales tax revenues; provided for State
aid to the City which was less than assumed in the Financial Plan; and enacted a
State funded tax relief program which begins a year later than reflected in the
Financial Plan. In addition, the net effect of tax law changes made in the
Federal Balanced Budget Act of 1997 are expected to increase tax revenues in the
1998 fiscal year. These changes will be reflected in the Modification.
The projections for the 1998 through 2001 fiscal years reflect the costs of the
settlements with the United Federation of Teachers ("UFT") and a coalition of
unions headed by District Council 37 of the American Federation of State, County
and Municipal Employees ("District Council 37"), which together represent
approximately two-thirds of the City's workforce, and they assume that the City
will reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements. The settlements provide for a wage
freeze in the first two years, followed by a cumulative effective wage increase
of 11% by the end of the five-year period covered by the proposed agreements,
ending in fiscal years 2000 and 2001. Additional benefit increases would raise
the total cumulative effective increase to 13% above present costs. Costs
associated with similar settlements for all City-funded employees would total
$49 million, $459 million and $1.2 billion in the 1997, 1998 and 1999 fiscal
years, respectively, and exceed $2 billion in each fiscal year after the 1999
fiscal year. Subsequently, the City reached settlements, through agreements or
statutory impasse procedures, with bargaining units which, together with the UFT
and District Council 37, represent approximately 86% of the City's workforce.
In 1975, Standard & Poor's suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from Standard & Poor's. On July 2, 1985, Standard
& Poor's revised its rating of City bonds upward to BBB+, and on November 19,
1987, to A-. On July 10, 1995, Standard & Poor's revised its rating of City
bonds downward to BBB+.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1. On July 17, 1997, Moody's changed
its outlook on City bonds from stable to positive. Since July 15, 1993, Fitch
has rated City bonds A-. Since July 8, 1997, IBCA Limited has rated City bonds
A.
10
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New York State and its Authorities. The budget for the State's 1997-1998 fiscal
year, commencing on April 1, 1997, was adopted by the Legislature on August 4,
1997. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements for its 1997-1998 fiscal year considered to be necessary for
State operations and other purposes. The State Financial Plan for the 1997-1998
fiscal year was formulated on August 11, 1997 and is based on the State's budget
as enacted by the Legislature, as well as actual results for the first quarter
of the current fiscal year. The 1997-1998 State Financial Plan is expected to be
updated in October and January. The 1997-1998 State Financial Plan is projected
to be balanced on a cash basis. Total General Fund receipts and transfers from
other funds are projected to be $35.09 billion, while total General Fund
disbursements and transfers to other funds are projected to be $34.60 billion.
The adopted 1997-1998 budget projects a year-over-year increase in General Fund
disbursements of 5.2 percent. As compared to the Governor's proposed budget
amended in February 1997, the State's adopted budget for 1997-1998 increases
General Fund spending by $1.7 billion, primarily due to increases for local
assistance ($1.3 billion). Resources used to fund these additional expenditures
include increased revenues projected for the 1997-1998 fiscal year, increased
resources produced in the 1996-1997 fiscal year that will be utilized in
1997-1998, reestimates of social service, fringe benefit and other spending, and
certain non-recurring resources.
The 1997-1998 adopted budget includes multi-year tax reductions, including a
State funded property and local income tax reduction program, estate tax relief,
utility gross receipts tax reductions, permanent reductions in the State sales
tax on clothing, and elimination of assessments on medical providers. The
various elements of the State and local tax and assessment reductions have
little or no impact on the 1997-1998 Financial Plan, and do not begin to
materially affect the out-year projections until the State's 1999-2000 fiscal
year.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the Federal government, that are not under the
control of the State. In addition, the State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Actual results could differ materially and
adversely from projections and those projections may be changed materially and
adversely from time to time.
The State closed projected budget gaps of $5.0 billion, $3.9 billion and $2.3
billion for its 1995-1996, 1996-1997 and 1997-1998 fiscal years, respectively.
The 1998-1999 budget gap was projected at $1.68 billion (before the application
of any assumed efficiencies) in the out-year projections submitted to the
Legislature in February 1997. As a result of changes made in the adopted budget,
the 1998-1999 gap is now expected by the State to be about the same or smaller
than the amount previously projected, after application of the $530 million
reserve for future needs. The Governor has indicated that he will propose to
close any potential imbalance primarily through General Fund expenditure
reductions and without increases in taxes or deferrals of scheduled tax
reductions. The revised expectations for the 1998-1999 fiscal year reflect the
loss of $1.4 billion in surplus resources from 1996-1997 operations that are
being utilized to finance current year spending, an incremental effect of
approximately $300 million in legislated State and local tax reductions in the
out-year, and other factors.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the Federal government, and other factors, have created structural budget
gaps for the State. These gaps resulted from a significant disparity between
recurrent revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
Other actions taken in the 1997-1998 adopted budget add further pressure to
future State budget balance. For example, the fiscal effects of tax reductions
adopted in the 1997-1998 budget are projected to grow more substantially beyond
the 1998-1999 fiscal year. The full annual cost of the enacted tax reduction
package is estimated by the State at approximately $4.8 billion when fully
effective in State fiscal year 2001-2002. In addition, the 1997-1998 budget
included multi-year commitments for school aid and pre-kindergarten early
learning programs which could add as much as $1.4 billion in costs when fully
annualized in fiscal year 2001-2002. These spending commitments are subject to
annual appropriation.
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On September 11, 1997, the New York State Comptroller issued a report which
noted that the ability to deal with future budget gaps could become a
significant issue in the State's 2000-2001 fiscal year, when the cost of tax
cuts increases by $1.9 billion. The report contained projections that, based on
current economic conditions and current law for taxes and spending, showed a gap
in the 2000-2001 State fiscal year of $5.6 billion and of $7.4 billion in the
2001-2002 State fiscal year. The report noted that these gaps would be smaller
if recurring spending reductions produce savings in earlier years. The State
Comptroller has also stated that if Wall Street earnings moderate and the State
experiences a moderate recession, the gap for the 2001-2002 State fiscal year
could grow to nearly $12 billion.
In recent years, the State has failed to adopt a budget prior to the beginning
of this fiscal year. A prolonged delay in the adoption of the State's budget
beyond the statutory April 1 deadline without interim appropriations could delay
the projected receipt by the City of State aid, and there can be no assurance
that State budgets in future fiscal years will be adopted by the April 1
statutory deadline.
On August 28, 1997, Standard & Poor's revised its ratings on the State's general
obligation bonds from A- to A and, in addition, revised its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. On January 6, 1992, Moody's reduced its ratings on outstanding
limited-liability State lease purchase and contractual obligations from A to
Baa1. On February 10, 1997, Moody's confirmed its A2 rating on the State's
general obligation long-term indebtedness.
Litigation. The court actions in which the State is a defendant generally
involve State programs and miscellaneous tort, real property, and contract
claims. While the ultimate outcome and fiscal impact, if any, on the State of
those proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
State's ability to maintain a balanced 1997-98 State Financial Plan. The claims
involving the City other than routine litigation incidental to the performance
of their governmental and other functions and certain other litigation arise out
of alleged constitutional violations, torts, breaches of contract and other
violations of law and condemnation proceedings. While the ultimate outcome and
fiscal impact, if any, on the City of those proceedings and claims are not
currently predictable, adverse determinations in certain of them might have a
material adverse effect upon the City's ability to carry out the 1998-2001
Financial Plan. The City has estimated that its potential future liability on
account of outstanding claims against it as of June 30, 1996 amounted to
approximately $2.8 billion.
New Jersey Risk Factors.
The information summarized below describes some of the more significant aspects
relating to New Jersey's credit and financial condition. The sources of such
information are the official statements of issuers located in New Jersey as well
as other publicly available documents.
Certain Economic Information. New Jersey is the ninth largest state in
population and the fifth smallest in land area. With an average of 1,077 people
per square mile, it is the most densely populated of all the states. The State's
economic base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas with selective
commercial agriculture. Historically, New Jersey's average per capita income has
been well above the national average, and in 1996 the State ranked second among
the states in per capita personal income ($31,053).
The Fund is susceptible to political, economic or regulatory factors affecting
issuers of the New Jersey securities. The following information provides only a
brief summary of some of the complex factors affecting the financial situation
in New Jersey (the "State") and is derived from sources that are generally
available to investors, and believed to be accurate. It is based in part on
information obtained from various State and local agencies in New Jersey. No
independent verification has been made of any of the following information.
The onset of the national recession (which officially began in July 1990,
according to the National Bureau of Economic Research) caused an acceleration of
New Jersey's job losses in construction and manufacturing. In addition, the
national recession caused an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State rose
from a low of 3.6% during the first quarter of 1989 to a recessionary peak of
8.5% during 1992. Since then, the unemployment rate fell to 5.5% for the
six-month period from January 1997 through June 1997.
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New Jersey's Budget and Appropriation System. The State operates on a fiscal
year beginning July 1 and ending June 30. Pursuant to the State Constitution, no
money may be drawn from the State Treasury except for appropriations made by
law. In addition, all monies for the support of State government and all other
State purposes, as far as can be ascertained or reasonably foreseen, must be
provided for in one general appropriation law covering one and the same fiscal
year. No general appropriations law or other law appropriating money for any
State purpose shall be enacted if the amount of money appropriated therein,
together with all other prior appropriations made for the same fiscal year,
exceeds the total amount of revenue on hand and anticipated to be available for
such fiscal year, as certified by the Governor.
In addition to the Constitutional provisions, the New Jersey Statutes contain
provisions concerning the budget and appropriation system. On or before October
1 in each year, each department, board, commission, officer or other agency of
the State must file with the Budget Director a request for appropriation or
permission to spend, specifying all expenditures proposed to be made by such
spending agency during the following fiscal year. The Budget Director then
examines each request and determines the necessity or advisability of the
appropriation request. On or before December 31 of each year, the Budget
Director submits the requests, together with her findings, comments and
recommendations, to the Governor. It is then the responsibility of the Governor
to examine and consider all requests and formulate her budget recommendations.
The Governor's Budget Message must embody the proposed complete financial
program of the State government for the next ensuing fiscal year and must set
forth in detail each source of anticipated revenue and the purposes of
recommended expenditures for each spending agency. After a process of
legislative committee review, the budget, in the form of an appropriations bill,
must be approved by the Senate and Assembly and must be submitted to the
Governor for review. Upon such submissions, the Governor may approve the bill,
revise the estimate of anticipated revenues contained therein, delete or reduce
appropriation items contained in the bill through the exercise of her line-item
veto power, or veto the bill in its entirety. Like any gubernatorial veto, such
action may be reversed by a two-thirds vote of each House of the State
Legislature.
During the course of the fiscal year, the Governor may take steps to reduce
State expenditures if it appears that revenues have fallen below those
originally anticipated. There are additional means by which the Governor may
ensure that the State does not incur a deficit. Under the State Constitution, no
supplemental appropriation may be enacted after adoption of an appropriations
act except where there are sufficient revenues on hand or anticipated, as
certified by the Governor, to meet such appropriation.
General Obligation Bonds. The State finances certain capital projects through
the sale of the general obligation bonds of the State. These bonds are backed by
the full faith and credit of the State. Certain State tax revenues and certain
other fees are pledged to meet the principal and interest payments and, if
provided, redemption premium payments, if any, required to repay the bonds. As
of June 30, 1997, there was a total authorized bond indebtedness of
approximately $10.315 billion, of which $3.44 billion was issued and
outstanding, $5.002 billion was retired (including bonds for which provision for
payment has been made through the sale and issuance of refunding bonds), and
$1.88 billion was unissued. The recommended appropriation for debt service
obligation on outstanding projected indebtedness is $506.1 million for Fiscal
Year 1999. In addition to payment from bond proceeds, capital construction can
also be funded by appropriation of current revenues on a pay-as-you go basis. In
Fiscal Year 1999, the amount appropriated to this purpose is $617.9 million.
All appropriations for capital projects and all proposals for State bond
authorizations are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning. This permanent commission was
established in November 1975, and is charged with the preparation of the State
Capital Improvement Plan, which contains proposals for State spending for
capital projects.
Tax and Revenue Anticipation Notes. In fiscal year 1992 New Jersey initiated a
program under which it issued tax and revenue anticipation notes to aid in
providing effective cash flow management to fund imbalances which occur in the
collection and disbursement of the General Fund and Property Tax Relief Fund
revenues. There are presently $800 million of tax and revenue anticipation notes
outstanding. These notes shall mature on June 15, 1998. Such tax and revenue
anticipation notes do not constitute a general obligation of New Jersey or a
debt or liability within the meaning of the New Jersey Constitution. Such notes
constitute special obligations of New Jersey payable solely from moneys on
deposit in the General Fund and Property Tax Relief Fund, and legally available
for such payment.
