Rule 497(c)
33-97984
811-9108
Lipper High Income Bond Fund
Lipper U.S. Equity Fund
Prime Lipper Europe Equity Fund
The Lipper Funds, Inc.
101 Park Avenue
New York, NY 10178
For information call 1-800-LIPPER 9
December 29, 1995
The Lipper Funds, Inc. (the "Company") is an open-end management
investment company which offers three diversified portfolios: Lipper High
Income Bond Fund (the "High Income Fund"), Lipper U.S. Equity Fund (the "U.S.
Equity Fund") and Prime Lipper Europe Equity Fund (the "Europe Equity Fund"
and, together with the High Income Fund and the U.S. Equity Fund, the "Funds").
This Statement of Additional Information should be read in conjunction with the
Funds' Prospectus dated December 29, 1995 (which may be amended or
supplemented from time to time) (the "Prospectus"), and is incorporated by
reference in its entirety into the Prospectus.
This Statement of Additional Information is not itself a prospectus and is
authorized for distribution only when preceded or accompanied by a prospectus.
No investment in shares of the Funds should be made solely upon the information
contained herein. Copies of the Prospectus may be obtained without charge by
writing or calling the Company at the address and telephone number set forth
above. Capitalized terms used but not defined herein have the same meanings as
in the Prospectus.
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TABLE OF CONTENTS
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . 3
Investment Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Additional Purchase Information . . . . . . . . . . . . . . . . . . . . . . 15
Additional Redemption Information . . . . . . . . . . . . . . . . . . . . . 16
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Management of The Company . . . . . . . . . . . . . . . . . . . . . . . . . 18
Distribution and Service Plans . . . . . . . . . . . . . . . . . . . . . . 24
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . . 25
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Additional Information Concerning Fund Shares . . . . . . . . . . . . . . . 29
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the High Income Fund is high current income.
The investment objective of the U.S. Equity Fund and the Europe Equity Fund is
capital appreciation. The following policies supplement the description of each
Fund's investment objective and policies in the Prospectus.
Portfolio Transactions
Subject to the general control of the Company's Board of Directors, Lipper
& Company, L.L.C., the investment adviser to the High Income Fund and the U.S.
Equity Fund (the "U.S. Adviser"), and Prime Lipper Asset Management, the
investment adviser to the Europe Equity Fund (the "European Adviser" and,
together with the U.S. Adviser, the "Advisers") are responsible for making
decisions with respect to, and placing orders for, all purchases and sales of
portfolio securities for the Fund(s) for which each serves as investment
adviser. The High Income Fund's portfolio transactions will occur primarily
with issuers, underwriters and major dealers acting as principals, and the U.S.
Equity Fund's and the Europe Equity Fund's portfolio transactions may consist
of such transactions. Such transactions are normally on a net basis which does
not involve payment of brokerage commissions. The cost of securities purchased
from underwriters includes an underwriter's commission or concession, and the
prices at which securities are purchased from and sold to dealers include an
undisclosed dealer spread. Transactions on foreign securities exchanges may
involve the payment of negotiated brokerage commissions, which may vary among
different brokers, or the payment of fixed brokerage commissions. In making
portfolio investments, the Advisers seek to obtain the best net price and the
most favorable execution of orders. To the extent that the execution and price
offered by more than one broker or dealer are comparable, the Advisers may, in
their discretion, effect transactions in portfolio securities with brokers or
dealers who provide the Advisers with research advice or other services.
Research advice and other services furnished by brokers through whom the Funds
effect securities transactions may be used by the Advisers in servicing
accounts in addition to the Funds, and not all such services will necessarily
benefit the Funds.
With respect to over-the-counter transactions, the Funds, where possible,
will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere.
Investment decisions for each Fund are made independently from those for
the other Funds or other investment company portfolios or accounts advised by
the Advisers. Such other portfolios may also invest in the same securities as
the Funds. When purchases or sales of the same security are made at
substantially the same time on behalf of such other portfolios, transactions
are averaged as to price, and available investments allocated as to amount, in
a manner which the Advisers believe to be equitable to each portfolio,
including the Funds. In some instances, this investment procedure may adversely
affect the price paid or received by the Funds or the size of the position
obtainable for a Fund. To the extent permitted by law, the Advisers may
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aggregate the securities to be sold or purchased for the Funds with those to be
sold or purchased for such other portfolios in order to obtain best execution.
The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with the Advisers or any affiliated person (as such term
is defined in the Investment Company Act of 1940, as amended (the "1940 Act"))
of the Advisers, except to the extent permitted by the Securities and Exchange
Commission (the "SEC"). The Funds will not purchase securities during the
existence of any underwriting or selling group relating thereto of which the
Advisers or any affiliate thereof is a member, except to the extent permitted
by the SEC. Under certain circumstances, the Funds may be at a disadvantage
because of these limitations in comparison with other investment company
portfolios which have similar investment objectives but are not subject to such
limitations.
It is anticipated that the annual portfolio turnover rate generally will
not exceed 75%, in the case of the High Income Fund, 125%, in the case of the
U.S. Equity Fund, and 40%, in the case of the Europe Equity Fund. This rate is
calculated by dividing the lesser of sales or purchases of portfolio securities
for any given year by the average monthly value of the Fund's portfolio
securities for that year. For purposes of this calculation, no regard is given
to securities having a maturity or expiration date at the time of acquisition
of one year or less. Portfolio turnover directly affects the amount of
transaction costs that are borne by each Fund. Higher portfolio turnover
results in the incurrence of higher transaction costs. In addition, the sale
of securities held by a Fund for not more than one year will give rise to
short-term capital gain or loss for federal income tax purposes. The federal
income tax requirement that each Fund derive less than 30% of its gross income
from the sale or other disposition of stock or securities held less than three
months may limit a Fund's ability to dispose of its securities. See "Additional
Information Concerning Taxes."
Additional Information on Portfolio Instruments and Certain Investment
Strategies
U.S. Government Obligations. Examples of the types of U.S. government
securities that may be held by the Funds include, in addition to U.S. Treasury
Bills, the obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, Federal Financing Bank, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal Farm Credit Banks, Maritime Administration,
Resolution Trust Corporation, Tennessee Valley Authority, U.S. Postal Service
and Washington D.C. Armory Board.
Depositary Receipts. A purchaser of unsponsored Depositary Receipts may
not have unlimited voting rights and may not receive as much information about
the issuer of the underlying security as with sponsored Depositary Receipts.
Depositary Receipts evidence ownership of underlying securities issued by
either a non-U.S. or a U.S. corporation that have been deposited with a
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depositary or custodian bank. Depositary Receipts may be issued in connection
with an offering of securities by the issuer of the underlying securities or
issued by a depositary bank as a vehicle to promote investment and trading in
the underlying securities. ADRs are receipts issued by U.S. banks or trust
companies in respect of securities of non-U.S. issuers held on deposit for use
in the U.S. securities markets. GDRs, EDRs and other types of Depositary
Receipts are typically issued by a U.S. bank or trust company and traded
principally in the U.S. and other international markets.
