Rule 497(c)
LEBENTHAL Registration No. 33-36784
NEW YORK,
NEW JERSEY
& TAXABLE
MUNICIPAL
BOND FUNDS
PROSPECTUS MARCH 30, 2000
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LEBENTHAL FUNDS, INC.
PROSPECTUS 120 Broadway, New York, NY 10271
March 30, 2000 212-425-6116
OUTSIDE NYC TOLL FREE 1-800-221-5822
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Lebenthal New York Municipal Bond Fund - Class A and Class B Shares
Lebenthal New Jersey Municipal Bond Fund
Lebenthal Taxable Municipal Bond Fund
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TABLE OF CONTENTS
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Risk/Return Summary........................................ 2 Distribution Arrangements...........................23
Investment Objectives, Principal Investment More Information on the Municipal Market............(i)
Strategies and Related Risks............................ 9 Letter of Intent....................................(viii)
Management, Organization and Capital Structure.............13 Financial Highlights................................29
Shareholder Information....................................14
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The Securities and Exchange Commission has not approved or disapproved the
shares described in this prospectus or determined whether this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
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RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCE
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INVESTMENT OBJECTIVES LEBENTHAL NEW YORK MUNICIPAL BOND FUND-
The New York Portfolio is a municipal
bond fund whose investment objective is
to maximize income exempt from regular
Federal income taxes and from New York
State and New York City personal income
taxes, consistent with preservation of
capital, with consideration given to
opportunities for capital gain.
LEBENTHAL NEW JERSEY MUNICIPAL BOND
FUND-The New Jersey Portfolio is a
municipal bond fund whose investment
objective is to maximize income exempt
from regular Federal income taxes and
personal New Jersey gross income tax,
consistent with preservation of
capital, with consideration given to
opportunities for capital gain.
LEBENTHAL TAXABLE MUNICIPAL BOND
FUND-The Taxable Portfolio is a
municipal bond fund whose investment
objective is to maximize income
consistent with preservation of
capital, with consideration given to
opportunities for capital gain.
PRINCIPAL INVESTMENT STRATEGIES The Portfolios invest primarily in
Municipal Obligations. Municipal
Obligations refer to municipal bonds
and notes. These bonds and notes
represent an obligation by a local
government entity or agency to repay a
debt, the proceeds of which are used
for a public purpose. The Portfolios
invest in Municipal Obligations that
are long-term (i.e. average maturity is
15 to 25 years) and are investment
grade.
/ /The New York Portfolio intends to
concentrate (i.e. 25% or more of the
Portfolio's net assets) primarily in
tax-exempt New York Municipal
Obligations.
/ /The New Jersey Portfolio intends to
concentrate (i.e. 25% or more of the
Portfolio's net assets) primarily in
tax-exempt New Jersey Municipal
Obligations.
/ /The Taxable Portfolio intends to
concentrate (i.e. 25% or more of the
Portfolio's net assets) primarily in
taxable Municipal Obligations.
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PRINCIPAL INVESTMENT RISKS o There can be no assurance that the
Portfolios' investment objectives
will be achieved.
o You may lose money by investing in
the Portfolios.
o Securities with longer maturities
are more likely to lead to a greater
degree of market fluctuation in the
value of such securities than do
securities with shorter maturities.
o The types and maturities of the
securities in the Portfolios and the
credit quality of the issuers will
affect the Fund's reaction to
changes in interest rates. Interest
rates impact the yield and share
price of a bond fund. Bond prices
generally rise when interest rates
fall and fall when interest rates
rise. Bonds with longer maturities
are usually more sensitive to
interest rate changes. In other
words, the longer the maturity of a
bond, the greater the impact a
change in interest rates is likely
to have on the bond's price. In
addition, short and long-term
interest rates do not necessarily
move in the same increments or in
the same directions. Short-term
bonds usually react more to changes
in short-term interest rates while
long-term bonds usually react more
to changes in long-term interest
rates.
o The Portfolios may invest in
lower-rated investment grade
securities which may have
speculative characteristics that can
lead to a greater degree of market
fluctuation than higher-rated
investment grade securities with
similar maturities.
o The New York Portfolio and the New
Jersey Portfolio are non-diversified
funds. This means that, compared to
other mutual funds, these portfolios
may each invest a greater percentage
of their assets in a particular
issuer. The risk of investing in a
non-diversified fund is that the
fund may be more sensitive to
changes in the market value of a
single issuer.
o Investors of each Portfolio should
consider the greater risk of the
Portfolio's concentration versus the
safety that comes with a less
concentrated portfolio.
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o Each Portfolio is concentrated in
Municipal Obligations. The value of
Municipal Obligations may be
affected by uncertainties in the
municipal debt market related to
taxation. In addition, the payment
of interest and preservation of
capital are dependent upon the
continuing ability of New York and
New Jersey and other issuers and/or
obligors of state, municipal and
public authority debt obligations to
meet their payment obligations.
o An investment in the Portfolios is
not a deposit in a bank and is not
insured or guaranteed by the Federal
Deposit Insurance Corporation or any
other government agency.
WHO MAY WANT TO INVEST? / /NEW YORK PORTFOLIO: New York
taxpayers who seek income from a
portfolio of professionally managed
municipal bonds that are exempt from
New York City, New York State, and
regular Federal income taxes.
/ /NEW JERSEY PORTFOLIO: New Jersey
taxpayers who seek income from a
portfolio of professionally managed
municipal bonds that are exempt from
New Jersey State and regular Federal
income taxes.
/ /TAXABLE PORTFOLIO: Because the
interest earned on taxable Municipal
Obligations is included in gross
income for Federal income tax
purposes and may be subject to
personal state and local income
taxes, an investment in the
Portfolio may be appropriate for
investment plans, such as tax
deferred IRA's, 401(K) and other
retirement plans. This portfolio is
also recommended for families and
individuals in low to no tax
brackets.
Investors should compare the yields
and returns available on portfolios
of New York, New Jersey and taxable
issues with those of a more
diversified portfolio including
out-of-state issues before making an
investment decision.
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PERFORMANCE BAR CHARTS AND TABLES
The charts and tables below reflect the risks of investing in the Portfolios by
showing how the Portfolios have performed and how their performance has
fluctuated from year to year. The bar charts show the average annual total
returns for each Portfolio for the life of the Portfolio. The tables show how
the New York and New Jersey Portfolios' average annual total returns compare
with that of the Lehman Brothers Municipal Bond Index and how the Taxable
Portfolio's average annual total returns 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 in the bar charts do not include fees and expenses and, if
those amounts were included, returns would be less than those shown.
YEAR-BY-YEAR TOTAL RETURN AS OF 12/31
Lebenthal New York MunicipalBond Fund-Class A Shares
[GRAPHIC OMITTED]
1992 9.91%
1993 13.70%
1994 -8.68%
1995 20.60%
1996 5.05%
1997 9.90%
1998 6.50%
1999 -5.56%
Best quarter: 3/31/95 9.06%
Worst quarter: 3/31/94 (6.97)%
The year-to-date return as of December 31, 1999 is (5.56)%.
Average Annual Total Returns Past Five
(for the periods ending 12/31/99) Years Past One Year Since Inception
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New York Portfolio - Class A (1) 6.10% (9.81)% 5.75%*
Lehman Municipal Bond Index + 6.91% (2.06)% 6.72%*
New York Portfolio - Class B (2) NA (10.83)% (1.57%)***
Lehman Municipal Bond Index + NA (2.06)% 5.81%****
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+ Average annual total return is a measure of the Fund's performance over
time. The Fund's average annual return is compared with the Lehman
Municipal Bond Index. While the Fund does not seek to match the returns of
the Lehman Municipal Bond Index, this index is a good indicator of general
bond market performance. You may not invest in the Lehman Municipal Bond
Index and, unlike the Fund, it does not incur fees or charges.
(1) Reflects 4.50% sales load.
(2) Reflects deferred sales charge.
* Since June 24, 1991.
** Since June 28, 1991.
*** Since December 3, 1997.
**** Since November 30, 1997.
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YEAR-BY-YEAR TOTAL RETURN AS OF 12/31
Lebenthal New Jersey Municipal Bond Fund
[GRAPHIC OMITTED]
1994 -11.69%
1995 16.71%
1996 4.92%
1997 10.61%
1998 6.65%
1999 -5.85%
Best quarter: 3/31/95 6.22%
Worst quarter: 3/31/94 (9.64)%
The year-to-date return as of December 31, 1999 is (5.85)%.
Average Annual Total Returns Past Five Past One Since Inception
(for the periods ending 12/31/99) Years Year (December 1, 1993)
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New Jersey Portfolio (1) 5.45% (10.09)% 2.59%
Lehman Municipal Bond Index+ 6.91% (2.06)% 5.16%*
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+ Average annual total return is a measure of the Fund's performance over
time. The Fund's average annual return is compared with the Lehman
Municipal Bond Index. While the Fund does not seek to match the returns of
the Lehman Municipal Bond Index, this index is a good indicator of general
bond market performance. You may not invest in the Lehman Municipal Bond
Index and, unlike the Fund, it does not incur fees or charges.
(1) Reflects 4.50% sales load.
* Since November 30, 1993.
YEAR-BY-YEAR TOTAL RETURN AS OF 12/31
[GRAPHIC OMITTED]
1994 -5.15%
1995 22.91%
1996 4.88%
1997 13.79%
1998 10.06%
1999 -6.46%
Best quarter: 6/30/95 6.13%
Worst quarter: 6/30/94 (2.58%)
The year-to-date return as of December 31, 1999 is (6.46)%.
Average Annual Total Returns Past Five Since Inception
(for the periods ending 12/31/99) Years Past One Year (December 1, 1993)
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Taxable Portfolio (1) 7.31% (10.67)% 5.34%
Lehman Long Term Corporate Bond
Index+ 8.18% 1.96% 6.08%
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+ Average annual total return is a measure of the Fund's performance over
time. The Fund's average annual return is compared with the Lehman Long Term
Corporate Bond Index. While the Fund does not seek to match the returns of
the Lehman Long Term Corporate Bond Index, this index is a good indicator of
general bond market performance. You may not invest in the Lehman Long Term
Corporate Bond Index and, unlike the Fund, it does not incur fees or
charges.
(1) Reflects 4.50% sales load.
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FEE TABLE
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
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Shareholder Fees
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(fees paid directly from your investment)
New York Portfolio New Jersey Portfolio Taxable Portfolio
Class A Shares Class B Shares Class A Shares Class A Shares
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Maximum Sales Load Imposed on
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Purchases (as a percentage of
offering price)....................... 4.50% None 4.50% 4.50%
Maximum Deferred Sales Charge (as a
percentage of the lesser of original
purchase price or redemption proceeds) None 5%(1) None None
Maximum Sales Load on Reinvestment
Dividends............................. None None None None
Redemption Fees.......................... None None None None
Exchange Fees............................ None None None None
Annual Fund Operating Expenses(2)
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(expenses that are deducted from Fund assets)
New York Portfolio New Jersey Portfolio Taxable Portfolio
Class A Shares Class B Shares Class A Shares Class A Shares
-------------- -------------- -------------- --------------
Management Fees.......................... 0.22% 0.22% 0.25% 0.25%
Distribution and/or Service
12b-1 Fees............................ 0.25% 1.00% 0.25% 0.25%
Other Expenses........................... 0.29% 1.16% 0.95% 0.65%
Total Annual Fund Operating Expenses..... 0.76% 2.38% 1.45% 1.15%
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(1) The deferred sales charge is 5% in the first year, declining to 1% in the
sixth year, and is eliminated thereafter.
(2) For the New York Portfolio - Class B shares, the Manager has voluntarily
reimbursed 0.83% of average net assets in certain Other Expenses.For the
New Jersey Portfolio, the Manager has voluntarily reimbursed the
Management Fee and certain Other Expenses of 0.25% and 0.49% of average
net assets, respectively. For the Taxable Portfolio, the Manager has
voluntarily reimbursed the Management Fee and certain Other Expenses of
0.07% and 0.26% of average net assets, respectively. Including such
reimbursements, Total Annual Fund Operating Expenses were 1.55%, 0.71% and
0.82% for the New York - Class B, New Jersey and Taxable Portfolios,
respectively. The Manager can terminate these voluntary reimbursements at
any time.
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EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. You would pay the following
expenses on a $10,000 investment, assuming a 5% annual return each year and
redemption at the end of each time period and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
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1 year 3 years 5 years 10 years
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New York Portfolio (Class A shares)* $524 $ 682 $ 854 $1,354
(Class B shares) $741 $1,043 $1,472 $2,117
New Jersey Portfolio* $591 $ 889 $1,208 $2,113
Taxable Portfolio* $562 $ 800 $1,056 $1,790
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You would pay the following expenses if you did not redeem your shares:
1 year 3 years 5 years 10 years
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New York Portfolio (Class B shares) $241 $743 $1,272 $2,117
There are no sales loads on reinvested dividends and other distributions.
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* Your cost is the same whether or not you redeem your shares.
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INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
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The investment objectives and policies for each Portfolio may not be changed
unless approved by the holders of a majority of the outstanding shares of the
Portfolio that would be affected by such a change. There can be no assurance
that the Portfolios' investment objectives will be achieved.
The New York and The New Jersey Portfolios. The New York and the New Jersey
Portfolios are municipal bond funds whose investment objective is to maximize
income exempt from regular Federal income tax and from New York State and New
York City personal income taxes and New Jersey gross income tax, respectively,
to the extent consistent with the preservation of capital, with consideration
given to opportunities for capital gain.
The New York and New Jersey Portfolios invest principally in long-term,
investment grade, tax-exempt Municipal Obligations issued by or on behalf of the
States of New York and New Jersey, respectively, and other states, Puerto Rico
and other U.S. territories and possessions of the United States, and their
authorities, agencies, instrumentalities and political subdivisions. The New
York Portfolio will invest at least 80%, although it will attempt to invest
100%, of its net assets in Municipal Obligations that are exempt from Federal
income tax and from the personal income tax of New York State and New York City
and that have remaining maturities of one year or more. The New Jersey Portfolio
will also invest at least 80%, although it will attempt to invest 100%, of its
net assets in Municipal Obligations that are exempt from Federal income tax and
from New Jersey gross income tax that have remaining maturities of one year or
more. Bond counsel to the issuer at the date of issuance will determine whether
a Municipal Obligation is considered tax exempt.
The Portfolios reserve the right to invest up to 20% of their net assets in (i)
Municipal Obligations that are exempt from regular Federal income tax but that
are subject to (a) New York State and City personal income taxes with respect to
the New York Portfolio and (b) New Jersey gross income tax with respect to the
New Jersey Portfolio and (ii) other taxable obligations, including securities
whose interest income may be subject to the Federal alternative minimum tax.
Municipal Obligations refer to various types of debt, including municipal bonds
and notes. Municipal debt shows that a local governmental entity or authority
needed money for a public purpose. It represents the obligation of the borrower
to repay a fixed sum of money on a definite future date at a fixed rate of
interest. Such interest is free of Federal income tax and free in most states
where issued from state and local taxes in that state. See "Taxation of the
Fund" in the Statement of Additional Information ("SAI") for more information
regarding the types of Municipal Obligations in which the Fund may invest.
The New York Portfolio may also purchase Municipal Obligations consisting of
general obligation bonds, revenue bonds and private activity bonds (also known
as industrial revenue bonds). A general discussion of these types of bonds is
set forth in "Municipal Obligations" in the SAI.
The New York and New Jersey Portfolios will invest principally, without
percentage limitations, in tax-exempt securities that on the date of investment
are investment grade. Investment grade means that the securities fall within the
four highest credit ratings of nationally recog-
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nized rating agencies as set forth below. The Fund will not necessarily dispose
of a security that falls below investment grade if the Manager determines that
retention of the security is consistent with the Fund's investment objectives.
The New York and New Jersey Portfolios may invest in tax-exempt securities that
are not rated or that do not fall into the credit ratings noted above if the
Manager's credit analysis reflects that the securities are of comparable credit
quality.
Variable &
Floating
Commercial Demand
Bonds Notes Paper Notes
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Moody's Aaa MIG-1 P-1 VMIG-1
Investors Aa MIG-2 P-2 VMIG-2
Service A MIG-3 P-3 VMIG-3
Baa MIG-4 VMIG-4
Standard & AAA SP-1 A-1 SP-1
Poor's Rating AA SP-2 A-2 SP-2
Service, a A SP-3 A-3 SP-3
division of BBB SP-4 B SP-4
The McGraw
Hill Cos.
Fitch AAA F-1 F-1 F-1
Investors AA F-2 F-2 F-2
Service A F-3 F-3 F-3
BBB
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The New York and New Jersey Portfolios may invest in participation interests
purchased from banks in variable rate tax-exempt securities owned by banks.
Participations are frequently backed by an irrevocable letter of credit or
guarantee of a bank that the Manager has determined meets the prescribed quality
standards for the Portfolio. The Manager will monitor the pricing, quality and
liquidity of the variable rate demand instruments held by each Portfolio,
including the securities supported by bank letters of credit or guarantees, on
the basis of published financial information, reports of rating agencies and
other analytical services to which the Manager may subscribe. Participation
interests will be purchased only if, in the opinion of counsel, interest income
on such interests will be tax-exempt when distributed as dividends to
shareholders. For further information, see "Description of the Fund and Its
Investments and Risks" in the SAI.
During adverse market conditions caused by rising interest rates or other
adverse market conditions, as determined by Lebenthal Asset Management, Inc.,
the Portfolios' investment manager (the "Manager"), the New York and New Jersey
Portfolios may invest up to 100% of the value of their net assets on a temporary
basis in securities, the interest on which is exempt from regular Federal income
tax, but not New York State and City personal income taxes and New Jersey gross
income tax, respectively. The Manager may also decide to invest in taxable
fixed-income securities, the interest on which is subject to regular Federal,
state and local income tax. The result of employing this type of temporary
defensive strategy is that the New York and New Jersey Portfolios may not
achieve their investment objectives.
Investments in taxable securities will be substantially in (i) securities issued
or guaranteed by the United States government (such as bills, notes and bonds),
its agencies, instrumentalities or authorities, (ii) highly-rated corporate debt
securities (rated AA or better by S&P or Fitch, or Aa3 or better by Moody's),
(iii) prime commercial paper (rated A-1+ by S&P, P-1 by Moody's or F-1+ by
Fitch), and (iv) certificates of deposit of the 100 largest domestic banks (in
terms of assets) that are subject to regulatory supervision by the United States
government or state governments and the 50 largest foreign banks (in terms of
assets) with branches or agencies in the United States. Investments in foreign
certificates of deposit and foreign branches of United States banks may involve
certain risks, including different regulation, use of different accounting
procedures, political or
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other economic developments, exchange controls, or possible seizure or
nationalization of foreign deposits. The result of employing this type of
temporary defensive strategy is that the New York or New Jersey Portfolio may
not achieve its investment objective.
The Taxable Portfolio. The Taxable Portfolio is a diversified municipal bond
fund whose investment objective is to maximize income to the extent consistent
with the preservation of capital, with consideration given to opportunities for
capital gain. The classification to be diversified is a fundamental policy and
may be changed only with the approval of the majority holders of the Taxable
Portfolio's outstanding shares.
As a diversified investment company, 75% of the assets of the Taxable Portfolio
are subject to the following limitations: (i) 5% of its total assets may not be
invested in the securities of any one issuer, except obligations of the United
States government and its agencies and instrumentalities and (ii) the Taxable
Portfolio may not own more than 10% of the outstanding voting securities of any
one issuer.
The Taxable Portfolio's assets will be invested primarily in taxable long-term
investment grade securities issued by or on behalf of states and municipal
governments, other U.S. territories and possessions of the United States, and
their authorities, agencies, instrumentalities and political subdivisions
("Taxable Municipal Obligations"). The average maturity of the Taxable Municipal
Obligations in which the Taxable Portfolio invests is currently expected to be
over 10 years.
The Taxable Portfolio attempts to invest 100%, and as a matter of fundamental
policy invests at least 65%, of the value of its total assets in taxable
securities with remaining maturities of one year or more. The interest on the
Taxable Municipal Obligations is includible in gross income for Federal income
tax purposes and may be subject to personal income taxes imposed by any state of
the United States or any political subdivision thereof, or by the District of
Columbia.
The Taxable Portfolio will invest principally, without percentage limitations,
in securities which on the date of investment are within the four highest credit
ratings of nationally recognized rating agencies as set forth above. The Fund
will not necessarily dispose of a security that falls below investment grade if
the Manager determines that retention of the security is consistent with the
Fund's investment objectives. The Taxable Portfolio may invest in securities
that are not rated or that do not fall into the credit ratings noted above if
the Manager's credit analysis reflects that the securities are of comparable
credit quality.
During adverse market conditions, as determined by the Manager, the Taxable
Portfolio may assume a temporary defensive position in which the Taxable
Portfolio may also invest up to 100% of the value of its net assets on a
temporary basis in (i) securities issued or guaranteed by the United States
Government (such as bills, notes and bonds), its agencies, instrumentalities or
authorities, (ii) tax-exempt securities, (iii) highly-rated corporate debt
securities (rated AA or better by S&P, or Aa3 or better by Moody's), (iv) prime
commercial paper (rated A-1+ by S&P or P-1 by Moody's), and (v) certificates of
deposit of the 100 largest domestic banks (in terms of assets) that are subject
to regulatory supervision by the U.S. Government or state governments, or the 50
largest foreign banks in (terms of assets) with branches or agencies in the
United States. Investments in certificates of deposit of foreign banks and
foreign branches of U.S. banks may involve certain risks, including different
regulation, use of different accounting procedures, political or other economic
develop-
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ments, exchange controls, or possible seizure or nationalization of foreign
deposits. The result of employing this type of temporary defensive strategy is
that the Taxable Portfolio may not achieve its investment objective.
Portfolios--Generally. Each Portfolio may purchase securities on a when-issued
or delayed-delivery basis. Delivery of and payment for these securities may
occur a month or more after the date of the purchase commitment. These
securities are subject to market fluctuation during this period and no interest
accrues to the Portfolio until settlement. Each Portfolio maintains a separate
account with the custodian, with a segregated portfolio of liquid high grade
debt securities in an amount at least equal to these commitments. For further
information, see the SAI.
The Manager determines when to make purchases and sales for each Portfolio based
on the Manager's opinion on whether these actions are necessary to meet each
Portfolio's objective. The Manager considers the following factors when buying
and selling securities for the Portfolios: (i) availability of cash, (ii)
redemption requests, (iii) yield management, (iv) credit management, and (v)
duration.
For the fiscal year ended November 30, 1999, the annual portfolio turnover rates
were 59.91%, 52.66% and 21.12% 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 that must be borne directly
by a Portfolio (and thus, indirectly by its shareholders), and can affect Fund
performance. In addition, a high rate of portfolio turnover may result in the
realization of larger amounts of capital gains which, when distributed to that
Portfolio's shareholders, are taxable to them.
Risks of Investing in the Fund:
o Concentration in Municipal Obligations: Investors should consider the
greater risk of the Portfolios' concentration versus the safety that comes
with a less concentrated investment portfolio. The Fund intends that the
New York Portfolio be concentrated in New York Municipal Obligations, the
New Jersey Portfolio be concentrated in New Jersey Municipal Obligations
and the Taxable Portfolio consist primarily of Taxable Municipal
Obligations (each as defined below). Payment of interest and preservation
of capital are dependent upon the continuing ability of New York and New
Jersey and other issuers and/or obligors of state, municipal and public
authority debt obligations to meet their obligations thereunder.
o Interest Rate Risk: The types and maturities of the securities in the
Portfolios and the credit quality of the issuers will affect the Fund's
reaction to changes in interest rates. Interest rates impact the yield and
share price of a bond fund. Bond prices generally rise when interest rates
fall and fall when interest rates rise. Bonds with longer maturities are
usually more sensitive to interest rate changes. In other words, the longer
the maturity of a bond, the greater the impact a change in interest rates
is likely to have on the bond's price. In addition, short and long-term
interest rates do not necessarily move in the same increments or in the
same directions. Short-term bonds usually react more to changes in
short-term interest rates while long-term bonds usually
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react more to changes in long-term interest rates.
o Investment Grade Securities: Although bonds and notes rated in the fourth
credit rating category are commonly referred to as investment grade, they
may have speculative characteristics. Such characteristics may, under
certain circumstances, lead to a greater degree of market fluctuation 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 the SAI.
o New York Risk Factors: The primary purpose of investing in a portfolio of
New York Municipal Obligations is the special tax treatment accorded New
York resident individual investors. Investment in the New York Portfolio
should be made with an understanding of the risks that an investment in New
York Municipal Obligations may entail. However, payment of interest and
preservation of principal are dependent upon the continuing ability of the
New York issuers and/or obligors of state, municipal and public authority
debt obligations to meet their obligations thereunder. Investors should
consider the greater risk of the Portfolio's concentration versus the
safety that comes with a less concentrated investment portfolio, and should
compare yields available on portfolios of New York issues with those of
more diversified portfolios including out-of-state issues before making an
investment decision. For a more complete description of these risk factors,
see "New York Risk Factors" in the SAI.
o New Jersey Risk Factors: The primary purpose of investing in a portfolio of
New Jersey Municipal Obligations is the special tax treatment accorded New
Jersey resident individual investors. Investment in the Portfolio should be
made with an understanding of the risks that 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 SAI.
