LEHMAN SELECTED GROWTH
STOCK PORTFOLIO
Prospectus
November 28, 1994
No person has been authorized to give any information or to make
any representations not contained in this Prospectus, or in the
Statement of Additional Information incorporated herein by
reference, in connection with the offering made by this Prospectus
and, if given or made, such information or representations must
not be relied upon as having been authorized by the Fund or its
Distributor. This Prospectus does not constitute an offering by
the Fund or by the Distributor in any jurisdiction in which such
offering may not lawfully be made.
TABLE OF CONTENTS
<TABLE>
<S> <C>
<C>
2 Prospectus Summary
3 Background and Expense Information
4 Financial Highlights
4 Investment Objective and Policies
9 Purchase of Shares
10 Redemption of Shares
11 Exchange Privilege
11 Valuation of Shares
11 Management of the Fund
13 Dividends
13 Taxes
14 The Fund's Performance
15 Additional Information
</TABLE>
- ---------------------------------------------------------------LOGO
<PAGE>
PROSPECTUS LEHMAN SELECTED GROWTH STOCK PORTFOLIO
AN INVESTMENT PORTFOLIO OF LEHMAN BROTHERS FUNDS, INC.
November 28, 1994
This Prospectus describes the LEHMAN SELECTED GROWTH STOCK PORTFOLIO
(the "Fund"), a
diversified portfolio of Lehman Brothers Funds, Inc. (the "Company"),
an open-end
management investment company.
The Fund's investment objective is to seek long-term capital
appreciation. The Fund
will, under normal market conditions, invest primarily
in equity securities which the
Fund's Investment Adviser believes to have the potential
for above-average capital
appreciation. Such securities will be primarily those of
small- and medium-sized
companies. Because of the nature of the Fund's investment
objective and policies and
its ability to leverage its assets, the Fund may be
subject to greater investment risks
than those assumed by certain other investment companies.
LEHMAN BROTHERS INC. sponsors the Fund and acts as
Distributor of the Fund's shares.
LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
("LBGAM") serves as the Fund's Investment
Adviser.
The address of the Fund is 3 World Financial Center, New York, New York 10285.
Performance and other information regarding the Fund
may be obtained through a Lehman
Brothers Investment Representative or by calling 800-861-4171.
This Prospectus briefly sets forth certain information
about the Fund that investors
should know before investing. Investors are
advised to read this Prospectus and retain
it for future reference. Additional information
about the Fund, contained in a
Statement of Additional Information dated
November 28, 1994, as amended or supplemented
from time to time, has been filed with
the Securities and Exchange Commission and is
available to investors without charge
by calling 800-861-4171. The Statement of
Additional Information is incorporated in its entirety by reference into this
Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND SUCH SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE
FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
1 <PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in
its entirety by detailed information appearing
elsewhere in this Prospectus and
in the Statement of Additional Information. Cross-
references in this summary are to headings in the Prospectus.
BENEFITS TO INVESTORS
The Fund offers investors several important benefits:
- - a professionally managed portfolio of
equity securities having the potential for
above-average capital appreciation.
- - investment liquidity through convenient purchase and redemption procedures.
- - a convenient way to invest without the
administrative and recordkeeping burdens
normally associated with the direct ownership of securities.
- - automatic dividend reinvestment feature,
plus exchange privilege with the shares of
certain other funds in the Lehman Brothers Group of Funds.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek
long-term capital appreciation. The Fund
will, under normal market conditions,
invest primarily in equity securities which the
Fund's Investment Adviser believes to
have the potential for above-average capital
appreciation. Although the Fund invests
primarily in common stocks, it may also invest
in other equity securities, such as
convertible securities, preferred stocks and
warrants. The equity securities in which
the Fund invests will be primarily those of
small- and medium-sized companies, although
the Fund may invest up to 20% of its total
assets in equity securities of larger companies.
INVESTMENT APPROACH
In selecting equity securities with above-average growth potential, the Fund's
Investment Adviser employs a disciplined
investment methodology under which (i) a
fundamental analysis is performed on
specific issuers, (ii) quantitative models are
applied to assess the relative attractiveness of issuers with fundamental
characteristics deemed to be favorable,
(iii) investments are selected in a manner
intended to achieve diversification
across broad industry sectors, and (iv) investments
are monitored on an ongoing basis
with respect to fundamental characteristics and
quantitative projections. See "Investment Objective and Policies."