Bank Obligations. Bank obligations include negotiable certificates of
deposit, bankers' acceptances, fixed time deposits and deposit notes. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction. The borrower is liable
for payment as is the bank, which unconditionally guarantees to pay the draft
at its face amount on the maturity date. Fixed time deposits are obligations of
branches of United States banks or foreign banks which are payable at a stated
maturity date and bear a fixed rate of interest. Although fixed time deposits
do not have a market, there are no contractual restrictions on the right to
transfer a beneficial interest in the deposit to a third party. Fixed time
deposits subject to withdrawal penalties and with respect to which a Fund
cannot realize the proceeds thereon within seven days are deemed "illiquid" for
the purposes of the ninth investment limitation set forth under "Investment
Objective and Policies--Investment Limitations" below. Deposit notes are notes
issued by commercial banks which generally bear fixed rates of interest and
typically have original maturities ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation. Investors should also be aware that
securities of foreign banks and foreign branches of U.S. banks may involve
investment risks in addition to those relating to domestic bank obligations.
Such risks include future political and economic developments, the possible
seizure or nationalization of foreign deposits, and the possible adoption of
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and non-U.S. issuers generally are subject to different
accounting, auditing, reporting and recordkeeping standards than those
applicable to U.S. issuers.
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Convertible Securities. A unique feature of convertible securities is that
as the market price of the underlying security declines, convertible securities
tend to trade increasingly on a yield basis, and so may not experience market
value declines to the same extent as the underlying security. When the market
price of the underlying security increases, the price of the convertible
securities tends to rise as a reflection of the value of the underlying
security. Fixed income convertible securities are investments that provide for
a stable stream of income with generally higher yields than common stocks. Of
course, like all fixed income securities, there can be no assurance of current
income because the issuers of the fixed income convertible securities may
default on their obligations. Convertible securities, however, generally offer
lower interest or dividend yields than non-convertible securities of similar
quality because of the potential for capital appreciation. A fixed income
convertible security, in addition to providing fixed income, offers the
potential for capital appreciation through the conversion feature, which
enables the holder to benefit from increases in the market price of the
underlying security. There can be no assurance of capital appreciation,
however, because securities prices fluctuate. Convertible securities generally
are subordinated to other similar but non-convertible securities of the same
issuer, although convertible bonds, as corporate debt obligations, enjoy
seniority in right of payment to all equity securities, and convertible
preferred stock is senior to common stock of the same issuer. Because of the
subordination feature, however, convertible securities typically have lower
ratings than similar non-convertible securities.
Repurchase Agreements. The repurchase price under the repurchase
agreements described in the Prospectus generally equals the price paid by a
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
Company's custodian, sub-custodian or in the Federal Reserve/Treasury
book-entry system. Repurchase agreements are considered to be loans by a Fund
under the 1940 Act. Each Fund will enter into repurchase agreements only with
counterparties determined to be creditworthy in accordance with standards
adopted by the Company's Board of Directors.
Reverse Repurchase Agreements. Reverse repurchase agreements are
considered to be borrowings by a Fund under the 1940 Act. Reverse repurchase
agreements involve the risk that the market value of the portfolio securities
sold by a Fund may decline below the price of the securities such Fund is
obligated to repurchase. Each Fund will enter into reverse repurchase
agreements only with counterparties determined to be creditworthy by its
Adviser.
Loans of Portfolio Securities. Each Fund has the ability to lend
securities from its portfolio to brokers, dealers and other financial
organizations. There is no investment restriction on the amount of securities
that may be loaned. The Funds may not lend their portfolio securities to the
Advisers or their affiliates without specific authorization from the SEC. Loans
of portfolio securities by the a Fund will be collateralized by cash, letters
of credit or securities which are consistent with its permitted investments,
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. From time to time, the Funds
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may return a part of the interest earned from the investment of collateral
received for securities loaned to the borrower and/or a third party, which is
unaffiliated with the Funds or the Advisers, and which is acting as a "finder."
With respect to loans by a Fund of its portfolio securities, such Fund would
continue to accrue interest on loaned securities and would also earn income on
loans. Any cash collateral received by a Fund in connection with such loans
would be invested in securities in which such Fund is permitted to invest.
When-Issued and Delayed Delivery Securities. Each Fund may purchase
securities on a "when issued" or delayed delivery basis (i.e., for delivery
beyond the normal settlement date at a stated price). When a Fund agrees to
purchase when-issued or delayed delivery securities, the custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the custodian will set aside portfolio
securities to satisfy a purchase commitment, and in such a case a Fund may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of a
Fund's commitment. It may be expected that a Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash. When a Fund engages in
when-issued or delayed delivery transactions, it relies on the seller to
consummate the trade. Failure of the seller to do so may result in such Fund
incurring a loss or missing an opportunity to obtain a price considered to be
advantageous.
Illiquid and Restricted Securities. Each Fund may not invest more than 15%
of its assets in illiquid securities, including securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale. Securities that have legal or contractual restrictions
on resale but have a readily available market are not considered illiquid for
purpose of this limitation.
The SEC has adopted Rule 144A under the Securities Act of 1933, as amended
(the "1933 Act"), which allows for a broader institutional trading market for
securities otherwise subject to restrictions on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
1933 Act for resales of certain securities to qualified institutional buyers.
The Advisers anticipate that the market for certain restricted securities such
as institutional commercial paper and institutional municipal securities will
expand further as a result of this regulation and the development of automated
systems for the trading, clearance and settlement of unregistered securities of
domestic and non-U.S. issuers, such as the PORTAL System sponsored by the
National Association of Securities Dealers, Inc.
Each Adviser will monitor the liquidity of restricted and other illiquid
securities under the supervision of the Board of Directors. In reaching
liquidity decisions with respect to Rule 144A securities, the Advisers will
consider, among others, the following factors: (1) the unregistered nature of a
Rule 144A security; (2) the frequency of trades and quotes for a Rule 144A
security; (3) the number of dealers wishing to purchase or sell the Rule 144A
security and the number of other potential purchasers; (4) dealer undertakings
to make a market in the Rule 144A security; (5) the trading markets for the
Rule 144A security; and (6) the nature of the Rule 144A security and the nature
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of the marketplace trades (e.g., the time needed to dispose of the Rule 144A
security, the method of soliciting offers and the mechanics of the transfer).
Appendix A to the Prospectus contains a description of the relevant rating
symbols used by nationally recognized rating agencies for obligations that may
be purchased by the Funds.
Additional Information Regarding Hedging and Derivatives
As described in the Prospectus, each Fund is authorized to use various
hedging and investment strategies to hedge market risks (such as broad or
specific market movements and interest rates, or other factors relevant to the
Fund's investments, such as commodity prices or rates of inflation), to manage
the effective maturity or duration of debt instruments held by the Fund, or to
seek to increase the Fund's income or gain. A detailed discussion of
Derivatives (as defined below) that may be used by the Advisers on behalf of
the Funds follows below. The Funds will not be obligated, however, to use any
Derivatives and make no representations as to the availability or use of these
techniques at this time or at any time in the future. "Derivatives," as used
herein, refers to the purchase and sale (or writing) of exchange listed and
over-the-counter ("OTC") put and call options on securities, securities
indices, currencies and other financial instruments, and entering into currency
forward contracts.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Derivatives involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, index or other instrument at the exercise price. A Fund's purchase of
a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
such Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, index or
other instrument might be intended to protect such Fund against an increase in
the price of the underlying instrument that it intends to purchase in the
future by fixing the price at which it may purchase the instrument. An
"American" style put or call option may be exercised at any time during the
option period, whereas a "European" style put or call option may be exercised
only upon expiration or during a fixed period prior to expiration. Exchange-
listed options are issued by a regulated intermediary such as the Options
Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to the options. The discussion below uses the OCC as
an example, but is also applicable to other similar financial intermediaries.