MANAGEMENT, ORGANIZATION AND
CAPITAL STRUCTURE
- --------------------------------------------------------------------------------
The Manager. The Fund has employed Lebenthal Asset Management, Inc. to serve as
Investment Manager of the New York, New Jersey and Taxable Portfolios of the
Fund. The Manager, with its principal office at 120 Broadway, New York, New York
10271-0005, is a wholly-owned subsidiary of Lebenthal & Co., Inc. As of November
30, 1999, the Manager was manager, adviser or supervisor of assets aggregating
in excess of $240 million. The Manager is a regis-
-13-
<PAGE>
tered investment adviser providing fixed-income investment advisory services to
individuals, institutions and other investment advisers. The Manager is under
the leadership of James L. Gammon, President and Director of the Manager. James
A. Lebenthal, Chairman and Director of the Manager, is a controlling person of
the Manager.
Mr. Gammon is primarily responsible for the day-to-day management of the Fund's
portfolios. Mr. Gammon, President and Director of the Manager since February
1994, has over 25 years experience in municipal bond portfolio management. From
March 1984 to July 1993, Mr. Gammon was Senior Vice President and Senior
Portfolio Manager at Loews/CNA Holdings, Inc. with $12.5 billion under his
management. From 1977 to 1984 he managed the $221 million Elfun Tax Exempt
Income Fund. The Fund's Annual Report contains information regarding the Fund's
performance and is available, without charge, upon request.
Pursuant to the Management Contracts, the Manager manages the portfolio of
securities of each of the Portfolios and makes decisions with respect to the
purchase and sale of investments, subject to the general control of the Fund's
Board of Directors. Pursuant to the Investment Management Contracts, the Fund
pays the Manager a management fee for its services under these contracts,
calculated daily and payable monthly. The management fee is equal to .25% of
each of the Portfolios' average daily net assets not in excess of $50 million,
.225% of such assets between $50 million and $100 million plus .20% of such
assets in excess of $100 million. The Manager may, at its discretion, waive all
or a portion of its fees under the Management Contracts. There can be no
assurance that such fees will be waived in the future.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
The Fund sells and redeems its shares on a continuing basis based on their net
asset value. All transactions in Fund shares are effected through State Street
Bank & Trust Company, the Fund's transfer agent.
Pricing Of Fund Shares. The net asset value of the Fund's shares is determined
as of the earlier of 4:00 p.m., New York City time, or the close of the NYSE on
each Fund Business Day. Fund Business Day means weekdays (Monday through Friday)
except customary business holidays and Good Friday. The net asset value 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 market value determined most likely on the basis of
the factors listed above. If a pricing service is not used, Municipal
Obligations will be valued at quoted prices provided by municipal bond dealers.
Non-tax-exempt securities for which transaction prices are readily available are
stated at market value (determined on the basis of the last reported sales
price, or by similar means). Short-term investments that will mature in 60 days
or less are stated at amortized cost, which approximates market value. All other
securities and assets are valued at their fair value
-14-
<PAGE>
as determined in good faith by the Board of Directors.
Dividends And Distributions. The Fund declares dividends equal to all its net
investment income daily (excluding capital gains and losses, if any, and
amortization of market discount). The Fund pays dividends on the tenth day of
each month or, if the tenth day is not a Fund Business Day, on the preceding
Fund Business Day. There is no fixed dividend rate. In computing these
dividends, interest earned and expenses are accrued daily.
Net realized capital gains, if any, are distributed at least annually in
accordance with the Internal Revenue Code (the "Code"), as amended, and other
applicable statutory and regulatory requirements. All dividends and
distributions of capital gains are automatically invested in additional shares
of a Portfolio immediately upon payment thereof, received in cash, or can be
deposited into one or more of the Fund's other Portfolios. Shareholders are
permitted to elect the payment option of their choice on the subscription form
for share purchases.
How To Purchase And Redeem Shares.
You may invest in the Fund directly or through a Lebenthal & Co., Inc. brokerage
account.
Minimum and Maximum Investments:
-------------------------------
o Initial investment $2,500
o Subsequent investments $250
o Maximum purchase of
Class B shares $250,000
o No maximum purchase for Class A shares
Alternative Sales Arrangements.
<TABLE>
What Classes of Shares Can You Buy: What Sales Charges Will You Pay:
- ----------------------------------- --------------------------------------
<S> <C> <C>
o New York Class A and B shares o Class A shares You will pay an initial sales charge at time
o New Jersey Class A shares of purchase and will also be eligible for a
o Taxable Class A shares reduced sales charge (described below).
o Class B shares There is no sales charge but you will be
subject to paying a contingent deferred sales
charge ("CDSC") when you redeem the shares
(see below).
</TABLE>
Your decision to buy Class A or B shares depends on a number of factors
including (i) the amount and intended length of your investment, (ii) whether
you qualify for reduced sales charges applicable to Class A shares only, or
(iii) whether you prefer not to pay an up-front sales charge. For more
information about these sales arrangements, consult your broker or the
Distributor.
Sales and Redemptions.
Charges and Other Information on Redeeming Shares:
-------------------------------------------------
o no redemption charge by the Fund
o no minimum period of investment
o no minimum amount for a redemption
o no restrictions on the frequency of withdrawals
-15-
<PAGE>
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 $2,500.
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 $2,500.
Redemption of shares may result in the Investor's receipt of more or less than
he paid for his shares and, thus, in a taxable gain or loss to the investor.
Direct Purchase Procedures. If you wish to invest in the Fund directly or
through a brokerage account maintained at Lebenthal & Co., Inc. and not through
Participating Organizations you may use the following procedures. You may obtain
a current prospectus and a Lebenthal & Co., Inc. account application necessary
to open an account by telephoning Lebenthal & Co., Inc. at the following
numbers:
Within New York City: (212) 425-6116
Outside New York City (toll free): (800) 221-5822
-16-
<PAGE>
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.
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 (or at 800-271-5822
outside New York City) to obtain a Fund account number. The investors should
then instruct a member commercial bank to wire their money immediately to:
Chase Manhattan Bank
ABA# 021-000021
f/a/o Donaldson, Lufkin & Jenrette Securities Corp.
Pershing Division
Acct# 930-1-032992
For Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund
A/C Name_______________________________
Lebenthal A/C # _______________________
Investors planning to wire funds should instruct their bank 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.
Direct Redemption Procedures. A redemption order is executed immediately
following, and at a price determined in accordance with, the next determination
of net asset value per share following receipt by the Fund of the redemption
order (and any supporting documentation which it may require). Redemption
payments will not be effected unless the check (including a certified or
cashier's check) used for investment has been cleared for payment by the
investor's bank, which may take up to 10 days after investment. All requests for
redemption should clearly indicate the Lebenthal account number ____________.
Written Redemption Requests. Shareholders may make a redemption in any amount by
sending a written request addressed to:
Lebenthal Funds, Inc.
Lebenthal Municipal Bond Fund
c/o Lebenthal & Co., Inc.
120 Broadway
New York, New York 10271-0005
Investment through Participating Organizations. Investors who invest through
Participating Organizations ("Participant Investors") may, if they wish, invest
in the Fund through the Participating Organizations with which they have
accounts. "Participating Organizations" are securities brokers, banks and
financial institutions or other industry professionals or organizations which
have entered into shareholder servicing agreements with the Distributor with
respect to investment of their customer accounts in the Fund. When instructed by
its customer to purchase or redeem Fund shares, the Participating Organization,
on behalf of the customer, transmits to the Fund as transfer agent a purchase or
redemption order.
-17-
<PAGE>
Participating Organizations may confirm purchases and redemptions of Fund shares
for their customers who are shareholders in the Fund. Participating
Organizations may also send their customers periodic account statements showing
the total number of Fund shares owned by each customer as of the statement
closing date, purchases and redemptions of the Fund shares by each customer
during the period covered by the statement, and the income earned by Fund shares
of each customer during the statement period (including dividends paid in cash
or reinvested in additional Fund shares). Participant Investors whose
Participating Organizations have not undertaken to provide such confirmations
and statements will receive them from the Fund directly.
Participating Organizations may charge Participant Investors a fee in connection
with their use of specialized purchase and redemption procedures offered to
Participant Investors by the Participating Organizations. In addition,
Participating Organizations offering purchase and redemption procedures similar
to those offered to shareholders who invest in the Fund directly may impose
charges, limitations, minimums and restrictions in addition to or different from
those applicable to shareholders who invest in the Fund directly. Accordingly,
the net yield to investors who invest through Participating Organizations may be
less than by investing in the Fund directly. Therefore, an investor may consider
investing in the Fund directly. A Participant Investor should read this
Prospectus in conjunction with the materials provided by the Participating
Organization describing the procedures under which Fund shares may be purchased
and redeemed through the Participating Organization.
In the case of qualified Participating Organizations, orders received by the
Fund before the earlier of 4:00 p.m., New York City time, or the close of the
NYSE on a Fund Business Day, will be executed on that day. Orders received after
such time will not result in execution until the following Fund Business Day.
Participating Organizations are responsible for instituting procedures to insure
that purchase orders by their respective clients are processed expeditiously.
The following procedures apply to Participant Investors who wish to invest in
the Fund through the Participating Organizations with which they have accounts.
Requests for assistance or additional information should be directed to the Fund
at (800) 828-3246.
By Bank Wire:
Participant Investors should instruct a member commercial bank to wire their
money immediately to:
State Street Bank & Trust Co.
ABA# 01100028 For Credit to Account
99051971
f/a/o [ ]/Lebenthal Funds Inc.
Lebenthal ________ Municipal Bond Fund
A/C Name____________________
Lebenthal A/C #_____________
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
-18-
<PAGE>
Investment Plan of a specified amount of $250 or more automatically (effective
May 1, 2000) on a monthly basis. The minimum investment required to open an
Automatic Investment Plan account is $2,500 (effective May 1, 2000). An
Automatic Investment Authorization Form (available on request from the transfer
agent or the Distributor) provides for funds to be automatically drawn on a
shareholder's bank account and deposited in his or her Fund account. 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. Prior to May 1, 2000, the minimum
investment required to open an Automatic Investment Plan account will continue
to be $1,000 with a $100 monthly minimum purchase.
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.
You can exchange your shares
into the following Portfolios:
- --------------------------------------------------------------------------------
o Lebenthal New York Municipal Bond Fund
o Lebenthal New Jersey Municipal Bond Fund
o Lebenthal Taxable Municipal Bond Fund
You must exchange shares in the same Class as you currently hold.
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.
Charges and Minimums for
exchanging your shares:
- --------------------------------------------------------------------------------
o There is no charge for the exchange privilege or limitation as to frequency
of exchange.
-19-
<PAGE>
o The minimum amount for an exchange is $2,500, 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.
o 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 as a sale on
which a shareholder may realize a taxable gain or loss for Federal and,
generally, state income tax purposes. An additional prospectus may be obtained
by contacting the Fund at the address or telephone number set forth on the cover
page of this Prospectus.
Instructions for exchanges may be made by sending a signature guaranteed written
request to:
Lebenthal Funds, Inc.
Lebenthal ________ Municipal Bond Fund
c/o Lebenthal & Co., Inc.
120 Broadway
New York, New York 10271-0005
or, for shareholders who have elected that option, by telephone. The Fund
reserves the right to reject any exchange request and may modify or terminate
the exchange privilege at any time.
Dollar Cost Averaging Program. Shareholders may elect to have a specified amount
automatically exchanged, either monthly or quarterly, from one of their accounts
through Lebenthal & Co., Inc. into one or more of the Class A shares of the
Lebenthal Fund portfolios. The account from which exchanges are to be made must
have a value of at least $10,000 when a shareholder elects to begin this
program, and, effective May 1, 2000, the exchange minimum is $250 per
transaction. For shareholders who elect to participate in this program prior to
May 1, 2000, the exchange minimum will continue to be $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 "Distribution
Arrangements").
Telephone Exchanges and Redemptions. Arrangements have been made for the
acceptance of instructions by telephone to exchange or redeem shares in
book-entry form if certain preauthorizations or indemnifications are accepted
and are on file. Shareholders who elect the telephone exchange or redemption
option bear the risk of any loss, damages, expense or cost arising from their
election of the telephone exchange option, including risk of unauthorized use,
provided, however, that the Fund shall employ reasonable procedures to confirm
that all telephone instructions are gen-
-20-
<PAGE>
uine. 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 purchase of portfolio shares will be the purchase of
an asset. 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. Each Portfolio intends to maintain
qualification as a "regulated investment company" under Subchapter M of the
Code. 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. 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,
-21-
<PAGE>
1986 will constitute an item of tax preference subject to the individual
alternative minimum tax. Corporations will be required to include, as an item of
tax preference for purposes of the alternative minimum tax, 75% of the amount by
which their adjusted current earnings (including generally, tax-exempt interest)
exceeds their alternative minimum taxable income (determined without this tax
item). In addition, in certain cases, Subchapter S corporations with accumulated
earnings and profits from Subchapter C corporations will be subject to a tax on
"passive investment income," including tax-exempt interest.
With respect to variable rate demand instruments, including participation
certificates therein, the Fund is relying on the opinion of Battle Fowler LLP,
counsel to the Fund, that it will be treated for Federal income tax purposes as
the owner of an interest in the underlying Municipal Obligations and that the
interest thereon will be exempt from regular Federal income taxes to the Fund to
the same extent as the interest on such underlying Municipal Obligations.
Counsel has pointed out that the Internal Revenue Service has announced that it
will not ordinarily issue advance rulings on the question of the ownership of
securities or participation interests therein subject to a put, and could reach
a conclusion different from that reached by counsel. (See "Federal Income Taxes"
in the SAI.)
The U.S. Supreme Court has held that there is no constitutional prohibition
against the Federal government's taxing the interest earned on state or other
municipal bonds. The decision does not, however, affect the current exemption
from taxation of the interest earned on Municipal Obligations in accordance with
Section 103 of the Code.
New York Income Taxes. The exemption of interest income for Federal income tax
purposes does not necessarily result in an exemption under the income or other
tax laws of any state or local taxing authority. However, to the extent that
dividends are derived from interest on New York Municipal Obligations, the
dividends will also be excluded from a New York resident shareholder's gross
income for New York State and New York City personal income tax purposes. This
exclusion does not result in a corporate shareholder'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, obliga-
-22-
<PAGE>
tions issued at a discount or bond indexes related thereto to the extent such
instruments are authorized under the regulated investment company rules under
the Code, cash and cash items (which cash items shall include receivables) in
obligations issued by or on behalf of the State of New Jersey or any county,
municipality or other political subdivision of the State of New Jersey ("New
Jersey-Specific Obligations") or obligations which are statutorily free from New
Jersey state or local taxation under the laws of the United States ("U.S.
Government Obligations"). Additionally, a qualified investment fund must comply
with certain continuing reporting requirements.
In the opinion of McCarter & English, LLP, special New Jersey tax counsel to the
New Jersey Portfolio, assuming that the New Jersey Portfolio constitutes a
qualified investment fund and that the New Jersey Portfolio complies with the
reporting obligations under New Jersey law with respect to qualified investment
funds, (i) distributions paid by the New Jersey Portfolio to a New Jersey
resident individual shareholder will not be subject to the New Jersey gross
income tax to the extent that the distributions are attributable to income
received as interest on or gain from New Jersey State-Specific Obligations or
U.S. Government Obligations, and (ii) gain from the sale of shares in the New
Jersey Portfolio by a New Jersey resident individual shareholder will not be
subject to the New Jersey gross income tax to the extent that the gain is
attributable to investments in New Jersey State-Specific Obligations or U.S.
Government Obligations. Shareholders should consult their own tax advisers about
the status of distributions from the New Jersey Portfolio in their own states
and localities.
DISTRIBUTION ARRANGEMENTS
- --------------------------------------------------------------------------------
Sales Charges.
Class A Shares. The price paid for Class A shares of the Fund is the public
offering price, that is, the next determined net asset value of the shares plus
a sales load. The sales load is a one-time charge paid at the time of purchase
of shares, most of which ordinarily goes to the investor's broker-dealer to
compensate him for the services provided the investor. The Dealer Discounts
described below may be negotiated for promotional purposes and disclosed to any
investor.
The sales load for the Class A shares and applicable volume discounts are:
Sales
Charge Dealer
as % of Discount
Amount Net as % of
of Sales Amount Offering
Purchase Load Invested Price
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
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
-23-
<PAGE>
the CDSC, as described below. For other shares, the amount of the charge is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed.
The CDSC for the Class B shares is:
Period Class B Shares Held CDSC
- --------------------------------------------------------------------------------
0 through 11 months 5%
12 through 23 months 4%
24 through 47 months 3%
48 through 59 months 2%
60 through 71 months 1%
72 months and longer 0%
- --------------------------------------------------------------------------------
In determining whether a CDSC is payable on any redemption, shares not subject
to any charge will be redeemed first, followed by shares held longest during the
CDSC period. For this purpose, the amount of any increase in a share's value
above its initial purchase price is not regarded as a share exempt from the
CDSC. Thus, when a share that has appreciated in value is redeemed during the
CDSC period, a CDSC is assessed only on its initial purchase price.
Class B shares also bear a higher 12b-1 fee than Class A shares. Class B shares
automatically convert into Class A shares, based on relative net asset value,
approximately eight years after purchase. For more information about the
conversion of Class B shares, see the SAI. The SAI includes information about
how shares acquired through reinvestment of distributions are treated for
conversion purposes and also notes certain circumstances under which a
conversion may not occur. Class B shares provide an investor the benefit of
putting all of the investor's dollars to work from the time the investment is
made. Until conversion, Class B shares will have a higher expense ratio and pay
lower dividends than Class A shares because the Class B shares bear a higher
12b-1 fee than the Class A shares and because of other related expenses.
In addition, the New York Portfolio may sell shares at net asset value without a
CDSC in connection with the acquisition by the Portfolio of assets of an
investment company or personal holding company. The CDSC will be waived on
redemptions of shares arising out of the death or post-purchase disability of a
shareholder or settlor of a living trust account, and on redemptions in
connection with certain withdrawals from IRA or other retirement plans. Up to
12% of the value of shares subject to a systematic withdrawal plan may also be
redeemed each year without a CDSC.
Reduction or Elimination of Sales Loads.
Volume Discounts. Volume discounts are provided if the total amount being
invested in shares of a Portfolio reaches the levels indicated in the above
sales load schedules. Volume discounts are not available for Class B shares.
Investors may add on to 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 a Portfolio worth $95,000 at the
current offering price and purchases an additional $5,000 worth of Class A
shares of that 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. Rein-
-24-
<PAGE>
vestment 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., Inc. account may invest
distributions received from such unit investment trusts in shares of the
Portfolio at no sales load or CDSC. Unit holders of the Empire State Municipal
Exempt Trust Series co-sponsored by Glickenhaus & Co. and Lebenthal & Co., Inc.
may elect to invest semi-annual distributions received from such unit investment
trusts in shares of a Portfolio at no sales load regardless of where such
certificates are actually held. The minimum initial investment of $2,500 and the
minimum subsequent investment of $250 will be waived for such purchases.
Letter of Intent. Any investor may sign a Letter of Intent, enclosed in this
Prospectus, stating an intention to make purchases of Class A shares totaling a
specified amount within a period of thirteen months. Purchases within the
thirteen-month period can be made at the reduced sales load applicable to the
total amount of the intended purchase noted in the Letter of Intent. If a larger
purchase is actually made during the period, then a downward adjustment will be
made to the sales charge based on the actual purchase size. Any shares purchased
within 90 days preceding the actual signing of the Letter of Intent are eligible
for the reduced sales charge, and the appropriate price adjustment will be made
on those share purchases. A number of shares equal to 4.50% of the dollar amount
of intended purchases specified in the Letter of Intent is held in escrow by the
Distributor until the purchases are completed. Dividends and distributions on
the escrowed shares are paid to the investor.
If the intended purchases are not completed during the Letter of Intent period,
the investor is required to pay the Distributor an amount equal to the
difference between the regular sales load applicable to a single purchase of the
number of shares actually purchased and the sales load actually paid. If such
payment is not made within 20 days after written request by the Distributor,
then the Distributor has the right to redeem a sufficient number of escrowed
shares to effect payment of the amount due. Any remaining escrowed shares are
released to the investor's account. Agreeing to a Letter of Intent does not
obligate you to buy, or the Fund to sell, the indicated amount of shares. You
should read the Letter of Intent carefully before signing.
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 $2,500. For example, an investor purchasing Class A shares in the
amount of $10,000 will be charged a reduced sales load of 4.00% and an investor
purchasing Class A shares in the amount of $100,000 will be charged a reduced
sales load of 3.00%. An investor purchasing Class B shares in those amounts that
sells those shares within one year of purchase will be subject to a CDSC of
5.0%. The reduction of a sales load reflects the Fund's interest in offering a
savings vehicle for investors in this age bracket. The reduction in sales charge
will be in effect until the day prior to the investor's 36th birthday.
Financial Planners. Investors purchasing their shares through certain financial
planners and intermediaries that assess a charge and have accounts with such
clients will not be charged an initial sales load or CDSC.
-25-
<PAGE>
Employees of the Distributor and Participating Organizations. Employees (and
their immediate families) of Lebenthal & Co., Inc. or any Participating
Organization may purchase shares of a Portfolio at net asset value.
Rule 12b-1 Fees.
The Fund pays fees in connection with the distribution of shares and for
services provided to the shareholders. The Fund pays these fees from its assets
on an ongoing basis. Therefore, over time, 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 Lebenthal & Co., Inc., (the "Distributor") have entered into
a Distribution Agreement and the New Jersey and Taxable Portfolios and the
Distributor have entered into a Distribution Agreement and a Shareholder
Servicing Agreement. The following paragraphs describe the fees paid by each
Portfolio pursuant to the Plan and its related agreements.
The New York Portfolio. Under the Distribution Agreement, the Distributor, as
agent for the Fund, will solicit orders for the purchase of the New York
Portfolio's shares, provided that any subscriptions and orders not be binding on
the Fund until accepted by the Fund, as principal. Under the Distribution
Agreement, the Distributor receives from each of the Class A and Class B shares
of the Portfolio a Service Fee equal to 0.25% per annum of the New York
Portfolio's average daily net assets (the "Service Fee") for providing
shareholder servicing and maintenance of shareholder accounts. The Distributor
may make payments, from time to time, from the Service Fee it received to pay
the costs of, and to compensate others, including Participating Organizations,
for performing shareholder servicing functions. Under the Distribution
Agreement, the Distributor receives from the Class B shares of the Portfolio an
asset based sales charge ("Asset Based Sales Charge") equal to 0.75% per annum
of the Class B shares' average daily net assets to be used by the Distributor to
pay sales commissions for sales of the Class B shares. These 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 Partici-
-26-
<PAGE>
pating 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 that the New York Portfolio is required to pay to the
Distributor for any fiscal year under both the Distribution Agreement and the
Management Contract in effect for that year.
The New Jersey Portfolio and The Taxable Portfolio. For its services under the
Shareholder Servicing Agreements, the Distributor receives from the New Jersey
and Taxable Portfolios a fee equal to 0.25% per annum of the Portfolios' average
daily net assets (the "Shareholder Servicing Fee"). The fee is accrued daily and
paid monthly. Any portion of the Shareholder Servicing Fee may be deemed to be
used by the Distributor (i) for purposes of 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
0.10% 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 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
-27-
<PAGE>
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 that the New Jersey and
Taxable Portfolios are required to pay to the Distributor or the Manager for any
fiscal year under the Distribution Agreements, Shareholder Servicing Agreements
or the Management Contracts in effect for that year.
-28-
<PAGE>
MORE INFORMATION ON THE MUNICIPAL MARKET
Individuals considering an investment in the Fund should be aware that the
municipal securities market is "large, dynamic, and increasingly complex," to
quote an SEC Staff Report. Many diverse factors affect the yield, security, and
suitability of one's investment in the Fund. Among them:
Municipal Bonds raise money for public works. These are the indispensable roads,
sewers, schools, subways, airports, public buildings and
facilities--"Built-by-Bonds"--that provide the physical infrastructure for
communal life and the underpinnings for long range economic development of the
community.