PURCHASE OF SHARES
The Fund's shares are offered with
no sales charge imposed at the time of purchase but
are subject to a contingent deferred
sales charge ("CDSC") upon redemption as described
below. The Fund engages in a continuous
offering of its shares. Shares of the Fund may
be purchased at the next determined
net asset value per share through a brokerage
account maintained through Lehman
Brothers Inc. ("Lehman Brothers") or through a broker
that clears securities transactions
through Lehman Brothers on a fully disclosed basis
(an "Introducing Broker"). See "Purchase of Shares."
INVESTMENT MINIMUMS
Investors are subject to a minimum
initial investment requirement of $5,000 and a
minimum subsequent investment requirement
of $1,000. However, for Individual Retirement
Accounts ("IRAs") and Self-Employed
Retirement Plans, the minimum initial investment
requirement is $2,000 and the minimum
subsequent investment requirement is $1,000 and
for certain qualified retirement plans,
the minimum initial and subsequent investment
requirement is $500. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN
The Fund also offers shareholders a
Systematic Investment Plan under which they may
authorize the automatic placement of
a purchase order each month or quarter for Fund
shares in an amount not less than $100. See "Purchase of Shares."
REDEMPTION OF SHARES
The Fund redeems shares at its next
determined net asset value, subject to a maximum
CDSC of 2% of redemption proceeds
during the first year after the date of purchase, 1%
of redemption proceeds during the
second year, and no CDSC thereafter. See "Redemption
of Shares."
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for
shares of certain other funds in the Lehman
Brothers Group of Funds. See "Exchange Privilege."
MANAGEMENT OF THE FUND
LBGAM serves as Investment Adviser to the
Fund. LBGAM, together with other Lehman
Brothers investment advisory affiliates,
had approximately $11 billion in assets under
management as of September 30, 1994. See "Management of the Fund."
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute its
investment income and net realized capital
gains, if any, once a year, normally at
the end of the year in which earned or at the
beginning of the next year. Dividends and distributions will be reinvested in
additional shares of the Fund unless a
shareholder requests otherwise. See "Dividends."
2
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
There is no assurance that the Fund
will achieve its investment objective. Securities
of the kinds of companies in which the
Fund invests may be subject to significant price
fluctuation and above-average risk.
In addition, the Fund may from time to time
leverage its investments by purchasing
securities with borrowed money, in amounts not
to exceed 33-1/3% of its total assets
(including the amount borrowed) less its
liabilities (excluding the amount
borrowed). Borrowed money creates an opportunity for
greater capital gain but at the same
time increases exposure to capital risk. In
addition, the Fund may invest up to
15% of its total assets in illiquid securities and
engage in hedging and derivatives and
certain other investment practices, which may
entail certain risks. For a more
complete discussion of the risks associated with an
investment in the Fund, see "Investment
Objective and Policies - Other Investments and
Investment Practices" and "Risk Factors and Special Considerations."
BACKGROUND AND EXPENSE INFORMATION
The following Expense Summary lists
the costs and expenses that a shareholder can
expect to incur as an investor in
the Fund, based upon the maximum CDSC and estimated
expenses and average net assets for the current fiscal year.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum CDSC
(as a percentage of redemption
proceeds)..................... 2.00%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Advisory Fees
(estimated, after expense
reimbursements)............... 0.75%
Rule 12b-1 Fees*.............. 1.00%
Other Expenses - including
Administration Fees
(estimated, after expense
reimbursements)**............. 0.35%
----Total Fund Operating Expenses (estimated,
after expense reimbursements)***............ 2.10%
- -----
- -----
<FN>
* Lehman Brothers receives an annual 12b-1 fee of 1.00% of the value of the
Fund's average daily net assets,
consisting of a .75% distribution fee and a .25%
service fee. See "Management of the Fund - Distributor."
** The amount set forth for "Other Expenses"
is based on estimates for the current
fiscal year, after giving effect to
the voluntary expense reimbursements as described
below. Absent these voluntary expense
reimbursements, the ratio of "Other Expenses" to
average net assets is estimated to be 0.46%.
*** The amount set forth for "Total Fund
Operating Expenses" reflects the agreement by
LBGAM and the Fund's Administrator to
reimburse the Fund for "Total Fund Operating
Expenses" in excess of 2.10% average
net assets for a period of at least one year from
the date of this Prospectus. Absent
these voluntary expense reimbursements, the ratio
of "Total Fund Operating Expenses" to average
net assets is estimated to be 2.21%.
</TABLE>
The CDSC set forth in the above table
is the maximum charge imposed on redemptions of
Fund shares, and investors may pay an
actual CDSC of less than 2% as described under
"Redemption of Shares."