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Lease Financing. The State has entered into a number of leases relating to the
financing of certain real property and equipment. The State leases the Richard
J. Hughes Justice Complex in Trenton from the Mercer County Improvement
Authority (the "Authority"). On August 8, 1991 the Authority defeased
outstanding lease bonds originally issued to finance construction of the Richard
J. Hughes Justice Complex through the issuance of custody receipts (the "Custody
Receipts") in the aggregate principal amount of $98,760,000. The rental is
sufficient to cover the debt service on the Authority's Custody Receipts. The
State's obligation to pay the rentals is subject to appropriations being made by
the State Legislature.
The State has also entered into a lease agreement, as lessee, with the New
Jersey Economic Development Authority (the "EDA"), as lessor, to lease (i)
office buildings that house the New Jersey Division of Motor Vehicles, New
Jersey Network (the State's public television station), a branch of the United
States Postal Service, and a parking facility, and (ii) approximately 13 acres
of real property and certain infrastructure improvements thereon located in the
City of Newark. In addition, in December 1995, the State entered into lease
agreements, as lessee, with the EDA, as lessor, to lease (i) an office building
and (ii) certain energy saving equipment which shall be installed in various
buildings used by the State. The State also, in July 1996, entered into a lease
agreement, as lessee, with the EDA, as lessor, to lease the New Jersey
Performing Arts Facility in the City of Newark. The rental payments required to
be made by the State under such lease agreements are sufficient to cover debt
service on bonds issued by the EDA to finance the acquisition and construction
of such projects and other amounts payable to the EDA, including certain
administrative expenses of the EDA, and such rental payments are subject to
annual appropriation by the State Legislature.
The State has also entered into a sublease with the EDA to lease two parking
lots, certain infrastructure improvements and related elements located at
Liberty State Park in the City of Jersey City. The rental payments required to
be made by the State under such sublease agreement will be sufficient to cover
debt service on bonds issued by the EDA and other amounts payable to the EDA,
and such rental payments are subject to appropriation by the State Legislature.
The State also leases several office buildings, facilities and improvements from
the New Jersey Building Authority (the "Building Authority") on a basis similar
to that described above. The Building Authority bonds are secured by annual
rentals from the State which are subject to and dependent upon annual
appropriations by the State legislature.
Beginning in April 1984, the State, acting through the Director of the Division
of Purchase and Property, entered into a series of lease purchase agreements
which provide for the acquisition of equipment, services and real property to be
used by various departments and agencies of the State. To date, the State has
completed eleven lease purchase agreements which have resulted in the issuance
of Certificates of Participation totaling $749,350,000. A Certificate of
Participation evidences a proportionate interest of the owner thereof in the
lease payments to be made by the State under the terms of the agreement. The
agreements relating to these transactions provide for semi-annual rental
payments. The State's obligation to pay rentals due under these leases is
subject to annual appropriations being made by the State Legislature. The
majority of proceeds from these transactions have been or will be used to
acquire equipment or services for the State and its agencies. The State intends
to continue to use this financing technique for a substantial portion of its
future equipment requirements.
State Supported School and County College Bonds. Legislation provides for future
appropriations for State aid to local school districts equal to debt service on
a maximum principal amount of $280,000,000 of bonds issued by such local school
districts for construction and renovation of school facilities and for State aid
to counties equal to debt service on up to $80,000,000 of bonds issued by
counties for construction of county college facilities. The New Jersey
Legislature is not legally bound to make such future appropriations, but has
done so to date on all outstanding obligations issued under these laws.
~Moral Obligation~ Financing. The authorizing legislation for certain New Jersey
entities provides for specific budgetary procedures with respect to certain
obligations issued by such entities. Pursuant to such legislation, a designated
official is required to certify any deficiency in a debt service reserve fund
maintained to meet payments of principal of and interest on the obligations, and
a State appropriation in the amount of the deficiency is to be made. However,
the New Jersey Legislature is not legally bound to make such an appropriation.
Bonds issued pursuant to authorizing legislation of this type are sometimes
referred to as "moral obligation" bonds. There is no statutory limitation on the
amount of "moral obligation" bonds which may be issued by eligible New Jersey
entities.
The following table sets forth the "moral obligation" bonded indebtedness issued
by New Jersey entities as of June 30, 1997:
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786574.2
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<TABLE>
<CAPTION>
Maximum Annual Debt Service
Outstanding Subject to Moral Obligation
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
New Jersey Housing and Mortgage
Finance Agency $399,224,305.59 $37,344,151.04
South Jersey Port Corporation 78,715,000.00 7,002,815.00
Higher Education Assistance Authority 136,385,000.00 23,155,400.00
--------------------- ----------------
$614,324,305.59 $67,502,366.04
=============== ==============
</TABLE>
Higher Education Assistance Authority. The Higher Education Assistance Authority
("HEAA") has issued $149,996,064 aggregate principal amount of revenue bonds. It
is anticipated that the HEAA's revenues will be sufficient to cover debt service
on its bonds.
New Jersey Housing and Mortgage Finance Agency. Neither the New Jersey Housing
and Mortgage Finance Agency nor its predecessors, the New Jersey Housing Finance
Agency and the New Jersey Mortgage Finance Agency, have had a deficiency in a
debt service reserve fund which required New Jersey to appropriate funds to meet
its "moral obligation." It is anticipated that this agency's revenues will
continue to be sufficient to cover debt service on its bonds.
South Jersey Port Corporation. New Jersey has periodically provided the South
Jersey Port Corporation (the "Corporation") with funds to cover all debt service
and property tax requirements, when earned revenues are anticipated to be
insufficient to cover these obligations. For calendar years 1986 through 1993,
the State has made appropriations totaling $18,137,565 to pay property taxes and
for calendar years 1989 through 1997, the State has made appropriations totaling
$31,485,971.25 to pay debt service.
New Jersey Sports and Exposition Authority. On March 2, 1992, the New Jersey
Sports and Exposition Authority ("Sports Authority") issued $147,490,000 in New
Jersey guaranteed bonds and defeased all previously outstanding New Jersey
guaranteed bonds of the Sports Authority. New Jersey officials have stated the
belief that the revenue of the Sports Authority will be sufficient to provide
for the payment of debt service on these obligations without recourse to New
Jersey's guarantee.
Legislation enacted in 1992 authorizes the Sports Authority to issue bonds for
various purposes payable from New Jersey appropriations. Pursuant to this
legislation, the Sports Authority and the New Jersey Treasurer have entered into
an agreement (the "State Contract") pursuant to which the Sports Authority will
undertake certain projects, including the refunding of certain outstanding bonds
of the Sports Authority, and the New Jersey Treasurer will credit to the Sports
Authority Fund amounts from the General Fund sufficient to pay debt service and
other costs related to the bonds. The payment of all amounts under the State
Contract is subject to and dependent upon appropriations being made by the New
Jersey Legislature. As of June 30, 1997 there were approximately $458,890,000
aggregate principal amount of Sports Authority bonds outstanding, the debt
service on which is payable from amounts under the State Contract.
New Jersey Transportation Trust Fund Authority. In July 1984, New Jersey created
the New Jersey Transportation Trust Fund Authority (the "TTFA"), an
instrumentality of New Jersey organized and existing under the New Jersey
Transportation Trust Fund Authority Act of 1984, as amended (the "TFA Act") for
the purpose of funding a portion of New Jersey's share of the cost of
improvements to New Jersey's transportation system. Pursuant to the TFA Act, the
TTFA, the New Jersey Treasurer and the Commissioner of Transportation executed a
contract (the "Contract") which provides for the payment of certain amounts to
the TTFA. The payment of all such amounts is subject to and dependent upon
appropriations being made by the New Jersey Legislature and there is no legal
obligation that the Legislature make such appropriations.
Pursuant to the TFA Act, the aggregate principal amount of the TTFA's bonds,
notes or other obligations which may be issued in any one fiscal year generally
may not exceed $700 million plus amounts carried over from prior fiscal years.
These bonds are special obligations of the TTFA payable from the payments made
by New Jersey pursuant to the Contract.
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Economic Recovery Fund Bonds. Legislation enacted during 1992 by New Jersey
authorizes the EDA to issue bonds for various economic development purposes.
Pursuant to that legislation, EDA and the New Jersey Treasurer have entered into
an agreement (the "ERF Contract") through which EDA has agreed to undertake the
financing of certain projects and the New Jersey Treasurer has agreed to credit
the Economic Recovery Fund from the General Fund amounts equivalent to payments
due to New Jersey under an agreement with the Port Authority of New York and New
Jersey. The payment of all amounts under the ERF Contract is subject to and
dependent upon appropriations being made by the New Jersey Legislature.
Market Transition Facility Bonds. Legislation enacted in June 1994 authorizes
the EDA to issue bonds to pay the current and anticipated liabilities and
expenses of the Market Transition Facility, which issued private passenger
automobile insurance policies for drivers who could not be insured by private
insurance companies on a voluntary basis. On July 26, 1994 the EDA issued
$705,270,000 aggregate principal amount of Market Transition Facility Senior
Lien Revenue Bonds. The EDA and the New Jersey Treasurer have entered into an
agreement which provides for the payment to the EDA of amounts on deposit in the
DMV Surcharge Fund to pay debt service on the bonds. Such payments are subject
to and dependent upon appropriations being made by the New Jersey Legislature.
Educational Facilities Authority. Legislation enacted in 1993 authorizes the
Educational Facilities Authority ("EFA") to issue bonds to finance the purchase
of equipment to be leased to institutions of higher learning. On August 17, 1994
the EFA issued $100,000,000 aggregate principal amount of Higher Education
Leasing Fund Program bonds. The EFA and the New Jersey Treasurer have entered
into an agreement which provides to the EFA amounts required to pay debt service
on the bonds. Such payments are subject to and dependent upon appropriations
being made by the State Legislature. Other legislation enacted in 1993 created
the Higher Education Facilities Trust Fund from which the EFA makes grants to
institutions of higher education. The legislation authorizes the EFA to issue
bonds to finance the grants, and limits the total outstanding principal amount
of such bonds to $220,000,000. On November 29, 1995 the EFA issued $220,000,000
aggregate principal amount of Higher Education Facilities Trust Fund Bonds.
These bonds are secured by payments made to the EFA by the State, which are
subject to annual appropriation by the State Legislature.
State Pension Funding Bonds. Legislation enacted in June 1997 authorizes the EDA
to issue bonds to pay a portion of the State's unfunded accrued pension
liability for the State's retirement systems (the "Unfunded Accrued Pension
Liability"), which, together with amounts derived from the revaluation of
pension assets pursuant to companion legislation enacted at the same time, will
be sufficient to fully fund the Unfunded Accrued Pension Liability. The Unfunded
Accrued Pension Liability represents pension benefits earned in prior years
which, pursuant to standard actuarial practices, are not yet fully funded. On
June 30, 1997, the EDA issued $2,803,042,498.56 aggregate principal amount of
State Pension Funding Bonds, Series 1997A-1997C. The EDA and the State Treasurer
have entered into an agreement which provides for the payment to the EDA of
monies sufficient to pay debt service on the bonds. Such payments are subject to
and dependent upon appropriations being made by the State Legislature.
Municipal Finance. New Jersey's local finance system is regulated by various
statutes designed to assure that all local governments and their issuing
authorities remain on a sound financial basis. Regulatory and remedial statutes
are enforced by the Division of Local Government Services (the "Division") in
the State Department of Community Affairs.
Counties and Municipalities. The Local Budget Law (N.J.S.A. 4OA: 4-1 et seq.)
imposes specific budgetary procedures upon counties and municipalities ("local
units"). Every local unit must adopt an operating budget which is balanced on a
cash basis, and items of revenue and appropriation must be examined by the
Director of the Division (the "Director"). The accounts of each local unit must
be independently audited by a registered municipal accountant. State law
provides that budgets must be submitted in a form promulgated by the Division
and further provides for limitations on estimates of tax collection and for
reserves in the event of any shortfalls in collections by the local unit. The
Division reviews all municipal and county annual budgets prior to adoption for
compliance with the Local Budget Law. The Director is empowered to require
changes for compliance with law as a condition of approval; to disapprove
budgets not in accordance with law; and to prepare the budget of a local unit,
within the limits of the adopted budget of the previous year with suitable
adjustments for legal compliance, if the local unit fails to adopt a budget in
accordance with law. This process insures that every municipality and county
annually adopts a budget balanced on a cash basis, within limitations on
appropriations or tax levies, respectively, and makes 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
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assistance to local units in all aspects of financial administration, including
revenue collection and cash management procedures, contracting procedures, debt
management and administrative analysis.