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OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security, although in the future,
cash settlement may become available. Index options are cash settled for the
net amount, if any, by which the option is "in-the-money" (that is, the amount
by which the value of the underlying instrument exceeds, in the case of a call
option, or is less than, in the case of a put option, the exercise price of the
option) at the time the option is exercised. Frequently, rather than taking or
making delivery of the underlying instrument through the process of exercising
the option, listed options are closed by entering into offsetting purchase or
sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed
by an exchange, (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits, (4) interruption of the
normal operations of the OCC or an exchange, (5) inadequacy of the facilities
of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as "Counterparties" and
individually referred to as a "Counterparty") through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms
of an OTC option, including such terms as method of settlement, term, exercise
price, premium, guarantees and security, are determined by negotiation of the
parties. It is anticipated that any Fund authorized to use OTC options will
generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.
Unless the parties provide for it, no central clearing or guarantee
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, such Fund will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, a Fund's Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
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met. A Fund will enter into OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers," or broker-dealers, domestic or foreign banks, or other
financial institutions that its Adviser deems to be creditworthy. In the
absence of a change in the current position of the staff of the SEC, OTC
options purchased by a Fund and the amount of such Fund's obligation pursuant
to an OTC option sold by such Fund (the cost of the sell-back plus the in-the-
money amount, if any) or the value of the assets held to cover such options
will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by such Fund or will
increase such Fund's income. Similarly, the sale of put options can also
provide gains.
A Fund may purchase and sell call options on securities that are traded on
U.S. and foreign securities exchanges and in the OTC markets, and on securities
indices. All calls sold by a Fund must be "covered" (that is, such Fund must
own the securities subject to the call), or must otherwise meet the asset
segregation requirements described below for so long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by such Fund will expose such Fund during the term
of the option to possible loss of opportunity to realize appreciation in the
market price of the underlying security or instrument and may require such Fund
to hold a security or instrument that it might otherwise have sold.
Each Fund reserves the right to purchase or sell options on instruments
and indices which may be developed in the future to the extent consistent with
applicable law, such Fund's investment objective and the restrictions set forth
herein.
Each Fund may purchase and sell put options on securities (whether or not
it holds the securities in its portfolio) and on securities indices. A Fund
will not sell put options if, as a result, more than 50% of such Fund's assets
would be required to be segregated to cover its potential obligations under put
options. In selling put options, a Fund faces the risk that it may be required
to buy the underlying security at a disadvantageous price above the market
price.
Options on Securities Indices and Other Financial Indices. Each Fund may
purchase and sell call and put options on securities indices and other
financial indices. In so doing, a Fund can achieve many of the same objectives
it would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, options on indices settle by cash settlement; that is, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also
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may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
comprising the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.
Options on Currencies. Each Fund may purchase and sell put and call
options on foreign currencies for the purposes of protecting against declines
in the U.S. dollar value of foreign portfolio securities and anticipated
dividends on such securities and against increases in the U.S. dollar cost of
foreign securities to be acquired. Each Fund may use options on currency to
cross-hedge, which involves writing or purchasing options of one currency to
hedge against changes in exchange rates for a different currency, if there is a
pattern of correlation between the two currencies. As with other kinds of
options transactions, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium received.
A Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to
a Fund's position, the Fund may forfeit the entire amount of the premium plus
related transactions costs. In addition, a Fund may purchase call or put
options on a currency for non-hedging purposes when its Adviser anticipates
that the currency will appreciate or depreciate in value, but securities
denominated in that currency do not present attractive investment
opportunities. Currency transactions are subject to risks different from
other portfolio transactions, as discussed below under "Risk Factors."
Forward Foreign Currency Exchange Contracts. Each Fund may enter into
forward foreign currency exchange contracts ("forward contracts") which provide
for the purchase or sale of an amount of a specified currency at a future date.
Purposes for which such contracts may be used include protecting against
fluctuations in the value of a foreign currency against the U.S. dollar between
the trade date and settlement date when a Fund purchases or sells securities,
locking in the U.S. dollar value of dividends declared on securities held by a
Fund and generally protecting the U.S. dollar value of securities held by a
Fund against exchange rate fluctuation.
Combined Transactions. A Fund may enter into multiple transactions,
including multiple options transactions, multiple interest rate transactions
and any combination of options and interest rate transactions, instead of a
single Derivative, as part of a single or combined strategy when, in the
judgment of its Adviser, it is in the best interests of such Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions will
normally be entered into by a Fund based on its Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase the risks or hinder achievement of such Fund's management
objective.
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Risk Factors. Derivatives have special risks associated with them,
including possible default by the Counterparty to the transaction, illiquidity
and, to the extent an Adviser's view as to certain market movements is
incorrect, the risk that the use of the Derivatives could result in losses
greater than if they had not been used. Use of put and call options could
result in losses to a Fund, force the sale or purchase of portfolio securities
at inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, or cause a Fund
to hold a security it might otherwise sell.
The use of options transactions entails certain special risks. In
particular, options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain
markets, a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time it will tend to limit any potential gain to
the Fund that might result from an increase in value of the position.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result
in losses to a Fund if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that a Fund is engaging in hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
Currency exchange rates may fluctuate based on factors extrinsic to the issuing
countries' economies.
Losses resulting from the use of Derivatives will reduce a Fund's net
asset value, and possibly income, and the losses can be greater than if
Derivatives had not been used.
Risks of Derivatives Outside the United States. When conducted outside the
United States, Derivatives may not be regulated as rigorously as in the United
States, may not involve a clearing mechanism and related guarantees, and will
be subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities and other instruments. The value of positions
taken as part of non-U.S. Derivatives also could be adversely affected by: (1)
other complex foreign political, legal and economic factors, (2) lesser
availability of data on which to make trading decisions than in the United
States, (3) delays in a Fund's ability to act upon economic events occurring in
foreign markets during non-business hours in the United States, (4) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States and (5) lower trading volume and
liquidity.
<PAGE>
Use of Segregated and Other Special Accounts. Use of many Derivatives by a
Fund will require, among other things, that such Fund segregate cash, liquid
high grade debt obligations or other assets with its custodian, or a designated
sub-custodian, to the extent such Fund's obligations are not otherwise
"covered" through ownership of the underlying security or financial instrument.
In general, either the full amount of any obligation by a Fund to pay or
deliver securities or assets must be covered at all times by the securities or
instruments required to be delivered, or, subject to any regulatory
restrictions, an amount of cash or liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by a Fund, for
example, will require such Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option
sold by a Fund on an index will require such Fund to own portfolio securities
that correlate with the index or to segregate liquid high grade debt
obligations equal to the excess of the index value over the exercise price on a
current basis. A put option on securities written by a Fund will require such
Fund to segregate liquid high grade debt obligations equal to the exercise
price.
OTC options entered into by a Fund, including those on securities,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although such Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options. OCC-
issued and exchange-listed options sold by such Fund other than those described
above generally settle with physical delivery, and such Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related
Derivatives. A Fund could purchase a put option, for example, if the strike
price of that option is the same or higher than the strike price of a put
option sold by such Fund. Moreover, instead of segregating assets if it holds a
forward contract, a Fund could purchase a put option on the same forward
contract with a strike price as high or higher than the price of the contract
held. Other Derivatives may also be offset in combinations. If the offsetting
transaction terminates at the time of or after the primary transaction, no
segregation is required, but if it terminates prior to that time, assets equal
to any remaining obligation would need to be segregated.