A Municipal Bond is evidence of collective debt. It shows that a local
governmental entity or authority needed money for a public purpose. It
represents the obligation of the borrower to repay a fixed sum of money on a
definite future date at a fixed rate of interest. And that interest is free of
Federal income tax and free from state and local taxes in most states of origin
where issued.
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. TBMA,
The Bond Market Association, has estimated that the savings in borrowing costs
on $1.01 trillion of Municipal Bonds issued between 1995 and 1999 will add up to
$317 billion by the year 2012, versus what it would have cost the states, their
political subdivisions, agencies, and authorities to borrow at prevailing
corporate interest rates.
-i-
<PAGE>
Individuals investing their savings in municipal securities help improve the
rate of savings and investment in America. Economists believe that the root of
such economic ills as deficits, imbalance of payments, poor productivity and
crumbling infrastructure lies in the sharp decline in the nation's savings rate
in the 1980s and 1990s. Saving is the seedcorn of an economy. You plant it. It
grows. Through the lending/borrowing process your savings are converted into
factories, housing, roads, airports--productive investments that create jobs and
real wealth. All investment--public, private, municipal, corporate--begins with
savings. In advertising municipal securities as the "workhorse of investments,"
Lebenthal & Co., Inc. is alluding to municipal securities as a tool, both for
building one's own future and for digging roads, building schools, laying
sewers, producing power, providing housing, putting up hospitals, moving
commuters, paving runways, boring tunnels and rebuilding a more productive
America.
Tax exempt securities are owned primarily by individuals. There are
approximately $1.5 trillion of Municipal Bonds outstanding, approximately 73% 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,
filers with adjusted gross incomes of less than $100,000 accounted for 70% of
all filers reporting tax exempt income and 39% 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
-ii-
<PAGE>
are Federally insured. And there is a penalty, but no market risk, for early
redemption, whereas the resale value of Fund shares will rise or fall with
changes in interest rates in general or with changes in the creditworthiness of
the underlying bonds in the Fund portfolio.
There is "market risk" in selling before maturity. The words "safe," "safety,"
and "secure" as used in bonds apply to creditworthiness: the assuredness of
receiving your interest right along and getting your principal back at the end.
But anyone considering an investment in municipal securities must accept market
fluctuation--and possible loss in resale value before maturity--as facts of
life. This is because the resale value of a fixed income security will adjust to
changing interest rates and the yields available from comparable new issues in
the market. As a rule of thumb, generally if interest rates are higher when you
go to sell than they were when you bought your bond, you will get less than you
paid. ("Yields up, price down.") Also generally, if interest rates are lower
when you sell than when you bought, you will make money. ("Yields down, price
up.")
There are two broad categories of creditworthiness: general obligation bonds and
revenue bonds. General obligations are secured by tax collections, revenue bonds
by earnings. When a bond is secured by the power of a governmental issuer to
levy taxes on real estate without limitation as to rate or amount, and when the
issuer pledges all its resources to pay principal and interest, the bond is said
to be a full faith and credit general obligation. The laws governing the
issuance of general obligation bonds intend for the bondholder to be paid in
full and on time. And such bonds have earned for all Municipal Bonds their
reputation for safety. There is another type of Municipal Bond--the revenue
bond. As the name implies, revenue bonds are secured by tolls, rentals, mortgage
payments, tuitions, fees--that is by earnings of the project so financed. Their
strength is the commercial viability of the project and power of the issuer to
levy user charges. Tax collections or earnings--they are both cashflow. And
cashflow is the collateral behind municipal securities.
-iii-
<PAGE>
Municipal securities are creatures of law. They depend on law. They must conform
to statutory requirements, the most desirable of which is that the people voted
for the issue. The issuer must not exceed the legal debt limit, and every law
governing the birth of a bond must be carefully followed when a municipality is
borrowing money. All this must be attested to by the legal opinion of reputable
and recognized attorneys specializing in municipal law.
There are over one million combinations of issuer, issue, interest rate, and
maturity to choose from. Moody's Manuals list 9,000 state and local entities
whose bonds are in the hands of the public. An issuer generally has more than
one issue of bonds outstanding. And each issue is like many in one, made up of
"maturities"--blocks of bonds that come due in staggered years from now to the
year 2030 and longer. The possible combinations provide flexibility in tailoring
a Municipal Bond portfolio to the needs of the individual--or for some people
may result in deciding to buy a fund of bonds and let the fund manager do the
picking and choosing.
Boiling choice down to four investment decisions. Before recommending specific
municipal securities, an investment adviser does some digging. Are you likely to
jump in and out of your bonds? Do you really need the income now? When do you
plan to retire? What about heirs? How much is the peace and comfort of a
triple-A rating worth to you in cold cash? Are you investing for children's
education? Are you using municipals to build up an estate? Are you living on the
interest and leaving your principal to your survivors? Should you reduce your
estate and your estate taxes through an orderly invasion of your capital? These
personal characteristics and financial objectives translate into the four basic
investment decisions: (1) long versus short; (2) high coupon rate versus low or
even zero coupon rate; (3) rating versus yield; and (4) individual bonds versus
packages of bonds, like unit investment trusts or mutual funds.
-iv-
<PAGE>
Individual Municipal Bonds have a fixed maturity. A mutual fund of Municipal
Bonds does not. A Municipal Bond is a contract for the future delivery of
money--a fixed sum at a definite date in the future. Like any fixed income
security, individual bonds fluctuate in market value with interest rates and
changing market conditions. But hold your bond to maturity, cash it in at the
end, and you are promised getting back full face value--in 2, 5, 10, 30
years--whatever the due date engraved on the books of the issuer. On the other
hand, the bonds in a fund portfolio are candidates for buy, sell, and hold every
day. The Lebenthal New York Municipal Bond Fund is nominally a portfolio of long
term bonds. But a 30-year bond in the portfolio may have an effective "maturity"
no longer than the number of days, weeks, months the Adviser decides to hold it
in the portfolio. The Adviser does not sit there waiting for bonds in the
portfolio to mature. He or she trades them in and out of the Fund portfolio
opportunistically, seeking to maximize tax free income consistent with the
preservation of capital, and to take gains, or, in falling markets, to minimize
losses.
There can be no assurance of a particular Fund yield, because the bonds in the
portfolio change. They are being added to, disposed of and replaced with other
bonds opportunistically. Nor can there be any guarantee the Fund will achieve
its objectives. When you sell your shares you may get more for them than you
paid. You may get less. It depends on current market conditions, whether
interest rates are higher or lower than when you bought your shares, and the
ability of Management to anticipate markets and know when to buy, sell, or hold.
An open end fund for open end savings goals. If you know you are going to need
your money for a specific purpose on a specific date in the future, buy a fixed
income security and target the maturity date. On the other hand, the Lebenthal
New York and New Jersey Municipal Bond Funds are for more general open-ended
objectives like building up an estate or saving for retirement. The Funds can
pay out interest every month, free of New York or New Jersey and regular Federal
income tax. Or, it can reinvest
-v-
<PAGE>
your monthly interest in additional Fund shares...so your interest earns
interest...and each month that interest earns still more tax free interest, and
builds upon itself. Monthly income, or automatic reinvestment--the option is
yours.
The principle of "total return." In buying individual bonds to hold to maturity,
one might tend to dismiss ups and downs in market value with a mantra, "I didn't
buy to sell. I didn't buy to sell." But investing in an open-end mutual fund of
bonds with automatic reinvestment, one holds their portfolio to a different
standard. One measures portfolio performance by the concept of "total return."
Total return takes into account 1) interest income being spun off by the bonds
in the portfolio, 2) that cashflow being reinvested in additional fund shares,
3) the impact of gains or losses in net asset value per share multiplied by the
growing number of shares being accumulated through reinvestment. One goes into a
fund seeking a higher total return than just the stated yield to maturity to be
had from individual bonds. But one can lose money, too. How you fare will depend
on whether the price you receive upon selling your shares is more than your
original cost or less, owing to fluctuating interest rates in general and the
performance of the fund Adviser in particular.
Price down, yield up. In the infamous 1999 bond market decline, nothing was
spared. Not individual bonds. Not the Lebenthal New York Municipal Bond Fund.
But all is not lost when the market declines. Bond prices down means that bond
yields are up. Buying new shares at the lower price is called "dollar cost
averaging." The Fund takes your new money and invests it for you at higher
rates. As for old bonds in the portfolio, the interest being spun off and
reinvested right along now buys more Fund shares than if the price were higher.
So that if, as, and when--and should the price go up again--you now have that
many more shares to go along for the ride and move up in market value. As events
have shown, compounding does not protect against fluctuating bond prices and
losses in the resale value of your shares. A decline in the value of the
underlying bonds in the Fund
-vi-
<PAGE>
portfolio could more than offset the positive impact of any gains from
compounding. But your thinking when you buy the Fund should be the philosophy of
the long haul: dollar cost averaging, plus interest on interest, plus time, may
conspire to build growth. If you invest when you have the funds, over the long
haul you will hit some markets, you will miss some markets. Your bet is that
time and regular investing will smooth out the bumps. No guarantee, just a
fighting chance.
Count The Shares, Give It Time. With automatic dividend reinvestment, every
month your shares spin off new shares. And the next month those shares do the
same thing. So the number of shares you own accumulates and builds.
The accumulation of shares by itself is no guarantee of investment success. But
it stands to reason that the more shares you have accumulated through
reinvestment over time, the bigger the multiplier that will be working for you
when you decide to sell.
So, if you go into a fund and sign up for reinvestment for long term saving
goals, don the mantle of the long term saver. When you get your statement every
month showing current share value, count the growing number of shares you own,
not just price. And give it time. Time is the soulmate of automatic
reinvestment--and the best friend a long term saver's got.
-vii-
<PAGE>
LEBENTHAL FUNDS, INC.
LETTER OF INTENT (L.O.I.)
Although I am not obligated to invest and Lebenthal Funds Inc. (the "Fund") is
not obligated to sell, it is my intention to invest over a 13-month period (the
"L.O.I. Period") in an aggregate amount of shares of the Fund at least equal to
that which is checked below, thereby entitling me to the reduced sales load
applicable to such aggregate amount.
<TABLE>
<CAPTION>
Sales Sales
Aggregate Amount Load Aggregate Amount Load
Lebenthal New York Municipal Bond Fund
<S> <C> <C> <C> <C> <C> <C>
/ / $50,000.00 - $99,999.99 4.00% / / $100,000.00 - $249,999.99 3.50%
/ / $250,000.00 - $499,999.99 2.75% / / $500,000.00 - $999,999.99 2.00%
/ / $1,000,000.00 and over 0.00%
Lebenthal New Jersey Municipal Bond Fund
/ / $50,000.00 - $99,999.99 4.00% / / $100,000.00 - $249,999.99 3.50%
/ / $250,000.00 - $499,999.99 2.75% / / $500,000.00 - $999,999.99 2.00%
/ / $1,000,000.00 and over 0.00%
Lebenthal Taxable Municipal Bond Fund
/ / $50,000.00 - $99,999.99 4.00% / / $100,000.00 - $249,999.99 3.50%
/ / $250,000.00 - $499,999.99 2.75% / / $500,000.00 - $999,999.99 2.00%
/ / $1,000,000.00 and over 0.00%
</TABLE>
I understand that purchases made within the last 90 days will be included as
part of my intended investment.
In addition, I understand that a number of shares with a value equal to 4.50% of
the dollar amount of intended purchases specified herein will be held in escrow
(the "Escrowed Shares") by Lebenthal & Co., Inc. (the "Distributor") until the
purchases are completed and that dividends and distributions on the Escrowed
Shares will be paid to me. During the escrow period, I grant to the Distributor
a security interest in the Escrowed Shares. If the intended purchases are not
completed during the L.O.I. Period, I understand that I will be required to pay
the Distributor an amount equal to the difference between the regular sales load
applicable to a single purchase of the number of shares actually purchased and
the sales load actually paid. If such payment is not made within 20 days after
written request to me by the Distributor, I agree that the Distributor has the
right to redeem a sufficient number of Escrowed Shares to effect payment of the
amount due. Any remaining Escrowed Shares will be released to my account.
Lebenthal New York Municipal Bond Fund
- --------------------- ---------------------- ---------------- ------------
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
-viii-
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
This financial highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
financial highlights for the fiscal years ended November 30, 1997, 1998 and 1999
have been audited by PricewaterhouseCoopers LLP, Independent Certified Public
Accountants, whose report is incorporated by reference into the SAI, and is
available upon request. Prior years' information was audited by other
independent auditors, whose reports are incorporated by reference into the
Fund's 1996 and 1995 Annual Reports to Shareholders, which are available upon
request.
<TABLE>
<CAPTION>
NEW YORK PORTFOLIO
(Class A shares only)
----------------------------------
Year Ended November 30,
- --------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period................ $ 8.53 $8.32 $ 8.09 $ 7.99 $ 6.84
------ ----- ------ ------ ------
Income from investment operations:
Net investment income............................ 0.41 0.42 0.42 0.41 0.43
Net realized and unrealized gain (loss)
on investments................................. (0.79) 0.21 0.23 0.10 1.15
------ ----- ------ ------ ------
Total from investment operations................. (0.38) 0.63 0.65 0.51 1.58
------ ----- ------ ------ ------
Less distributions:
Dividends from net investment income............. (0.41) (0.42) (0.42) (0.41) (0.43)
Distributions from net realized gain on investments (0.10) -- -- -- --
------ ----- ------ ------ ------
Total distributions.............................. (0.51) (0.42) (0.42) (0.41) (0.43)
------ ----- ------ ------ ------
Net asset value, end of period...................... $ 7.64 $8.53 $ 8.32 $ 8.09 $ 7.99
======= ====== ======= ======= =======
Total Return (without deduction of sales load)...... (4.69)% 7.69 % 8.27% 6.63%* 23.56%
Ratios/Supplemental Data:
Net assets, end of period (000's omitted)........... $ 134,857 $147,673 $ 134,144 $ 122,611 $ 105,579
Ratios to average net assets:
Expenses......................................... 0.76%** 0.76 %** 0.89%** 1.09% 0.99%
Net investment income............................ 5.00% 4.92 % 5.16% 5.17% 5.63%
Portfolio turnover rate............................. 59.91% 66.04 % 60.80% 45.92% 148.88%
</TABLE>
- ---------------
* Includes the effect of a capital contribution from the Fund's Manager. Without
the capital contribution the total return would have been 6.24%.
** Includes fees paid indirectly of less than 0.01% of average net assets.
-29-
<PAGE>
NEW YORK PORTFOLIO (Class B Shares only)*
- --------------------------------------------------------------------------------
Year ended November 30,
- --------------------------------------------------------------------------------
1999 1998*
---------- -----------
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period......................$8.54 $ 8.34
------ ------
Income from investment operations:
Net investment income.................................. 0.34 0.33
Net realized and unrealized
gain (loss) on investments...........................(0.80) 0.20
Total from investment operations.......................(0.46) 0.53
Less distributions:
Dividends from net investment income...................(0.34) (0.33)
Distributions from net realized gain on investments....(0.10) --
------ ------
Total distributions.......................................(0.44) (0.33)
------ ------
Net asset value, end of period............................$ 7.64 $ 8.54
====== ======
Total Return (1)
(without deduction of sales load)......................(5.57)% 6.48%
Ratios/Supplemental Data:
Net assets, end of period (000's omitted).................$3,909 $2,801
Ratios to average net assets:
Expenses**(2)..........................................1.55%*** 1.55%***
Net investment income (2)..............................4.21% 3.95%
Portfolio turnover rate...................................59.91% 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 2.38% and 4.58%
for the years ended 1999 and 1998, respectively.
*** Includes fees paid indirectly of less than .01% of average net assets.
(1) Not annualized for periods less than one year.
(2) Annualized for periods less than one year.
-30-
<PAGE>
<TABLE>
<CAPTION>
NEW JERSEY PORTFOLIO
------------------------------------------------------
Year Ended November 30,
- --------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding throughout the period)
Net asset value, beginning of period................ $7.20 $6.97 $6.74 $6.70 $5.95
------ ----- ------ ------ ------
Income from investment operations:
Net investment income............................ 0.34 0.35 0.35 0.36 0.36
Net realized and unrealized gain (loss)
on investments................................. (0.69) 0.23 0.23 0.04 0.75
------ ----- ------ ------ ------
Total from investment operations.................... (0.35) 0.58 0.58 0.40 1.11
------ ----- ------ ------ ------
Less distributions:
Dividends from net investment income............. (0.34) (0.35) (0.35) (0.36) (0.36)
Distributions from net realized gain
on investments................................. -- -- -- -- --
------ ----- ------ ------ ------
Total distributions................................. (0.34) (0.35) (0.35) (0.36) (0.36)
------ ----- ------ ------ ------
Net asset value, end of period...................... $6.51 $7.20 $6.97 $6.74 $6.70
====== ===== ====== ====== ======
Total Return (without deduction of sales load)...... (5.07)% 8.47% 8.84% 6.18% 19.10%
Ratios/Supplemental Data:
Net assets, end of period (000's omitted)........... $8,911 $9,042 $6,122 $5,182 $3,358
Ratios to average net assets:
Expenses*........................................ 0.71%** 0.60%** 0.70%** 0.63%** 0.60%
Net investment income............................ 4.84% 4.87% 5.12% 5.37% 5.64%
Portfolio turnover rate............................. 52.66% 31.81% 57.19% 28.56% 61.69%
</TABLE>
- -----------
* 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 1.45%, 1.60%,
2.57%, 3.20% and 4.13% for the years ended November 30, 1999, 1998, 1997,
1996 and 1995, respectively.
** Includes fees paid indirectly of 0.01%, 0.02%, 0.02% and 0.03% of average
net assets for 1999, 1998, 1997 and 1996, respectively.
-31-
<PAGE>
<TABLE>
<CAPTION>
TAXABLE PORTFOLIO
------------------------------------------------------------------------------
Year Ended November 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
(for a share outstanding
throughout the period)
Net asset value, beginning of period................ $7.73 $7.37 $7.13 $7.22 $6.34
------ ----- ------ ------ ------
Income from investment operations:
Net investment income............................ 0.49 0.49 0.50 0.52 0.53
Net realized and unrealized gain (loss)
on investments................................. (0.92) 0.36 0.24 (0.09) 0.88
------ ----- ------ ------ ------
Total from investment operations.................... (0.43) 0.85 0.74 0.43 1.41
------ ----- ------ ------ ------
Less distributions:
Dividends from net investment income............. (0.49) (0.49) (0.50) (0.52) (0.53)
Distributions from net realized gain
on investments................................. -- -- -- -- --
------ ----- ------ ------ ------
Total distributions................................. (0.49) (0.49) (0.50) (0.52) (0.53)
------ ----- ------ ------ ------
Net asset value, end of period...................... $6.81 $7.73 $7.37 $7.13 $7.22
====== ===== ====== ====== ======
Total Return (without deduction of sales load)...... (5.77)% 11.85% 10.89% 6.35% 23.11%
Ratios/Supplemental Data:
Net assets, end of period (000's omitted)........... $13,487 $17,789 $14,994 $14,607 $8,686
Ratios to average net assets:
Expenses*........................................ 0.82%** 0.70%** 0.79%** 0.61%** 0.60%
Net investment income............................ 6.71% 6.45% 7.06% 7.34% 7.57%
Portfolio turnover rate............................. 21.12% 23.75% 34.52% 44.46% 84.74%
</TABLE>
- --------------------------------------------------------------------------------
* 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%, 1.15%, 1.42%, 1.63% and
2.59% for the years ended November 30, 1999, 1998, 1997, 1996 and 1995,
respectively.
** Includes fees paid indirectly of 0.01% of average net assets.
-32-
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
For more information about the Fund, the following documents are available free
upon request:
Annual/Semiannual Reports:
The Fund's semi-annual and audited annual reports to shareholders contain
detailed information on the Fund's investments. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Fund, including its
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
You can get free copies of Reports and SAI, or request other information and
discuss your questions about the Fund by contacting:
Lebenthal & Co., Inc.
120 Broadway
New York, New York 10271
212-425-6116
or
800-221-5822 (outside New York City)
www.lebenthal.com
You can review the Fund's reports and SAI at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies:
o For a fee, by writing the Public Reference Section of the Securities and
Exchange Commission, Washington, D.C. 20549-0102 or calling 1-202-942-8090.
o Free from the EDGAR Database on the Securities and Exchange Commission's
Website at http://www.sec.gov.
o By electronic request (after paying a duplicating fee) at the e-mail address
[email protected].
SEC. File No. 811-6170
<PAGE>
LEBENTHAL
FUNDS, INC.
120 Broadway, New York, NY 10271
212-425-6116
OUTSIDE NYC TOLL FREE 1-800-221-5822
Lebenthal New York Municipal Bond Fund -- Class A and Class B Shares
Lebenthal New Jersey Municipal Bond Fund
Lebenthal Taxable Municipal Bond Fund
STATEMENT OF ADDITIONAL INFORMATION
March 30, 2000
This Statement of Additional Information (SAI) is not a prospectus. It
supplements the information contained in the current Prospectus dated March 30,
2000, 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
Fund History 2
Description of the Fund and Its Investments and Risks 2
Management of the Fund 21
Control Persons and Principal Holders of Securities 22
Investment Advisory and Other Services 23
Brokerage Allocation and Other Practices 27
Capital Stock and Other Securities 28
Purchase, Redemption, and Pricing of Fund Shares 28
Taxation of the Fund 28
Underwriters 32
Calculation of Performance Data 32
Financial Statements 34
Description of Security Ratings and Notes 35
Taxable Equivalent Yield Tables 38
<PAGE>
FUND HISTORY
- -------------------------------------------------------------------------------
The Fund was incorporated on August 17, 1990 in the State of Maryland.
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
- -------------------------------------------------------------------------------
The Fund is an open-end management investment company currently consisting of
two non-diversified portfolios, the New York Portfolio and the New Jersey
Portfolio, and a diversified Portfolio, the Taxable Portfolio. The investment
objectives of the Portfolios described in this section may not be changed unless
approved by the holders of a majority of the outstanding shares of the
respective Portfolio that will be affected by such a change. As used in this
Prospectus, the term "majority of the outstanding shares" of the Portfolio means
the vote of the lesser of (i) 67% or more of the shares of the Portfolio present
at a meeting, if the holders of more than 50% of the outstanding shares of the
Portfolio are present or represented by proxy or (ii) more than 50% of the
outstanding shares of the Portfolio.
As non-diversified investment companies, the New York Portfolio and the New
Jersey Portfolio are not subject to any statutory restriction under the
Investment Company Act of 1940 (the "1940 Act") with respect to investing their
assets in one or relatively few issuers. This non-diversification may present
greater risks than in the case of a diversified company. As a diversified
investment company, 75% of the assets of the Taxable Portfolio are subject to
the following limitations: (i) the Portfolio may not invest more than 5% of its
total assets in the securities of any one issuer, except obligations of the
United States government and its agencies and instrumentalities, and (ii) the
Portfolio may not own more than 10% of the outstanding voting securities of any
one issuer.
The classification of the Taxable Portfolio as a diversified investment company
is a fundamental policy of the Portfolio and may be changed only with the
approval of the holders of a majority of such Portfolio's outstanding shares.
The following discussion expands upon the description of the Portfolios'
investment objectives, policies and risks in the Prospectus.
Description of The Portfolios' Investment Securities.
Investment Objectives, Policies and Risks of the New York and New Jersey
Portfolios.
The New York and New Jersey Portfolios are each a municipal bond
fund. The New York and New Jersey Portfolios' investment objective is to
maximize income exempt from regular Federal income tax and from New York State
and New York City personal income taxes, with respect to the New York Portfolio,
and from New Jersey gross income tax, with respect to the New Jersey Portfolio,
consistent with preservation of capital, with consideration given to
opportunities for capital gain. No assurance can be given that these objectives
will be achieved. The following discussion expands upon the description of the
New York and New Jersey Portfolios' investment objective, policies and risks in
the Prospectus. The New York and New Jersey Portfolios each provide tax free
income that, when reinvested into additional shares of the New York and New
Jersey Portfolios, respectively, provides investors growth by increasing the
value of their total investment.