The Local Government Cap Law (N.J.S.A. 4OA: 4-45.1 et seq.) (the "Cap Law")
generally limits the year-to-year increase of the total appropriations of any
municipality and the tax levy of any county to either 5% or an index rate
determined annually by the Director, whichever is less. However, where the index
percentage rate exceeds 5%, the Cap Law permits the governing body of any
municipality or county to approve the use of a higher percentage rate up to the
index rate. Further, where the index percentage rate is less than 5%, the Cap
Law also permits the governing body of any municipality or county to approve the
use of a higher percentage rate up to 5%. Regardless of the rate utilized,
certain exceptions exist to the Cap Law's limitation on increases in
appropriations. The principal exceptions to these limitations are: municipal and
county appropriations to pay debt service requirements; to comply with certain
other State or federal mandates; appropriations of private and public dedicated
funds; amounts approved by referendum; and, in the case of municipalities only,
to fund the preceding year's cash deficit with the approval of the Local Finance
Board or to reserve for shortfalls in tax collections, and amounts required
pursuant to contractual obligations for specified services. The Cap Law was
re-enacted in 1990 with amendments and made a permanent part of the Municipal
Finance System.
State law also regulates the issuance of debt by local units. The Local Budget
Law limits the amount of tax anticipation notes that may be issued by local
units and requires the repayment of such notes within 120 days of the end of the
fiscal year (six months in the case of the counties) in which issued. The Local
Bond Law (N.J.S.A. 4OA: 2-1 et seq.) governs the issuance of bonds and notes by
the local units. No local unit is permitted to issue bonds for the payment of
current expenses (other than Fiscal Year Adjustment Bonds described more fully
below). Local units may not issue bonds to pay outstanding bonds, except for
refunding purposes, and then only with the approval of the Local Finance Board.
Local units may issue bond anticipation notes for temporary periods not
exceeding in the aggregate approximately ten years from the date of first issue.
The debt that any local unit may authorize is limited to a percentage of its
equalized valuation basis, which is the average of the equalized value of all
taxable real property and improvements within the geographic boundaries of the
local unit, as annually determined by the Director of the Division of Taxation,
for each of the three most recent years. In the calculation of debt capacity,
the Local Bond Law and certain other statutes permit the deduction of certain
classes of debt ("statutory deductions") from all authorized debt of the local
unit ("gross capital debt") in computing whether a local unit has exceeded its
statutory debt limit. Statutory deductions from gross capital debt consist of
bonds or notes (i) authorized for school purposes by a regional school district
or by a municipality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations set
forth in the School Bond Law (as hereinafter defined); (ii) authorized for
purposes which are self liquidating, but only to the extent permitted by the
Local Bond Law; (iii) authorized by a public body, other than the local unit the
principal of and interest on which is guaranteed by the local unit, but only to
the extent permitted by law; (iv) that are bond anticipation notes; (v) for
which provision for payment has been made; or (vi) authorized for any other
purpose for which a deduction is permitted by law. Authorized net capital debt
(gross capital debt minus statutory deductions) is limited to 3.5% of the
equalized valuation basis in the case of municipalities and 2% of the equalized
valuation basis in the case of counties. The debt limit of a county or
municipality, with certain exceptions, may be exceeded only with the approval of
the Local Finance Board.
Chapter 75 of the Pamphlet Laws of 1991 signed into law on March 28, 1991
required certain municipalities and permits all other municipalities to adopt
the State fiscal year in place of the existing calendar fiscal year.
Municipalities that change fiscal years must adopt a six month transition year
budget funded by Fiscal Year Adjustment Bonds. Notes issued in anticipation of
Fiscal Year Adjustment Bonds, including renewals, can only be issued for up to
one year unless the Local Finance Board permits the municipality to renew them
for a further period of time. The Local Finance Board must confirm the actual
deficit experienced by the municipality. The municipality then may issue Fiscal
Year Adjustment Bonds to finance the deficit on a permanent basis.
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State law authorizes State officials to supervise fiscal administration in any
municipality which is in default on its obligations; which experiences severe
tax collection problems for two successive years; which has a deficit greater
than 4% of its tax levy for two successive years; which has failed to make
payments due and owing to the State, county, school district or special district
for two consecutive years; which has an appropriation in its annual budget for
the liquidation of debt which exceeds 25% of its total operating appropriations
(except dedicated revenue appropriations) for the previous budget year; or which
has been subject to a judicial determination of gross failure to comply with the
Local Bond Law, the Local Budget Law or the Local Fiscal Affairs Law which
substantially jeopardizes its fiscal integrity. State officials are authorized
to continue such supervision for as long as any of the conditions exist and
until the municipality operates for a fiscal year without incurring a cash
deficit. In September 1996, the Township of Irvington requested supervision
which was approved by the Local Finance Board and is expected to continue for at
least one year.
There are 567 municipalities and 21 counties in New Jersey. During 1993, 1994
and 1995 no county exceeded its statutory debt limitations or incurred a cash
deficit in excess of 4% of its tax levy. Only two municipalities had a cash
deficit greater than 4% of their tax levies for 1994 and 1995. The number of
municipalities which exceeded statutory debt limits was six as of December 31,
1995. No New Jersey municipality or county has defaulted on the payment of
interest or principal on any outstanding debt obligation since the 1930's.
School Districts. All New Jersey school districts are coterminous with the
boundaries of one or more municipalities. They are characterized by the manner
in which the board of education, the governing body of the school district,
takes office. Type I school districts, most commonly found in cities, have a
board of education appointed by the mayor or the chief executive officer of the
municipality constituting the school district. In a Type II school district, the
board of education is elected by the voters of the district. Nearly all regional
and consolidated school districts are Type II school districts.
The State Department of Education has been empowered with the necessary and
effective authority to abolish an existing school board and create a
State-operated school district where the existing school board has failed or is
unable to take the corrective actions necessary to provide a thorough and
efficient system of education in that school district pursuant to N.J.S.A.
18A:7A-15 et seq. (the "School Act"). The State operated school district
operated under the direction of a State-appointed superintendent has all of the
powers and authority of the local board of education and of the local district
superintendent. Pursuant to the authority granted under the School Act, on
October 4, 1989, the State Board of Education ordered the creation of a State
operated school district in the City of Jersey City. Similarly, on August 7,
1991, the State Board of Education ordered the creation of a State operated
school district in the City of Paterson and on July 5, 1995 ordered the creation
of a State-operated school district in the City of Newark.
School Budgets. In every school district having a board of school estimate, the
board of school estimate examines the budget request and fixes the appropriation
amounts for the next year's operating budget after a public hearing at which the
taxpayers and other interested persons have an opportunity to raise objections
and to be heard with respect to the budget. This board, whose composition is
fixed by statute, certifies the budget to the municipal governing bodies and to
the local board of education. If the local board of education disagrees, it must
appeal to the State Commissioner of Education (the "Commissioner") to request
changes.
In Type II school districts without a board of school estimate, the elected
board of education develops the budget proposal and, after public hearing,
submits it to the voters of such district for approval. Previously authorized
debt service is not subject to referendum in the annual budget process. If
approved, the budget goes into effect. If defeated, the governing body of each
municipality in the school district must determine the amount necessary to be
appropriated for each item appearing in such budget. Should the governing body
fail to certify an amount determined by the board of education to be necessary,
the board of education may appeal the action to the Commissioner.
The State laws governing the distribution of State aid to local school districts
limit the annual increase of a school district's net current expense budget. The
Commissioner certifies the allowable amount of increase for each school district
but may grant a higher level of increase in certain limited instances. A school
district may also submit a proposal to the voters to raise amounts above the
allowable amount of increase. If defeated, such a proposal is subject to further
review or appeal to the Commission only if the County Superintendent determines
that additional funds are required to provide a thorough and efficient
education.
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In Type I or Type II school districts which have failed monitoring over a period
of time by the State because of continued educational deficiencies, and are
implementing an approved corrective action plan, the Commissioner is required to
determine the cost to the school district of the implementation of those
portions of the corrective action plan which are directly responsive to the
district's deficiencies as identified in the monitoring process. Where
appropriate, the Commissioner is required to reallocate funds within the
district's budget to support the corrective action plan. The Commissioner is
also required to determine the amount of additional revenue needed to implement
the corrective action plan, and to recertify the budget for the district.
In State operated school districts, the State District Superintendent has the
responsibility for the development of the budget subject to appeal by the
governing body of the municipality to the Commissioner and the Director of the
Division of Local Government Services in the State Department of Community
Affairs. Based upon his review, the Director is required to certify the amount
of revenues which can be raised locally to support the budget of the State
operated district. Any difference between the amount which the Director
certifies, and the total amount of local revenues required by the budget
approved by the Commissioner, is paid by the State in the fiscal year in which
the expenditures are made subject to the availability of appropriations.
School District Bonds. School district bonds and temporary notes are issued in
conformity with N.J.S.A 18A: 24-1 et seq. (the "School Bond Law") which closely
parallels the Local Bond Law. Although school districts are exempted from the 5%
down payment provision generally applied to bonds issued by municipalities and
counties, they are subject to debt limits (which vary depending on the type of
school system provided) and to State regulation of their borrowing. The debt
limitation on school district bonds depends upon the classification of the
school district but may be as high as 4% of the average equalized valuation
basis of the constituent municipality. In certain cases involving school
districts in cities with populations exceeding 100,000, the debt limit is 8% of
the average equalized valuation basis of the constituent municipality, and in
cities with population in excess of 80,000 the debt limit is 6% of the aforesaid
average equalized valuation.
School bonds are authorized by (i) an ordinance adopted by the governing body of
a municipality within a Type I school district; (ii) adoption of a proposal by
resolution by the board of education of a Type II school district having a board
of school estimate; (iii) adoption of a proposal by resolution by the board of
education and approval of the proposal by the legal voters of any other Type II
school district; or (iv) adoption of a proposal by resolution by a capital
project control board for projects in a State operated school district. If
school bonds will exceed the school district borrowing capacity, a school
district (other than a regional school district) may use the balance of the
municipal borrowing capacity. If the total amount of debt exceeds the school
district's borrowing capacity and any available remaining municipal borrowing
capacity, the Commissioner and the Local Finance Board must approve the proposed
authorization before it is submitted to the voters. All authorizations of debt
in a Type II school district without a board of school estimate require an
approving referendum, except where, after hearing, the Commissioner and the
State Board of Education determine that the issuance of such debt is necessary
to meet the constitutional obligation to provide a thorough and efficient system
of public schools. When such obligations are issued, they are issued by, and in
the name of, the school district.
In Type I and II school districts with a board of school estimate, that board
examines the capital proposal of the board of education and certifies the amount
of bonds to be authorized. When it is necessary to exceed the borrowing capacity
of the municipality, the approval of a majority of the legally qualified voters
of the municipality is required, together with the approval of the Commissioner
and the Local Finance Board. When such bonds are issued for a Type I school
district, they are issued by the municipality and identified as school bonds.
When bonds are issued by a Type II school district having a board of school
estimate, they are issued by, and in the name of, the school district.
All authorizations of debt must be reported to the Division of Local Government
Services by a supplemental debt statement prior to final approval.
School District Lease Purchase Financings. In 1982, school districts were given
an alternative to the traditional method of bond financing capital improvements
pursuant to N.J.S.A. 18A: 20-4.2(f) (the "Lease Purchase Law"). The Lease
Purchase Law permits school districts to acquire a site and school building
through a lease purchase agreement with a private lessor corporation. The lease
purchase agreement does not require voter approval. The rent payments
attributable to the lease purchase agreement are subject to annual appropriation
by the school district and are required, pursuant to N.J.A.C. 6: 22A-1.2(h), to
be included in the annual current expense budget of the school district.
Furthermore, the rent payments attributable to the lease purchase agreement do
not constitute debt of the school district and therefore do not impact on the
school district's debt limitation. Lease purchase agreements in excess of five
years require the approval of the Commissioner and the Local Finance Board.
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Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c. 38 and c. 39)
which provides for the issuance by municipalities and school districts of
"qualified bonds." Whenever a local board of education or the governing body of
a municipality determines to issue bonds, it may file an application with the
Local Finance Board, and, in the case of a local board of education, the
Commissioner, to qualify bonds pursuant to P.L. 1976, c. 38 or c. 39. Upon
approval of such an application and after receipt of a certificate stating the
name and address of the paying agent for such bonds, the maturity schedule,
interest rates and payment dates, the State Treasurer shall, in the case of
qualified bonds for school districts, withhold from the school aid payable to
such municipality or school district and, in the case of qualified bonds for
municipalities, withhold from the amount of business personal property tax
replacement revenues, gross receipts tax revenues, municipal purposes tax
assistance fund distributions, State urban aid, State revenue sharing, and any
other funds appropriated as State aid and not otherwise dedicated to specific
municipal programs, payable to such municipalities, an amount sufficient to
cover debt service on such bonds. These "qualified bonds" are not direct,
guaranteed or moral obligations of the State, and debt service on such bonds
will be provided by the State only if the above mentioned appropriations are
made by the State. Total outstanding indebtedness for "qualified bonds" as of
June 30, 1996 consisted of $208,642,750 by various school districts and
$899,586,220 by various municipalities.