<PAGE>
INVESTMENT LIMITATIONS
The Prospectus summarizes certain investment limitations that may not be
changed without the affirmative vote of the holders of a majority of a Fund's
outstanding shares (as defined below under "Additional Information Concerning
Fund Shares"). Investment limitations numbered 1 through 8 below may not be
changed with respect to a Fund without such vote of shareholders; investment
limitations 9 through 12 may be changed at any time with respect to a Fund by a
vote of the Company's Board of Directors without shareholder approval.
1. A Fund may not purchase the securities of any one
issuer if as a result more than 5% of the value of its total assets would
be invested in the securities of such issuer, except that up to 25% of the
value of its total assets may be invested without regard to this 5%
limitation and provided that there is no limitation with respect to
investments in U.S. Government Securities, and provided further that a
Fund may invest all or substantially all of its assets in another
registered investment company having the same investment objective and
policies and substantially the same investment restrictions as those with
respect to such Fund.
2. A Fund may not borrow money, except that each Fund may
borrow money from banks or enter into reverse repurchase agreements, in
each case for temporary or emergency purposes only (not for leveraging or
investment), in aggregate amounts not exceeding 33-1/3% of the value of
its total assets at the time of such borrowing. For purposes of the
foregoing investment limitation, the term "total assets" shall be
calculated after giving effect to the net proceeds of any borrowings and
reduced by any liabilities and indebtedness other than such borrowings.
Additional investments will not be made by a Fund when borrowings exceed
5% of its total net assets.
3. A Fund may not issue senior securities, except as
permitted under the 1940 Act.
4. A Fund may not purchase any securities which would
cause 25% or more of the value of its total assets at the time of such
purchase to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry;
provided that there is no limitation with respect to investments in U.S.
Government Securities, and provided further, that a Fund may invest all or
substantially all of its assets in another registered investment company
having the same investment objective and policies and substantially the
same investment restrictions as those with respect to such Fund.
5. A Fund may not make loans, except that it may purchase
or hold debt instruments in accordance with its investment objective and
policies, may lend its portfolio securities as described in its Prospectus
and may enter into repurchase agreements with respect to portfolio
securities.
6. A Fund may not act as an underwriter of securities,
except insofar as it may be deemed an underwriter under applicable
securities laws in selling portfolio securities.
<PAGE>
7. A Fund may not purchase or sell real estate or real
estate limited partnerships, provided that it may purchase securities of
issuers which invest in real estate or interests therein.
8. A Fund may not purchase or sell commodities unless
acquired as a result of ownership of securities or other instruments (but
this shall not prevent a Fund from purchasing or selling options and
futures contracts or from investment in securities or other instruments
backed by or indexed to, or representing interests in, physical
commodities or investing or trading in Derivatives), or invest in oil, gas
or mineral exploration or development programs or in mineral leases.
9. A Fund may not invest more than 15% of the value of
its assets in securities that are illiquid, provided, however, that a Fund
may invest all or substantially all of its assets in another registered
investment company having the same investment objective and policies and
substantially the same investment restrictions as those with respect to
such Fund.
10. A Fund may not purchase securities on margin, make
short sales of securities or maintain a short position, except that a Fund
may make short sales against the box and except in connection with
Derivatives.
11. A Fund may not write or sell puts, calls, straddles,
spreads or combinations thereof except in connection with Derivatives.
12. A Fund may not purchase securities of other investment
companies except as permitted under the 1940 Act or in connection with a
merger, consolidation, acquisition or reorganization.
In order to permit the sale of a Fund's shares in certain states, such
Fund may make commitments more restrictive than the investment policies and
limitations above. Should a Fund determine that any such commitments are no
longer in its best interest, it will revoke the commitment by terminating sales
of its shares in the state involved. If a percentage restriction set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changes in value or in the number of outstanding
securities of an issuer will not be considered a violation. However, with
respect to investment restriction 2 above, to the extent that asset coverage
with respect to borrowings falls at any time below 300%, then the Fund will
within three business days or such longer period as the SEC may prescribe,
reduce the amount of borrowings so that asset coverage shall be at least 300%.
ADDITIONAL PURCHASE INFORMATION
Information on how to purchase and redeem shares of each Fund is included
in the Prospectus. The issuance of a Fund's shares is recorded on such Fund's
books, and certificates for shares are not issued unless expressly requested in
writing to the Transfer Agent. Certificates are not issued for fractional
shares.
<PAGE>
ADDITIONAL REDEMPTION INFORMATION
Under the 1940 Act, a Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period during which the New York
Stock Exchange is closed, other than customary weekend and holiday closings, or
during which trading on said Exchange is restricted, or during which (as
determined by the SEC by rule or regulation) an emergency exists as a result of
which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Fund may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.) Each Fund is obligated to
redeem shares solely in cash up to $250,000 or 1% of such Fund's net asset
value, whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount will also be in cash unless the Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable. In such a case, a Fund may make
payment wholly or partly in readily marketable securities or other property,
valued in the same way as such Fund determines net asset value. Redemption in
kind is not as liquid as a cash redemption. Shareholders who receive a
redemption in kind may incur transaction costs, if they sell such securities or
property, and may receive less than the redemption value of such securities or
property upon sale, particularly where such securities are sold prior to
maturity.
VALUATION OF SHARES
Because of the differences in distribution fees, service fees and class-
specific expenses, the per share net asset value of each class of each Fund may
differ. The following is a description of the procedures used by each Fund in
valuing its assets.
Securities traded on an exchange will be valued on the basis of the last
sale price on the principal market on which such securities are traded, on the
date on which the valuation is made or, in the absence of sales in such market,
at the mean between the closing bid and asked prices. Over-the-counter
securities will be valued on the basis of the mean between the bid and ask
prices at the close of business on each day, or, if market quotations for those
securities are not readily available, at fair value, as determined in good
faith by the Company's Board of Directors. Securities which are traded both in
the over-the-counter market and on a stock exchange will be valued according to
the broadest and most representative market. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term obligations with maturities
of 60 days or less are valued at amortized cost, which constitutes fair value
as determined by the Company's Board of Directors. Amortized cost involves
valuing an instrument at its original cost to a Fund and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. All
<PAGE>
other securities and other assets of a Fund will be valued at fair value as
determined in good faith by the Company's Board of Directors.
<PAGE>
MANAGEMENT OF THE COMPANY
Directors and Officers
The Board of Directors of the Company is responsible for the overall
management and operations of each Fund. The Company's directors and executive
officers, their addresses, ages, principal occupations during the past five
years and other affiliations are as follows:
<TABLE>
<CAPTION>
Position with the Principal Occupations During
Name, Address and Age Company Past 5 Years and Other Affiliations
- --------------------- ----------------- -----------------------------------
<S> <C> <C>
Kenneth Lipper<F1> Director, Chairman of President of Lipper & Company, L.L.C.