The New York and New Jersey Portfolios' assets will be invested primarily in
long term investment grade tax-exempt securities issued by or on behalf of the
State of New York with respect to the New York Portfolio, and the State of New
Jersey, with respect to the New Jersey Portfolio, and other states, Puerto Rico
and other United States territories and possessions, and their authorities,
agencies, instrumentalities and political subdivisions ("Municipal
Obligations"). The average maturity of the Municipal Obligations in which the
New York and New Jersey Portfolios will invest is 15-25 years. The New York and
New Jersey Portfolios each attempts to invest 100%, and as a matter of
fundamental policy invests at least 80%, of the value of its net assets in
securities with remaining maturities of one year or more the interest on which
is, in the opinion of bond counsel to the issuer at the date of issuance, exempt
from regular Federal income tax and from New York State and New York City
personal income taxes ("New York Municipal Obligations") with respect to the New
York Portfolio, and from New Jersey gross income tax ("New Jersey Municipal
Obligations") with respect to the New Jersey Portfolio. The New York and New
Jersey Portfolios may each also invest in tax-exempt securities of issuers
outside New York State or the State of New Jersey, respectively, if such
securities bear interest which is exempt from regular Federal income tax and New
York State and City personal income taxes or New Jersey gross income tax,
respectively. The New York and New Jersey Portfolios each also reserves the
right to invest up to 20% of the value of its net assets in securities, the
interest on which is exempt from regular Federal income tax but not New York
State and City personal income taxes with respect to the New York Portfolio, and
New Jersey gross income tax with respect to the New Jersey Portfolio, and other
taxable obligations. Although the Supreme Court has determined that Congress has
the authority to subject the interest on municipal bonds to Federal income
taxation, existing law excludes such interest from regular Federal income tax.
However, such tax-exempt interest may be subject to the Federal alternative
minimum tax. Securities, the interest income on which may be
-2-
<PAGE>
subject to the Federal alternative minimum tax, may be purchased by the New
York and New Jersey Portfolios without limit. (See "Federal Income Taxes"
herein.)
The New York and New Jersey Portfolios will invest principally, without
percentage limitations, in tax-exempt securities which on the date of investment
are within the four highest credit ratings of Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A, Baa for bonds; MIG-1, MIG-2, MIG-3, MIG-4 for notes;
P-1, P-2, P-3 for commercial paper; VMIG-1, VMIG-2, VMIG-3, VMIG-4 for variable
and floating demand notes), Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies ("S&P") (AAA, AA, A, BBB for bonds; SP-1, SP-2, SP-3 for
notes and for variable and floating demand notes; A-1, A-2, A-3, B for
commercial paper) or Fitch Investors Service, Inc. ("Fitch") (AAA, AA, A, BBB
for bonds; F-1, F-2, F-3 for notes, variable and floating demand notes and
commercial paper). Although bonds and notes rated in the fourth credit rating
category are commonly referred to as investment grade, they may have speculative
characteristics. In addition, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. The Fund will
not necessarily dispose of a security that falls below investment grade upon the
Manager's determination as to whether retention of such a security is consistent
with the Fund's investment objectives. A detailed discussion of such
characteristics and circumstances and their effect upon the New York and New
Jersey Portfolios appears herein. A description of the credit ratings appears
under the heading "Description of Security Ratings and Notes." The New York and
New Jersey Portfolios may invest in tax-exempt securities which are not rated or
which do not fall into the credit ratings noted above if, based upon credit
analysis by the Adviser, it is believed that such securities are of comparable
quality.
In unusual circumstances during adverse market conditions, as determined by the
Manager, the New York and New Jersey Portfolios may each assume a temporary
defensive position in which the New York or New Jersey Portfolio, respectively,
may invest up to 100% of the value of its net assets on a temporary basis in
securities, the interest on which is exempt from regular Federal income tax, but
not New York State and City personal income taxes, with respect to the New York
Portfolio, and New Jersey gross income tax, with respect to the New Jersey
Portfolio, and in fixed-income securities, the interest on which is subject to
regular Federal, state or local income tax, pending the investment or
reinvestment in tax-exempt securities of proceeds of sales of shares or sales of
portfolio securities or in order to avoid the necessity of liquidating portfolio
investments to meet redemptions of shares by investors or where market
conditions due to rising interest rates or other adverse factors warrant
temporary investing for defensive purposes. Investments in taxable securities
will be substantially in securities issued or guaranteed by the United States
government (such as bills, notes and bonds), its agencies, instrumentalities or
authorities; highly-rated corporate debt securities (rated AA or better by S&P
and Fitch, or Aa3 or better by Moody's); prime commercial paper (rated A-1+ by
S&P, F-1+ by Fitch or P-1 by Moody's); and certificates of deposit of the 100
largest domestic banks (in terms of assets) which are subject to regulatory
supervision by the United States government or state governments and the 50
largest foreign banks (in terms of assets) with branches or agencies in the
United States. Investments in certificates of deposit of foreign banks and
foreign branches of United States banks may involve certain risks, including
different regulations, use of different accounting procedures, political or
other economic developments, exchange controls, or possible seizure or
nationalization of foreign deposits.
Investment in the Portfolios should be made with an understanding of the risk
which an investment in New York Municipal Obligations or New Jersey Municipal
Obligations, as the case may be, may entail. Payment of interest and
preservation of capital are dependent upon the continuing ability of New York
and New Jersey issuers and/or obligors of state, municipal and public authority
debt obligations to meet their obligations thereunder. Investors should consider
the greater risk of the Portfolio's concentration versus the safety that comes
with a less concentrated investment portfolio.
Investment Objectives, Policies and Risks of the Taxable Portfolio
The Taxable Portfolio is a taxable municipal bond fund. The Taxable Portfolio's
investment objective is to maximize income consistent with preservation of
capital, with consideration given to opportunities for capital gain. No
assurance can be given that this objective will be achieved. The following
discussion expands upon the description of the Taxable Portfolio's investment
objective, policies and risks in the Prospectus.
The Taxable Portfolio's assets will be invested primarily in long term
investment grade taxable securities issued by or on behalf of states and
municipal governments, other United States territories and possessions of the
United States, and their authorities, agencies, instrumentalities and political
subdivisions ("Taxable Municipal Obligations"). The average maturity of the
Taxable Municipal Obligations in which the Taxable Portfolio will invest is over
10 years. The Taxable Portfolio attempts to invest 100%, and as a matter of
fundamental policy invests at least 65%, of the value of its total assets in
taxable securities with remaining maturities of one year or more. The interest
on the Taxable Municipal Obligations is includable in gross income for federal
income tax purposes and may be subject to personal income taxes imposed by any
state of the United States or any political subdivision thereof, or by the
District of Columbia. (See "Federal Income Taxes" herein.)
-3-
<PAGE>
The Taxable Portfolio will invest principally, without percentage limitations,
in securities which on the date of investment are within the four highest credit
ratings of Moody's (Aaa, Aa, A, Baa for bonds; MIG-1, MIG-2, MIG-3, MIG-4 for
notes; P-1, P-2, P-3 for commercial paper; VMIG-1, VMIG-2, VMIG-3, VMIG-4 for
variable and floating demand notes), S&P (AAA, AA, A, BBB for bonds; SP-1, SP-2,
SP-3 for notes and for variable and floating demand notes; A-1, A-2, A-3, B for
commercial paper) or Fitch (AAA, AA, A, BBB for bonds; F-1, F-2, F-3 for notes,
variable and floating demand notes and commercial paper). Although bonds and
notes rated in the fourth credit rating category are commonly referred to as
investment grade they may have speculative characteristics. In addition, changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case with
higher grade bonds. The Fund will not necessarily dispose of a security that
falls below investment grade upon the Manager's determination as to whether
retention of such a security is consistent with the Fund's investment
objectives. A detailed discussion of such characteristics and circumstances and
their effect upon the Taxable Portfolio appears herein. A description of the
credit ratings appears under the heading "Description of Security Ratings and
Notes." The Taxable Portfolio may invest in securities which are not rated or
which do not fall into the credit ratings noted above if, based upon credit
analysis by the Manager, it is believed that such securities are of comparable
quality.
In unusual circumstances during adverse market conditions, as determined by the
Manager, the Taxable Portfolio may assume a temporary defensive position in
which the Taxable Portfolio may invest up to 100% of the value of its net assets
on a temporary basis in securities issued or guaranteed by the United States
government (such as bills, notes and bonds), its agencies, instrumentalities or
authorities, tax-exempt securities; highly-rated corporate debt securities
(rated AA or better by S&P and Fitch, or Aa3 or better by Moody's); prime
commercial paper (rated A-1+ by S&P, F-1+ by Fitch or P-1 by Moody's) and
certificates of deposit of the 100 largest domestic banks (in terms of assets)
which are subject to regulatory supervision by the United States government or
state governments and the 50 largest foreign banks (in terms of assets) with
branches or agencies in the United States. Investments in certificates of
deposit of foreign banks and foreign branches of United States banks may involve
certain risks, including different regulations, use of different accounting
procedures, political or other economic developments, exchange controls, or
possible seizure or nationalization of foreign deposits.
Investment in the Portfolio should be made with an understanding of the risks
which an investment in Municipal Obligations may entail. However, payment of
interest and preservation of principal are dependent upon the continuing ability
of the obligors of state, municipal and public authority debt obligations to
meet their obligations thereunder.
Municipal Obligations
(1) Municipal Bonds include long term, and for the Taxable Portfolio, taxable,
obligations that are rated Baa or better at the date of purchase by
Moody's, or BBB or better by S&P or Fitch or, if not rated, are of
comparable quality as determined by Lebanthal Asset Management, Inc. (the
"Manager") on the basis of the Manager's credit evaluation of the obligor,
or credit enhancement issued in support of the obligation.
Municipal Bonds are debt obligations of states, cities, counties,
municipalities and municipal agencies (all of which are generally referred
to as "municipalities") which generally have a maturity at the time of
issue of one year or more and which are issued to raise funds for various
public purposes such as construction of a wide range of public facilities,
to refund outstanding obligations and to obtain funds for institutions and
facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of and interest on revenue bonds are payable from the income of specific
projects or authorities and generally are not supported by the issuer's
general power to levy taxes. For example, in some cases, revenues derived
from specific taxes are pledged to support payments on a revenue bond.
Revenue bonds are secured by tolls, rentals, mortgage payments, tuitions,
fees, that is, by earnings. Among the projects financed by revenue bonds
are housing projects, turnpikes, hospitals, power plants, airports,
colleges, water and sewer systems, resource recovery and solid waste
disposal systems--in fact, any municipal enterprise that sustains itself by
the sale of a service to the public.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on the IRBs contained in the New York Portfolio and New
Jersey Portfolio is generally exempt, with certain exceptions, from regular
Federal income tax pursuant to Section 103(a) of the Code, provided the
issuer and corporate obligor thereof continue to meet certain conditions.
(See "Federal Income Taxes" herein.) IRBs are, in most cases, revenue
bonds, and do not generally constitute the pledge of the credit of the
issuer of such bonds. The payment of the principal of and interest on IRBs
usually depends solely on the ability of the user of the facilities
financed by the bonds or the other guarantor to meet its financial
obligations and, in certain instances, on the pledge of real and personal
property as security for payment. If there is no established secondary
market for a particular IRB, the IRB or the participation certificates in
-4-
<PAGE>
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.
The Board of Directors may adopt guidelines and delegate to the Adviser or
the Manager of the Portfolios, as the case may be, the daily function of
determining and monitoring the liquidity of Municipal Leases. In making
such determination, the Board and the Adviser or the Manager of the
Portfolios, as the case may be, may consider such factors as the frequency
of trades for the obligation, the number of other potential buyers and the
nature of the marketplace for the obligations, including the time needed to
dispose of the obligations and the method of soliciting offers. If the
Board determines that any Municipal Leases are illiquid, such leases will
be subject to the 15% limitation on investments in illiquid securities.
(5) Each Portfolio may also purchase any other Federal tax-exempt and, where
applicable, New York or New Jersey income tax-exempt obligations issued by
or on behalf of states and municipal governments and their authorities,
agencies, instrumentalities and political subdivisions, whose inclusion in
a Portfolio would be consistent with such Portfolio's investment objectives
and policies. Subsequent to its purchase by a Portfolio, a rated Municipal
Obligation may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Portfolio. Neither event will require
sale of such Municipal Obligation by the applicable Portfolio, but the
Adviser (as defined below) will consider such event in determining whether
such Portfolio should continue to hold the Municipal Obligation. To the
extent that the ratings given to the Municipal Obligation or other
securities held by such Portfolios are altered due to changes in either the
Moody's, S&P or Fitch ratings systems (see "Description of Security Ratings
and Notes" herein for an explanation of S&P, Moody and Fitch ratings), the
Adviser will adopt such changed ratings as standards for its future
investments in accordance with the investment policies contained in the
Prospectus.
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Floating Rate and Variable Rate Securities
The Portfolios may purchase floating rate and variable rate put option
securities, or participation interests therein. Floating and variable rate put
option securities bear a variable interest rate which generally is determined by
the bond remarketing agent based on current market conditions, although certain
issuers may set rates using a designated base rate or a specified percentage
thereof. The rate of interest used is that rate which would enable the
securities to be remarketed. These securities have a put feature which allows
the holder to demand payment of the obligation on short notice at par plus
accrued interest. Frequently, these securities are backed by letters of credit
or similar liquidity facilities provided by banks.
The New York Portfolio and the New Jersey Portfolio may invest in participation
interests purchased from banks in variable-rate tax-exempt securities owned by
banks. A participation interest gives the purchaser an undivided interest in the
tax-exempt security in the proportion that such Portfolio's participation
interest bears to the total principal amount of the tax-exempt security and
provides the demand repurchase feature described above. Participations are
frequently backed by an irrevocable letter of credit or guarantee of a bank that
the Manager has determined meets the prescribed quality standards for the
Portfolio. The Portfolio has the right to sell the instrument back to the bank
and draw on the letter of credit on demand, on seven days' notice, for all or
any part of such Portfolio's participation interest in the tax-exempt security,
plus accrued interest. The New York Portfolio and the New Jersey Portfolio
intend to exercise the demand under the letter of credit only (i) upon a default
under the terms of the documents of the tax-exempt security, (ii) as needed to
provide liquidity in order to meet redemptions, or (iii) to maintain the
investment quality of the portfolio. Banks will retain a service and letter of
credit fee and a fee for issuing repurchase commitments in an amount equal to
the excess of the interest paid on the tax-exempt securities over the negotiated
yield at which the instruments are purchased by the Portfolio.
The Manager will monitor the pricing, quality and liquidity of the variable rate
demand instruments held by the Portfolios, on the basis of published financial
information, reports of rating agencies and other analytical services to which
the Manager may subscribe. The Portfolios will purchase participation interests
only if, in the opinion of counsel, interest income on such interests will be
tax-exempt when distributed as dividends to shareholders.
When-Issued Securities
New issues of certain Municipal Obligations are frequently offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on the Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Portfolio's
commitment to purchase. Although each Portfolio will only make commitments to
purchase when-issued Municipal Obligations with the intention of actually
acquiring them, each Portfolio may sell these securities before the settlement
date if deemed advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in a Portfolio are subject to changes in value. Both generally change in the
same way--experiencing appreciation when interest rates decline and depreciation
when interest rates rise. These fluctuations in value are based upon the
public's perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates.
Purchasing Municipal Obligations on a when-issued basis can involve a risk that
the yields available in the market when the delivery takes place may actually be
higher or lower than those obtained in the transaction itself. A segregated
account of the Fund consisting of cash or liquid high-grade debt securities
equal to the amount of the when-issued commitments will be established at the
respective Portfolio's custodian banks. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market value. If the market value of such securities declines,
additional cash or highly liquid securities will be placed in the account daily
so that the value of the account will equal the amount of such commitments by
the Portfolio. On the settlement date of the when-issued securities, the
Portfolio will meet its obligations from then-available cash flow, sale of
securities held in the separate account, sale of other securities or, although
it would not normally expect to do so, from sale of the when-issued securities
themselves (which may have a value greater or lesser than the Portfolio's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When each Portfolio purchases Municipal Obligations it may also acquire stand-by
commitments from banks and other financial institutions with respect to such
Municipal Obligations. Under a stand-by commitment, a bank or broker-dealer
agrees to purchase at the Portfolio's option a specified Municipal Obligation at
a specified price with same day settlement. A stand-by commitment is the
equivalent of a "put" option acquired by one of the Portfolios with respect to a
particular Municipal Obligation held in such Portfolio.
The amount payable to a Portfolio upon its exercise of a stand-by commitment
normally would be (i) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Portfolio paid on the acquisition),
less any amortized
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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 1/2 of 1% of the value of such Portfolio's total assets calculated
immediately after each stand-by commitment was acquired.
Each Portfolio will enter into stand-by commitments only with banks and other
financial institutions that, in the Adviser's opinion, present minimal credit
risks and, where the issuer of the Municipal Obligation does not have a
sufficient quality rating, only if the issuer of the stand-by commitment has
received a sufficient quality rating from an unaffiliated nationally recognized
rating organization or, if not rated, presents a minimal risk of default as
determined by the Board of Directors. Each Portfolio's reliance upon the credit
of these banks and broker-dealers will be supported by the value of the
underlying Municipal Obligations held by such Portfolio that is subject to the
commitment.
Each Portfolio intends to acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The purpose of this practice is to permit a Portfolio to be
fully invested in securities the interest on which, excluding the Taxable
Portfolio, is exempt from regular Federal income taxes, while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions and to purchase at a later date securities other
than those subject to the stand-by commitment.
The acquisition of a stand-by commitment will not affect the valuation or
assumed maturity of the underlying Municipal Obligations, which will continue to
be valued in accordance with the amortized cost method. Stand-by commitments
acquired by each Portfolio will be valued at zero in determining net asset
value. In those cases in which one of the Portfolios paid directly or indirectly
for a stand-by commitment, its cost will be reflected as unrealized depreciation
for the period during which the commitment is held by such Portfolio. Stand-by
commitments will not affect the dollar-weighted average maturity of the
Portfolio. The maturity of a security subject to a stand-by commitment is longer
than the stand-by repurchase date.
The stand-by commitments that each Portfolio may enter into are subject to
certain risks, which include the ability of the issuer of the commitment to pay
for the securities at the time the commitment is exercised, the fact that the
commitment is not marketable by such Portfolio, and that the maturity of the
underlying security will generally be different from that of the commitment.
In addition, a Portfolio may apply to the Internal Revenue Service for a ruling,
or seek from its counsel an opinion, that interest on Municipal Obligations
subject to stand-by commitments will be exempt from regular Federal income
taxation (see "Federal Income Taxes" herein). In the absence of a favorable tax
ruling or opinion of counsel, a Portfolio will not engage in the purchase of
securities subject to stand-by commitments. The New Jersey Portfolio may apply
to the New Jersey Division of Taxation for a ruling that income from the
stand-by commitments will be exempt from the New Jersey Gross Income Tax.
Taxable Securities
The New York Portfolio and the New Jersey Portfolio will attempt to invest 100%
of their net assets in tax-exempt Municipal Obligations. However, if the Manager
determines that the Portfolios should assume a temporary defensive position due
to adverse market conditions, the New York Portfolio and the New Jersey
Portfolio may invest up to 100% of the value of their net assets, in securities
of the kind described below, the interest income on which is subject to Federal
and New Jersey income tax, respectively. 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
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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. For purposes of the Taxable Portfolio,
taxable securities will be substantially in Taxable Municipal Obligations as
well as in the securities described in this paragraph.
Repurchase Agreements
Each Portfolio may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Portfolio will acquire an
underlying debt instrument for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase and the Portfolio
to resell the instrument at a fixed price and time, thereby determining the
yield during the Portfolio's holding period. This results in a fixed rate of
return insulated from market fluctuation during such period. A repurchase
agreement is subject to the risk that the seller may fail to repurchase the
security.
Repurchase agreements may be deemed to be loans under the 1940 Act. All
repurchase agreements entered into by each Portfolio, at all times during the
period of the agreements, shall be fully collateralized as follows: (i) the
value of the underlying security shall be at least equal to the amount of the
loan, including the accrued interest thereon, and (ii) the Portfolio or its
custodian shall have possession of the collateral, which the Fund's Board of
Directors believes will give it a valid, perfected security interest in the
collateral. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Portfolio but only constitute collateral for the seller's obligation to
pay the repurchase price. Therefore, the Portfolio may suffer time delays and
incur costs in connection with the disposition of the collateral. The Fund's
Board of Directors believes that the collateral underlying repurchase agreements
may be more susceptible to claims of the seller's creditors than would be the
case with securities owned by the Portfolio.
It is expected that repurchase agreements will give rise to income which will
not qualify as tax-exempt income when distributed by the Portfolio. Each
Portfolio will not invest in a repurchase agreement maturing in more than seven
days if any such investment together with illiquid securities held by such
Portfolio exceeds 15% of such Portfolio's net assets. (See Investment
Restriction Number 6 herein.) Repurchase agreements are subject to the same
risks described herein for stand-by commitments.
Investment Restrictions
The Fund has adopted the following fundamental investment restrictions which
apply to each Portfolio (except where application to only a particular Portfolio
is specified) and which may not be changed unless approved by a majority of the
outstanding shares of the Portfolio affected by such a change. The Portfolios
may not:
(1) Make portfolio investments other than as described under "Investment
Objectives, Policies and Risks" of the respective Portfolio or any other
form of taxable or Federal tax-exempt investment, where applicable,
which meets the Portfolio's quality criteria, as determined by the Board
of Directors and which is consistent with the Portfolio's objectives and
policies.
(2) Borrow money. This restriction shall not apply to borrowing from banks
for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Portfolio's total assets (including the amount borrowed) valued at
market less liabilities (not including the amount borrowed) at the time
the borrowing was made. While borrowings exceed 5% of the value of a
Portfolio's total assets, such Portfolio will not make any investments.
Interest paid on borrowings will reduce net income.
(3) Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets and only to
secure borrowings for temporary or emergency purposes.
(4) Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options, except to the extent that securities subject to a demand
obligation and stand-by commitments may be purchased as set forth under
"Investment Objectives, Policies and Risks" of the respective Portfolio.
(5) Underwrite the securities of other issuers, except insofar as the
Portfolio may be deemed an underwriter under the Securities Act of 1933
in disposing of a portfolio security.
(6) Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"). These Portfolios will
not invest more than an aggregate of 15% of their net assets in a
repurchase agreement
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maturing in more than seven days, variable rate demand instruments
exercisable in more than seven days and securities that are not readily
marketable.
(7) Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests, but this
shall not prevent the Portfolio from investing in Municipal Obligations
secured by real estate or interests in real estate.
(8) Make loans to others, except through the purchase of portfolio
investments, including repurchase agreements, as described under
"Investment Objectives, Policies and Risks" of the respective Portfolio.
(9) For purposes of the New York Portfolio and the New Jersey Portfolio,
purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
(10) Invest more than 25% of its assets in the securities of "issuers" in any
single industry, provided there shall be no limitation on the New York
Portfolio to purchase New York Municipal Obligations or on the New
Jersey Portfolio to purchase New Jersey Municipal Obligations and other
obligations issued or guaranteed by the United States government, its
agencies or instrumentalities. When the assets and revenues of an
agency, authority, instrumentality or other political subdivision are
separate from those of the government creating the issuing entity and a
security is backed only by the assets and revenues of the entity, the
entity is deemed to be the sole issuer of the security. Similarly, in
the case of an industrial revenue bond, if that bond is backed only by
the assets and revenues of the non-governmental user, then such
non-governmental user is deemed to be the sole issuer. If, however, in
either case, the creating government or some other entity, such as an
insurance company or other corporate obligor, guarantees a security or a
bank issues a letter of credit, such a guarantee or letter of credit is
considered a separate security and will be treated as an issue of such
government, other entity or bank.
(11) Invest in securities of other investment companies, except (i) the
Portfolios may purchase unit investment trust securities where such unit
investment trusts meet the investment objectives of the Portfolios and
then only up to 5% of the Portfolios' net assets, except as they may be
acquired as part of a merger, consolidation or acquisition of assets and
(ii) with respect to the New York Portfolio, the New Jersey Portfolio
and the Taxable Portfolio as permitted by Section 12(d) of the 1940 Act.
(12) Issue senior securities, except insofar as the Fund may be deemed to
have issued a senior security in connection with any permitted
borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Portfolio's assets will not
constitute a violation of such restriction.
New York Risk Factors
This summary is included for the purpose of providing a general description of
New York State's (the "State") and New York City's (the "City") credit and
financial condition. The information set forth below is derived from the
official statements and/or preliminary drafts of official statements prepared in
connection with the issuance of State and City municipal bonds. The Fund has not
independently verified this information.