New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve Act
(N.J.S.A. 18A: 56-17 et seq.) establishes a school bond reserve within the
constitutionally dedicated Fund for the Support of Free Public Schools. Under
this law the reserve is maintained at an amount equal to 1.5% of the aggregate
outstanding bonded indebtedness of counties, municipalities or school districts
for school purposes (exclusive of bonds whose debt service is provided by State
appropriations), but not in excess of monies available in such Fund. If a
municipality, county or school district is unable to meet payment of the
principal of or interest on any of its school bonds, the trustee of the school
bond reserve will purchase such bonds at the face amount thereof or pay the
holders thereof the interest due or to become due. At June 30, 1996, the book
value of the Fund's assets aggregated $88,816,968 and the reserve, computed as
of June 30, 1996, amounted to $40,363,607. There has never been an occasion to
call upon this Fund.
Local Financing Authorities. The Local Authorities Fiscal Control Law (N.J.S.A.
4OA: 5A-l et seq.) provides for State supervision of the fiscal operations and
debt issuance practices of independent local authorities and special taxing
districts by the State Department of Community Affairs. The Local Authorities
Fiscal Control Law applies to all autonomous public bodies created by counties
or municipalities, which are empowered to issue bonds, to impose facility or
service charges, or to levy taxes in their districts. This encompasses most
autonomous local authorities (sewerage, municipal utilities, parking, pollution
control, improvement, etc.) and special taxing districts (fire, water, etc.).
Authorities which are subject to differing state or federal financial
restrictions are exempted, but only to the extent of that difference.
Financial control responsibilities over local authorities and special districts
are assigned to the Local Finance Board and the Director of the Division of
Local Government Services. The Local Finance Board exercises approval power over
the creation of new authorities and special districts as well as their
dissolution. The Local Finance Board also reviews, conducts public hearings and
issues findings and recommendations on any proposed project financing of an
authority or district, and on any proposed financing agreement between a
municipality or county and an authority or special district. The Local Finance
Board prescribes minimum audit requirements to be followed by authorities and
special districts in the conduct of their annual audits. The Director reviews
and approves annual budgets of authorities and special districts. As of June 30,
1995, there were 195 locally created authorities with a total outstanding
capital debt of $7.14 billion (figures do not include housing authorities and
redevelopment agencies). This amount reflects outstanding bonds, notes and loans
payable by the authorities as of their respective fiscal years ended nearest to
June 30, 1995.
Litigation. The following are cases pending or threatened as of February 24,
1998 in which the State has the potential for either a significant loss of
revenue or a significant unanticipated expenditure.
Tort, Contract and Other Claims. At any given time, there are various numbers of
claims and cases pending against the State, State agencies and employees,
seeking recovery of monetary damages that are primarily paid out of the fund
created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59: 1-1, et seq.).
The State does not formally estimate its reserve representing potential exposure
for these claims and cases. The State is unable to estimate its exposure for
these claims and cases. In addition, at any given time, there are various
numbers of contract and other claims against the State and State agencies,
including environmental claims asserted against the State, among other parties,
arising from the alleged disposal of hazardous waste. Claimants in such matters
are seeking recovery of monetary damages or other relief which, if granted,
would require the expenditure of funds. The State is unable to estimate its
exposure for these claims.
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At any given time, there are various numbers of claims and cases pending against
the University of Medicine and Dentistry and its employees, seeking recovery of
monetary damages that are primarily paid out of the Self Insurance Reserve Fund
created pursuant to the New Jersey Tort Claims Act. An independent study
estimated an aggregate potential exposure of $90.8 million for tort and medical
malpractice claims pending as of June 30, 1997. In addition, at any given time,
there are various numbers of contract and other claims against the University of
Medicine and Dentistry, seeking recovery of monetary damages or other relief
which, if granted, would require the expenditure of funds. The State is unable
to estimate its exposure for these claims.
Interfaith Community Organization v. Shinn, et al. In late October, 1993, the
Interfaith Community Organization ("ICO") a coalition of churches and church
leaders in Hudson County, filed suit on behalf of the ICO's membership and the
citizens of Hudson County against the Governor, the Commissioner of the
Department of Environmental Protection ("DEP"), Commissioner of the Department
of Health ("DOH"), and Lance Miller, Assistant Commissioner of DEP. The
multicount complaint alleged violations of numerous laws, allegedly resulting
from the existence of chromium contamination in the State-owned Liberty State
Park in Jersey City. It also asserted the alleged failure by DEP and DOH to
properly conduct remediation and health screens in Hudson County concerning
chromium contamination. No immediate relief was sought, but injunctive and
monetary relief was asked for.
In June 1994, ICO hired a law firm to represent it in this matter. The firm
filed amended complaints, naming only Commissioner Shinn of DEP and Governor
Whitman as defendants and alleges only Clean Water Act and Resource Conservation
Recovery Act ("RCRA") violations at Liberty State Park. Under the "citizen suit"
provisions of these federal acts, plaintiff is seeking remediation, health
studies and attorneys' fees. The State is unable to estimate its exposure for
this claim. In March, 1995, ICO filed another lawsuit over the shipments of soil
from the I-287 Wetlands Mitigation Project to Liberty State Park. The defendants
in that suit are Commissioner Shinn, Governor Whitman, Commissioner Wilson of
the Department of Transportation ("DOT") and R.W. Vogel, Inc., the transporter
of the soil. The new suit seeks a declaration that the CWA is being violated and
demands cessation of all construction at Liberty State Park and penalties
against Vogel. The State intends to defend these suits vigorously.
American Trucking Associations, Inc. and Tri-State Motor Transit, Co. v. State
of New Jersey: The American Trucking Associations, Inc. ("ATA") and Tri-State
Motor Transit, Co. filed a complaint in the Tax Court on March 23, 1994 against
the State of New Jersey and certain state officials challenging the
constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection ("DEP"). A-901
refers to the Assembly bill number which was adopted in 1983 as an amendment to
the Solid Waste Management Act N.J.S.A. 13:1E-1 et seq., and codified at
N.J.S.A. 13:1E-126 et seq., establishing a requirement that all persons and
entities engaged in solid and hazardous waste activities in the State of New
Jersey be investigated prior to the issuance of a license. Plaintiffs are
alleging that the A-901 renewal fees discriminate against interstate commerce in
violation of the Commerce Clause of the United States Constitution; that the
fees are not used for the purposes for which they are levied; and that the fees
do not reflect the duration or complexity of the services rendered by the
government entities receiving the fees as required under the A-901 statute.
Plaintiffs are seeking a declaration that the fees are unconstitutional; a
permanent injunction enjoining the future collection of the fees; a refund of
all annual A-901 renewal fees and all fines and penalties collected pursuant to
enforcement of these provisions; and attorneys' fees and costs. Plaintiffs are
also seeking class certification of their action. On October 2, 1997, oral
argument was conducted on the parties' cross motions for summary judgment in the
Tax Court.
The DEP currently collects approximately $3.5 to $4 million in A-901 fees
annually. In previous years, the total amount of fees collected was higher
because the number of applicants and licensees subject to the fees was much
larger. It is presently unknown what portion of the A-901 fees are paid by
haulers engaged in interstate commerce, and what percentage of the monies are
renewal fees as opposed to initial application fees. Consequently, the State is
unable to estimate its exposure for this claim and intends to defend this suit
vigorously.
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Abbott v. Burke. On January 6, 1997, the Education Law Center filed a motion in
aid of litigants' rights with the Supreme Court of New Jersey in the Abbott v.
Burke matter. In 1994, the Supreme Court ruled in Abbott v. Burke that the State
had to enact a funding formula that would close the spending gap between poor
urban school districts and wealthy suburban districts by Fiscal Year 1998. On
December 20, 1996 the Comprehensive Education Improvement and Financing Act
("CEIFA") was enacted. CEIFA is a departure from the mechanisms of previous
funding formulas. CEIFA was challenged by the Education Law Center and on May
14, 1997, the Supreme Court rendered a decision in Abbott v. Burke and held that
CEIFA was unconstitutional as applied to the 28 Abbott districts. The Supreme
Court ordered the State to appropriate additional funds, beginning in the
1997-98 school year, so that each Abbott district would be able to spend at the
average of the wealthy suburban districts. In addition, the Supreme Court
remanded the matter to the Superior Court to oversee a directive to the
Commissioner of Education to study and report on the special educational needs
of students in the Abbott districts and the facilities needs in those districts.
The Superior Court issued its recommendations to the Supreme Court in its report
on January 22, 1998. In its Report, the Superior Court recommended additional
supplemental programs be implemented at an estimated cost of $312 million and
indicated that the facilities needs identified by the Department of Education
were estimated to require between $1.8-$2.4 billion in repairs and new
construction costs. The Supreme Court will hear argument on the matter on March
2, 1998. A related action, Buena Regional Commercial Township et al. v. New
Jersey Department of Education et al., was filed in Superior Court, Chancery
Division, Cumberland County. This lawsuit was filed on December 9, 1997, on
behalf of 17 rural school districts seeking the same type of relief as has been
mandated to be provided to the poor urban school districts in Abbott v. Burke.
The plaintiffs requested a declaratory judgment stating that the chancery court
retain jurisdiction, pending the remanding of the matter to the Commissioner of
Education for a hearing. The State and plaintiffs have entered into a consent
order to transfer the matter to the Commissioner of Education for resolution.
The chancery court will not retain jurisdiction. The State is unable at this
time to estimate its exposure for these claims and intends to defend both suits
vigorously.
Affiliated FM Insurance Company, et al. v. State of New Jersey, et al. The
plaintiffs in this action are insurers licensed or admitted to write property
and casualty insurance in the State of New Jersey pursuant to N.J.S.A. 17:17-1
et seq. and are all members of the New Jersey Property-Liability Insurance
Guaranty Association ("PLIGA"), a private, non-profit organization created to
cover claims against certain insolvent insurers. Plaintiffs have filed suit in
the Superior Court of New Jersey, Chancery Division, Mercer County against the
State of New Jersey, the Commissioner of Banking, the Department of Banking and
Insurance, PLIGA and the State Treasurer. Plaintiffs contend that their
assessments are being used to retire debt of the Market Transition Fund ("MTF").
The plaintiffs argue that they were never members of the MTF, are not
statutorily responsible for its losses, have not agreed to assume its losses and
did not relinquish any right to repayment of loan assessments to PLIGA. Under
the Fair Automobile Insurance Reform Act of 1990 ("FAIRA"), PLIGA is responsible
for assessing and collecting from its member insurers the amounts necessary to
make certain loans to the Auto Guaranty Fund (the "Auto Guaranty Fund"), a
special nonlapsing fund created pursuant to FAIRA. Plaintiffs contend that
assessments dating back to 1990 are in dispute and challenge the
constitutionality of the assessments and legislation which allow the assessments
to be redirected to the MTF and request declaratory relief and an order that the
monies assessed since 1990 be returned as well as an accounting. The State
intends to vigorously defend this action and has filed a motion to dismiss this
case. In a related matter, In the Matter of the 1997 Assessment Made by the New
Jersey Property Liability Insurance Guaranty Association pursuant to N.J.S.A.
17:30A-8, the American Insurance Association ("AIA") and the Alliance of
American Insurers ("Alliance") filed an appeal of administrative action in
Superior Court-Appellate Division, seeking an emergent stay of their obligation
to pay assessments to PLIGA. These assessments were due on July 28, 1997.
Pursuant to N.J.S.A. 17:30A-8a(9), PLIGA assesses its members in order that
PLIGA can then loan these monies to the Auto Guaranty Fund for use by the MTF to
pay its unfunded liabilities. PLIGA is required by N.J.S.A. 17:30A-8a(10) to
make loans in the amount of $160 million per calendar year to the Auto Guaranty
Fund. AIA and the Alliance allege that the assessment of $160 million for
calendar year 1997 is without statutory authority. On July 28, 1997, the court
denied plaintiff's application for emergent relief, denied the State's motion
for summary disposition and granted plaintiff's motion to accelerate. The State
intends to vigorously defend this action.
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C.F., et al. v. Fauver, et al. This case is brought as a purported class action
consisting of prisoners with serious mental disorders who are confined within
the facilities of the Department of Corrections (the "Class") against the
Commissioner of the Department of Corrections and other officers of the
Department of Corrections. The Class alleges cruel and unusual punishment,
violation of the Americans with Disabilities Act of 1990, discrimination against
members of the Class, sex discrimination and violation of due process. The suit
was brought by the Class in the United States District Court of the District of
New Jersey. Through this action, the Class seeks injunctive relief in the form
of changes to the manner in which mental health services are provided to
inmates. The Class also seeks changes in the disciplinary process to the extent
that an inmate's mental health is taken into consideration by a hearing officer
when adjudicating a disciplinary charge. Discovery has commenced and is
continuing. The State intends to vigorously defend this action.