101 Park Avenue the Board and President since 1995; President of Lipper &
New York, NY 10178 Company, Inc. since 1986; President of
Age: 54 Lipper & Company, L.P. since 1991;
trustee of the Rockefeller Brothers Fund;
member of the Federal Reserve Bank of New
York's International Advisory Board;
Senior Financial Adviser to the New York
City Counsel; member of the Harvard
Executive Committee on University
Resources; member of the Visitor's
Committee of the Kennedy School of
Government at Harvard University.
Abraham Biderman<F1> Director, Executive Vice Executive Vice President of Lipper &
101 Park Avenue President, Treasurer and Company, L.L.C. since 1995; Executive
New York, NY 10178 Secretary Vice President of Lipper & Company, Inc.
Age: 47 since 1990; Executive Vice President of
Lipper & Company, L.P. since 1991.
Steven Finkel Executive Vice President Executive Vice President of Lipper &
101 Park Avenue Company, L.L.C. since 1995; Executive
New York, NY 10178 Vice President of Lipper & Company, Inc.
Age: 48 since 1987; Executive Vice President of
Lipper & Company, L.P. since 1991.
Martin Maltz<F2><F3> Director Principal Scientist, Xerox Corporation.
25 Dunrovin Lane
Rochester, NY 14618
Age: 54 <PAGE>
Irwin Russell<F2><F3> Director Attorney, Law Offices of Irwin E. Russell
433 North Camden Drive, #1200 since November 1992; Of Counsel, Rudin
Los Angeles, CA 90210 and Appel (November 1989 to November
Age: 69 1992); Director, The Walt Disney
Company.
Stanley Brezenoff<F2><F3> Director Chief Executive Officer, Maimonides
510 E. 23rd Street Medical Center, since February 1995;
New York, NY 10010 Executive Director, Port Authority of New
Age: 58 York and New Jersey (September 1990 to
February 1995).
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and
Chase Global Funds Services Company General Counsel of Chase Global Funds
73 Tremont Street Services Company, since November, 1991;
Boston, MA 02108-3913 Senior Vice President, Secretary and
Age: 40 General Counsel of Leland, O'Brien,
Rubinstein Associates, Inc., from
November, 1990 to November, 1991.
Robert E. O'Hare Assistant Secretary Associate General Counsel, Chase Global
Chase Global Funds Services Company Funds Services Company, since September
73 Tremont Street 1994; Special Counsel, Boston District
Boston, MA 02108-3913 Office, Securities and Exchange
Age: 49 Commission, from February, 1992 to
September, 1994; Associate Counsel, The
Boston Company Advisors, Inc., from
April, 1987 to February, 1992.
Ellen Watson Assistant Secretary Supervisor of State Regulation, Chase
Chase Global Funds Services Company Global Funds Services Company, since
73 Tremont Street November, 1991.
Boston, MA 02108-3913
Age: 38
Michael Leary Assistant Treasurer Assistant Treasurer, Chase Global Funds
Chase Global Funds Services Company Services Company, since December 1993;
73 Tremont Street Audit Manager, Ernst & Young, from
Boston, MA 02108-3913 August, 1988 to December, 1993.
Age: 30
John M. Corcoran Assistant Treasurer Assistant Vice President, Manager of
Chase Global Funds Services Company Administration, Chase Global Funds
73 Tremont Street Services Company since October, 1993;
Boston, MA 02108-3913 Audit Manager, Ernst & Young, from
Age: 30 August, 1987 to September, 1993.
<FN>
_______________________
<F1> Director considered by the Company to be an "interested person" of the Company as defined in the 1940 Act.
<F2> Audit Committee Member.
<F3> Nominating Committee Member.
</TABLE>
<PAGE>
For so long as the Retail Distribution Plan remains in effect, the
directors of the Company who are not "interested persons" of the Company, as
defined in the 1940 Act, will be selected and nominated by the directors who
are not "interested persons" of the Company.
No officer or employee of either Adviser or Chase Global Fund Services
Company, the Company's administrator, receives any compensation from the
Company for acting as an officer or director of the Company. The Company pays
each director who is not a director, officer or employee of either Adviser or
any of their affiliates, a fee of $8,000 per annum plus $500 per quarterly
meeting attended and reimburses them for travel and out-of-pocket expenses.
Set forth below is information regarding the aggregate amount of fees
estimated to be received by each director of the Company during the Company's
initial fiscal year ending December 31, 1996:
<PAGE>
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual From Fund and Fund
Compensation Accrued as Part of Benefits Upon Complex to
Name of Board Member from Company Company Expenses Retirement Board Member
- ----------------------------------------- ---------------- ---------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Kenneth Lipper 0 0 0 0
Abraham Biderman 0 0 0 0
Irwin Russell $ 10,000 0 0 $ 10,000
Martin Maltz $ 10,000 0 0 $ 10,000
Stanley Brezenoff $ 10,000 0 0 $ 10,000
</TABLE>
In addition, the Company estimates that the aggregate reimbursement to
directors for travel and out-of-pocket expenses for the initial fiscal year
ending December 31, 1996 will be approximately $17,000.
By virtue of the responsibilities assumed by the Advisers, Chase Global
Funds Services Company and their affiliates under their respective agreements
with the Company, the Company itself requires no employees other than its
officers.
Investment Advisers
Each Fund's Adviser will serve as its investment adviser pursuant to a
separate written advisory agreement approved by the Company's Board of
Directors, including a majority of the directors who are not "interested
persons" (as defined in the 1940 Act) of the Company or the Adviser, on
December 14, 1995. The services provided by each Fund's Adviser under its
advisory agreement with such Fund and the fees paid to each Adviser are
described in the Prospectus under "Management of the Company." The Advisers
bear all expenses in connection with the performance of their services and pay
the salaries of all officers or employees who are employed by the Advisers and
the Company. Unless sooner terminated, each advisory agreement will continue in
effect until for an initial two-year period and from year to year thereafter if
such continuance is approved at least annually by the Company's Board of
Directors or by a vote of a majority (as defined under "Additional Information
Concerning Fund Shares") of the outstanding shares of the relevant Fund and, in
either case, by a majority of the directors who are not parties to such
agreement or "interested persons" of any party by votes cast in person at a
meeting called for such purpose. Each advisory agreement is terminable by the
Company or the Adviser on 60 days' written notice, and will terminate
immediately in the event of its assignment.
<PAGE>
Administrator
Chase Global Funds Services Company (the "Administrator"), a wholly owned
subsidiary of The Chase Manhattan Bank, N.A., has agreed to provide the
following services: (i) assist generally in supervising each Fund's operations,
providing and supervising the operation of an automated data processing system
to process purchase and redemption orders, providing information concerning the
Funds to their shareholders of record, handling shareholder problems,
supervising the services of employees whose principal responsibility and
function is to preserve and strengthen shareholder relations and monitoring the
arrangements pertaining to the Company's agreements with Participating Dealers;
(ii) prepare reports to the Funds' shareholders and prepare tax returns and
reports to and filings with the SEC; (iii) compute the net asset value per
share of each class of each Fund; (iv) provide the services of certain persons
who may be elected as directors or appointed as officers of the Company by the
Board of Directors; and (v) maintain the registration or qualification of each
Fund's shares for sale under state securities laws.
Distributor
Lipper & Company, L.P. (the "Distributor") distributes the Funds' shares
continuously on a best efforts basis pursuant to an agreement which is
renewable annually. The Distributor pays the cost of printing and distributing
prospectuses to persons who are not shareholders of the Funds (excluding
preparation and printing expenses necessary for the continued registration of
the Funds' shares) and of preparing, printing and distributing all sales
literature. See "Distribution and Service Plans." The Distributor may act as
distributor for other investment companies.