Economic Trends. Over the long term, the State of New York (the "State") and the
City of New York (the "City") face serious potential economic problems. The City
accounts for approximately 41% of the State's population and personal income,
and the City's financial health affects the State in numerous ways. The State
historically has been one of the wealthiest states in the nation. For decades,
however, the State has grown more slowly than the nation as a whole, gradually
eroding its relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. The City has also
had to face greater competition as other major cities have developed financial
and business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden relative
to other states. The State and its localities have used these taxes to develop
and maintain their transportation networks, public schools and colleges, public
health systems, other social services and recreational facilities. Despite these
benefits, the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, has contributed to the decisions
of some businesses and individuals to relocate outside, or not locate within,
the State.
Notwithstanding the numerous initiatives that the State and its localities may
take to encourage economic growth and achieve balanced budgets, reductions in
Federal spending could materially and adversely affect the financial condition
and budget projections of the State and its localities.
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New York City. The City, with a population of approximately 7.4 million, is an
international center of business and culture. Its non-manufacturing economy is
broadly based, with the banking and securities, life insurance, communications,
publishing, fashion design, retailing and construction industries accounting for
a significant portion of the City's total employment earnings. Additionally, the
City is the nation's leading tourist destination. Manufacturing activity in the
City is conducted primarily in apparel and printing.
For each of the 1981 through 1999 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating results
as reported in accordance with then applicable generally accepted accounting
principles ("GAAP"), after discretionary transfers. The City has been required
to close substantial gaps between forecast revenues and forecast expenditures in
order to maintain balanced operating results. There can be no assurance that the
City will continue to maintain balanced operating results as required by State
law without tax or other revenue increases or reductions in City services or
entitlement programs, which could adversely affect the City's economic base.
As required by law, the City prepares a four-year annual financial plan, which
is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's current financial plan
projects a surplus in the 2000 fiscal year, before discretionary transfers, and
budget gaps for each of the 2001, 2002 and 2003 fiscal years. This pattern of
current year surplus operating results and projected subsequent year budget gaps
has been consistent through the entire period since 1982, during which the City
has achieved surplus operating results, before discretionary transfers, for each
fiscal year.
The City depends on aid from the State both to enable the City to balance its
budget and to meet its cash requirements. There can be no assurance that there
will not be reductions in State aid to the City from amounts currently
projected; that, in future years, State budgets will be adopted by the April 1
statutory deadline, or interim appropriations enacted; or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the Federal budget negotiation process could result
in a reduction in or a delay in the receipt of Federal grants which could have
additional adverse effects on the City's cash flow or revenues.
The Mayor is responsible for preparing the City's financial plan, including the
City's current financial plan for the 2000 through 2003 fiscal years (the
"2000-2003 Financial Plan" or "Financial Plan"). The City's projections set
forth in the Financial Plan are based on various assumptions and contingencies
which are uncertain and which may not materialize. Such assumptions and
contingencies include the condition of the regional and local economies, the
provision of State and Federal aid and the impact on City revenues and
expenditures of any future Federal or State policies affecting the City.
Implementation of the Financial Plan is dependent upon the City's ability to
market its securities successfully. The City's program for financing capital
projects for fiscal years 2000 through 2003 contemplates the issuance of $7.449
billion of general obligation bonds and $3.35 billion of bonds to be issued by
the New York City Transitional Finance Authority (the "Finance Authority"). In
addition, the Financial Plan anticipates access to approximately $2.4 billion in
financing capacity of Tobacco Settlement Asset Securitization Corporation, Inc.
("TSASC"), which will issue debt secured by revenues derived from the settlement
of litigation with tobacco companies selling cigarettes in the United States.
The Finance Authority and TSASC were created to assist the City in financing its
capital program while 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, New York City Municipal Water Finance Authority ("Water
Authority"), Finance Authority, TSASC and other bonds and notes will be subject
to prevailing market conditions. The City's planned capital and operating
expenditures are dependent upon the sale of its general obligation debt, as well
as debt of the Water Authority, Finance Authority and TSASC. 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 Comptroller and other agencies and public officials, from time to time,
issue reports and make public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans.
For the 1999 fiscal year, the City had a operating surplus, before discretionary
and other transfers, and achieved balanced operating results, after
discretionary and other transfers, in accordance with GAAP. The 1999 fiscal year
is the nineteenth year that the City has achieved an operating surplus, before
discretionary and other transfers, and balanced operating results, after
discretionary and other transfers.
Changes since adoption of the City's Expense Budget for the 1999 fiscal year in
June 1998, prior to the financial plan submitted to the Control Board on June
26, 1998 include: (i) an increase in projected tax revenues of $762 million,
$558 million, $417 million and $1.4 billion in fiscal years 2000 through 2003,
respectively; (ii) $300 million, $250 million, $300 million and $300 million of
projected resources in fiscal years 2000 through 2003, respectively, from the
receipt by the City of funds from the settlement of litigation with the leading
cigarette companies; (iii) a reduction in the assumed collection of $350 million
of projected rent payments for the City's airports to $210 million and a delay
in the receipt of such
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payments from fiscal year 2000 to fiscal year 2001; (iv) anticipated proceeds
from the proposed sale of the Coliseum in fiscal year 2001 totaling $345
million; and (v) net increases in spending of $817 million, $739 million, $713
million and $1.05 billion in fiscal years 2000 through 2003, including spending
for Medicaid, education initiatives, anti-smoking programs, employee fringe
benefit costs, and other agency programs. The Financial Plan includes a
discretionary transfer in the 1999 fiscal year of $2.6 billion primarily to pay
debt service due in fiscal year 2000, for budget stabilization purposes, a
discretionary transfer in fiscal year 2000 to pay debt service due in fiscal
year 2001 totaling $429 million, and a proposed discretionary transfer in fiscal
year 2001 to pay debt service due in fiscal year 2002 totaling $345 million.
On June 14, 1999, the City released the Financial Plan for the 2000 through 2003
fiscal years, which relates to the City and certain entities which receive funds
from the City. The Financial Plan reflects changes as a result of the City's
expense and capital budgets for fiscal year 2000, which were adopted on June 7,
1999. The Financial Plan projects revenues and expenditures for the 2000 fiscal
year balanced in accordance with GAAP and projects gaps of $1.8 billion, $1.9
billion and $1.8 billion for fiscal years 2001 through 2003, respectively.
In addition, the Financial Plan sets forth gap-closing actions to eliminate a
previously projected gap for the 2000 fiscal year and to reduce projected gaps
for fiscal years 2001 through 2003. The gap-closing actions for the 2000 through
2003 fiscal years include: (i) additional agency actions totaling $502 million,
$371 million, $293 million and $283 million for fiscal years 2000 through 2003,
respectively; (ii) additional Federal aid of $75 million in each of fiscal years
2000 through 2003, which include the proposed restoration of $25 million of
Federal revenue sharing and $50 million of increased Federal Medicaid aid; and
(iii) additional State actions totaling approximately $125 million in each of
fiscal years 2000 through 2003. The Financial Plan also reflects a tax reduction
program, which includes the elimination of the City's non-residents earning tax,
the proposed extension of current tax reductions for owners of cooperative and
condominium apartments and a proposed income tax credit for low income wage
earners.
The Financial Plan is based on numerous assumptions, including the condition of
the City's and the region's economies and modest employment growth and the
concomitant receipt of economically sensitive tax revenues in the amounts
projected. The Financial Plan is subject to various other uncertainties and
contingencies relating to, among other factors, the extent, if any, to which
wage increases for City employees exceed the annual wage costs assumed for the
2000 through 2003 fiscal years; continuation of projected interest earnings
assumptions for pension fund assets and current assumptions with respect to
wages for City employees affecting the City's required pension fund
contributions; the willingness and ability of the State to provide the aid
contemplated by the Financial Plan and to take various other actions to assist
the City; the ability of City agencies to maintain balanced budgets; the
willingness of the Federal government to provide the amount of Federal aid
contemplated in the Financial Plan; the impact on City revenues and expenditures
of Federal and State welfare reform and any future legislation affecting
Medicare or other entitlement programs; adoption of the City's budgets by the
City Council in substantially the forms submitted by the Mayor; the ability of
the City to implement cost reduction initiatives, and the success with which the
City controls expenditures; the impact of conditions in the real estate market
on real estate tax revenues; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
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.
On June 7, 1999, the City Council adopted a budget for fiscal year 2000. The
adopted budget includes lower estimated debt service expenditures in fiscal year
2000 resulting from a $456 million increase, from $2.1 billion to $2.6 billion,
in the proposed discretionary transfer in the 1999 fiscal year to pay debt
service due in fiscal year 2000. The $456 million increase in the discretionary
transfer reflects increased tax revenues and decreased expenditures in the 1999
fiscal year. The adopted budget also includes $220 million of spending
initiatives proposed by the City Council, other increased spending and the net
cost of revised tax reduction proposals, which reflect the repeal of all of the
City non-resident earnings tax and the elimination of certain of the previously
proposed tax reduction initiatives.
On July 16, 1998, Standard & Poor's revised its rating of City bonds upward from
BBB+ to A-. Moody's rating of City bonds was revised in February 1998 to A3 from
Baa1. On March 8, 1999, Fitch revised its rating of City bonds upward to A.
Moody's, Standard & Poor's and Fitch currently rate the City's outstanding
general obligation bonds A3, A- and A, respectively.
New York State and its Authorities. The State ended the 1998-1999 fiscal year in
balance on a cash basis for the 1998-1999 fiscal year, with a reported closing
balance in the General Fund of $892 million, after reserving a projected $1.8
billion surplus for use in future years. The State ended the 1998-1999 fiscal
year in balance on a cash basis, with a reported closing balance in the General
Fund of $892 million, after reserving a projected $1.8 billion surplus for use
in future years. The State Financial Plan for the 1999-2000 fiscal year, which
was released on August 20, 1999, projects balance on a cash basis for the
1999-2000 fiscal year, with a closing balance in the General Fund of $2.85
billion, including a projected tax reduction reserve of $1.82 billion for use in
future fiscal years. The State Division of the Budget ("DOB")
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has projected a potential imbalance in the 2000-2001 fiscal year of
approximately $1.9 billion. DOB's estimate includes an assumption for the
projected costs of new collective bargaining agreements, $500 million in assumed
unspecified operating efficiencies and the planned application of approximately
$615 million of the $1.82 billion tax reduction reserve in fiscal year
2000-2001.DOB has noted that, despite recent budgetary surpluses recorded by the
State, actions affecting the level of receipts and disbursements, the relative
strength of the State and regional economy and actions by the Federal government
could impact projected budget gaps of the State.
The State revised the cash-basis 1999-2000 State Financial Plan on January 11,
2000, with the release of the 2000-01 Executive Budget. The State updated the
Financial Plan on January 31, 2000 to reflect the Governor's amendments to his
Executive Budget. After these changes, the DOB now expects the State to close
the 1999-2000 fiscal year with an available cash surplus of $758 million in the
General Fund, an increase of $733 million over the surplus estimate in the
Mid-Year Update. The larger projected surplus derives from $499 million in net
higher projected receipts and $259 million in net lower estimated disbursements.
DOB revised both its projected receipts and disbursements based on a review of
actual operating results through December 1999, as well as an analysis of
underlying economic and programmatic trends it believes may affect the Financial
Plan for the balance of the year.
The State plans to use the entire $758 million surplus to make additional
deposits to reserve funds. At the close of the current fiscal year, the State
expects to deposit $75 million from the surplus into the State's Tax
Stabilization Reserve Fund -- the fifth consecutive annual deposit. In the
2000-01 Executive budget, as amended, the Governor is proposing to use the
remaining $683 million from the 1999-2000 surplus to fully finance the estimated
2001-02 and 2002-03 costs of his proposed tax reduction package ($433 million)
and to increase the Debt Reduction Reserve Fund ($250 million).
Through the first nine months of 1999-2000, General Fund receipts, including
transfers from other funds, have totaled $30.07 billion. General fund
disbursements, including transfers to other funds, totaled $25.19 billion over
the same period. The updated Financial Plan projections incorporate these
results to date.
Standard & Poor's rates the State's general obligation bonds A+, and Moody's
rates the State's general obligation bonds A2. On November 9, 1999, Standard &
Poor's revised its rating on the State's general obligation bonds from A to A+.
Litigation. A number of court actions have been brought involving State
finances. The court actions in which the State is a defendant generally involve
State programs and miscellaneous tort, real property, and contract claims. While
the ultimate outcome and fiscal impact, if any, on the State of those
proceedings and claims are not currently predictable, adverse determinations in
certain of them might have a material adverse effect upon the State's ability to
carry out the 1999 Modification and 2000-2003 Financial Plan. The City has
estimated that its potential future liability on account of outstanding claims
against it as of June 30, 1999 amounted to approximately $3.5 billion.
New Jersey Risk Factors
The following represents special considerations regarding investment in New
Jersey State-Specific Obligations. This information provides only a brief
summary, does not purport to be a complete description and is largely based on
information drawn from official statements relating to securities offerings of
New Jersey municipal obligations available as of the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in such offering statements has not been independently verified.
State Finance/Economic Information. New Jersey is the ninth largest state in
population and the fifth smallest in land area. With an average of 1,094 people
per square mile, it is the most densely populated of all the states. New
Jersey's economic base is diversified, consisting of a variety of manufacturing,
construction and service industries, supplemented by rural areas with selective
commercial agriculture.
For the last decade, New Jersey's job growth has been concentrated in five
clusters of economic activity -- high technology, health, financial,
entertainment and logistics. Personal income in New Jersey, spurred by strong
labor markets, increased by 5.4 percent in 1998, a rate comparable to the
national rate of increase. As a result, retail sales rose by an estimated 6.2
percent in 1998. Low inflation, now less than 2 percent, continues to benefit
New Jersey consumers and businesses and low interest rates boost housing and
consumer durable expenditures. Home building had its best year of the decade in
1998.
The New Jersey outlook is based largely on expected national economic
performance and on recent New Jersey strategic policy actions aimed at
infrastructure improvements, effective education and training of the workforce,
and those maintaining a competitive business climate. Investments in each of
these policy areas are seen as vital to maintaining the long-term health of New
Jersey's economy.
New Jersey's Budget and Appropriation System. New Jersey operates on a fiscal
year ending on June 30. The General fund is the fund into which all New Jersey
revenues not otherwise restricted by statute are deposited and from
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which appropriations are made. The largest part of the total financial
operations of New Jersey is accounted for in the General Fund, which includes
revenues received from taxes and unrestricted by statute, most Federal revenues,
and certain miscellaneous revenue items. The Appropriation Acts enacted by the
New Jersey Legislature and approved by the Governor provide the basic framework
for the operation of the General Fund. The undesignated General Fund balance at
year end for fiscal year 1997 was $280.5 million, for fiscal year 1998 was
$228.2 million and for fiscal year 1999 was 276.1 million. For fiscal year 2000,
the balance in the undesignated General Fund is estimated to be $206.2 million,
subject to change upon completion of the year-end audit. The estimated balance
for fiscal year 2001 is $130.9 million, based on the amounts contained in the
Governor's Fiscal Year 2001 Budget Message delivered on January 4, 2000. The
fund balances are available for appropriation in succeeding fiscal years.
During the course of the fiscal year, the Governor may take steps to reduce New
Jersey expenditures if it appears that revenues have fallen below those
originally anticipated. There are additional means by which the Governor may
ensure that New Jersey does not incur a deficit. Under the New Jersey
Constitution, no supplemental appropriation may be enacted after adoption of an
appropriation act except where there are sufficient revenues on hand or
anticipated to meet such appropriation.
General Obligation Bonds. New Jersey finances certain capital projects through
the sale of its general obligation bonds. These bonds are backed by the full
faith and credit of New Jersey. Certain tax revenues and certain other fees are
pledged to meet the principal payments, interest payments and redemption premium
payments, if any, required to pay the debt fully.
The aggregate outstanding general obligation bonded indebtedness of New Jersey
as of June 30, 1999 was $3.6499 billion. The recommended appropriation for the
debt service obligation on outstanding project indebtedness is $530.0 million
for fiscal year 2001.
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 2001 the amount recommended for this purpose is $1,164.5 million.
Tax and Revenue Anticipation Notes. In fiscal year 1992, New Jersey initiated a
program under which it issued tax and revenue anticipation notes to aid in
providing effective cash flow management to fund imbalances which occur in the
collection and disbursement of the General Fund and Property Tax Relief Fund
revenues. Such tax and revenue anticipation notes do not constitute a general
obligation of New Jersey or a debt or liability within the meaning of the New
Jersey Constitution. Such notes constitute special obligations of New Jersey
payable solely from moneys on deposit in the General Fund and Property Tax
Relief Fund and are legally available for such payment.
"Moral Obligation" Financing. The authorizing legislation for certain New Jersey
entities provides for specific budgetary procedures with respect to certain
obligations issued by such entities. Pursuant to such legislation, a designated
official is required to certify any deficiency in a debt service reserve fund
maintained to meet payments of principal of and interest on the obligations, and
a New Jersey appropriation in the amount of the deficiency is to be made.
However, the New Jersey Legislature is not legally bound to make such an
appropriation. Bonds issued pursuant to authorizing legislation of this type are
sometimes referred to as "moral obligation" bonds. There is no statutory
limitation on the amount of "moral obligations" bonds which may be issued by
eligible New Jersey entities. As of June 30, 1999, outstanding "moral
obligation" bonded indebtedness issued by New Jersey entities totaled
$689,355,315 and maximum annual debt service subject to "moral obligation" is
$82,691,389.
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 "Port Corporation") with funds to cover debt
service and property tax requirements, when earned revenues are anticipated to
be insufficient to cover these obligations. For calendar years 1990 through
1999, New Jersey has made appropriations totalling $53,036,261 which covered
deficiencies in revenues of the Corporation, for debt service and property tax
payments.
Higher Education Assistance Authority. The Higher Education Student Assistance
Authority ("HESAA"), the successor to the Higher Education Assistance Authority
pursuant to legislation enacted March, 1999, has not had a revenue deficiency
which required New Jersey to appropriate funds to meet its "moral obligation".
It is anticipated that the HESAA's revenues will be sufficient to cover debt
service on its bonds.
Obligations Guaranteed by New Jersey. The New Jersey Sports and Exposition
Authority ("NJSEA") has issued New Jersey guaranteed bonds of which $99,510,000
are outstanding as of June 30, 1999. To date, the NJSEA has not had a revenue
deficiency requiring New Jersey to make debt service payments pursuant to its
guarantee. It is anticipated
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that the NJSEA's revenues will continue to be sufficient to pay debt service on
these bonds without recourse to New Jersey's guarantee.
Obligations Supported by New Jersey Revenue Subject to Annual Appropriation. New
Jersey has entered into a number of leases and contracts described below
(collectively, the "Agreements") with several governmental authorities to secure
the financing of various New Jersey projects. Under the terms of the Agreements,
New Jersey has agreed to make payments equal to the debt service on, and other
costs related to, the obligations sold to finance the projects. New Jersey's
obligation to make payments under the Agreements is subject to and dependent
upon annual appropriations being made by the New Jersey Legislature for such
purposes. The New Jersey Legislature has no legal obligation to enact such
appropriations, but has done so to date for all such obligations.
New Jersey Economic Development Authority. Pursuant to legislation, the New
Jersey Economic Development Authority ("EDA") has been authorized to issue
Economic Recovery Bonds, State Pension Funding Bonds and Market Transition
Facility Bonds. The Economic Recovery Bonds have been issued pursuant to
legislation enacted during 1992 to finance various economic development
purposes. Pursuant to that legislation, the EDA and the New Jersey Treasurer
entered into an agreement through which the EDA has agreed to undertake the
financing of certain projects and the New Jersey Treasurer has agreed to credit
to the Economic Recovery Fund from the General Fund amounts equivalent to
payments due to New Jersey under an agreement with the Port Authority of New
York and New Jersey subject to appropriation by the New Jersey Legislature.
For a discussion of the State Pension Funding Bonds, see the caption below
entitled "State Pension Funding Bonds".
The Market Transition Facility Bonds have been issued pursuant to legislation
enacted in June 1994 to pay the current and anticipated liabilities and expenses
of the Market Transition Facility, which issued private passenger automobile
insurance policies for drivers who could not be insured by private insurance
companies on a voluntary basis.
In addition, New Jersey has entered into a number of leases with the EDA
relating to the financing of certain real property, office buildings and
equipment for (i) the New Jersey Performing Arts Center; (ii) Liberty State Park
in the City of Jersey City; (iii) various office buildings located in Trenton
known as the Trenton Office Complex; (iv) a facility located in Trenton; and (v)
certain energy saving equipment installed in various New Jersey office
buildings. The rental payments required to be made by New Jersey under these
lease agreements are sufficient to pay debt service on the bonds issued by the
EDA to finance the acquisition and construction of such projects and other
amounts payable to the EDA, including certain administrative expenses of the
EDA.
New Jersey Building Authority. Legislation enacted in 1981 established the New
Jersey Building Authority ("NJBA") to undertake the acquisition, construction,
renovation and rehabilitation of various New Jersey office buildings, historic
buildings, and correctional facilities. The NJBA finances the cost of such
projects through the issuance of bonds, the payment of debt service on which is
made pursuant to a lease between the NJBA and New Jersey.
New Jersey Educational Facilities Authority. The New Jersey Educational
Facilities Authority issues bonds pursuant to three separate legislative
programs to finance (i) the purchase of equipment to be leased to institutions
of higher learning; (ii) grants to New Jersey's public and private institutions
of higher education for the development, construction and improvement of
instructional, laboratory, communication and research facilities; and (iii)
grants to public and private institutions of higher education to develop a
technology infrastructure within and among the New Jersey's institutions of
higher education.
New Jersey Sports and Exposition Authority. Legislation enacted in 1992
authorizes the New Jersey Sports and Exposition Authority (the "NJSEA") to issue
bonds for various purposes payable from a contract between the NJSEA and the New
Jersey Treasurer (the "NJSEA State Contract"). Pursuant to the NJSEA State
Contract, the NJSEA undertakes certain projects and the New Jersey Treasurer
credits to the NJSEA amounts from the General Fund sufficient to pay debt
service and other costs related to the bonds.
State Transportation System Bonds. In July 1994, New Jersey created the New
Jersey Transportation Trust Fund Authority (the "TTFA"), an instrumentality of
New Jersey pursuant to the New Jersey Transportation Trust Fund Authority Act of
1984, as amended (the "TTFA Act") for the purpose of funding a portion of New
Jersey's share of the cost of improvements to its transportation system.
Pursuant to the TTFA Act, the principal amount of the TTFA's bonds, notes or
other obligations which may be issued in any fiscal year generally may not
exceed $700 million plus amounts carried over from prior fiscal years, except
that pursuant to legislation adopted in June, 1999, the amount of such debt has
been increased to $900 million for Fiscal Year 2000. The debt issued by the TTFA
are special obligations of the TTFA payable from a contract among the TTFA, the
New Jersey Treasurer and the Commissioner of Transportation.
New Jersey Transit Corporation Hudson-Bergen Light Rail Transit System. The TTFA
has entered into a Standby Deficiency Agreement (the "Standby Deficiency
Agreement") with the trustee for grant anticipation notes (the "GANS") issued by
New Jersey Transit Corporation ("NJT") for the financing of the construction of
the Hudson-Bergen Light Rail
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Transit System. The GANS are primarily payable from federal grant monies. To the
extent that the GANS are not paid by NJT from federal grant monies, the GANS are
payable by the TTFA pursuant to the Standby Deficiency Agreement. To date,
federal grant payments have been sufficient such that the TTFA has not been
required to make payments pursuant to the Standby Deficiency Agreement.
State of New Jersey Certificates of Participation. Beginning in April 1984, New
Jersey, acting through the Director of the Division of Purchase and Property,
has entered into a series of lease purchase agreements which provide for the
acquisition of equipment, services and real property to be used by various
departments and agencies of New Jersey. Certificates of Participation in such
lease purchase agreements have been issued. A Certificate of Participation
represents a proportionate interest of the owner thereof in the lease payments
to be made by New Jersey under the terms of the lease purchase agreement.
New Jersey Supported School and County College Bonds. Legislation
provides for future appropriations for New Jersey Aid to local school districts
equal to debt service on bonds issued by such local school districts for
construction and renovation of school facilities (P.L. 1968, c. 177; P.L. 1971,
c. 10; and P.L. 1978, c. 74) and for New Jersey Aid to counties equal to debt
service on bonds issued by counties for construction of county college
facilities (P.L. 1971, c. 12, as amended). The New Jersey Legislature has no
legal obligations to make such appropriations, but has done so to date for all
obligations issued under these laws.
Community Mental Health Loan Program. The EDA issues revenue bonds from time to
time on behalf of non-profit community mental health service providers. The
payment of debt service on these revenue bonds as well as the payment of certain
other provider expenses is made by New Jersey pursuant to service contracts
between the State Department of Human Services and these providers. The
contracts have one year terms, subject to annual renewal.