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS <S>
<C> <C> ------------------------------------------Expenses, assuming
complete
redemption
at the end of each time
period:*...................... $ 41 $ 66 Expenses, assuming no
redemption:................... $ 21 $ 66
<FN>
* Assumes deduction at the time of redemption of the maximum CDSC applicable
for that time period. </TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A
REPRESENTATION OF ACTUAL EXPENSES AND RATE OF
RETURN, WHICH MAY BE GREATER OR LESS
THAN THOSE SHOWN. The foregoing table has not been
audited by the Fund's independent auditors.
Long-term shareholders in mutual funds
with Rule 12b-1 fees, such as the Fund, may pay
more than the economic equivalent of
the maximum front-end sales charge permitted by
rules of the National Association of Securities Dealers, Inc.
3 <PAGE>
FINANCIAL HIGHLIGHTS
The tables "For a share outstanding
throughout each period" below supplement the Fund's
Financial Statements contained in
the Statement of Additional Information and set forth
certain information regarding the investment
operations of the Fund for the periods
presented.
The financial highlights for the period
ended July 31, 1994 are derived from the Fund's
Financial Statements audited by Ernst & Young LLP,
independent auditors, whose report
thereon appears in the Company's Annual
Report dated July 31, 1994. This information
should be read in conjunction with the financial
statements and notes thereto that also
appear in the Company's Annual Report, which are
incorporated by reference into the
Statement of Additional Information.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
PERIOD ENDED 9/30/94** PERIOD ENDED
(UNAUDITED) 7/31/94*
<S> <C> <C>
Net asset value, beginning of
period........................ $ 9.73 $ 10.00
------------ ------------
Income from investment
operations:
Net investment income(1)...... 0.00(5) 0.01
Net realized and unrealized
gain/
(loss) on investments........ 0.54 (0.28) ------------ ------------
Total from investment
operations.................... 0.54 (0.27)
------------ ------------
Net asset value, end of
period........................ $ 10.27 $ 9.73
- ------------ ------------
- ------------ ------------
Total return(2)............... 5.56% (2.70)% ------------ ------------
- ------------ ------------
Ratios to average net assets/ supplemental data:
Net assets, end of period
(in 000's)................. $30,480 $26,341
Ratio of net investment
income to average net
assets(3).................. 0.09% 1.06%
Ratio of operating expenses
to average net
assets(3)(4)............... 2.17% 2.04%
Portfolio turnover rate..... 28% 33%
<FN>
* Lehman Selected Growth Stock Portfolio commenced operations on May 20,
1994.
** Period from August 1, 1994 to September 30, 1994.
(1) Net investment income before waiver of
fees and/or expenses reimbursed by
the Investment Adviser and Administrator
for the periods shown above rounded to less
than $0.00.
(2) Total return represents aggregate
total return for the periods indicated. (3)
Annualized.
(4) Annualized operating expense ratios
before waiver of fees and/or expenses
reimbursed by the Investment Adviser and
Administrator for the periods shown above were
3.02% and 3.42%, respectively.
(5) Amount represents less than $0.01 per share. </TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to
seek long-term capital appreciation. Although the
Fund may receive current income from
dividends, interest and other sources, income is
only an incidental consideration of
the Fund. The Fund will, under normal market
conditions, invest primarily in equity
securities which LBGAM believes to have the
potential for above-average capital
appreciation. Although LBGAM anticipates that the
assets of the Fund will, under normal
market conditions, be invested primarily in
common stocks, the Fund may also invest
in other equity securities, such as convertible
securities, preferred stocks and warrants.
See "Investment Objective and Policies -
Other Investments and Investment Practices."
The equity securities in which the Fund
invests will be primarily those of
small-and medium-sized companies, although the Fund
may invest up to 20% of its total assets
in equity securities of larger companies.
Although the Fund may receive current
income from dividends, interest and other
sources, income is only an incidental
consideration of the Fund. There can be no
assurance that the Fund will achieve
its investment objective. For a discussion of
certain risks and considerations
associated with an investment in the Fund, see
"Investment Objective and Policies -
Risk Factors and Special Considerations."
INVESTMENT APPROACH
In selecting equity securities with
above-average growth potential, LBGAM employs a
disciplined investment methodology
under which: (i) a fundamental analysis is performed
on specific issuers, (ii) quantitative
models are applied to assess the relative
attractiveness of issuers with
fundamental characteristics deemed to be favorable,
(iii) investments are selected in a
manner intended to achieve diversification across
broad industry sectors, and (iv)
investments are monitored on an ongoing basis with
respect to fundamental characteristics and quantitative projections.