Payment for Fund shares is due and shares of the Funds are issued
generally on the third business day following the day the public offering price
is next determined after a purchase order is received (the "Settlement Date").
When payment is made by the investor prior to a Settlement Date, unless
otherwise directed by the investor, the funds will be held as a free credit
balance in the investor's brokerage account, and the Distributor or a
Participating Dealer may benefit from the temporary use of the funds. The
investor may designate another use for the funds prior to the Settlement Date.
If the investor instructs the Distributor or a Participating Dealer to invest
the funds in a money market fund, the amount of the investment will be included
as part of the average daily net assets of both the relevant Fund and the money
market fund, and in the event the Distributor or its affiliates serve both
funds in an investment advisory capacity, the Distributor will benefit from the
fact that it (or its affiliates) is receiving fees from both such funds for
managing these assets computed on the basis of their average daily net assets.
The Company's Board of Directors has been advised of the benefits to the
Distributor and Participating Dealers resulting from delayed settlement
procedures and will take such benefits into consideration when reviewing the
advisory and distribution and service agreements for continuance.
<PAGE>
Custodian and Transfer Agent
The Chase Manhattan Bank, N.A. (the "Custodian"), is located at 4 Chase
MetroTech Center, Brooklyn, N.Y. 11245, and serves as the Company's custodian
pursuant to a custody agreement. Under the custody agreement, the Custodian
holds the Fund's portfolio securities and keeps all necessary accounts and
records. For its services, the Custodian receives a monthly fee based upon the
month-end market value of securities held in custody and also receives
securities transaction charges, including out-of-pocket expenses. The assets of
the Company are held under bank custodianship in compliance with the 1940 Act.
Chase Global Funds Services Company is located at 73 Tremont Street,
Boston, MA 02108, and serves as the Company's transfer agent. Under the
transfer agency agreement, the Transfer Agent maintains the shareholder account
records for the Company, handles certain communications between shareholders
and the Company, distributes dividends and distributions payable by the Company
and produces statements with respect to account activity for the Company and
its shareholders. For these services, the Transfer Agent receives a monthly fee
computed separately for each class of each Fund's shares and is reimbursed
separately by each class for out-of-pocket expenses.
Expenses
Each Fund's expenses include taxes, interest, fees and salaries of the
Company's trustees and officers who are not directors, officers or employees of
the Company's service contractors, SEC fees, state securities qualification
fees, costs of preparing and printing prospectuses for regulatory purposes and
for distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
Each Fund also pays for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities. Each Fund's expenses are
allocated to a particular class of its shares based on either expenses
identifiable to such class or the relative net assets of such class and the
other classes of its shares. In addition, the Retail Shares of each Fund bear a
distribution fee in accordance with the Retail Servicing Plan, and the Group
Retirement Plan Shares of each Fund may bear a service fee in accordance with
the Group Retirement Servicing Plan. See "Distribution and Service Plans."
Each Adviser has agreed that if, in any fiscal year, the expenses borne by the
Fund(s) it advises exceed the applicable expense limitations imposed by the
securities regulations of any state in which shares of such Fund(s) are
registered or qualified for sale to the public, it will reimburse such Fund(s)
for any excess to the extent required by such regulations. Unless otherwise
required by law, such reimbursement would be accrued and paid on the same basis
that the advisory fees are accrued and paid by such Fund(s). California is the
only state which currently imposes such an expense limitation. The limitation
is 2.5% of the first $30 million of average net assets, 2.0% of the next $70
million of average net assets and 1.5% of the remaining average net assets.
<PAGE>
DISTRIBUTION AND SERVICE PLANS
Retail Distribution Plan
Rule 12b-1 (the "Rule") adopted by the SEC under the 1940 Act provides,
among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. Because some or all of the fees paid by the Retail Shares of each Fund to
the Distributor and to certain Participating Dealers could be deemed to be
payment of distribution expenses, the Company's Board of Directors has adopted
such a plan with respect to the Retail Shares of each Fund (the Retail
Distribution Plan). The Company's Board of Directors believes that there is a
reasonable likelihood that the Retail Distribution Plan will benefit each Fund
and the holders of its Retail Shares. In some states, banks or other financial
services firms effecting transactions in Retail Shares may be required to
register as dealers pursuant to state law. The Funds' Premier Shares and Group
Retirement Plan Shares do not bear distribution fees.
Quarterly reports of the amounts expended under the Retail Distribution
Plan with respect to each Fund, and the purposes for which such expenditures
were incurred, must be made to the Board of Directors of the Company for its
review. In addition, the Retail Distribution Plan provides that it may not be
amended to increase materially the costs which the Retail Shares of any Fund
may bear pursuant to such plan without shareholder approval of the holders of
such Fund's Retail Shares, and that other material amendments of the Retail
Distribution Plan must be approved by the Board of Directors of the Company,
and by the directors who are neither interested persons of the Company nor have
any direct or indirect financial interest in the operation of such plan or in
any agreements entered into in connection with such plan, by vote cast in
person at a meeting called for the purpose of considering such amendments. The
Retail Distribution Plan and any agreements entered into in connection with
such plan are subject to annual approval with respect to each Fund by such vote
of the Board of Directors of the Company cast in person at a meeting called for
the purpose of voting on the Retail Distribution Plan. The Retail Distribution
Plan may be terminated at any time with respect to any Fund by vote of a
majority of the directors who are not interested persons and have no direct or
indirect financial interest in the operation of such plan or in any agreements
entered into in connection with such plan or by vote of a majority of the
Retail Shares of a Fund. Any agreement entered into in connection with the
Retail Distribution Plan may be terminated without penalty at any time, by such
vote. Each such agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
Group Retirement Servicing Plan
As stated in the Prospectus, in accordance with the Group Retirement
Servicing Plan, the Company intends to enter into servicing agreements pursuant
to which Participating Dealers and sometimes the Distributor will, as agent for
their customers, render certain support services to their customers who are
beneficial owners of Group Retirement Plan Shares. Such services are intended
to supplement the services provided by the Company's Administrator and Transfer
Agent, and are described in the Prospectus. Servicing agreements between the
<PAGE>
Company and Participating Dealers and/or the Distributor with respect to a
Fund's Group Retirement Plan Shares will be terminable by either party at any
time without penalty. As of the date of this Statement of Additional
Information, the Company has not entered into any such servicing agreements.
Conflict of interest restrictions may apply to an institution's receipt of
compensation paid by the Funds in connection with the investment of fiduciary
monies in the Funds. Institutions, including banks regulated by state banking
authorities and the Board of Governors of the Federal Reserve System and
investment advisers and other money managers subject to the jurisdiction of the
SEC, the Department of Labor or state securities commissions are urged to
consult their legal advisers before investing fiduciary monies in the Funds.
ADDITIONAL INFORMATION CONCERNING TAXES
The following discussion is only a brief summary of certain additional tax
considerations affecting the Funds and their shareholders. No attempt is made
to present a detailed explanation of all federal, state and local tax concerns,
and the discussion set forth here and in the Prospectus is not intended as a
substitute for careful tax planning. Investors are urged to consult their own
tax advisers with specific questions relating to federal, state or local taxes.