Line of Credit for Equipment Purchases. New Jersey finances the acquisition of
certain equipment, services and real property to be used by various New Jersey
departments through a line of credit.
State Pension Funding Bonds. Legislation enacted in June 1997 authorizes the EDA
to issue bonds, notes or other obligations for the purpose of financing in full
or in part the unfunded accrued pension liability for New Jersey's seven
retirement plans. On June 20, 1997, the EDA issued bonds pursuant to this
legislation (the "Pension Bonds") and $2.75 billion from the proceeds of the
Pension Bonds were deposited into New Jersey's retirement systems. As a result
of the funding from the proceeds of the Pension Bonds and the change in the
asset valuation method authorized by Chapter 115, Laws of 1997, enacted by the
New Jersey Legislature, full funding of the unfunded accrued pension liability
under each of New Jersey's retirement systems was achieved.
Conduit Issues. Certain State agencies and authorities are authorized to issue
debt on behalf of various private entities on a conduit basis. Under such
circumstances, neither the State agency or authority acting as a conduit issuer
nor the State of New Jersey is responsible for the repayment of such debt. The
payment obligations with respect to such debt is solely that of the entity on
whose behalf the debt was issued.
Municipal Finance. New Jersey's local finance system is regulated by various
statutes designated to assure that all local governments and their issuing
authorities remain on a sound financial basis. Regulatory and remedial statutes
are enforced by the Division of Local Government Services (the "Division") in
the New Jersey State Department of Community Affairs.
Counties and Municipalities. The Local Budget Law (N.J.S.A. 40A:4-1 et seq.)
imposes specific budgetary procedures upon counties and municipalities ("local
units"). Every local unit must adopt an operating budget which is balanced on a
cash basis, and items of revenue and appropriation must be examined by the
Director of the Division (the "Director"). The accounts of each local unit must
be independently audited by a registered municipal accountant. New Jersey law
provides that budgets must be submitted in a form promulgated by the Division
and further provides for limitations on estimates of tax collection and for
reserves in the event of any shortfalls in collections by the local unit. The
Division reviews all municipal and county annual budgets prior to adoption for
compliance with the Local Budget Law. The Director is empowered to require
changes for compliance with law as a condition of approval; to disapprove
budgets not in accordance with law; and to prepare the budget of a local unit,
within the limits of the adopted budget of the previous year with suitable
adjustments for legal compliance, if the local unit fails to adopt a budget in
accordance with law. This process insures that every local unit annually adopts
a budget balanced on a cash basis, within limitations on appropriations or tax
levies, respectively, and making adequate provision for principal of and
interest on indebtedness falling due in the fiscal year, deferred charges and
other statutory expenditure requirements. The Director also oversees changes to
local budgets after adoption as permitted by law, and enforces regulations
pertaining to execution of adopted budgets and financial administration. In
addition to the exercise of regulatory and oversight functions, the Division
offers expert technical assistance to local units in all aspects of financial
administration, including revenue collection and cash management procedures,
contracting procedures, debt management and administrative analysis.
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The Local Government Cap Law (N.J.S.A. 40A:4-45.1 et seq.) (the "Cap Law")
generally limits the year-to-year increase of the total appropriations of any
local unit to either 5 percent or an index rate determined annually by the
Director, whichever is less. However, where the index percentage rate exceeds 5
percent, the Cap Law permits the governing body of any local unit to approve the
use of a higher percentage rate up to the index rate. Further, where the index
percentage rate is less than 5 percent, the Cap Law also permits the governing
body of any local unit to approve the use of a higher percentage rate up to 5
percent. Regardless of the rate utilized, certain exceptions exist to the Cap
Law's limitation on increases in appropriations. The principal exceptions to
these limitations are municipal and county appropriations to pay debt service
requirements; to comply with certain other New Jersey or federal mandates;
appropriations of private and public dedicated funds; amounts approved by
referendum; and, in the case of municipalities only, to fund the preceding
year's cash deficit or to reserve for shortfalls in tax collections, and amounts
required pursuant to contractual obligations for specified services. The Cap Law
was re-enacted in 1990 with amendments and made a permanent part of the
municipal finance system.
New Jersey law also regulates the issuance of debt by local units. The Local
Budget Law limits the amount of tax anticipation notes that may be issued by
local units and requires the repayment of such notes within 120 days of the end
of the fiscal year (six months in the case of the counties) in which issued. The
Local Bond Law (N.J.S.A. 40A:2-1 et seq.) governs the issuance of bonds and
notes by the local units. No local unit is permitted to issue bonds for the
payment of current expenses (other than Fiscal Year Adjustment Bonds described
more fully below). Local units may not issue bonds to pay outstanding bonds,
except for refunding purposes, and then only with the approval of the Local
Finance Board. Local units may issue bond anticipation notes for temporary
periods not exceeding in the aggregate approximately ten years from the date of
issue. The debt that any local unit may authorize is limited to a percentage of
its equalized valuation basis, which is the average of the equalized value of
all taxable real property and improvements within the geographic boundaries of
the local unit, as annually determined by the Director of the Division of
Taxation, for each of the three most recent years. In the calculation of debt
capacity, the Local Bond Law and certain other statutes permit the deduction of
certain classes of debt ("statutory deduction") from all authorized debt of the
local unit ("gross capital debt") in computing whether a local unit has exceeded
its statutory debt limit. The Local Bond Law permits the issuance of certain
obligations, including obligations issued for certain emergency or self
liquidating purposes, notwithstanding the statutory debt limitation described
above, but, with certain exceptions, it is then necessary to obtain the approval
of the Local Finance Board. Authorized net capital debt (gross capital debt
minus statutory deductions) is limited to 3.5 percent of the equalized valuation
basis in the case of municipalities and 2 percent of the equalized valuation
basis in the case of counties.
School Districts. New Jersey's school districts operate under the same
comprehensive review and regulation as do its counties and municipalities.
Certain exceptions and differences are provided, but New Jersey supervision of
school finance closely parallels that of local governments.
All New Jersey school districts are coterminous with the boundaries of one or
more municipalities. They are characterized by the manner in which the board of
education, the governing body of the school districts takes office. Type I
school districts, most commonly found in cities, have a board of education
appointed by the mayor or the chief executive officer of the municipality
constituting the school district. In a Type II school district, the board of
education is elected by the voters of the district. Nearly all regional and
consolidated school districts are Type II school districts.
The New Jersey Department of Education has been empowered with the necessary and
effective authority to abolish an existing school board and create a
State-operated school district where the existing school board has failed or is
unable to take the corrective actions necessary to provide a thorough and
efficient system of education in that school district pursuant to N.J.S.A.
18A:7A-15 et seq. (the "School Intervention Act"). The State-operated school
district, under the direction of a New Jersey appointed superintendent, has all
of the powers and authority of the local board of education and of the local
district superintendent. Pursuant to the authority granted under the School
Intervention Act, on October 4, 1989, the New Jersey Board of Education ordered
the creation of a State-operated school district in the city of Jersey City.
Similarly, on August 7, 1991, the New Jersey Board of Education ordered the
creation of a State-operated school district in the City of Paterson, and on
July 5, 1995 the creation of a State-operated school district in the City of
Newark.
School Budgets. In every school district having a board of school estimate, the
board of school estimate examines the budget request and fixes the appropriate
amounts for the next year's operating budget after a public hearing at which the
taxpayers and other interested persons shall have an opportunity to raise
objections and to be heard with respect to the budget. This board certifies the
budget to the municipal governing bodies and to the local board of education. If
the local board of education disagrees, it must appeal to the New Jersey
Commissioner of Education (the "Commissioner") to request changes.
In a Type II school district without a board of school estimate, the elected
board of education develops the budget proposal and, after public hearing,
submits it to the voters of such district for approval. Previously authorized
debt service is not subject to referendum in the annual budget process. If
approved, the budget goes into effect. If defeated, the governing body of each
municipality in the school district has until May 19 in any year to determine
the amount necessary to be
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appropriated for each item appearing in such budget. Should the governing body
fail to certify any amount determined by the board of education to be necessary,
the board of education may appeal the action to the Commissioner.
The State laws governing the distribution of State aid to local school districts
limit the annual increase of a school district's net current expense budget. The
Commissioner certifies the allowable amount of increase for each school district
but may grant a higher level of increase in certain limited instances. A school
district may also submit a proposal to the voters to raise amounts above the
allowable amount of increase. If defeated, such a proposal is subject to further
review or appeal to the Commissioner only if the Commissioner determines that
additional funds are required to provide a thorough and efficient education.
In State-operated school districts the New Jersey District Superintendent has
the responsibility for the development of the budget subject to appeal by the
governing body of the municipality to the commissioner and the Director of the
Division. Based upon his review, the Director is required to certify the amount
of revenues which can be raised locally to support the budget of the
State-operated district. Any difference between the amount which the Director
certifies and the total amount of local revenues required by the budget approved
by the commissioner is to be paid by New Jersey in the fiscal year in which the
expenditures are made subject to the availability of appropriations.
School District Bonds. School district bonds and temporary notes are issued in
conformity with N.J.S.A. 18A:24-1 et seq. (the "School Bond Law"), which closely
parallels the Local Bond Law (for further information relating to the Local Bond
Law, see "Municipal Finance-Counties and Municipalities" herein). Although
school districts are exempted from the 5 percent down payment provision
generally applied to bonds issued by municipalities and counties, they are
subject to debt limits (which vary depending on the type of school system
provided) and to New Jersey regulation of their borrowing. The debt limitation
on school district bonds depends upon the classification of the school district,
but may be as high as 4 percent of the average equalized valuation basis on the
constituent municipality. In certain cases involving school districts in cities
with populations exceeding 150,000, the debt limit is 8 percent of the average
equalized valuation basis of the constituent municipality, and in cities with
population in excess of 80,000 the debt limit is 6 percent of the aforesaid
average equalized valuation.
School bonds are authorized by (i) an ordinance adopted by the governing body of
a municipality within a Type I school district; (ii) adoption of a proposal by
resolution by the board of education of a Type II school district having a board
of school estimate; (iii) adoption of a proposal by resolution by the board of
education and approval of the proposal by the legal voters of any other Type II
school district; or (iv) adoption of a proposal by resolution by a capital
project control board for projects in a State operated school district.
If school bonds will exceed the school district borrowing capacity, a school
district (other than a regional school district) may use the balance of the
municipal borrowing capacity. If the total amount of debt exceeds the school
district's borrowing capacity, the Commissioner and the Local Finance Board must
approve the proposed authorization before it is submitted to the voters. All
authorizations of debt in a Type II school district without a board of school
estimate require an approving referendum, except where, after hearing, the
Commissioner and the New Jersey Board of Education determine that the issuance
of such debt is necessary to meet the constitutional obligation to provide a
thorough and efficient system of public schools. When such obligations are
issued, they are issued by, and in the name of, the school district.
In Type I and II school districts with a board of school estimate, that board
examines the capital proposal of the board of education and certifies the amount
of bonds to be authorized. When it is necessary to exceed the borrowing capacity
of the municipality, the approval of a majority of the legally qualified voters
of the municipality is required, together with the approval of the Commissioner
and the Local Finance Board. When such bonds are issued by a Type I school
district, they are issued by the municipality and identified as school bonds.
When bonds are issued by a Type II school district having a board of school
estimate, they are issued by, and in the name of, the school district.
All authorizations of debt must be reported to the Division by a supplemental
debt statement prior to final approval.
School District Lease Purchase Financings. In 1982, school districts were given
an alternative to the traditional method of bond financing capital improvements
pursuant to N.J.S.A. 18A:20-4.2(f) (the "Lease Purchase Law"). The Lease
Purchase Law permits school districts to acquire a site and school building
through a lease purchase agreement with a private lessor corporation. The lease
purchase agreement does not require voter approval. The rent payments
attributable to the lease purchase agreement are subject to annual appropriation
by the school district and are required to be included in the annual current
expense budget of the school district. Furthermore, the rent payments
attributable to the lease purchase agreement do not constitute debt of the
school district and therefore do not impact on the school district's debt
limitation. Lease purchase agreements in excess of five years require the
approval of the Commissioner and the Local Finance Board.
Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c. 38 and c. 39)
which provides for the issuance by municipalities and school districts of
"qualified bonds." Whenever a local board of education or the governing body of
a
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<PAGE>
municipality determines to issue bonds, it may file an application with the
Local Finance Board, and, in the case of a local board of education, the
Commissioner, to qualify bonds pursuant to P.L. 1976 c. 38 or c. 39. Upon
approval of such an application, the New Jersey Treasurer shall withhold from
certain New Jersey revenues or other New Jersey aid payable to the
municipalities, or from New Jersey school aid payable to the school district, as
appropriate, an amount sufficient to pay debt service on such bonds. These
"qualified bonds" are not direct, guaranteed or moral obligations of New Jersey,
and debt service on such bonds will be provided by New Jersey only if the above
mentioned appropriations are made by New Jersey. Total outstanding indebtedness
for "qualified bonds" consisted of $290,848,900 by various school districts as
of June 30, 1999 and $864,078,164 by various municipalities as of June 30, 1999.
New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve Act
(N.J.S.A. 18A:56-17 et seq.) establishes a school bond reserve within the
constitutionally dedicated Fund for the support of free public schools. Under
this law the reserve is maintained at an amount equal to 1.5 percent of the
aggregate outstanding bonded indebtedness of counties, municipalities or school
districts for school purposes (exclusive of bonds whose debt service is provided
by New Jersey appropriations), but not in excess of monies available in such
Fund. If a municipality, county or school district is unable to meet payment of
the principal of or interest on any of its school bonds, the trustee of the
school bond reserve will purchase such bonds at the face amount thereof or pay
the holders thereof the interest due or to become due. There has never been an
occasion to call upon this Fund. New Jersey provides support of certain bonds of
counties, municipalities and school districts through various statutes.
Local Financing Authorities. The Local Authorities Fiscal Control Law (N.J.S.A.
40A:5A-1 et seq.) provides for state supervision of the fiscal operations and
debt issuance practices of independent local authorities and special taxing
districts by the New Jersey Department of Community Affairs. The Local
Authorities Fiscal Control Law applies to all autonomous public bodies created
by local units, which are empowered to issue bonds, to impose facility or
service charges, or to levy taxes in their districts. This encompasses most
autonomous local authorities (sewerage, municipal utilities, parking, pollution
control, improvement, etc.) and special taxing districts (fire, water, etc.).
Authorities which are subject to differing New Jersey or Federal financial
restrictions are exempted, but only to the extent of that difference.
Financial control responsibilities over local authorities and special districts
are assigned to the Local Finance Board and the Director of the Division. The
Local Finance Board exercises approval over creation of new authorities and
special districts as well as their dissolution. The Local Finance Board reviews,
conducts public hearings and issues findings and recommendations on any proposed
project financing of an authority or district, and on any proposed financing
agreement between a municipality or county and an authority or special district.
The Local Finance Board prescribes minimum audit requirements to be followed by
authorities and special districts in the conduct of their annual audits. The
Director of the Division reviews and approves annual budgets of authorities and
special districts.
Certain local authorities are authorized to issue debt on behalf of various
entities on a conduit basis. Under such circumstances, neither the local
authority acting as a conduit issuer, the local unit creating such local
authority nor the State of New Jersey is responsible for the repayment of such
debt. The payment obligations with respect to such debt is solely that of the
entity on whose behalf the debt was issued.
Pollution Control Bonds. In the 1970's, the State Legislature initiated a
comprehensive statutory mechanism for the management of solid waste disposal
within the State that required each county to develop a plan for county-wide
controlled flow of solid waste to a franchised location. The controlled flow of
solid waste to a franchised location enabled the imposition of above-market-rate
disposal fees. Most counties created independent local authorities or utilized
existing local authorities in order to finance, with the proceeds of bonds, the
technically complex and expensive infrastructure required to implement this
statutory mechanism. Typically, the primary security for the amortization of the
bonds was the above-market-rate disposal fees, although some bonds were further
secured by a guaranty of the respective county. On May 1, 1997, in Atlantic
Coast Demolition & Recycling, Inc. v. Board of Chosen Freeholders of Atlantic
County, 112 F.3d 652 (3d Cir. 1997), the United States Court of Appeals for the
Third Circuit held that the State's system of controlled flow of solid waste to
franchised locations unconstitutionally discriminated against out-of-State
operators of waste disposal facilities and, therefore, violated the Commerce
Clause of the United States Constitution. Subsequently, the United States
Supreme Court denied a petition for writ of certiorari. This decision has
terminated controlled flow of solid waste to franchised locations within the
State. In the absence of controlled flow, franchisees facing competition from
other operators of waste disposal facilities are unable to charge
above-market-rate disposal fees. The reduction of such fees to competitive
levels has reduced correspondingly the primary source of security for the
outstanding bonds of the local authorities. The facts relevant to each local
authority within the State remain unique. Some local authorities have
successfully implemented refunding and work-out financings. Other local
authorities have eliminated revenue shortfalls through the imposition of special
waste disposal taxes. In other cases, revenue shortfalls continue.
Litigation. At any given time, there are various numbers of claims and cases
pending against the State of New Jersey, New Jersey agencies and employees,
seeking recovery of monetary damages that are primarily paid out of the fund
created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1 et seq.).
New Jersey does not formally estimate its
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<PAGE>
reserve representing potential exposure for these claims and cases. New Jersey
is unable to estimate its exposure for these claims and cases.
New Jersey routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against New Jersey must be preceded
by a notice of claim, which affords New Jersey the opportunity for a six-month
investigation prior to the filing of any suit against it. In addition, at any
given time, there are various numbers of contract and other claims against New
Jersey and New Jersey agencies, including environmental claims asserted against
New Jersey, 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. New
Jersey is unable to estimate its exposure for these claims. At any given time,
there are various numbers of claims and cases pending against the University of
Medicine and Dentistry and its employees, seeking recovery of monetary damages
that are primarily paid out of the Self Insurance Reserve Fund created pursuant
to the New Jersey Tort Claims Act. An independent study estimated an aggregate
potential exposure of $87,880,000 for tort and medical malpractice claims
pending as of July 1, 1998. In addition, at any given time, there are various
numbers of contract and other claims against the University of Medicine and
Dentistry, seeking recovery of monetary damages or other relief which, if
granted, would require the expenditure of funds. New Jersey is unable to
estimate its exposure for these claims.
Other lawsuits presently pending or threatened in New Jersey that have the
potential for either a significant loss of revenue or significant unanticipated
expenditures include the following:
Interfaith Community Organization v. Shinn et al., a suit filed by a coalition
of churches and church leaders in Hudson County against the Governor, the
Commissioners of the Department of Environmental Protection (the "DEP") and the
Department of Health, concerning chromium contamination in Liberty State Park in
Jersey City. On March 2, 1999 the federal district court entered an order for a
preliminary injunction requiring the DEP to fence in certain areas of Liberty
State Park, requires no mitigation work beyond that which the DEP has nearly
completed as part of the Green Park development in that area and denies the
plaintiff's motion for preliminary injunctive relief in other areas of Liberty
State Park.
American Trucking Associations, Inc. and Tri-State Motor Transit Co. v. State of
New Jersey, challenging the constitutionality of annual hazardous and solid
waste licensure renewal fees collected by the Department of Environmental
Protection, seeking permanent injunction enjoining future collection of fees and
refund of all renewal fees, fines and penalties collected. On October 2, 1997
oral argument was conducted on the parties' cross-motions for summary judgement
in the Tax Court. No decision on the Cross-motions has been rendered to date.
Buena Regional Commercial Township et al. v. New Jersey Department of Education
et al. This lawsuit was filed on behalf of 17 rural school districts seeking the
same type of relief as has been mandated to be provided to the poor urban school
districts in Abbot v. Burke, which included, without limitation, sufficient
funds to allow the school districts to spend at the average of wealthy suburban
school districts, to implement additional programs and to upgrade school
facilities. The Buena school districts are seeking to be treated as special
needs districts and to receive parity funding the with Abbot school districts as
a remedial measure. They also are seeking additional funding as may be necessary
to provide an educational equivalent to that being provided in the Abbot
districts. Similar complaints have been filed individually by the school
districts of Dover and Pennsville and are presently pending before the
Commissioner of Education.
Abbot District's Early Childhood Plan Appeals. Thirteen Abbot District's have
filed petitions of appeal with the Commissioner concerning the Department of
Education's letters regarding such District's early childhood programs developed
in response to the Court's decision in Abbot v. Burke. The matters were
transmitted to the Office of Administrative Law for further proceedings. To
date, eleven of the original districts that filed petitions remain active (two
withdrew their petitions). Additionally, the Education Law Center has filed
petitions on behalf of the students in the state-operated schools of Newark,
Jersey City and Paterson as well as the students of West New York. A petition of
appeal was filed by the Passaic school district seeking supplemental funding for
special education, facilities and other programs for the commencement of the
1999-2000 school year.
Verner Stabaus, et al. v. State of New Jersey, et al. Plaintiffs, 25 middle
income school districts, have filed a complaint alleging that New Jersey's
system of funding for their schools is violative of the constitutional rights of
equal protection and a thorough and efficient education. One June 23, 1998,
plaintiffs filed an amended complaint removing one and adding eighteen school
district plaintiffs. A motion to dismiss the amended complaint was argued on
January 29, 1999 and the court reserved its decision.
Affiliated FM Insurance Company v. State of New Jersey, an action by certain
members of the New Jersey Property-Liability Insurance Guaranty Association
challenging the constitutionality of assessments used for the Market Transition
Fund and seeking repayment of assessments paid since 1990. New Jersey is
vigorously defending this action which on August 7, 1998 was transferred to the
Appellate Division as an appeal from final agency action.
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<PAGE>
Cleary v. Waldman, the plaintiffs claim that the Medicare Catastrophic Coverage
Act, providing funds to spouses of institutionalized individuals sufficient
funds to live in the community, requires that a certain system be used to
provide the funds and another system is being used instead. Plaintiffs motion
for a preliminary injunction was denied and is being appealed. Subsequently,
plaintiffs filed for class certification which was granted. On February 8, 1999,
the Third Circuit court of Appeals affirmed the District court's decision,
concluding the federal statute allowed States discretion to employ either
methodology. Plaintiffs' petition for certiorari to the United States Supreme
Court was denied.
United Hospitals v. State of New Jersey and William Waldman, 19 New Jersey
hospitals are challenging the Medicaid reimbursements made since February 1995
claiming that New Jersey failed to comply with certain federal requirements, the
reimbursements regulations are arbitrary, capricious and unreasonable, rates
were incorrectly calculated, the hospitals were denied due process, the Medicaid
reimbursement provisions violate the New Jersey Constitution, and Medicaid State
Plan was violated by the New Jersey Department of Human Services implementation
of hospital rates in 1995 and 1996.
United Healthcare System, Inc. v. Fishman and Guhl. This Chapter 11 case
commenced two years ago when United Hospital closed. United seeks to expunge
proofs of claim filed in the Chapter 11 case by the Department of Health and
Senior Services and the Department of Human Services. United moreover asserts
claims for turnover of the property of the debtor's estate and declaratory
relief. United wants the bankruptcy court to take jurisdiction of and decide
Medicaid reimbursement matters pending in New Jersey state administrative
proceedings or on appeal in the New Jersey appellate courts. New Jersey has
filed a motion to dismiss.
Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Incorporated, the State of
New Jersey et al., the plaintiff is suing Mirage Resorts, New Jersey and various
New Jersey agencies and authorities in an attempt to enjoin their efforts to
build a highway and tunnel funded by Mirage Resorts and $55 million in bonds
collateralized by future casino obligations, claiming that the project violates
the New Jersey Constitution provision that requires all revenues the state
receives from gaming operations to benefit the elderly and disabled. The
plaintiff also claims (i) the failure to disclose this constitutional infirmity
is a material omission within the meaning of Rule 10B-5 of the Securities and
Exchange Act of 1934, (ii) the defendants have sought to avoid the requirements
of the Clean Water Act, Clean Air Act, Federal Highway Act and the New Jersey
Coastal Area Facility Review Act and (iii) the defendants sought to avoid the
requirement of the New Jersey Coastal Area Facility Review Act. On May 1, 1997,
the federal district court granted the defendants' motion to dismiss and the
Third Circuit has affirmed the District Court's determinations and the time for
appealing that decision has run. In a related action, State of New Jersey and
CRDA v. Trump Hotels & Casino Resorts, Inc., New Jersey filed a declaratory
judgment action seeking a declaration that the use of certain funds under the
Casino Reinvestment Development Authority legislation does not violate the New
Jersey State Constitution. Declaratory judgment was entered in favor of New
Jersey on May 14, 1997 and the Appellate Division has affirmed the decision on
April 2, 1998. The New Jersey Supreme Court affirmed the Appellate Division's
decision on August 2, 1999.