Cleary v. Waldman. This case involves the spousal impoverishment provisions of
the Medicare Catastrophic Coverage Act ("MCCA"). Under this provision, the
spouse of an institutionalized husband or wife is allowed to have sufficient
funds to live in the community, called the monthly needs allowance.
The State, in determining a spouse's monthly needs allowance, uses a system
called the "income first" rule. If a community spouse does not have sufficient
funds to meet the monthly needs allowance, an institutionalized spouse is
allowed to shift his or her income to the community spouse to make up the
difference. If the institutionalized spouse's income is insufficient to meet the
monthly needs allowance, then the institutionalized spouse is allowed to shift
resources to the community spouse to generate income to make up the difference.
A class action was brought in Federal court in which plaintiffs argue that the
income first rule is disallowed under the MCCA. Rather plaintiffs claim that the
MCCA mandates the use of what is called the "resource-first" rule. Under this
scheme, before income is shifted from the institutionalized spouse to the
community spouse to meet the monthly needs allowance, resources must be shifted
first and income generated from these resources used to meet the monthly needs
allowance. Estimates of exposure if a court were to find that the MCAA only
allows the "resource-first" rule have been estimated in the area of $50 million
per year from both State and Federal sources combined.
Plaintiffs filed for a preliminary injunction arguing that, under Federal law,
only the resource first rule was allowed under the MCCA. The State opposed the
motion and the New Jersey Association of Health Care Facilities and the New
Jersey Association for Non-Profit Homes for the Aging moved for intervenor
status, opposing the plaintiffs' motion. The court granted the motion of
intervention and denied the motion for preliminary injunction, finding that
plaintiffs were unlikely to prevail on the merits since New Jersey's methodology
was at least a permissible application of the Federal law. Subsequently,
plaintiffs filed for class certification which was granted on March 25, 1996. On
March 26, 1997, Plaintiffs filed a Notice of Appeal to the Court of Appeals for
the Third Circuit. Briefing on plaintiffs' application for preliminary
injunction has been completed and it is anticipated that the matter will be
argued during the first calendar quarter of 1998. The State intends to
vigorously defend this action.
United Hospitals et al. v. State of New Jersey and William Waldman. This case
represents a challenge by 18 New Jersey hospitals to Medicaid hospital
reimbursement since February 1995. The matter was filed in the Appellate
Division of the Superior Court of New Jersey in January 1997. The hospitals
challenge all of the following: (i) whether the State complied with certain
Federal requirements for Medicaid reimbursement; (ii) whether the State's
reimbursement regulations, N.J.A.C. 10:52-1 et. seq., are arbitrary, capricious
and unreasonable; (iii) whether the Department of Human Services (DHS)
incorrectly calculated the rates; (iv) whether DHS denied hospitals a meaningful
appeal process; (v) whether the 1996-7 State Appropriations Act (L.1996, c.42)
violates the New Jersey Constitution with respect to the provision for Medicaid
reimbursement to hospitals; and (vi) whether DHS violated the Medicaid State
Plan, filed with the U.S. Department of Health and Human Services, in
implementing hospital rates in 1995 and 1996. The State intends to vigorously
defend this action.
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Trump Hotels & Casino Resorts, Inc. ("Trump") v. Mirage Resorts Incorporated,
The State of New Jersey et al. An action was filed in Federal District Court to
enjoin and declare unlawful the actions of the Mirage Resorts Incorporated
("Mirage"), the State of New Jersey, the New Jersey Department of
Transportation, the South Jersey Transportation Authority, the Casino
Reinvestment Development Authority ("CRDA"), the New Jersey Transportation Trust
Fund Authority and certain officials of the aforesaid agencies and authorities
in their efforts to revitalize Atlantic City through the design and construction
of a highway and tunnel funded by Mirage, the New Jersey Transportation Trust
Fund Authority and $55,000,000 in bonds to be issued by the South Jersey
Transportation Authority and collateralized by future alternative investment
obligations of casinos to be located in the marina district of Atlantic City.
Plaintiffs claim that the highway and tunnel development funding violates a
provision of the New Jersey State Constitution that requires the State to
dedicate all State revenues derived from gambling to programs benefiting the
elderly and the disabled pursuant to the New Jersey State Constitution, Article
IV, Section 7, Paragraph 2. The plaintiffs further allege that (i) the failure
to disclose the constitutional infirmities alleged in the financing for the
highway and tunnel project will be material omissions within the meaning of Rule
10b-5 of the Securities and Exchange Act of 1934; (ii) the defendants have
sought to avoid the Federal requirements of the Clean Water Act, the Federal
Highway Act, and the Clean Air Act; and (iii) the defendants have sought to
avoid the requirement of the New Jersey Coastal Area Facility Review Act. The
defendants filed a motion to dismiss the Federal action. In an opinion filed May
1, 1997, defendant's motion to dismiss the Federal suit was granted. The matter
is now pending in the U.S. Court of Appeals for the Third Circuit.
While the Trump v. Mirage action was pending, the State and CRDA filed a
declaratory judgment action in Superior Court of New Jersey, Law Division -
Atlantic County, entitled, State of New Jersey and CRDA v. Trump Hotels & Casino
Resorts, Inc. In this action, the State and CRDA sought a declaratory judgment
that the alternative investment program established under N.J.S.A. 5:12-144.1 of
the CRDA legislation and the use of parking fees and sales tax revenues under
the CRDA legislation to fund eligible projects do not violate the New Jersey
State Constitution. In an opinion filed May 14, 1997, declaratory judgment was
granted in favor of the State and CRDA. Trump's application for direct
certification of that decision to the New Jersey Supreme Court was denied. The
matter is now in the Appellate Division.
United Senior Alliance et al. v. State of New Jersey. This matter was filed in
the Superior Court of New Jersey and represents a similar challenge as the Trump
Hotels v. Mirage Resorts case described above. The case alleges that the Casino
Reinvestment Development Authority funding mechanisms are illegal including the
gross receipts tax, the parking tax and the Atlantic City fund. The plaintiffs
in this action have been denied a motion to intervene in the Trump Hotels v.
Mirage Resorts matter in the Appellate Division but have been granted the right
to appear and participate as an amicus. The Superior Court has placed this
matter on the inactive list.
Five additional cases have been filed in opposition to the road and tunnel
project which also contain related challenges. The five matters, Bryant et al.
v. New Jersey Department of Transportation et al., Merolla and Brady v. The
Casino Reinvestment Development Authority et al., Middlesex County v. The Casino
Reinvestment Development Authority et al., Gallagher et al. v. The Casino
Reinvestment Development Authority et al. and George Harms v. State of New
Jersey et al. are also being vigorously defended by the State. In three of these
cases ("Merolla", "Middlesex" and "Gallagher"), the court granted summary
judgment in favor of the New Jersey Department of Transportation and the South
Jersey Transportation Authority on September 29, 1997. These plaintiffs have
filed an appeal. On February 17, 1998 the Federal District Court dismissed the
plaintiffs' claim of violation of the New Jersey Coastal Area Facility Review
Act in the "Bryant" case without prejudice, by declining to exercise
jurisdiction, and dismissed the other claims of the "Bryant" plaintiffs with
prejudice.
Blecker v. State of New Jersey. This is a class action lawsuit filed in Superior
Court-Law Division, Atlantic County, on behalf of all providers of Medicare Part
B services to Qualified Medicare Beneficiaries (QMB's) seeking reimbursement for
Medicare co-insurance and deductibles not paid by the State Medicaid program
from 1988 to February 10, 1995. QMB's are persons who are eligible for Medicare
and Medicaid and from whom Medicaid pays the premiums for Medicare Part B
benefits. From 1988 until February 10, 1995 the State did not pay providers for
co-insurance and deductibles unless the Medicare rate plus the co-insurance and
deductibles was equal to or less than the Medicaid reimbursement rate for the
service. Plaintiff alleges a breach of the contract between the State and
Federal governments intended to benefit providers, and a breach of a contract
between the State Medicaid program and its providers, as well as a claimed
violation of Federal civil rights law. Plaintiff is seeking all co-insurance and
deductibles for Medicare Part B benefits provided to all QMB's for the period
from 1988 to 1995. On August 11, 1997, the State filed a motion to dismiss the
matter and on September 15, 1997, the State filed a motion for summary judgment.
The State intends to vigorously defend this lawsuit.
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Spadoro v. New Jersey Economic Development Authority, Alan Steinberg, Brian W.
Clymer, Joseph Latoof and Elizabeth Randall. The Pension Bond Financing Act of
1997 authorized the New Jersey Economic Development Authority (the "Authority")
to issue bonds to fund the accrued unfunded liability in the State's pension
funds. Bonds in the amount of $2,803,042,498.56 were issued by the Authority on
June 30, 1997 for the purposes set forth in the Pension Bond Financing Act of
1997. This suit, a second attempt by this plaintiff to challenge the Pension
Bond Act, was brought in July 1997 to challenge the validity of the Authority's
resolution authorizing the issuance of the bonds. Fundamentally, the plaintiff
alleges that the resolution is invalid because (i) the State Treasurer and the
other ex officio members of the Authority had a conflict of interest, (ii) the
actions of the Authority violated the public policy of the State, and (iii)
there were various procedural defects in the conduct of the meeting. On
September 2, 1997, the defendants filed a motion for summary judgment. On
January 9, 1998, the trial court granted the State's motion for summary judgment
and dismissed the claim in its entirety. The time period for plaintiffs to
appeal has not yet run.
Camden County Energy Recovery Associates v. New Jersey Department of
Environmental Protection, Board of Chosen Freeholders of the County of Camden,
et al. Plaintiff, Camden County Energy Recovery Associates ("CCERA"), the owner
and operator of a resource recovery facility in South Camden since 1991, filed
suit on October 20, 1997 in Superior Court-Mercer County. Plaintiff CCERA sought
to have the county solid waste reprocurement process halted to clarify bid
specifications. On November 6, 1997, the court denied the claim to halt the
bidding process but did require that the bid specifications be clarified. In
responding to the complaint, the Pollution Control Financing Authority of Camden
County ("PCFFA") counterclaimed, seeking reformation of the contract between
CCERA and PCFFA. PCFFA also cross-claimed against the State for contribution and
indemnification by the State to the extent PCFFA remains responsible for the
debt which was issued to finance the resource recovery facility. The State filed
motions to dismiss the complaint and a cross-claim which are pending with the
court. The State intends to vigorously defend this action.
Sojourner A. et al. v. Dept. of Human Services. The plaintiffs in this action
filed a complaint and motion for preliminary injunction on September 4, 1997,
seeking damages and declaratory and injunctive relief overturning, on State
constitutional grounds, the "family cap" provisions of the State Work First New
Jersey Act N.J.S.A.44: 10-1 et seq. Damages sought are retroactive payment of
benefits to all persons who did not obtain an increase in welfare benefits
because of the cap. The motion for preliminary injunction was denied on October
28, 1997 and the State has filed an answer to the complaint. The State intends
to defend this suit vigorously.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed the Manager 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. Mr. Lebenthal may be deemed an
"interested person" of the Fund, as defined in the 1940 Act, on the basis of his
affiliation with Lebenthal Asset Management, Inc.
James A. Lebenthal, 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. His address is 120
Broadway, New York, New York 10271.
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 of N/W
Capital, Inc., a principal and financial advisory firm since March, 1995. Prior
to that he was Executive Vice President of MBIA, Inc. and its predecessor
organization from December 1985 until March 1995. His address is 1177 High Ridge
Road, Stamford, CT 06905.
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<PAGE>
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 an A.B. in U.S.
History. Her address is 120 Broadway, New York, New York 10271.
Deidre McCourt, 35 - Secretary of the Fund, has been employed by Lebenthal &
Co., Inc. since 1989. Her address is 120 Broadway, New York, New York 10271.
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. His address is
120 Broadway, New York, New York 10271.
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 "Manager" herein).
COMPENSATION TABLE
<TABLE>
- ----------------------- ------------------------ ------------------------- ------------------------- -----------------------------
<S> <C> <C> <C> <C>
1) Name of Person, 2) Aggregate 3) Pension or 4) Estimated Annual 5) Total Compensation
Position Compensation from Retirement Benefits Benefits upon from Fund Complex Paid
Registrant for Accrued as Part of Retirement to Directors*
Fiscal Year Fund Expenses
- ----------------------- ------------------------ ------------------------- ------------------------- -----------------------------
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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
On February 28, 1999 there were _______, _____________ and _________ shares of
the New York, New Jersey and Taxable Portfolio outstanding, respectively. As of
February 28, 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 28, 1999:
- ------------------------------------------------------------ -------------------
Nature of
Name and address % of Class Ownership
- ------------------------------------------------------------ -------------------
[insert]
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 at November 30, 1998 manager, advisor or supervisor with respect to assets
aggregating in excess of $199 million.