In General
Each Fund intends to qualify as a regulated investment company (a "RIC")
under Subchapter M of the Code and to continue to so qualify. Qualification as
a RIC requires, among other things, that a Fund: (a) derive at least 90% of
its gross income in each taxable year from dividends, interest, payments with
respect to securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stocks or securities; (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months: (i) stock or securities, (ii)
options, futures, or forward contracts, or (iii) foreign currencies (or foreign
currency options, futures or forward contracts) that are not directly related
to its principal business of investing in stock or securities (or options and
futures with respect to stocks or securities) (the "30% limitation"); and (c)
diversify its holdings so that, at the end of each quarter of each taxable
year, (i) at least 50% of the market value of such Fund's assets is represented
by cash, cash items, U.S. government securities, securities of other regulated
investment companies and other securities with such other securities limited,
in respect of any issuer, to an amount not greater than 5% of the value of such
Fund's assets and 10% of the outstanding voting securities of such issuer, and
(ii) not more than 25% of the value of its assets is invested in the securities
(other than U.S. government securities or the securities of other regulated
investment companies) of any one issuer.
Investors should consider the tax implications of buying shares just prior
to distribution. Although the price of shares purchased at that time may
reflect the amount of the forthcoming distribution, those purchasing just prior
<PAGE>
to a distribution will receive a distribution which will nevertheless be
taxable to them.
Gain or loss, if any, on the sale or other disposition of shares of a Fund
will generally result in capital gain or loss to shareholders. Generally, a
shareholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. If a shareholder sells or otherwise disposes
of a share of a Fund before holding it for more than six months, any loss on
the sale or other disposition of such share shall be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder with respect to such share, or shall be disallowed to the extent of
any exempt-interest dividend. Currently, the maximum federal income tax rate
imposed on individuals with respect to net realized long-term capital gains is
limited to 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to net realized short-term capital gains (which are
taxed at the same rates as ordinary income) is 39.6%.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail currently to distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income
(excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Each Fund may make investments that produce income that is not matched by
a corresponding cash distribution to such Fund, such as investments in
obligations that have original issue discount (i.e., an amount equal to the
excess of the stated redemption price of the security at maturity over its
issue price), or market discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its basis immediately
after it was acquired if such Fund elects to accrue market discount on a
current basis. Because such income may not be matched by a corresponding cash
distribution to a Fund, such Fund may be required to dispose of other
securities to be able to make distributions to its investors. The extent to
which a Fund may liquidate securities at a gain may be limited by the 30%
limitation discussed above.
If for any taxable year a Fund does not qualify for tax treatment as a
regulated investment company, all of such Fund's taxable income will be subject
to tax at regular corporate rates without any deduction for distributions to
such Fund's shareholders. In such event, dividend distributions to shareholders
would be taxable as ordinary income to the extent of such Fund's earnings and
profits, and would be eligible for the dividends received deduction in the case
of corporate shareholders.
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or 31% of gross proceeds realized upon
sale paid to its shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to backup
withholding by the Internal Revenue Service for failure properly to include on
their return payments of taxable interest or dividends, or who have failed to
certify to such Fund that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
<PAGE>
Each Fund's net long-term capital gains will be distributed at least
annually. The Funds will generally have no tax liability with respect to such
gains, and the distributions, whether paid in cash or reinvested in additional
shares, will be taxable to each Fund's shareholders as long-term capital gains,
regardless of how long a shareholder has held such Fund's shares. Such
distributions will be designated as a capital gain dividend in a written notice
mailed by a Fund to its shareholders not later than 60 days after the close of
such Fund's taxable year.
Investment company taxable income earned by a Fund will be distributed to
its shareholders. In general, a Fund's investment company taxable income will
be its taxable income (for example, any short-term capital gains) subject to
certain adjustments and excluding the excess of any net long-term capital gain
for the taxable year over the net short-term capital loss, if any, for such
year. A Fund will be taxed on any undistributed investment company taxable
income of such Fund. To the extent such income is distributed by a Fund, it
will be taxable to such Fund's shareholders as ordinary income, whether paid in
cash or reinvested in additional shares.
PERFORMANCE DATA
From time to time, each Fund may quote total return information, and the
High Income Fund may quote yield information, for one or more classes of its
shares in advertisements or in reports and other communications to shareholders
and compare total return and yield on one or more classes of its shares to that
of other funds or accounts with a similar objective and to relevant indices.
Total return for each of the High Income Fund and the Europe Equity Fund will
include the performance of a corresponding limited partnership which was the
predecessor entity to each Fund.
Average Annual Total Return
Under the rules of the SEC, funds advertising performance must include
"average annual total return" figures computed according to a formula
prescribed by the SEC. The formula can be expressed as follows:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return
n = number of year
ERV = Ending Redeemable Value of hypothetical $1,000 investment
made at the beginning of a 1-,5-, or 10 year period at the
end of the 1-,5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
Aggregate Total Return
"Aggregate total return" figures represent the cumulative change in the
value of an investment in a class of a Fund's shares for the specified period
and are computed by the following formula:
<PAGE>
AGGREGATE TOTAL RETURN = ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of the 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
Thirty Day Yield
The High Income Fund may advertise the yield on one or more classes of its
shares based on a 30-day (or one month) period, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
6
Yield 2[(a-b+1) -1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the High Income Fund based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest), (2) dividing that
figure by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest as referred to above) to
determine the interest income on the obligation in the High Income Fund's
portfolio (assuming a month of 30 days) and (3) computing the total of the
interest earned on all debt obligations during the 30-day or one month period.
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price
calculation required pursuant to "d" above.
Each Fund may also from time to time include in advertisements a total
return figure that is not calculated according to the formulas set forth above.
Any such figure, and any quotation of the High Income Fund's performance stated
in terms of yield (whether or not based on a 30-day period)l, will be given no
greater prominence than the information prescribed under SEC rules.
Each Fund's performance will vary from time to time depending upon market
conditions, the composition of such Fund's portfolio and operating expenses.
Consequently, any given performance quotations should not be considered
representative of the performance of any class of a Fund's shares for any
<PAGE>
specified period in the future. Because performance will vary, it may not
provide a basis for comparing an investment in a Fund's shares with certain
bank deposits or other investments that pay a fixed yield for a stated period
of time. Investors comparing a Fund's performance with that of other mutual
funds should give consideration to the nature, quality and maturity of the
respective investment companies' portfolio securities and market conditions.
ADDITIONAL INFORMATION CONCERNING FUND SHARES
As used in this Statement of Additional Information and the Prospectus, a
"majority of the outstanding shares," when referring to the 1940 Act approvals
to be obtained from shareholders in connection with matters affecting any
particular portfolio of the Company (such as each Fund) (e.g., approval of
investment advisory contracts) or any particular class (e.g., approval of the
plan of distribution with respect to the Retail Shares of each Fund) means the
lesser of (1) 67% of the shares of that particular portfolio or class, as
appropriate, represented at a meeting at which the holders of more than 50% of
the outstanding shares of such portfolio or class, as appropriate, are present
in person or by proxy, or (2) more than 50% of the outstanding shares of such
portfolio or class, as appropriate.
The By-Laws of the Company provide that the Company shall not be required
to hold an annual meeting of shareholders in any year in which the election of
directors to the Company's Board of Directors is not required to be acted upon
under the 1940 Act. The law under certain circumstances provides shareholders
with the right to call for a meeting of shareholders to consider the removal of
one or more directors. To the extent required by law, the Company will assist
in shareholder communication in such matters.