United Alliance v. State of New Jersey, plaintiffs allege that the Casino
Reinvestment Development Authority funding mechanisms are illegal including the
gross receipts tax, the parking tax, and the Atlantic City fund. This matter has
been placed on the inactive list. Other cases have been filed in opposition to
the road and tunnel project which also contain related challenges. Merolla and
Brandy v. Casino Reinvestment Development Authority, Middlesex County v. Casino
Reinvestment Development Authority, Gallagher v. Casino Reinvestment Development
Authority and Trump Hotels & Casino Resorts, Inc. v. New Jersey Department of
Transportation and South Jersey Transportation Authority, and Mirage Resorts
Incorporated. The Superior Court of New Jersey, Appellate Division has affirmed
the dismissal of these matters by the trial courts. The Plaintiffs filed
petitions for certification with the New Jersey Supreme court and are awaiting
oral argument.
Camden County Energy Recovery Associates v. New Jersey Department of
Environmental Protection, Board of Chosen Freeholders of the County of Camden et
al., the plaintiff owns and operates a resource facility in Camden County and
has filed suit seeking to have the solid waste reprocurement process halted to
clarify bid specification. The court did not halt the bid process but did
require clarifications. Co-defendant Pollution Control Financing Authority of
Camden County (the "PCFA") counterclaimed, seeking reformation of the contract
between it and the plaintiff and cross-claimed against New Jersey for
contribution and indemnification. New Jersey has filed motions to dismiss the
complaint and a cross-claim. On August 7, 1999 the Appellate Division ruled in
favor of New Jersey and ordered the trial court to dismiss all claims and
cross-claims against New Jersey. The Camden County Energy Recovery Associates,
the County of Camden and the PCFA have filed motions for leave to appeal to the
Supreme Court of New Jersey. The New Jersey Supreme Court granted leave to
appeal this case. The matter has been fully briefed and the parties are awaiting
oral argument.
Sojourner A. et al. v. Dept. of Human Services. The plaintiffs in this
action filed a complaint and motion for preliminary injunction, seeking damages
and declaratory and injunctive relief overturning, on New Jersey Constitutional
grounds, the "family cap" provisions of the New Jersey Work First New Jersey Act
N.J.S.A. 44:10-1 et seq. New Jersey `s motion to dismiss the complaint was
denied and it filed an answer to the complaint.
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<PAGE>
Zurbrugg Hospital et al v. Fishman; Rancocas Hospital et al. v. Fishman;
St. Francis Medical Center et al. v. Fishman and Solaris Health System v.
Fishman. These cases represent challenges by various hospitals to the $10 per
adjusted hospital admission charges imposed by N.J.S.A. 26:2H-18.57. Most of the
fees in controversy have been paid by hospitals pending the outcome of the
appeal pursuant to agreements with the Department of Health and Senior Service.
The Appellate Division upheld the $10 per adjusted admission charges and
affirmed the payment demand and rejected the hospitals' claims that the
assessment constituted a special law relating to taxation or a violation of the
hospitals' equal protection rights. The hospitals filed a petition for
certification with the New Jersey Supreme Court.
Charlie and Nadine H. v. Christine Todd Whitman, a class action suit filed by
Children's Rights Inc. against the Governor, the Commissioner of the Department
of Human Services and Charles Venti, Director of the Division of Youth and
Family Services alleging their systemic failures to protect the plaintiff class
and furnish legally required services to the children and their families and
that the alleged failures violate the United States Constitution, federal
statutes and federal common law. The state has filed a motion to dismiss. The
motion was argued on November 15, 1999 and the court reserved its decision.
East Cape May Associates v. NJ Dept. of Environmental Protection, the plaintiff
claims that it is entitled to damages for a taking of its property without just
compensation. The property is approximately 80 acres of freshwater wetlands in
Cape May, New Jersey. The Appellate Division held that DEP could avoid liability
by approving development on the property under the Freshwater Wetlands
Protection Act and remanded the case for a determination of whether the property
included 100 acres already developed. On remand, the trial court ruled that the
"property" did not include those 100 acres and that DEP could not approve
development of the 80 remaining acres without adopting rules. Since DEP had not
adopted rules, the trial court held that DEP's development offer was ineffective
and DEP was liable for a taking of the property. New Jersey has filed an appeal
of the trial court's decision and East Cape May Associates file a cross-appeal.
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed Lebenthal Asset Management, Inc. to
serve as investment manager of the Fund. The Manager provides persons
satisfactory to the Fund's Board of Directors to serve as officers of the Fund.
Such officers, as well as certain other employees and directors of the Fund, may
be directors or officers of the Manager or employees of the Manager or its
affiliates.
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. James A. Lebenthal may be deemed an
"interested person" of the Fund, as defined in the 1940 Act, on the basis of his
affiliation with Lebenthal Asset Management, Inc. Unless otherwise stated, the
address for each individual is 120 Broadway, New York, New York 10271.
James A. Lebenthal, 71 - Chairman of the Board and Director of the Fund,
has been Chairman and Director of Lebenthal & Co., Inc. since 1978, Chairman and
Director of the Manager since 1994, President of Lebenthal, The Ad Agency, Inc.
since 1978, and Chairman of Lebenthal, the Insurance Agency.
Victor Chang, 61 - Director of the Fund, formed Victor Chang Associates
and V.C. Management Co., Inc. in 1980 and is President of both organizations
which are in the business of providing financial analysis and economic
consulting. His address is 30 Broad Street, New York, New York 10004.
Robert R. Godfrey, 50 - Director of the Fund, is founder and Chairman since
March, 1995 of N/W Capital, Inc., a principal and financial advisory firm. Prior
to that he was Executive Vice President of MBIA, Inc. and its predecessor
organization from December 1985 until March 1995. His address is 1177 High Ridge
Road, Stamford, CT 06905.
Alexandra Lebenthal, 36 - President of the Fund, President of Lebenthal &
Co., Inc. since 1995, and President of Lebenthal the Insurance Agency. Ms.
Lebenthal was affiliated with Kidder Peabody from 1986 to 1988 where she worked
in the unit investment trust department and the municipal institutional sales
department. She graduated from Princeton University in 1986 with a B.A. in U.S.
History. Ms. Lebenthal is the daughter of James A. Lebenthal.
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.
Gregory Serbe, 54 - Secretary of the Fund, has been employed by Lebenthal
Asset Management, Inc. since 1998, first as a Managing Director and since 1999
as a Senior Managing Director. From 1997 to 1998, Mr. Serbe was employed by
Lebenthal & Co., Inc. as a personal account executive. From 1983 to 1996 Mr.
Serbe was affiliated with Mitchell Hutchins Asset Management Inc., ultimately as
Managing Director of all municipal securities.
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<PAGE>
The table below illustrates that the Portfolios paid an aggregate remuneration
of $8,000 to their disinterested directors with respect to the period ended
November 30, 1999, pursuant to the terms of the Investment Management Contract
(see "Investment Advisory and Other Services" herein).
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -------------------------------------------------------------------------------
Aggregate Pension or
Compensation From Retirement Benefits Estimated Annual Total Compensation
Name of Person, Registrant for Fiscal Accrued as Part of Benefits Upon From Fund Complex
Position Year Fund Expenses Retirement Paid to Directors*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Victor Chang,
Director $4,000 0 0 $4,000
Robert F. Godfrey,
Director $4,000 0 0 $4,000
- ------------------------------------------------------------------------------------------------------------------------
* The total compensation paid to such persons by the Fund for the fiscal year
ending November 30, 1999. The Fund Complex consists of the three Portfolios of
the Fund.
</TABLE>
CODE OF ETHICS
The Fund, the Adviser and the Distributor have each adopted a Code of Ethics
under Rule 17j-1 of the 1940 Act. The Code of Ethics for the Fund and the
Adviser and the Code of Ethics for the Distributor (the "Codes") restrict the
personal investing activities of certain Access Persons and others, as defined
in the Codes. The primary purpose of the Codes is to ensure that these investing
activities do not disadvantage the Fund. Such Access Persons are generally
required to preclear security transactions with the Adviser or his designee and
to report all transactions on a regular basis. The Compliance Officer or his
designee has the responsibility for interpreting the provisions of the Codes,
for adopting and implementing procedures for the enforcement of the provisions
of the Codes, and for determining whether a violation has occurred. In the event
of a finding that a violation has occurred, the Compliance Officer or designee
shall take appropriate action. The Fund, the Adviser and the Distributor have
developed procedures for administration of the Codes.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
On February 29, 2000 there were 16,887,620, 537,693, 1,303,769 and 1,944,871
shares of the New York-Class A Portfolio, New York-Class B Portfolio, New Jersey
Portfolio, and Taxable Portfolio outstanding, respectively. As of February 29,
2000, 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 29, 2000:
<TABLE>
<CAPTION>
Name and Address % of Class Nature of Ownership
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lebenthal New York Class B Shares
Paul Mastrangelo & Bozena Michalowski
JTWROS
27 Interlaken Dr
Eastchester, NY 10709-1503 5% Beneficial
Munir Nader
Barbara Nader JTWROS
8015 41st Avenue, Apt. 532
Elmhurst, NY 11373-1240 5% Benefical
Lebenthal Taxable Municipal Bond Fund
Barouh Eaton Allen Co.
Attn: Barbara J. Glover
67 Kent Avenue
Brooklyn, New York 11211-1926 10% Beneficial
</TABLE>
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<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
- -------------------------------------------------------------------------------
The Manager of the Fund is Lebenthal Asset Management, Inc. The Manager, with
its principal office at 120 Broadway, New York, New York 10271, is a wholly
owned subsidiary of Lebenthal & Co., Inc. The Manager, a registered investment
adviser providing fixed-income investment advisory services to individuals,
institutions and other investment advisers, is under the leadership of James L.
Gammon, President and Director of the Manager. James A. Lebenthal, Chairman and
Director of the Manager, is a "controlling person" of the Manager. The Manager
was as of November 30, 1999, manager, advisor or supervisor with respect to
assets aggregating in excess of $240 million.
Pursuant to the Management Contracts, the Manager manages the portfolio of
securities of each of the Portfolios and makes decisions with respect to the
purchase and sale of investments, subject to the general control of the Fund's
Board of Directors. For its services under the Management Contracts, the Manager
is entitled to receive a management fee for its services, calculated daily and
payable monthly, equal to .25% of each of the Portfolios' average daily net
assets not in excess of $50 million, .225% of such assets between $50 million
and $100 million and .20% of such assets in excess of $100 million. The Manager
may, at its discretion, waive all or a portion of its fees under each Management
Agreement. There can be no assurance that such fees will be waived in the
future.
The Management Contracts for each Portfolio were most recently approved by the
Board of Directors, including a majority of the directors who are not interested
persons (as defined in the 1940 Act) of the Fund or the Distributor, on July 15,
1999 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,
2000, 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.
<TABLE>
<CAPTION>
FEES PAID TO THE MANAGER
- ------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended November 30,
Portfolio 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York
o Fee paid to Manager $333,175 $327,319 $288,050
o Net Assets $138,766,216 $150,473,736 $134,144,060
New Jersey
o Fee paid to Manager $23,475 $19,473 $13,639(1)
o Net Assets $8,910,564 $9,042,143 $6,121,584
Taxable
o Fee paid to Manager $39,370 $40,186 $35,804(1)
o Net Assets $13,486,635 $17,789,079 $14,993,874
- ------------------------------------------------------------------------------------------------------------------------
(1) Entire fee was waived.
</TABLE>
Expense Limitation
The Manager has agreed to reimburse the New Jersey Portfolio and the Taxable
Portfolio for their expenses (exclusive of interest, taxes, brokerage, and
extraordinary expenses) which in any year exceed the limits on investment
company expenses prescribed by any state in which such Portfolio's shares are
qualified for sale. For the purpose of this obligation to reimburse expenses, a
Portfolio's annual expenses are estimated and accrued daily, and any appropriate
estimated payments are made to it on a monthly basis. Subject to the obligations
of the Manager to reimburse a Portfolio for its
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<PAGE>
excess expenses as described above, such Portfolio has, under its respective
Management Contract, confirmed its obligation for payment of all its other
expenses, including taxes, brokerage fees and commissions, commitment fees,
certain insurance premiums, interest charges and expenses of the custodian,
transfer agent and dividend disbursing agent's fees, telecommunications
expenses, costs and expenses of fund bookkeeping agent, auditing and legal
expenses, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the Manager
or its affiliates, or the Administrator, costs of investor services,
shareholders' reports and corporate meetings, Securities and Exchange Commission
registration fees and expenses, state securities laws registration fees and
expenses, expenses of preparing and printing the Fund's prospectus for delivery
to existing shareholders and of printing application forms for shareholder
accounts, the fees payable to the Manager under the Management Contract, the
fees payable to the Distributor under the Distribution Agreement and Shareholder
Servicing Agreement (where applicable) and the fees payable to the Administrator
under the Administration Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein, and the management of the Fund intends to do
so whenever it appears advantageous to the Fund. A Portfolio's expenses for
employees and for such services are among the expenses subject to the expense
limitation described above. As a result of the recent passage of the National
Securities Markets Improvement Act of 1996, all state expense limitations have
been eliminated at this time.
Administrator
The Administrator for the New York Portfolio, the New Jersey Portfolio and the
Taxable Portfolio is State Street Bank and Trust Company (the "Administrator"),
a Massachusetts trust company, which has its principal office at 225 Franklin
Street, Boston, Massachusetts 02111. The Administrator also serves as
administrator of other mutual funds.
Pursuant to the Administration Agreement with the New York Portfolio, the
Taxable Portfolio and the New Jersey Portfolio, the Administrator provides all
administrative services reasonably necessary for such Portfolios, other than
those provided by the Manager, subject to the supervision of the Fund's Board of
Directors. Because of the services rendered to a Portfolio by the Administrator
and the Manager, the Portfolio itself may not require any employees other than
its officers, none of whom receive compensation from the Portfolio.
Under the Administration Agreement with the New York Portfolio, the Taxable
Portfolio and the New Jersey Portfolio, the Administrator provides
administrative services including, without limitation: (i) services of personnel
competent to perform such administrative and clerical functions as are necessary
to provide effective administration of the Portfolio, (ii) assisting Fund
officers in preparing Portfolio tax returns, (iii) in conjunction with Fund
counsel, preparing and filing all Blue Sky filings, reports and renewals, (iv)
coordinating the preparation and distribution of all materials for directors,
including the 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 State Street Bank and Trust Company, the
bookkeeping agent for the Portfolio.
For the services rendered to such Portfolios by the Administrator, the Fund pays
the Administrator a fee, computed daily and payable monthly, equal to .08% per
annum of the average daily net assets of the respective Portfolio up to $125
million, .06% per annum of the average daily net assets of each of the
Portfolios of the next $125 million and .04% of such assets of each of the
Portfolios in excess of $250 million. There is a minimum annual fee payable of
$165,000.
<TABLE>
<CAPTION>
FEES PAID TO THE ADMINISTRATOR
- ------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended November 30,
Portfolio 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
New York $147,346 $139,816 $143,014
New Jersey $8,925 $7,511 $6,213
Taxable $16,117 $15,642 $16,453
The Administration Agreement's initial term extended 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.
</TABLE>
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<PAGE>
Counsel and Auditors
Legal matters in connection with the issuance of shares of stock of the Fund and
New York law are passed upon by Battle Fowler LLP, 75 East 55th Street, New
York, New York 10022.
Matters in connection with New Jersey law are passed upon by McCarter & English,
LLP, Four Gateway Center, 100 Mulberry Street, Newark, New Jersey 07101-0652.
PricewaterhouseCoopers LLP, 1055 Broadway, Kansas City, MO 64105, independent
accountants, have been selected as auditors for the Fund.
Custodian, Transfer Agent And Dividend Agent
State Street Bank and Trust Company, 801 Pennsylvania, Kansas City, Missouri
64105-1716, is custodian for the Fund's cash and securities. The custodian does
not assist in, and is not responsible for, investment decisions involving assets
of the Fund. The Fund retains State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02111, to perform transfer agency related services
for the Fund.
Distribution And Service Plans
Pursuant to Rule 12b-1 under the 1940 Act, the Securities and Exchange
Commission requires that an investment company which bears any direct or
indirect expense of distributing its shares must do so only in accordance with a
plan permitted by the Rule. The Fund's Board of Directors has adopted
distribution and service plans on behalf of each Portfolio (the "Plan" or
"Plans").
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Portfolios or the
Distributor and Participating Organizations or other organizations must be in a
form satisfactory to the Fund's Board of Directors. In addition, the Plan
requires the Fund and the Distributor to prepare, at least quarterly, written
reports setting forth all amounts expended for distribution purposes by the
Portfolio and the Distributor pursuant to the Plan and identifying the
distribution activities for which those expenditures were made.
The New York Portfolio
Pursuant to its Plan, the New York Portfolio and Lebenthal & Co., Inc., 120
Broadway, New York, New York 10271 (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 and can be used to provide shareholder servicing and for
the maintenance of shareholder accounts. The Distribution Agreement also
provides that the Distributor may make payment from time to time from the
Service Fee received to pay the costs of, and to compensate others, including
Participating Organizations for performing such shareholder servicing functions
on behalf of the Portfolio.
The Plan and the Distribution Agreement provide that, in addition to the Service
Fee, the New York Portfolio will pay for (i) telecommunications expenses
including the cost of dedicated lines and CRT terminals, incurred by the
Distributor in carrying out its obligations under the Distribution Agreement and
(ii) preparing, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing and printing subscription application
forms for shareholder accounts.
The Plan and the Management Agreement provide that the Manager may make payments
from time to time from its own resources, which may include the Management Fee
and past profits for the following purposes: (i) to defray the costs of, and to
compensate others, including Participating Organizations with whom the
Distributor has entered into written agreements, for performing shareholder
servicing and related administrative functions on behalf of the New York
Portfolio, (ii) to compensate certain Participating Organizations for providing
assistance in distributing the New York Portfolio's shares, (iii) to pay the
cost of printing and distributing the New York Portfolio's prospectus to
prospective investors, and (iv) to defray the cost of the preparation and
printing of brochures and other promotional materials, mailings to prospective
shareholders, advertising, and other promotional activities, including the
salaries and/or commissions of sales personnel in connection with the
distribution of the New York Portfolio's shares. The Distributor may also make
payments from time to
-25-
<PAGE>
time from its own resources which may include the Service Fee and past profits
for the purposes enumerated in (i) above. With respect to the Class B shares
only, the Distributor may also make payments for the purposes enumerated in
(ii), (iii), and (iv) from the Asset Based Sales Charges received by the
Distributor. The Distributor, in its sole discretion, will determine the amount
of such payments made pursuant to the Plan, provided that such payments will not
increase the amount which the New York Portfolio is required to pay to the
Distributor for any fiscal year under the Distribution Agreement in effect for
that year.
The Plan provides that it may continue in effect for successive annual periods
provided it is approved by the shareholders or by the Board of Directors,
including a majority of directors who are not interested persons of the Fund and
who have no direct or indirect interest in the operation of the Plan or in the
agreements related to the Plan. The Board of Directors most recently approved
the Plan for the Class A and Class B shares on October 14, 1999 to be effective
until October 30, 1999. The Plan was most recently approved by the shareholders
of the Portfolio on June 23, 1992. 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 fiscal year ended November 30, 1999, the total amount spent pursuant to
the Plan for the New York Portfolio-Class A shares was $119,162 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 $119,162 on compensation to sales personnel. With
respect to Class B shares, the total amount spent pursuant to the Plan was
$2,285, 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 $2,285 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.
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 0.25% per annum of the respective
Portfolio's average daily net assets (the "Shareholder Servicing Fee"). The fee
is accrued daily and paid monthly and any portion of the fee may be deemed to be
used by the Distributor for (i) shareholder servicing and maintenance of
shareholder accounts and (ii) payments to Participating Organizations with
respect to servicing their clients or customers who are shareholders of the
Portfolio.
Under each Portfolio's Distribution Agreement, the Distributor, for nominal
consideration and as agent for the respective Portfolio, will solicit orders for
the purchase of the respective Portfolio's shares, provided that any
subscriptions and orders will not be binding on the Portfolio until accepted by
the Portfolio as principal. In addition, the Distribution Agreement provides for
reimbursement to the Distributor by the Portfolio for its distribution,
promotional and advertising costs incurred in connection with the distribution
of the respective Portfolio's shares in an amount not to exceed 0.10% 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.
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
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<PAGE>
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 14, 1999 to be effective until October 30, 2000. The Plan
was most recently approved by the shareholders of each Portfolio on November 10,
1994. The Plan further provides that it may not be amended to increase
materially the costs which may be spent by the Fund for distribution pursuant to
the Plan without shareholder approval, and the other material amendments must be
approved by the directors in the manner described in the preceding sentence. The
Plan may be terminated at any time by a vote of a majority of the disinterested
directors of the Fund or the shareholders of each respective Portfolio.
For the New Jersey Portfolio's fiscal year ended November 30, 1999, the total
amount spent pursuant to the Plan was $7,477, all of which was paid by the
Portfolio to the Distributor pursuant to the Distribution agreement and all of
which was paid by the Distributor (which may be deemed an indirect payment by
the Portfolio). Of the total amount paid to the Distributor, the Distributor
utilized $7,477 on compensation to sales personnel.
For the Taxable Portfolio's fiscal year ended November 30, 1999, the total
amount spent pursuant to the Plan was $13,784, 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). Of the total amount paid to the Distributor, the Distributor
utilized $13,784 on compensation to sales personnel.
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.
-27-
<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
is herein incorporated by reference.
TAXATION OF THE FUND
- --------------------------------------------------------------------------------
Federal Income Taxes
The following is a general discussion of certain of the Federal income tax
consequences of the purchase, ownership and disposition of shares of the
Portfolios. The summary is limited to investors who hold the shares as "capital
assets" generally (property held for investment), and who are not subject to
special tax treatment, such as securities dealers, financial institutions,
insurance companies and foreign investors. Shareholders should consult their tax
advisers in determining the Federal, state, local and any other tax consequences
of the purchase, ownership and disposition of shares.
The Fund intends to maintain its qualification as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). The Fund will be restricted in that at the close of each quarter
of the taxable year, at least 50% of the value of the assets of each Portfolio
must be represented by cash, government securities, investment company
securities and other securities limited in respect of any one issuer to not more
than 5% in value of the assets of each Portfolio and to not more than 10% of the
outstanding voting securities of such issuer. In addition, at the close of each
quarter of its taxable year, not more than 25% in value of each Portfolio's
total assets may be invested in securities of one issuer other than U.S.
government securities. The limitations described in this paragraph regarding
qualification as a "regulated investment company" are not fundamental policies
and may be revised to the extent applicable Federal income tax requirements are
revised.
The New York Portfolio and the New Jersey Portfolio
The New York Portfolio and the New Jersey Portfolio (a "Tax-exempt Fund" and
collectively, the "Tax-exempt Funds") have each elected to qualify under the
Internal Revenue Code of 1986 as amended, (the "Code"), and the New York
Portfolio has elected to qualify under New York law as a "regulated investment
company" that distributes "exempt-interest dividends". Each Tax-exempt Fund
intends to continue to qualify for regulated investment company status so long
as such qualification is in the best interests of its shareholders. Such
qualification relieves the Tax-exempt Fund of liability for
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<PAGE>
Federal income taxes to the extent its earnings are distributed in accordance
with the applicable provisions of the Code. If each Tax-exempt Fund fails to
qualify as a regulated investment company, it will be taxed on all its earnings
and its shareholders will be taxed on all its distributions.
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. However, the amount of
tax exempt interest received will have to be disclosed on the shareholders'
Federal income tax returns. 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. 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.
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 tax on tax-exempt interest. A shareholder is advised to consult its
tax advisers with respect to whether exempt-interest dividends retain the
exclusion from income if such shareholder is a "substantial user" or "related
person" with respect to some or all of the "private activity bonds," if any,
held by a Tax-exempt Fund.