FUNDAMENTAL ANALYSIS. In selecting equity
securities for the Fund's portfolio, LBGAM
initially applies a fundamental
analysis on specific issuers. LBGAM focuses on
companies which have relatively
unleveraged capital structures (generally where debt
represents less than one-third of
total capitalization), small-and medium-sized
companies which have total annual
revenues of less than $1 billion and a market
capitalization of less than $2.5 billion, companies which satisfy certain
4
<PAGE>
benchmarks with respect to their internal
rates of return, and companies with high cash
flows relative to market capitalization.
LBGAM also seeks to identify companies with
certain business characteristics which
it deems favorable, such as strong brand name
recognition, a franchise or service
that can be easily replicated but is expensive to
duplicate in a defined market niche,
and service companies which compete based
primarily on quality of service
rather than price. LBGAM also seeks companies where a
significant proportion of revenues is
derived from reorder activity as opposed to
companies which are dependent on
product life cycles. Companies may not satisfy all of
the foregoing fundamental criteria,
however, if the overall mix of characteristics is
deemed favorable by LBGAM.
The Fund may invest up to 20% of its total assets in larger
companies (I.E., those with total
annual revenues in excess of $1 billion or a market
capitalization in excess of $2.5 billion).
QUANTITATIVE MODELS. After selecting equity securities with fundamental
characteristics deemed by LBGAM to be favorable, LBGAM applies three distinct
quantitative models to assess the
relative attractiveness of the securities identified
as having favorable fundamental
characteristics. In applying the quantitative models,
LBGAM seeks to select securities
with projected earnings growth rates of 15% or higher
over the following three years.
In addition, LBGAM seeks to use the models to identify
securities with favorable risk/reward
characteristics. Among the models employed by
LBGAM are a valuation model which
places a value on growth relative to the long-term
interest rate environment, an earnings
momentum model, which seeks to identify
companies most likely to experience
an upward revision in earnings targets, and an
earnings stability model, which emphasizes
the consistency of growth. There can of
course be no assurance that the models
will predict accurately the performance of
particular securities.
INDUSTRY DIVERSIFICATION. Once equity
securities are identified by LBGAM as having
favorable fundamental and quantitative
characteristics, LBGAM selects stocks for the
Fund in a manner intended to achieve
diversification across broad industry sectors.
LBGAM divides companies into four broad
industry classifications: Business/Industrial
Service, Consumer Service, Health Care
and Technology. LBGAM expects that a substantial
proportion of the Fund's investments
will be comprised of companies in each of these
sectors. However, LBGAM does not seek
an equal balance among sectors but instead
allocates investments in each of these
sectors based upon its expectations as to the
relative future performance of each
sector. Although the Fund is subject to an
investment limitation which generally
prohibits it from investing 25% or more of its
total assets in a single industry,
the four industry classifications employed by LBGAM
are substantially broader than the
term "industry" as used in the foregoing investment
limitation and as interpreted by
the staff of the Securities and Exchange Commission
(the "SEC"). See "Investment
Objective and Policies - Investment Limitations."
ONGOING MONITORING. LBGAM will
monitor the Fund's investments on an ongoing basis with
respect to, among other things,
the continuing presence of favorable fundamental
characteristics, the performance of
investments compared with projections of the
quantitative models, and changing
prospects for the industry sectors. LBGAM will also
review other investment opportunities
on an ongoing basis and will alter the Fund's
investment portfolio as it deems appropriate.
TEMPORARY INVESTMENTS
For temporary defensive purposes,
the Fund may vary from its investment objective and
may invest, without limit (except
for the limitations described under "Investment
Objective and Policies -
Investment Limitations"), in cash or certain high quality
short-term debt instruments
described below. The Fund may also at any time invest funds
in such instruments for cash
management purposes, pending investment in accordance with
the Fund's investment objective and policies and to meet operating expenses.
The short-term instruments in which
the Fund may invest include obligations issued or
guaranteed by the United States
Government, its agencies or instrumentalities ("U.S.
Government Securities");
obligations issued or guaranteed by other governments or one
of their agencies or instrumentalities; obligations issued or guaranteed by
international organizations
designed or supported by multiple foreign government
entities to promote economic
reconstruction or development; bank obligations, such as
certificates of deposit, time
deposits and bankers' acceptances; corporate debt
obligations, including commercial
paper; and repurchase agreements. To be eligible for
investment under the circumstances
described above, such instruments (other than U.S.
Government Securities) must be
issued by an issuer having a short-term debt rating of
A-1 or better by Standard & Poor's
Ratings Group, a rating of Prime-1 by Moody's
Investors Service, Inc., a comparable
rating from another nationally recognized rating
service or, if unrated, deemed to be of equivalent quality by LGBAM.