Shares of each class of a particular portfolio of the Company (such as
each Fund) are entitled to such dividends and distributions out of the assets
belonging to that class as are declared in the discretion of the Company's
Board of Directors. In determining the net asset value of a class of a
portfolio, assets belonging to a particular class are credited with a
proportionate share of any general assets of the Company not belonging to a
particular class of a portfolio and are charged with the direct liabilities in
respect of that class of the portfolio and with a share of the general
liabilities of the Company which are normally allocated in proportion to the
relative net asset values of the respective classes of the portfolios of the
Company at the time of allocation.
In the event of the liquidation or dissolution of the Company, shares of
each class of a portfolio are entitled to receive the assets attributable to it
that are available for distribution, and a proportionate distribution, based
upon the relative net assets of the classes of each portfolio, of any general
assets not attributable to a portfolio that are available for distribution.
Shareholders are not entitled to any preemptive rights.
Subject to the provisions of the Company's Charter, determinations by the
Board of Directors as to the direct and allocable liabilities and the allocable
portion of any general assets of the Company with respect to a particular
portfolio or class are conclusive.
<PAGE>
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), 425 Lexington Avenue, New York, New York 10017-3954, serves as
counsel to the Company. The validity of the shares under Maryland law will be
passed upon for the Company by Piper & Marbury, Baltimore, Maryland.
AUDITORS
Price Waterhouse L.L.P. acts as the Company's independent auditors and has
offices at 1177 Avenue of the Americas, New York, New York 10036. The
financial statement included in this Statement of Additional Information has
been so included in reliance upon the report of the Company's independent
auditors, given on the authority of that firm as experts in auditing and
accounting.
<PAGE>
Report of Independent Accountants
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Lipper U.S. Equity
Fund (the "Fund"), one of the series portfolios of The Lipper Funds, Inc., at
December 27, 1995, in conformity with generally accepted accounting principles.
This financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on
our audit. We conducted our audit of this financial statement in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
December 28, 1995
<PAGE>
THE LIPPER FUNDS, INC.
LIPPER U.S. EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 27, 1995
<TABLE>
<S> <C>
ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Deferred organization costs (Note 1) . . . . . . . . . . . . . . . . . . . . . . . 77,863
177,863
LIABILITIES:
Deferred organization costs payable (Note 1) . . . . . . . . . . . . . . . . . . . 77,863
Net Assets (applicable to 10,000 shares of beneficial interest of Premier class
issued and outstanding (par value .001), 1,111,111,111 shares authorized. No Retail
or Group Retirement Plan shares issued.) . . . . . . . . . . . . . . . . . . . . . $100,000
Net asset value, offering and redemption price per share of Premier class $10.00
</TABLE>
Note 1 Organization:
Lipper U.S. Equity Fund (the "Fund") is one of the series of The Lipper Funds,
Inc. (the "Company") which was incorporated under Maryland law on August 22,
1995. The Fund has had no operations to date other than matters relating to
its organization and registration of the Company as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act")
and the sale and issuance of 6,667 Premier class shares to Lipper & Company,
L.L.C. for $66,667 and 3,333 Premier class shares to Prime Lipper Asset
Management, an affiliate of Lipper & Company, L.L.C., for $33,333 on
<PAGE>
December 27, 1995. Lipper & Company, L.L.C. is the adviser to the Fund and
Lipper High Income Bond Fund, which are two of the three separate investment
series of the Company. Prime Lipper Asset Management is the adviser to the
third of the three investment series of the Company, Prime Lipper Europe Equity
Fund. Lipper & Company, L.L.C. has agreed to advance all of the costs incurred
in connection with the organization and initial registration of the Fund, and
the Fund has agreed to reimburse the adviser for such costs. If any of the
initial shares are redeemed by any holder thereof during the amortization
period, the redemption proceeds will be reduced by the unamortized organization
expenses in the same proportion as the number of initial shares redeemed bears
to the number of initial shares outstanding at the time of redemption. The
portion of costs incurred and to be incurred by the Company allocated to the
Fund's organization and registration, estimated at $77,863, will be amortized
on a straight line basis for a period of 60 months beginning at the
commencement of operations of the Fund.
Note 2 Investment Advisory Agreement:
The Fund has entered into an investment advisory agreement with Lipper &
Company, L.L.C. (the "Adviser") to manage the investment of the assets of the
Fund. For services performed under the agreement, the Fund will pay the
Adviser a fee calculated daily and paid monthly at an annual rate of .85% of
the average daily net assets of the Fund. The Adviser has voluntarily
undertaken to reimburse Fund expenses to the extent necessary to limit the
total operating expenses of the Fund to 1.10% of the Premier Share's average
daily net assets for any fiscal year or portion thereof that the limitation is
in effect. The voluntary reimbursement is limited to the extent of the
Adviser's investment advisory fee. The Adviser will continue this
reimbursement until further notice.
Note 3 Administration Agreement:
Chase Global Funds Services Company provides administrative, fund accounting,
dividend disbursing, and transfer agent services pursuant to a Mutual Funds
Service Agreement between the Company and The Chase Manhattan Bank, N.A.
("Chase"). For services performed under the agreement, the Company will pay
Chase an annual fee computed daily and paid monthly, based on the combined
aggregate average daily net assets of the Company, as follows: .2% of the
first $200 million, .1% of the next $200 million, and .05% over $400 million.
Administration fees payable by each Fund are determined in proportion to the
relative average daily net assets of the respective Fund for the period paid.
Chase is entitled to an annual minimum fee of $70,000 per series.
Note 4 Class of Shares and Distribution and Shareholder Servicing Plans:
Each series of the Company is authorized to offer three separate classes of
shares - Premier, Retail, and Group Retirement Plan shares. The outstanding
shares presented in this financial statement relate to the Premier class
shares. No Retail or Group Retirement shares have been issued prior to the
date of this financial statement.
<PAGE>
Pursuant to a distribution agreement between the Company and Lipper & Company,
L.P. (the "Distributor"), the Distributor will act as the distributor of the
shares of each series. The Distributor will be the primary distributor and
will be entering into selling arrangements with third-party distributors. In
connection with a distribution plan for the Retail shares pursuant to Rule
12b-1 of the 1940 Act, the Fund has agreed to compensate the Distributor for
its services at a rate which may not exceed .25% of the average daily net
assets on an annual basis applicable to the Retail class of shares. Such fees
are accrued daily and paid monthly. The distribution plan provides that the
Distributor will use these fees to finance activities that promote the sale of
the Retail class shares.
The Company, on behalf of the Group Retirement Plan class of shares of each
series, intends to enter into shareholder servicing agreements with third
parties which will render certain support services to their customers who are
beneficial owners of Group Retirement Plan shares. Under the Group Retirement
Servicing Plan, each series at the expense of its Group Retirement Plan shares,
will pay these third parties up to .25% of the average daily net asset value on
an annual basis of the Group Retirement Plan shares of that series. The fee
will be accrued daily and paid monthly. The services to be provided under the
Group Retirement Servicing Plan include communication and correspondence with
shareholders as well as assistance to shareholders regarding shareholder
activity, furnishing reports to shareholders, and maintaining shareholder
records.