26
786574.2
<PAGE>
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 approved by the Board of
Directors, including a majority of the directors who are not interested persons
(as defined in the Act) of the Fund or the Distributor, on July 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.
For the New York Portfolio's fiscal year ended November 30, 1998 the fee payable
to the Manager was $327,319. The New York Portfolio's net assets at the close of
business on November 30, 1998 totaled $150,473,736. For the New York Portfolio's
fiscal year ended November 30, 1997, the fee payable to the Manager was
$288,050. The New York Portfolio's net assets at the close of business on
November 30, 1997 totaled $134,144,060. For the New York Portfolio's fiscal year
ended November 30, 1996, the fee payable to the Manager was $266,395. The New
York Portfolio's net assets at the close of business on November 30, 1996
totaled $122,611,313. For the New Jersey Portfolio's fiscal year ended November
30, 1997 the fee payable to the Manager was $13,639, all of which was waived.
For the New Jersey Portfolio's fiscal year ended November 30, 1998, the fee
payable to the Manager was $19,473. The New Jersey Portfolio's net assets at the
close of business on November 30, 1998 totaled $9,042,143. The New Jersey
Portfolio's net assets at the close of business on November 30, 1997 totaled
$6,121,584. For the New Jersey Portfolio's fiscal year ended November 30, 1996
the fee payable to the Manager was $10,708, all of which was waived. The New
Jersey Portfolio's net assets at the close of business on November 30, 1996
totaled $5,182,149. For Taxable Portfolio's fiscal year ended November 30, 1998,
the fee payable to the Manager was $40,186. The Taxable Portfolio's net assets
at the close of business on November 30, 1998 totaled $17,789,079. For the
Taxable Portfolio's fiscal year ended November 30, 1997, the fee payable to the
Manager was $35,804, all of which was waived. The Taxable Portfolio's net assets
at the close of business on November 30, 1997 totaled $14,993,874. The Taxable
Portfolio's net assets at the close of business on November 30, 1996 totaled
$14,607,185.
27
786574.2
<PAGE>
Expense Limitation. The Manager has agreed to reimburse the Taxable Portfolio
and the New Jersey Portfolio for their expenses (exclusive of interest, taxes,
brokerage, and extraordinary expenses) which in any year exceed the limits on
investment company expenses prescribed by any state in which such Portfolio's
shares are qualified for sale. For the purpose of this obligation to reimburse
expenses, a Portfolio's annual expenses are estimated and accrued daily, and any
appropriate estimated payments are made to it on a monthly basis. Subject to the
obligations of the Manager to reimburse a Portfolio for its excess expenses as
described above, such Portfolio has, under its respective Management Contract,
confirmed its obligation for payment of all its other expenses, including taxes,
brokerage fees and commissions, commitment fees, certain insurance premiums,
interest charges and expenses of the custodian, transfer agent and dividend
disbursing agent's fees, telecommunications expenses, costs and expenses of fund
bookkeeping agent, auditing and legal expenses, costs of forming the corporation
and maintaining corporate existence, compensation of directors, officers and
employees of the Fund and costs of other personnel performing services for the
Fund who are not officers of the Manager or its affiliates, or the
Administrator, costs of investor services, shareholders' reports and corporate
meetings, Securities and Exchange Commission registration fees and expenses,
state securities laws registration fees and expenses, expenses of preparing and
printing the Fund's prospectus for delivery to existing shareholders and of
printing application forms for shareholder accounts, the fees payable to the
Manager under the Management Contract, the fees payable to the Distributor under
the Distribution Agreement and Shareholder Servicing Agreement (where
applicable) and the fees payable to the Administrator under the Administration
Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. A Portfolio's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above. As a result of the recent passage of the National
Securities Markets Improvement Act of 1996, all state expense limitations have
been eliminated at this time.
Administrator. The Administrator for the New York Portfolio, the Taxable
Portfolio and the New Jersey Portfolio is State Street Bank and Trust Company
(the "Administrator"), a Massachusetts trust company, which has its principal
office at 225 Franklin Street, Boston, Massachusetts 02111. The Administrator
serves as administrator of other mutual funds.
Pursuant to the Administration Agreement with the New York Portfolio, the
Taxable Portfolio and the New Jersey Portfolio, the Administrator provides all
administrative services reasonably necessary for such Portfolios, other than
those provided by the Manager, subject to the supervision of the Fund's Board of
Directors. Because of the services rendered to a Portfolio by the Administrator
and the Manager, the Portfolio itself may not require any employees other than
its officers, none of whom receive compensation from the Portfolio.
Under the Administration Agreement with the New York Portfolio, the Taxable
Portfolio and the New Jersey Portfolio, the Administrator provides
administrative services including, without limitation: (i) services of personnel
competent to perform such administrative and clerical functions as are necessary
to provide effective administration of the Portfolio; (ii) assisting Fund
officers in preparing Portfolio tax returns; (iii) in conjunction with Fund
counsel, preparing and filing all Blue Sky filings, reports and renewals; (iv)
coordinating the preparation and distribution of all materials for directors,
including the agenda for meetings and all exhibits thereto, and actual and
projected quarterly summaries; (v) coordinating the activities of the
Portfolio's Manager, Custodian, Legal Counsel and Independent Accountants; (vi)
monitoring daily and periodic compliance with respect to all requirements and
restrictions of the 1940 Act, the Internal Revenue Code and the Prospectus;
(vii) monitoring daily the Portfolio's accounting services agent's calculation
of all income and expense accruals, sales and redemptions of capital shares
outstanding; (viii) evaluating expenses, projecting future expenses, and
processing payments of expenses; and (ix) monitoring and evaluating performance
of bookkeeping and related services by Investors Fiduciary Trust Company, the
bookkeeping agent for the Portfolio.
28
786574.2
<PAGE>
For the services rendered to such Portfolios by the Administrator, the Fund pays
the Administrator a fee, computed daily and payable monthly, equal to .08% per
annum of the average daily net assets of the respective Portfolio up to $125
million, .06% per annum of the average daily net assets of each of the
Portfolios of the next $125 million and .04% of such assets of each of the
Portfolios in excess of $250 million. There is a minimum annual fee payable of
$165,000. Fees paid to the Administrator were as follows: for the New York
Portfolio's fiscal year ended November 30, 1998, the fee payable was $139,816,
for the New Jersey Portfolio's fiscal year ended November 30, 1998, the fee
payable was $7,511, and for the Taxable Portfolio's fiscal year ended November
30, 1998, the fee payable was $15,642. For the New York Portfolio's fiscal year
ended November 30, 1997, the fee payable was $143,014, for the New Jersey
Portfolio's fiscal year ended November 30, 1997, the fee payable was $6,213, for
the Taxable Portfolio's fiscal year ended November 30, 1997, the fee was
$16,453, for the New York Portfolio's fiscal year ended November 30, 1996, the
fee payable was $144,407, for the New Jersey Portfolio's fiscal year ended
November 30, 1996, the fee payable was $5,398, for the Taxable Portfolio's
fiscal year ended November 30, 1996, the fee payable was $15,311.
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").
The New York Portfolio. Pursuant to its Plan, the New York Portfolio and the
Distributor have entered into a Distribution Agreement. Under the Distribution
Agreement, the Distributor, as agent for the Fund, will solicit orders for the
purchase of the New York Portfolio's shares, provided that any subscriptions and
orders will not be binding on the Fund until accepted by the Fund as principal.
Under the Distribution Agreement, the Distributor receives from the Class A
Shares of the New York Portfolio a fee equal to 0.25% per annum of the average
daily net assets of the Class A Shares of the Portfolio as a service fee (the
"Service Fee"). Under the Distribution Agreement, the Distributor receives from
the Class B Shares of the New York Portfolio an aggregate fee equal to 1% per
annum of such Class B Shares' average daily net assets which includes (i) an
asset based sales charge (the "Asset Based Sales Charge") equal to 0.75% per
annum of its average daily net assets to compensate the Distributor for sales
commissions paid by the Distributor for sales of the Portfolio's Class B Shares
and (ii) 0.25% of its average daily net assets as the Service Fee.
These fees are accrued daily and paid monthly. For providing shareholder
servicing and the maintenance of shareholder accounts and that provides that the
Distributor may make payment from time to time from the Service Fee received to
pay the costs of, and to compensate others, including Participating
Organizations for performers such shareholder servicing functions on behalf of
the Portfolio.
29
786574.2
<PAGE>
The Plan and the Distribution Agreement provide that, in addition to the Service
Fee, the New York Portfolio will pay for i) telecommunications expenses
including the cost of dedicated lines and CRT terminals, incurred by the
Distributor in carrying out its obligations under the Distribution Agreement and
ii) preparing, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing and printing subscription application
forms for shareholder accounts.
The Plan and the Management Agreement provide that the Manager may make payments
from time to time from its own resources, which may include the Management Fee
and past profits for the following purposes: i) to defray the costs of, and to
compensate others, including Participating Organizations with whom the
Distributor has entered into written agreements, for performing shareholder
servicing and related administrative functions on behalf of the New York
Portfolio, ii) to compensate certain Participating Organizations for providing
assistance in distributing the New York Portfolio's shares, iii) to pay the cost
of printing and distributing the New York Portfolio's prospectus to prospective
investors, and iv) to defray the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including the salaries and/or
commissions of sales personnel in connection with the distribution of the New
York Portfolio's shares. The Distributor may also make payments from time to
time from its own resources which may include the Service Fee and past profits
for the purposes enumerated in (i) above. With respect to the Class B shares
only, the Distributor may also make payments for the purposes enumerated in
(ii), (iii), and (iv) from the Asset Based Sales Charges received by the
Distributor. The Distributor, in its sole discretion, will determine the amount
of such payments made pursuant to the Plan, provided that such payments will not
increase the amount which the New York Portfolio is required to pay to the
Distributor for any fiscal year under the Distribution Agreement in effect for
that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the New York Portfolio or the
Distributor and Participating Organizations or other organizations must be in a
form satisfactory to the Fund's Board of Directors. In addition, the Plan
requires the Fund and the Distributor to prepare, at least quarterly, written
reports setting forth all amounts expended for distribution purposes by the New
York Portfolio and the Distributor pursuant to the Plan and identifying the
distribution activities for which those expenditures were made.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Directors,
including a majority of directors who are not interested persons of the Fund and
who have no direct or indirect interest in the operation of the Plan or in the
agreements related to the Plan. The Board of Directors most recently approved
the Plan for the Class A Shares on May 21, 1998 to be effective until April 30,
1999. The Plan was approved by the shareholders of the Portfolio at their first
meeting held on June 23, 1992. The Board of Directors most recently approved the
Plan for the Class B Shares of the New York Portfolio on October 27, 1998. The
Directors first approved the Plan for the Class B Shares of the New York
Portfolio on July 31, 1997. The Plan further provides that it may not be amended
to increase materially the costs which may be spent by the Fund for distribution
pursuant to the Plan without shareholder approval, and the other material
amendments must be approved by the directors in the manner described in the
preceding sentence. The Plan may be terminated at any time by a vote of a
majority of the disinterested directors of the Fund or the New York Portfolio's
shareholders.
For the New York Portfolio's fiscal year ended November 30, 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 [$9,031]
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.
30
786574.2
<PAGE>
The Taxable Portfolio and the New Jersey Portfolio. Pursuant to each Portfolio's
Plan, the Taxable Portfolio and the New Jersey Portfolio have each entered into
a Distribution Agreement and a Shareholder Servicing Agreement.
For its services under the respective Portfolio's Shareholder Servicing
Agreement, the Distributor receives from each of the Taxable Portfolio and the
New Jersey Portfolio a service fee equal to .25% per annum of the respective
Portfolio's average daily net assets (the "Shareholder Servicing Fee"). The fee
is accrued daily and paid monthly and any portion of the fee may be deemed to be
used by the Distributor for purposes of i) shareholder servicing and maintenance
of shareholder accounts and ii) for payments to Participating Organizations with
respect to servicing their clients or customers who are shareholders of the
Portfolio.
Under each Portfolio's Distribution Agreement, the Distributor, for nominal
consideration and as agent for the respective Portfolio, will solicit orders for
the purchase of the respective Portfolio's shares, provided that any
subscriptions and orders will not be binding on the Portfolio until accepted by
the Portfolio as principal. In addition, the Distribution Agreement provides for
reimbursement to the Distributor by the Portfolio for its distribution,
promotional and advertising costs incurred in connection with the distribution
of the respective Portfolio's shares in an amount not to exceed .10% per annum
of the respective Portfolio's average daily net assets. To the extent the
Distributor does not take reimbursements for such expenses in a current fiscal
year, it is precluded from taking any reimbursement for such amounts in a future
fiscal year.