A Tax-exempt Fund may realize capital gains or losses from its portfolio
transactions and upon the maturity or disposition of securities acquired at
discounts resulting from market fluctuations. In the case of a Municipal
Obligation acquired at a market discount, gain on the disposition of the
Municipal Obligation generally will be treated as ordinary income to the extent
of accrued market discount. Short-term capital gains will be taxable to
shareholders as ordinary income when they are distributed. Ordinary income is
currently subject to a maximum individual tax rate of 39.6%. Any net capital
gains (the excess of net realized long-term capital gain over net realized
short-term capital loss) will be distributed annually to the Tax-exempt Funds'
shareholders. A Tax-exempt Fund will have no tax liability with respect to
distributed net capital gains and the distributions will be taxable to
shareholders as long-term capital gains regardless of how long the shareholders
have held Tax-exempt Fund shares. However, Tax-exempt Fund shareholders, who at
the time of such a net capital gain distribution have not held their Tax-exempt
Fund shares for more than 6 months, and who subsequently dispose of those shares
at a loss, will be required to treat such loss as a long-term capital loss to
the extent of the net capital gain distribution. If the securities held by a
Tax-exempt Fund appreciate in value, purchasers of shares of the Tax-exempt Fund
after the occurrence of such appreciation will acquire such shares subject to
the tax obligation that may be incurred in the future when there is a sale of
such securities. Distributions of net capital gain will be designated as a
"capital gain dividend" in a written notice mailed to the Tax-exempt Funds'
shareholders not later than 60 days after the close of the Tax-exempt Fund's
taxable year. A shareholder may recognize a taxable gain or loss if the
shareholder sells or redeems its shares. Any gain or loss arising from (or
treated as arising from) the sale or redemption of shares will be a capital gain
or loss, except in the case of a dealer in securities. Capital gains realized by
corporations are generally taxed at the same rate as ordinary income. However,
capital gains are taxable at a maximum rate of 20% to non-corporate shareholders
who have a holding period of more than 12 months. Corresponding maximum rate and
holding period rules apply with respect to capital gains dividends distributed
by a Tax-exempt Fund, without regard to the length of time the shares have been
held by the shareholder. The deduction of capital losses is subject to
limitations.
Each Tax-exempt Fund intends to distribute at least 90% of its investment
company taxable income (taxable income subject to certain adjustments and
exclusive of the excess of its net long-term capital gain over its net
short-term capital loss) for each taxable year. Each Tax-exempt Fund will be
subject to Federal income tax on any undistributed investment company taxable
income. To the extent such income is distributed it will be taxable to
shareholders as ordinary income. Expenses paid or incurred by the Tax-exempt
Fund will be allocated between tax-exempt and taxable income in the same
-29-
<PAGE>
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.
The U.S. Supreme Court has held that there is no constitutional prohibition
against the Federal government's taxing the interest earned on state or other
municipal bonds. 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. If the Taxable Portfolio fails to
qualify as a regulated investment company, it will be taxed on all its earnings
and its shareholders will be taxed on all its distributions.
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
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<PAGE>
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.
If a shareholder fails to provide the Taxable Portfolio with a current taxpayer
identification number, the Taxable Portfolio generally is required to withhold
31% of taxable interest, dividend payments and proceeds from the redemption of
shares of the Taxable Portfolio.
Dividends and distributions to shareholders will be treated in the same manner
for Federal income tax purposes whether received in cash or reinvested in
additional shares of the Taxable Portfolio.
Entities that generally qualify for an exemption from Federal income tax, such
as many pension trusts and retirement plans, are nevertheless taxed under
Section 511 of the Code on "unrelated business taxable income." Unrelated
business taxable income is income from a trade or business regularly carried on
by the tax-exempt entity that is unrelated to the entity's exempt purpose.
Unrelated business taxable income generally does not include dividend or
interest income or gain from the sale of investment property, unless such income
is derived from property that is debt-financed or is dealer property. A
tax-exempt entity's dividend income from the Taxable Portfolio and gain from the
sale of shares in the Taxable Portfolio or the Taxable Portfolio's sale of
securities is not expected to constitute unrelated business taxable income to
such tax-exempt entity unless the acquisition of the share itself is
debt-financed or constitutes dealer property in the hands of the tax-exempt
entity.
Before investing in the Taxable Portfolio, the trustee or investment manager of
an employee benefit plan (e.g., a pension or profit sharing retirement plan)
should consider among other things (i) whether the investment is prudent under
the Employee Retirement Income Security Act of 1974 ("ERISA"), taking into
account the needs of the plan and all of the facts and circumstances of the
investment in the Taxable Portfolio; (ii) whether the investment satisfies the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (iii) whether
the assets of the Portfolio are deemed "plan assets" under ERISA and the
Department of Labor regulations regarding the definition of "plan assets."
Prospective tax-exempt investors are urged to consult their own tax advisers
prior to investing in the Taxable Portfolio.
New York Income Taxes
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. However, to the extent that dividends are derived from interest on
New York Municipal Obligations, the dividends will also be excluded from a New
York shareholder's gross income for New York State and New York City personal
income tax purposes. This exclusion will not result in a corporate shareholder
being exempt for New York State and New York City franchise tax purposes.
New Jersey Income Taxes
The exemption of interest income for Federal income tax purposes does not
necessarily result in an exemption under the income or other tax laws of any
state or local taxing authority. The New Jersey Portfolio intends to be a
"qualified investment fund" within the meaning of the New Jersey gross income
tax. The primary criteria for constituting a "qualified investment fund" are
that i) such fund is an investment company registered with the Securities and
Exchange Commission which, for the calendar year in which the distribution is
paid, has no investments other than interest-bearing obligations, obligations
issued at a discount, and cash and cash items, including receivables, and
financial options, futures, forward contracts, or other similar financial
instruments relating to interest-bearing obligations, obligations issued at a
discount or bond indexes related thereto and ii) at the close of each quarter of
the taxable year, such fund has not less than 80% of the aggregate principal
amount of all of its investments, excluding financial options, futures, forward
contracts, or other similar financial instruments relating to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto to
the extent such instruments are authorized under the regulated investment
company rules under the Code, cash and cash items, which cash items shall
include receivables, in obligations issued by or on behalf of the State of New
Jersey or any county, municipally or other political subdivision of the State of
New Jersey ("New Jersey State-Specific Obligations") or obligations which are
statutorily free from New Jersey state or local taxation under the laws of the
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<PAGE>
United States ("U.S. Government Obligations"). Additionally, a qualified
investment fund must comply with certain continuing reporting requirements.
In the opinion of McCarter & English, special New Jersey tax counsel to the New
Jersey Portfolio, assuming that the New Jersey Portfolio constitutes a qualified
investment fund and that the New Jersey Portfolio complies with the reporting
obligations under New Jersey law with respect to qualified investment funds, i)
distributions paid by the New Jersey Portfolio to a New Jersey resident
individual shareholder will not be subject to the New Jersey gross income tax to
the extent that the distributions are attributable to income received as
interest on or gain from New Jersey State-Specific Obligations or U.S.
Government Obligation and ii) gain from the sale of shares in the New Jersey
Portfolio by a New Jersey resident individual shareholder will not be subject to
the New Jersey gross income tax to the extent that the gain is attributable to
investments in New Jersey State-Specific Obligations or U.S. Government
Obligations. Shareholders are urged to consult their tax advisers with respect
to the treatment of distributions from each Portfolio and ownership of shares of
each Portfolio in their own states and localities.
UNDERWRITERS
- -------------------------------------------------------------------------------
The Fund sells and redeems its shares on a continuing basis at their net asset
value. In effecting sales of Fund shares under the Distribution Agreement, the
Distributor, as agent for the Fund, will solicit orders for the purchase of the
Fund's shares, provided that any subscriptions and orders will not be binding on
the Fund until accepted by the Fund as principal.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. On November 16, 1999,
President Clinton signed the Gramm-Leach-Bailey Act, repealing certain
provisions of the Glass-Steagall Act which have restricted affiliation betweek
banks and securities firms and amending the Bank Holding Company Act thereby
removing restrictions on banks and insurance companies. The new legislation
grants banks new authority to conduct certain authorized activity through
financial subsidiaries. In the opinion of the Manager, however, based on the
advice of counsel, these laws and regulations do not prohibit such depository
institutions from providing other services for investment companies such as the
shareholder servicing and related administrative functions referred to above.
The Fund's Board of Directors will consider appropriate modifications to the
Fund's operations, including discontinuance of any payments then being made
under the Plan to banks and other depository institutions, in the event of any
future change in such laws or regulations which may affect the ability of such
institutions to provide the above-mentioned services. It is not anticipated that
the discontinuance of payments to such an institution will result in loss to
shareholders or change in the Fund's net asset value. In addition, state
securities laws on this issue may differ from the interpretations of Federal law
expressed herein and banks and financial institutions may be required to
register ad dealers pursuant to state law.
CALCULATION OF PERFORMANCE DATA
- -------------------------------------------------------------------------------
Total Return and Average Annual Total Return
The Portfolios may from time to time advertise a total return or average annual
total return. Average annual total return is a measure of the average annual
compounded rate of return of $1,000 invested at the maximum public offering
price in such Portfolio over a specified period, which assumes that any
dividends or capital gains distributions are automatically reinvested in such
Portfolio rather than paid to the investor in cash. Total return is calculated
with the same assumptions and shows the aggregate return on an investment over a
specified period. The formula for total return used by the Portfolios includes
three steps: (1) adding to the total number of shares purchased by the
hypothetical investment in a Portfolio of $1,000 (assuming the investment is
made at a public offering price that includes the current maximum sales load of
4.50% for the New York Portfolio, 4.50% for the New Jersey Portfolio or 4.50%
for the Taxable Portfolio) all additional shares that would have been purchased
if all dividends and distributions paid or distributed during the period had
been automatically reinvested; (2) calculating the value of the hypothetical
initial investment as of the end of the period by multiplying the total number
of shares owned at the end of the period by the net asset value per share on the
last trading day of the period; and (3) dividing this account value for the
hypothetical investor by the amount of the initial investment. The average
annual total return for the specified period is then determined by calculating
the annual rate required for the hypothetical initial investment to grow to the
account value at the end of the specified period. Total return or average annual
return may be stated with or without giving effect to any expense limitations in
effect for the Portfolio.
-32-
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE DATA
- ------------------------------------------------------------------------------------------------------------------------
Average Annual
Compounded Total
Total Return For Return Since 30-day Taxable 30-day Taxable
Twelve Months Ended Inception to Equivalent Yield for Equivalent Yield
Portfolio November 30, 1999 November 30, 1999 November 30, 1999 State Residents
(Federal only)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York (Class A) (inception June 24, 1991) (8.75)% 5.94% 9.53% 8.51%
New York (Class B) (inception December 3, 1997)(9.84)% (1.58)% 8.56% 7.65%
New Jersey (inception December 1, 1993) (9.10)% 2.82% 8.82% 5.26%
Taxable (inception December 1, 1993) (9.70)% 5.62% N/A N/A
</TABLE>
Yield
The Portfolios compute yield by annualizing net investment income per share for
a recent thirty-day period and dividing that amount by a Portfolio share's
maximum public offering price (reduced by any undeclared earned income expected
to be paid shortly as a dividend) on the last trading day of that period. With
respect to the Class B shares of the New York Portfolio, CDSCs are not taken
into account when calculating this performance information. Net investment
income will reflect amortization of any market value premium or discount of
fixed income securities (except for obligations backed by mortgages or other
assets) and may include recognition of a pro rata portion of the stated dividend
rate of dividend paying portfolio securities. A Portfolio's yield will vary from
time to time depending upon market conditions, the composition of the Portfolio
and operating expenses of the Portfolio. These factors, possible differences in
the methods used in calculating yield and the tax exempt status of distributions
should be considered when comparing a Portfolio's yield to yields published for
other investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of the Portfolio's shares and to the
relative risks associated with the investment objectives and policies of the
Portfolio. Yield may be stated with or without giving effect to any expense
limitations in effect for the Portfolio.
The New York Portfolio and the New Jersey Portfolio may also advertise a tax
equivalent yield for residents of the States of New York and New Jersey,
respectively, wherein all or substantially all of the Portfolio's dividends are
not subject to the applicable state's income tax. The Portfolio's advertisement
of a tax equivalent yield reflects the taxable yield that a New York or New
Jersey investor subject to the highest Federal marginal tax rate and that
state's or municipality's highest marginal tax rate will have to receive in
order to realize the same level of after-tax yield as an investment in such a
Portfolio will produce. Tax equivalent yield is calculated by dividing the
portion of the Portfolio's yield that is not subject to New York State or
municipal taxes or New Jersey gross income tax (calculated as described above)
by the result of subtracting the sum of the highest Federal marginal tax rate
and the highest marginal state tax rate and assuming that the state taxes are
fully deductible for Federal tax purposes, the highest marginal tax rate from 1,
and adding the resulting figure to that portion, if any, of the Portfolio's
yield that is subject to state or municipal income tax.
Tax Equivalent Yield
The New York Portfolio and the New Jersey Portfolio may also advertise a tax
equivalent yield for one or more states and municipalities wherein all or
substantially all of the Portfolio's dividends are not subject to Federal income
tax. The Portfolio's advertisement of a tax equivalent yield reflects the
taxable yield that an investor subject to the highest Federal marginal tax rate
will have to receive in order to realize the same level of after-tax yield as an
investment in such Portfolio will produce. Tax equivalent yield is calculated by
dividing that portion of the Portfolio's yield that is not subject to regular
Federal taxes (calculated as described above) by the result of subtracting the
highest Federal marginal tax rate from 1, and adding the resulting figure to
that portion, if any, of the Portfolio's yield that is subject to regular
Federal income tax.
General
At any time in the future, yields and total return may be higher or lower than
past yields and total return and there can be no assurance that past results
will continue. Investors in a Portfolio are specifically advised that share
prices, expressed as the net asset values per share, will vary just as yields
will vary. An investor's focus on the yield of the Portfolio to the exclusion of
the consideration of the share price of the Portfolio may result in the
investor's misunderstanding the total return he or she may derive from the
Portfolio.
A Portfolio may from time to time include its yield and total return in
advertisements or information furnished to present or prospective shareholders.
A Portfolio may also from time to time include in advertisements the ranking of
those performance figures relative to such figures for groups of mutual funds
categorized by Lipper Analytical Services as having the same investment
objectives. A Portfolio may also use total return and yield to compare its
performance against the U.S.
-33-
<PAGE>
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, 1999 are herein incorporated by reference.
-34-
<PAGE>
DESCRIPTION OF SECURITY RATINGS AND NOTES
- -------------------------------------------------------------------------------
Moody's Investors Service, Inc. ("Moody's")
Bonds
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements may change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than Aaa bonds because margins of protection may not
be as large or fluctuation of protective elements may be of greater amplitude,
or there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
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.
-35-
<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.
-36-
<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.
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.
-37-
<PAGE>
<TABLE>
<CAPTION>
Table I-Federal tax exemption alone
- ------------------------------------------------------------------------------------------------------------------------
If your net taxable
Income in 2000 is Your Federal TO MATCH A TAX FREE RETURN OF
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------
Tax Bracket is 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25%
-------------------------------------------------------------------------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
- ------------------------------------------------------------------------------------------------------------------------
$0-$43,850 $0-$25,250 15% 4.1% 4.4% 4.7% 5.0% 5.3% 5.6% 5.9% 6.2%
$43,851-$105,950 $25,251-$63,550 28% 4.9% 3.9% 5.6% 4.5% 6.3% 5.0% 6.9% 7.3%
$105,951-$161,450 $63,551-$132,600 31% 5.1% 3.9% 5.8% 4.5% 6.5% 5.0% 7.2% 7.6%
$161,451-$288,350 $132,601-$288,350 36% 5.5% 3.9% 6.3% 4.5% 7.0% 5.1% 7.8% 8.2%
$288,351+ $288,351+ 39.6% 5.8% 3.9% 6.6% 4.5% 7.5% 5.1% 8.3% 8.7%
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------
5.50% 5.75% 6.00% 6.25% 6.50%
-------------------------------------------------------------------------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
- ------------------------------------------------------------------------------------------------------------------------
$0-$43,850 $0-$25,250 6.5% 6.8% 7.1% 7.4% 7.6%
$43,851-$105,950 $25,251-$63,550 7.6% 8.0% 8.3% 8.7% 9.0%
$105,951-$161,450 $63,551-$132,600 8.0% 8.3% 8.7% 9.1% 9.4%
$161,451-$288,350 $132,601-$288,350 8.6% 9.0% 9.4% 9.8% 10.2%
$288,351+ $288,351+ 9.1% 9.5% 9.9% 10.3% 10.8%
</TABLE>
<TABLE>
<CAPTION>
Table II-The value of a double exemption from Federal & New Jersey Income Tax
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
If your net taxable Your Combined
Income in 2000 is Federal & NJ TO MATCH A TAX FREE RETURN OF
Tax Bracket is -------------------------------------------------------------------------
3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25%
-------------------------------------------------------------------------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
- -----------------------------------------------------------------------------------------------------------------------------------
$20.001-$43,850 $20,001-$26,250 16.49% 4.2% 4.5% 4.8% 5.1% 5.4% 5.7% 6.0% 6.3%
$43,851-$50,000 $26,251-$35,000 29.26% 4.9% 5.3% 5.7% 6.0% 6.4% 6.7% 7.1% 7.4%
$50,001-$70,000 -- 29.76% 5.0% 5.3% 5.7% 6.1% 6.4% 6.8% 7.1% 7.5%
$70,001-$80,000 $35,001-$40,000 30.52% 5.0% 5.4% 5.8% 6.1% 6.5% 6.8% 7.2% 7.6%
$80,001-$105,950 $40,001-$63,550 31.98% 5.1% 5.5% 5.9% 6.2% 6.6% 7.0% 7.4% 7.7%
$105,951-$150,000 $63,551-$75,000 34.81% 5.4% 5.8% 6.1% 6.5% 6.9% 7.3% 7.7% 8.1%
$150,001-$161,450 $75,001-$132,600 35.40% 5.4% 5.8% 6.2% 6.6% 7.0% 7.4% 7.7% 8.1%
$161,451-$288,350 $132,601-$288,350 40.08% 5.8% 6.3% 6.7% 7.1% 7.5% 7.9% 8.3% 8.8%
$288,351+ $288,351+ 43.45% 6.2% 6.6% 7.1% 7.5% 8.0% 8.4% 8.8% 9.3%
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
5.50% 5.75% 6.00% 6.25% 6.50%
------------------------------------------------------------------------------------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
- -----------------------------------------------------------------------------------------------------------------------------------
$20.001-$43,850 $20,001-$26,250 6.6% 6.9% 7.2% 7.5% 7.8%
$43,851-$50,000 $26,251-$35,000 7.8% 8.1% 8.5% 8.8% 9.2%
$50,001-$70,000 -- 7.8% 8.2% 8.5% 8.9% 9.3%
$70,001-$80,000 $35,001-$40,000 7.9% 8.3% 8.6% 9.0% 9.4%
$80,001-$105,950 $40,001-$63,550 8.1% 8.5% 8.8% 9.2% 9.6%
$105,951-$150,000 $63,551-$75,000 8.4% 8.8% 9.2% 9.6% 10.0%
$150,001-$161,450 $75,001-$132,600 8.5% 8.9% 9.3% 9.7% 10.1%
$161,451-$288,350 $132,601-$288,350 9.2% 9.6% 10.0% 10.4% 10.8%
$288,351+ $288,351+ 9.7% 10.2% 10.6% 11.1% 11.5%
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
Table III-The value of a double exemption from Federal & NYS Income Tax
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
If your net taxable Your Combined
Income in 2000 is Federal & NYS TO MATCH A TAX FREE RETURN OF
Tax Bracket is -------------------------------------------------------------------------
3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25%
-------------------------------------------------------------------------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
- -----------------------------------------------------------------------------------------------------------------------------------
$26,001-$40,000 $13,001-$20,000 20.02% 4.4% 4.7% 5.0% 5.3% 5.6% 5.9% 6.3% 6.6%
$40,001-$43,850 $20,001-$26,250 20.82% 4.4% 4.7% 5.1% 5.4% 5.7% 6.0% 6.3% 6.6%
$43,851-$105,950 $26,251-$63,550 32.93% 5.2% 5.6% 6.0% 6.3% 6.7% 7.1% 7.5% 7.8%
$105,951-$161,450 $63,551-$132,600 35.73% 5.4% 5.8% 6.2% 6.6% 7.0% 7.4% 7.8% 8.2%
$161,451-$288,350 $132,601-$288,350 40.38% 5.9% 6.3% 6.7% 7.1% 7.5% 8.0% 8.4% 8.8%
$288,351+ $288,351+ 43.74% 6.2% 6.7% 7.1% 7.6% 8.0% 8.4% 8.9% 9.3%
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax Bracket is 5.50% 5.75% 6.00% 6.25% 6.50%
-----------------------------------------------------------------------------------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
- ----------------------------------------------------------------------------------------------------------------------------------
$26,001-$40,000 $13,001-$20,000 6.9% 7.2% 7.5% 7.8% 8.1%
$40,001-$43,850 $20,001-$26,250 6.9% 7.3% 7.6% 7.9% 8.2%
$43,851-$105,950 $26,251-$63,550 8.2% 8.6% 8.9% 9.3% 9.7%
$105,951-$161,450 $63,551-$132,600 8.6% 8.9% 9.3% 9.7% 10.1%
$161,451-$288,350 $132,601-$288,350 9.2% 9.6% 10.1% 10.5% 10.9%
$288,351+ $288,351+ 9.8% 10.2% 10.7% 11.1% 11.6%
</TABLE>
<TABLE>
<CAPTION>
Table IV-The value of a triple exemption from Federal, NYS & NYC Taxes
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
If your net taxable Your Combined
Income in 2000 is Federal, NYS & TO MATCH A TAX FREE RETURN OF
NYC Tax Bracket is -------------------------------------------------------------------------
3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25%
-------------------------------------------------------------------------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
- -----------------------------------------------------------------------------------------------------------------------------------
$26,001-$40,000 -- 22.29% 4.5% 4.8% 5.1% 5.5% 5.8% 6.1% 6.4% 6.8%
$26,001-$40,000 $12,001-$25,000 22.75% 4.5% 4.9% 5.2% 5.5% 5.8% 6.1% 6.5% 6.8%
$40,001-$43,850 $25,001-$26,250 23.56% 4.6% 4.9% 5.2% 5.6% 5.9% 6.2% 6.5% 6.9%
$43,851-$45,000 -- 35.25% 5.4% 5.8% 6.2% 6.6% 6.9% 7.3% 7.7% 8.1%
$45,001-$90,000 $26,251-$50,000 35.28% 5.4% 5.8% 6.2% 6.6% 7.0% 7.3% 7.7% 8.1%
$90,001-$105,950 $50,001-$63,550 35.32% 5.4% 5.8% 6.2% 6.6% 7.0% 7.3% 7.7% 8.1%
$105,951-$161,450 $63,551-$161,450 38.01% 5.6% 6.0% 6.5% 6.9% 7.3% 7.7% 8.1% 8.5%
$161,451-$288,350 $161,451-$288,350 42.51% 6.1% 6.5% 7.0% 7.4% 7.8% 8.3% 8.7% 9.1%
$288,351+ $288,351+ 45.74% 6.5% 6.9% 7.4% 7.8% 8.3% 8.8% 9.2% 9.7%
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
5.50% 5.75% 6.00% 6.25% 6.50%
---------------------------------------------------------------------------------
Joint Return Single Return YOU WOULD HAVE TO EARN THIS MUCH
- ----------------------------------------------------------------------------------------------------------------------------------
$26,001-$40,000 -- 7.1% 7.4% 7.7% 8.0% 8.4%
$26,001-$40,000 $12,001-$25,000 7.1% 7.4% 7.8% 8.1% 8.4%
$40,001-$43,850 $25,001-$26,250 7.2% 7.5% 7.8% 8.2% 8.5%
$43,851-$45,000 -- 8.5% 8.9% 9.3% 9.7% 10.0%
$45,001-$90,000 $26,251-$50,000 8.5% 8.9% 9.3% 9.7% 10.0%
$90,001-$105,950 $50,001-$63,550 8.5% 8.9% 9.3% 9.7% 10.0%
$105,951-$161,450 $63,551-$161,450 8.9% 9.3% 9.7% 10.1% 10.5%
$161,451-$288,350 $161,451-$288,350 9.6% 10.0% 10.4% 10.9% 11.3%
$288,351+ $288,351+ 10.1% 10.6% 11.1% 11.5% 12.0%
</TABLE>
- -------------------------------------------------------------------------------
* Assumptions: The income ranges listed above assume (i) a single person with
no dependents and (ii) a married couple filing jointly with no dependents.
Tables comparing tax free to taxable yields are computed on the theory that
the next dollar of taxable income earned will be taxed at the taxpayer's
highest marginal tax rate. Any savings as the result of a switch from taxable
to tax free securities should also be computed at the taxpayer's highest
rate.
The tables cover only a representative range of incomes, and income tax
brackets have been rounded off to facilitate illustration.
Tables are based on 2000 tax rates. There can be no assurance that such rates
will remain unchanged.
"Net taxable income" represents taxable income as currently defined in the
Internal Revenue Code and is the amount on which you actually pay tax, net of
deductions, exemptions, etc.
-39-
<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-