The Plan, the Shareholder Servicing Agreement and the Distribution Agreement
provide that, in addition to the Shareholder Servicing Fee and advertising
reimbursement, each Portfolio will pay for i) telecommunications expenses
including the cost of dedicated lines and CRT terminals incurred by the
Distributor in carrying out its obligations under the Shareholder Servicing
Agreement, and ii) typesetting, printing and delivering each Portfolio's
prospectus to existing shareholders of the Portfolio and preparing the printing
subscription application forms for shareholder accounts. The expenses enumerated
in this paragraph shall not exceed an amount equal to .05% per annum of the
Portfolio's average daily net assets.
Each Portfolio's Plan and Management Contract provide that the Manager may make
payments from time to time from its own resources, which may include the
management fee and past profits for the following purposes: i) to defray the
costs of and to compensate others, including participating organizations with
whom the Distributor has entered into written agreements, for performing
shareholder servicing and related administrative functions on behalf of the
Portfolio, ii) to compensate certain participating 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 approved by the shareholders of each Portfolio at their first meetings each
held on November 10, 1994. The Plan further provides that it may not be amended
to increase materially the costs which may be spent by the Fund for distribution
pursuant to the Plan without shareholder approval, and the other material
amendments must be approved by the directors in the manner described in the
preceding sentence. The Plan may be terminated at any time by a vote of a
majority of the disinterested directors of the Fund or the shareholders of each
respective Portfolio.
31
786574.2
<PAGE>
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 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.
32
786574.2
<PAGE>
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.
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
are 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
33
786574.2
<PAGE>
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 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.
34
786574.2
<PAGE>
A Tax-exempt Fund may realize capital gains or losses from its portfolio
transactions and upon the maturity or disposition of securities acquired at
discounts resulting from market fluctuations. In the case of a Municipal
Obligation acquired at a market discount, gain on the disposition of the
Municipal Obligation generally will be treated as ordinary income to the extent
of accrued market discount. Short-term capital gains will be taxable to
shareholders as ordinary income when they are distributed. 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 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.
35
786574.2
<PAGE>
In South Carolina v. Baker, the U.S. Supreme Court held that the Federal
government may constitutionally require states to register bonds they issue and
may subject the interest on such bonds to Federal tax if not registered, and
that there is no constitutional prohibition against the Federal government's
taxing the interest earned on state or other municipal bonds. The Supreme Court
decision affirms the authority of the Federal government to regulate and control
bonds such as the Municipal Obligations and to tax such bonds in the future. The
decision does not, however, affect the current exemption from taxation of the
interest earned on the Municipal Obligations in accordance with Section 103 of
the Code.
The Taxable Portfolio. The Taxable Portfolio has elected to qualify under the
Code as a "regulated investment company", and intends to continue to qualify for
regulated investment company status as long as such qualification is in the best
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.
36
786574.2
<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 New Jersey Municipal Obligations.
Additionally, a qualified investment fund must comply with certain continuing
reporting requirements.
In the opinion of McCarter & English, special New Jersey tax counsel to the New
Jersey Portfolio, assuming that the New Jersey Portfolio constitutes a qualified
investment fund and that the New Jersey Portfolio complies with the reporting
obligations under New Jersey law with respect to qualified investment funds, 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 Municipal 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.
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.
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<PAGE>
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. With
respect to the Class B Shares of the New York Portfolio, CDSCs are not taken
into account when calculating this performance information. The formula for
total return used by the Portfolios includes three steps: (1) adding to the
total number of shares purchased by the hypothetical investment in a Portfolio
of $1,000 (assuming the investment is made at a public offering price that
includes the current maximum sales load of 4.50% for the New York Portfolio,
4.50% for the Taxable Portfolio or 4.50% for the New Jersey Portfolio) all
additional shares that would have been purchased if all dividends and
distributions paid or distributed during the period had been automatically
reinvested; (2) calculating the value of the hypothetical initial investment as
of the end of the period by multiplying the total number of shares owned at the
end of the period by the net asset value per share on the last trading day of
the period; and (3) dividing this account value for the hypothetical investor by
the amount of the initial investment. The average annual total return for the
specified period is then determined by calculating the annual rate required for
the hypothetical initial investment to grow to the account value at the end of
the specified period. Total return or average annual return may be stated with
or without giving effect to any expense limitations in effect for the Portfolio.
The New York Portfolio's total return for the twelve months ended November 30,
1998 was 2.84%. The New York Portfolio's average annual compounded total return
from June 24, 1991 (inception) to November 30, 1998 was 7.46%. The New Jersey
Portfolio's total return for the twelve months ended November 30, 1998 was 3.59%
and the average annual compounded total return from December 1, 1993 (inception)
to November 30, 1998 was 4.38%. The Taxable Portfolio's total return for the
twelve months ended November 30, 1998, was 6.82% and the average annual
compounded total return from December 1, 1993 (inception) to November 30, 1998
was 8.06%.
Yield. The Portfolios compute yield by annualizing net investment income per
share for a recent thirty-day period and dividing that amount by a Portfolio
share's maximum public offering price (reduced by any undeclared earned income
expected to be paid shortly as a dividend) on the last trading day of that
period. With respect to the Class B Shares of the New York Portfolio, CDSCs are
not taken into account when calculating this performance information. Net
investment income will reflect amortization of any market value premium or
discount of fixed income securities (except for obligations backed by mortgages
or other assets) and may include recognition of a pro rata portion of the stated
dividend rate of dividend paying portfolio securities. A Portfolio's yield will
vary from time to time depending upon market conditions, the composition of the
Portfolio and operating expenses of the Portfolio. These factors, possible
differences in the methods used in calculating yield and the tax exempt status
of distributions should be considered when comparing a Portfolio's yield to
yields published for other investment companies and other investment vehicles.
Yield should also be considered relative to changes in the value of the
Portfolio's shares and to the relative risks associated with the investment
objectives and policies of the Portfolio. Yield may be stated with or without
giving effect to any expense limitations in effect for the Portfolio. The New
York, New Jersey and Taxable Portfolios' yield for the thirty-day period ended
November 30, 1998 was 4.01%, 4.05% and 5.5%, respectively.
The New York Portfolio and the New Jersey Portfolio may also advertise a tax
equivalent yield for residents of the States of New York and New Jersey,
respectively, wherein all or substantially all of the Portfolio's dividends are
not subject to 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. The New York and New
Jersey Portfolios' taxable equivalent yield for the period ended November 30,
1998 was 5.61% and 6.68%, respectively.
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<PAGE>
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. The New York and New Jersey Portfolios' taxable equivalent
yield for the period ended November 30, 1998 was 5.22% and 6.26%, respectively.
General. At any time in the future, yields and total return may be higher or
lower than past yields and total return and there can be no assurance that past
results will continue. Investors in a Portfolio are specifically advised that
share prices, expressed as the net asset values per share, will vary just as
yields will vary. An investor's focus on the yield of the Portfolio to the
exclusion of the consideration of the share price of the Portfolio may result in
the investor's misunderstanding the total return he or she may derive from the
Portfolio.
A Portfolio may from time to time include its yield and total return in
advertisements or information furnished to present or prospective shareholders.
A Portfolio may also from time to time include in advertisements the ranking of
those performance figures relative to such figures for groups of mutual funds
categorized by Lipper Analytical Services as having the same investment
objectives. A Portfolio may also use total return and yield to compare its
performance against the U.S. Bureau of Labor Statistics Consumer Price Index,
which is a statistical measure of changes over time in the prices of goods and
services in major United States household expenditure groups.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The audited financial statements for the Fund for the fiscal year ended November
30, 1998 are herein incorporated by reference.
39
786574.2
<PAGE>
DESCRIPTION OF SECURITY RATINGS AND NOTES1
- --------------------------------------------------------------------------------
Moody's Investors Service, Inc. (Moody's)
Bonds
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements may change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than Aaa bonds because margins of protection may not
be as large or fluctuation of protective elements may be of greater amplitude,
or there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers (1, 2 and 3) in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; modifier 2 indicates a mid-range ranking; and modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Notes
Moody's ratings for state and tax-exempt notes and short-term loans are
designated Moody's Investment Grade (MIG). The distinction is in recognition of
the difference between short-term and long-term credit risk. Loans bearing the
designation MIG-1 are of the best quality, enjoying strong protection by
established cash flows of funds for their servicing or by established and
broadbased access to the market for refinancing, or both. Loans bearing the
designation MIG-2 are of high quality, with margins of protection ample although
not as large as in the preceding group. Loans bearing the designation MIG-3 are
of favorable quality, with all security elements accounted for but lacking the
strength of the preceding grades. Market access for refinancing, in particular,
is likely to be less well established. Notes bearing the designation MIG-4 are
judged to be of adequate quality, carrying specific risk but having protection
commonly regarded as required of an investment security and not distinctly or
predominantly speculative.
Commercial Paper
Moody's Commercial Paper Ratings are opinions of the ability of issuers to repay
punctually promissory senior debt obligations not having an original maturity in
excess of one year. The designation Prime-1 or P-1 indicates the highest quality
repayment capacity of the rated issue.
The designation Prime-2 or P-2 indicates that the issuer has a strong capacity
for repayment of senior short-term promissory obligations. Earnings trends and
coverage ratios, while sound, may be subject to some variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Issuers rated "Not Prime" do not fall within any of the Prime rating categories.
- -------------------
1 As described by the rating agencies.
40
786574.2
<PAGE>
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
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.
41
786574.2
<PAGE>
Fitch Investors Services, Inc. (~Fitch~)
Tax-Exempt Bonds
Fitch investment grade bond ratings provide a guide to investors in determining
the credit risk associated with a particular security. The ratings represent
Fitch's assessment of the issuer's ability to meet the obligations of a specific
debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell or hold any security. Ratings
do not comment on the adequacy of market price, the suitability of any security
for a particular investor, or the tax-exempt nature or taxability of payments
made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for other reasons.
AAA: Bonds considered to be investment grade and of the highest grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be strong
but may be more vulnerable to adverse economic conditions and circumstances than
bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
Tax-Exempt Notes and Commercial Paper
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existences of liquidity necessary to meet the issuer's obligations in a timely
manner.
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.
42
786574.2
<PAGE>
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.
43
786574.2
<PAGE>
Lebenthal New York Municipal Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
TAXABLE EQUIVALENT YIELD TABLE
1. If Your Taxable Income Bracket Is . . .
<S> <C> <C> <C> <C> <C>
Single $ 25,351- 61,401- 128,101- 278,451
Return 61,400 128,100 278,450 and over
Joint 42,351- 102,301- 155,951- 278,451
Return 102,300 155,950 278,450 and over
2. Then Your Combined Income Tax Bracket Is . . .
Combined
Marginal 32.93% 35.73% 40.38% 43.74%
Tax Rate
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields . . .
Tax Exempt Equivalent Taxable Investment Yield
Yield With Taxable Income Yields
3.25% 4.8% 5.1% 5.5% 5.8%
3.50% 5.2% 5.4% 5.9% 6.2%
4.00% 6.0% 6.2% 6.7% 7.1%
4.25% 6.3% 6.6% 7.1% 7.6%
4.50% 6.7% 7.0% 7.5% 8.0%
4.75% 7.1% 7.4% 8.0% 8.4%
5.00% 7.5% 7.8% 8.4% 8.9%
5.25% 7.8% 8.2% 8.8% 9.3%
5.50% 8.2% 8.6% 9.2% 9.8%
5.75% 8.6% 8.9% 9.6% 10.2%
6.00% 8.9% 9.3% 10.1% 10.7%
6.25% 9.3% 9.7% 10.5% 11.1%
6.50% 9.7% 10.1% 10.9% 11.6%
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
44
786574.2
<PAGE>
Lebenthal New York Municipal Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
TAXABLE EQUIVALENT YIELD TABLE
(Federal, New York State and New York City)
1. If Your Taxable Income Bracket Is . . .
<S> <C> <C> <C> <C> <C>
Single $ 25,361- 61,401- 128,101- 278,451
Return 61,400 128,100 278,450 and over
Joint 42,351- 102,301- 155,951- 278,451
Return 102,300 155,950 278,450 and over
2. Then Your Combined Income Tax Bracket Is . . .
Combined
Marginal 36.10% 38.80% 43.24% 46.43%
Tax Rate
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields . . .
Tax Exempt Equivalent Taxable Investment Yield
Yield With Taxable Income Yields
3.25% 5.1% 5.3% 5.7% 6.1%
3.50% 5.5% 5.7% 6.2% 6.5%
4.00% 6.3% 6.5% 7.0% 7.5%
4.25% 6.7% 6.9% 7.5% 7.9%
4.50% 7.0% 7.4% 7.9% 8.4%
4.75% 7.4% 7.8% 8.4% 8.9%
5.00% 7.8% 8.2% 8.8% 9.3%
5.25% 8.2% 8.6% 9.2% 9.6%
5.50% 8.6% 9.0% 9.7% 10.3%
5.75% 9.0% 9.4% 10.1% 10.7%
6.00% 9.4% 9.8% 10.6% 11.2%
6.25% 9.8% 10.2% 11.0% 11.7%
6.50% 10.2% 10.6% 11.5% 12.1%
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
45
786574.2
<PAGE>
Lebenthal New Jersey Municipal Bond Fund
- --------------------------------------------------------------------------------
<TABLE>
TAXABLE EQUIVALENT YIELD TABLE
(New Jersey and Federal)
1. If Your Taxable Income Bracket Is . . .
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single $ 25,351- -- 35,001- 40,001- 61,401- 75,001- 128,101- 278,451
Return 35,000 -- 40,000 61,400 75,000 128,100 278,450 and over
Joint 42,351- 50,001- 70,001- 80,001- 102,301- 150,001- 155,951- 278,451
Return 50,000 70,000 80,000 102,300 150,000 155,950 288,450 and over
2. Then Your Combined Income Tax Bracket Is . . .
Combined
Tax Rate 29.29% 29.26% 30.52% 31.98% 34.81% 35.40% 40.08% 45.45%
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields . . .
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
3.25% 4.6% 4.6% 4.7% 4.8% 5.0% 5.0% 5.4% 5.7%
3.50% 4.9% 5.0% 5.0% 5.1% 5.4% 5.4% 5.8% 6.2%
4.00% 5.7% 5.7% 5.8% 5.9% 6.1% 6.2% 6.7% 7.1%
4.25% 6.0% 6.1% 6.1% 6.2% 6.5% 6.6% 7.1% 7.5%
4.50% 6.4% 6.4% 6.5% 6.6% 6.9% 7.0% 7.5% 8.0%
4.75% 6.7% 6.8% 6.8% 7.0% 7.3% 7.4% 7.9% 8.4%
5.00% 7.1% 7.1% 7.2% 7.4% 7.7% 7.7% 8.3% 8.8%
5.25% 7.4% 7.5% 7.6% 7.7% 8.1% 8.1% 8.8% 9.3%
5.50% 7.8% 7.8% 7.9% 8.1% 8.4% 8.5% 9.2% 9.7%
5.75% 8.1% 8.2% 8.3% 8.5% 8.8% 8.9% 9.6% 10.2%
6.00% 8.5% 8.5% 8.6% 8.8% 9.2% 9.3% 10.0% 10.6%
6.25% 8.8% 8.9% 9.0% 9.2% 9.6% 9.7% 10.4% 11.1%
6.50% 9.2% 9.3% 9.4% 9.6% 10.0% 10.1% 10.8% 11.5%
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
46
786574.2
<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)
786574.2
<PAGE>
PART C - OTHER INFORMATION
Item 23. Exhibits
++ (a) Articles of Incorporation of the Registrant.
++ (b) By-laws of the Registrant.
(c) Form of Certificate for shares of Common Stock, par value $.001
per share of the Registrant.
***** (d) Management Agreement between the Registrant and Lebenthal Asset
Management, Inc., for the Lebenthal New York Municipal Bond Fund
portfolio.
***** (d.1) Management Agreement between the Registrant and Lebenthal Asset
Management, Inc., for the Lebenthal New Jersey Municipal Bond
Fund portfolio.
***** (d.2) Management Agreement between the Registrant and Lebenthal Asset
Management, Inc., for the Lebenthal Taxable Municipal Bond Fund
portfolio.
(e) See Distribution Agreement filed as Exhibits 15.2.1, 15.2.2
and 15.2.3.
(f) [Not applicable].
***** (g) Custody Agreement between the Registrant and IFTC.
***** (h) Investment Accounting Agreement between the Registrant and IFTC.
***** (h.1) Transfer Agency and Service Agreement between the Registrant and
State Street Bank and Trust Company.
***** (h.2) Administration Agreement between the Registrant and State Street
Bank and Trust Company.
++ (i) Opinion of Battle Fowler LLP, as to the legality of the
securities being registered, including their consent to the
filing thereof and to the use of their name under the heading
"Federal Income Taxes" and "New York Income Taxes" in the
Prospectus and Statement of Additional Information, and under the
heading "Counsel and Auditors" in the Statement of Additional
Information.
++ (i.1) Opinion of McCarter & English, as to the New Jersey law,
including their consent to the filing thereof and to the use of
their name under the heading "New Jersey Income Taxes" in the
Prospectus.
- --------------------
***** Filed with Post-Effective Amendment No. 11 to said Registration
Statement on March 29, 1996 and is incorporated herein by reference.
++ Filed with Post-Effective Amendment No. 12 to the Registration
Statement on March 31, 1997 and is incorporated herein by reference.
798318.1
<PAGE>
# (j) Consent of McGladrey & Pullen LLP.
o (j.1) Consent of PricewaterhouseCoopers LLP
(k) Audited Financial Statements, for fiscal year ended November 30,
1998 (filed with Annual Report and incorporated herein by
reference)
(l) Written Assurance of Lebenthal that its purchase of shares of the
Registrant was for investment purposes without any present
intention of redeeming or reselling.
++ (m) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 for the Lebenthal New York Municipal
Bond Fund portfolio of the Registrant.
+ (m.1) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1990 for the Class B shares of the
Lebenthal New York Municipal Bond Fund Portfolio of the Registrant.
++ (m.2) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 for the Lebenthal New Jersey
Municipal Bond Fund portfolio of the Registrant.
++ (m.3) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 for the Lebenthal Taxable Municipal
Bond Fund portfolio of the Registrant.
++ (m.4) Distribution Agreement between the Registrant and Lebenthal &
Co., Inc. for the Lebenthal New York Municipal Bond Fund
portfolio of the Registrant.
+ (m.5) Distribution Agreement between the Registrant and Lebenthal &
Co., Inc. for the Class B shares of the Lebenthal New York
Municipal Bond Fund portfolio of the Registrant.
++ (m.6) Distribution Agreement between the Registrant and Lebenthal &
Co., Inc. for the Lebenthal New Jersey Municipal Bond Fund
portfolio of the Registrant.
++ (m.7) Distribution Agreement between the Registrant and Lebenthal &
Co., Inc. for the Lebenthal Taxable Municipal Bond Fund portfolio
of the Registrant.
++ (m.8) Shareholder Servicing Agreement between the Lebenthal New Jersey
Municipal Bond Fund and Lebenthal & Co., Inc.
++ (m.9) Shareholder Servicing Agreement between the Lebenthal Taxable
Municipal Bond Fund and Lebenthal & Co., Inc.
(n) Financial Data Schedule (for EDGAR Filing only).
++ (o) Form of Rule 18f-3 Multi-Class Plan.
(p) Powers of Attorney.
- -----------------------
++ Filed with Post-Effective Amendment No. 12 to the Registration Statement
on March 31, 1997 and is incorporated herein by reference.
o Filed herewith.
+ Filed with Post-Effective Amendment No. 14 to the Registration Statement
on November 3, 1997 and is incorporated herein by reference.
# Filed with Post-Effective Amendment No. 15 to the Registration Statement
on March 30, 1998 and is incorporated herein by reference.
C-2
798318.1
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
None.
Item 25. Indemnification
Registrant incorporates herein by reference to response to Item 27
of Pre-Effective Amendment No. 1 of this Registration Statement filed with the
Commission on December 18, 1990.
Item 26. Business and Other Connections of Investment Adviser
Registrant's investment adviser is Lebenthal Asset Management, Inc., a
Delaware corporation and a registered investment adviser. The description of
Lebenthal Asset Management, Inc. under the caption "Management of the Fund" in
the Prospectus and in the Statement of Additional Information constituting parts
A and B, respectively, of the Registration Statement, are incorporated herein by
reference.
C-3
798318.1
<PAGE>
Item 27. Principal Underwriters
(a) Lebenthal & Co., Inc., the Registrant's distributor. Lebenthal is
also a depositor for the Empire State Municipal Exempt Trust series of unit
investment trusts.
(b) The following are the directors and officers of Lebenthal & Co.,
Inc. The principal business address of each of these persons is 120 Broadway,
New York, NY 10271.
Positions and Offices Position and Offices
Name With Lebenthal & Co., Inc. With Fund
- -------- -------------------------- --------------------
James A. Lebenthal Chairman and Director Director
D. Warren Kaufman Senior Managing Director
and Director None
Jeffrey Michael James Executive Vice President
and Director None
James E. McGrath Senior Vice President Treasurer
Alexandra Lebenthal President and Director President
Duncan Kimber Smith Senior Managing Director
and Director None
(c) Not Applicable.
Item 28. Location of Accounts and Records
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are maintained in the physical possession of the Registrant or
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, Missouri
64104-1716, the Fund's custodian; at State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, Massachusetts 02171-2197, the Fund's
Administrator; National Financial Data Services, the delegatee of State Street
Bank and Trust Company, 1004 Baltimore, Kansas City, MO 64105, the Fund's
Transfer Agent, and at Lebenthal & Co., Inc., 120 Broadway, New York, New York
10271, the Fund's distributor.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
C-4
798318.1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has met all of
the requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, and State of New York, on the 29th day of January, 1999.
LEBENTHAL FUNDS, INC.
By: /s/ Alexandra Lebenthal
------------------------------
Alexandra Lebenthal
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE & CAPACITY DATE
(1) Principal Executive Officer
/s/ Alexandra Lebenthal
--------------------------
Alexandra Lebenthal January 29, 1999
President
(2) Principal Financial
& Accounting Officer
/s/ James McGrath
--------------------------
James McGrath January 29, 1999
Treasurer
(3) Majority of Directors
James A. Lebenthal}
Victor Chang}
Robert R. Godfrey}
By: /s/ Deidre McCourt
--------------------------
Deidre McCourt
*Attorney-in-Fact January 29, 1999
- -----------------
* Powers of Attorney were filed with Post-Effective Amendment No. 16 to said
Registration Statement on January 29, 1999, and are incorporated herein by
reference.
798318.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 16
to the Registration Statement of each of the Funds constituting Lebenthal Funds,
Inc. on Form N-1A of our report dated January 12, 1999 on our audits of the
financial statements and financial highlights of the Lebenthal New York
Municipal Bond Fund, Lebenthal New Jersey Municipal Bond Fund and Lebenthal
Taxable Municipal Bond Fund, which report is included in the Annual Report to
Shareholders for the year ended November 30, 1998 which is incorporated by
reference in the Statement of Additional Information. We also consent to the
reference in the Statement of Additional Information to our Firm under the
caption "Counsel and Auditors."
Kansas City, Missouri
January 28, 1999
/s/PricewaterhouseCoopers LLP
474778.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints James McGrath and Deidre McCourt, and each of them,
with full power of substitution, as his true and lawful attorney and agent to
execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto filed by
Lebenthal Funds, Inc. (the "Fund") with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, and under the Investment Company
Act of 1940, as amended, and any and all other instruments which such attorney
and agent deems necessary or advisable to enable the Fund to comply with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorney and agent shall do or cause to be done
by virtue hereof.
/s/James A. Lebenthal
-------------------------------------
James A. Lebenthal
350146.1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints James McGrath and Deidre McCourt, and each of them,
with full power of substitution, as his true and lawful attorney and agent to
execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto filed by
Lebenthal Funds, Inc. (the "Fund") with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, and under the Investment Company
Act of 1940, as amended, and any and all other instruments which such attorney
and agent deems necessary or advisable to enable the Fund to comply with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorney and agent shall do or cause to be done
by virtue hereof.
/s/Victor Chang
------------------------------------
Victor Chang
350146.1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints James McGrath and Deidre McCourt, and each of them,
with full power of substitution, as his true and lawful attorney and agent to
execute in his name and on his behalf, in any and all capacities, the
Registration Statement on Form N-1A, and any and all amendments thereto filed by
Lebenthal Funds, Inc. (the "Fund") with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, and under the Investment Company
Act of 1940, as amended, and any and all other instruments which such attorney
and agent deems necessary or advisable to enable the Fund to comply with the
Securities Act of 1933, as amended, the Investment Company Act of 1940, as
amended, the rules, regulations and requirements of the Securities and Exchange
Commission, and the securities or Blue Sky laws of any state or other
jurisdiction; and the undersigned hereby ratifies and confirms as his own act
and deed any and all that such attorney and agent shall do or cause to be done
by virtue hereof.
/s/Robert R. Godfrey
------------------------------------
Robert R. Godfrey
350146.1
<PAGE>
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> LEBENTHAL TAXABLE MUNICIPAL BOND FUND
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