OTHER INVESTMENTS AND INVESTMENT PRACTICES
LEVERAGE. The Fund may from time to time
leverage its investments by purchasing
securities with borrowed money.
The Fund may borrow only from banks or by entering into
reverse repurchase agreements, in
aggregate amounts not to exceed 33-1/3% of its total
assets (including the amount borrowed)
less its liabilities (excluding the amount
borrowed). Bank borrowings may be from
U.S. or foreign banks and may be secured or
5 <PAGE>
unsecured. The Fund may also borrow by
entering into reverse repurchase agreements,
pursuant to which it would sell
portfolio securities to financial institutions, such as
banks and broker-dealers, and agree
to repurchase them at an agreed upon date and
price. The Fund would also consider
entering into reverse repurchase agreements to
avoid otherwise selling securities
during unfavorable market conditions to meet
redemptions. Reverse repurchase
agreements involve the risk that the market value of
the portfolio securities sold by
the Fund may decline below the price of the securities
the Fund is obligated to repurchase.
In addition to the foregoing, the Fund may borrow
up to 5% of its total assets
(including the amount borrowed) for temporary or emergency
purposes. Borrowed money creates
an opportunity for greater capital gain but at the
same time increases exposure to
capital risk, as any gain in the value of securities
purchased with borrowed money that
exceeds the interest paid on the amount borrowed
would cause the Fund's net asset
value to increase more rapidly than otherwise, while
any decline in the value of securities
purchased would cause the Fund's net asset value
to decrease more rapidly than otherwise.
OTHER INVESTMENT COMPANIES. The Fund may
invest in the securities of other investment
companies, to the extent permitted by the
Investment Company Act of 1940, as amended
(the "1940 Act"). Under the 1940 Act,
the Fund may invest up to 10% of its total assets
in shares of other investment companies
and up to 5% of its total assets in any one
investment company, provided that the
investment does not represent more than 3% of the
voting stock of the acquired investment
company. By investing in another investment
company, the Fund bears a ratable share
of the investment company's expenses, as well
as continuing to bear the Fund's
advisory and administrative fees with respect to the
amount of the investment.
REPURCHASE AGREEMENTS. The Fund may purchase
instruments from financial institutions,
such as banks and broker-dealers, subject
to the seller's agreement to repurchase them
at an agreed upon time and price
("repurchase agreements"). The Fund would enter into
repurchase agreements to generate
additional income. The seller under a repurchase
agreement will be required to
maintain the value of the securities subject to the
agreement at not less than the
repurchase price. Default by the seller would, however,
expose the Fund to possible loss
because of adverse market action or delay in
connection with the disposition of the underlying obligations.
LOANS OF PORTFOLIO SECURITIES. The Fund may
lend its portfolio securities consistent
with its investment policies, in order
to generate additional income. The Fund may lend
portfolio securities against collateral,
consisting of cash or securities which are
consistent with its permitted investments,
which is equal at all times to at least 100%
of the value of the securities loaned.
There is no limitation on the amount of
securities that may be loaned. Such
loans would involve risks of delay in receiving
additional collateral or in recovering
the securities loaned or even loss of rights in
the collateral should the borrower of
the securities fail financially. However, loans
will be made only to borrowers deemed by
LBGAM to be of good standing and only when, in
the judgment of LBGAM, the income to be
earned from the loans justifies the attendant
risks.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES.
The Fund may purchase securities on a
"when-issued" or "delayed delivery" basis.
When-issued and delayed delivery securities
are securities purchased for delivery
beyond the normal settlement date at a stated
price. The Fund will generally not pay
for such securities or start earning income on
them until they are received. Securities
purchased on a when-issued or delayed delivery
basis are recorded as an asset and are
subject to changes in value based upon changes
in the general level of interest rates.
The Fund expects that commitments to purchase
when-issued or delayed delivery securities
will not exceed 25% of the value of its
total assets absent unusual market conditions.
The Fund does not intend to purchase
when-issued or delayed delivery securities
for speculative purposes but only in
furtherance of its investment objective.
When the Fund purchases securities on a when-
issued or delayed delivery basis, it
will set aside securities or cash with its
custodian equal to the payment that will be due.
ILLIQUID SECURITIES. The Fund will not
invest more than 15% of the value of its total
assets in illiquid securities. Illiquid
securities are securities which may not be sold
or disposed of in the ordinary course of
business within seven days at approximately
the value at which the Fund has valued the
investments, and include securities with
legal or contractual restrictions on resale,
time deposits, repurchase agreements
having maturities longer than seven days and
securities that do not have readily
available market quotations. In addition,
the Fund may invest in securities that are
sold in private placement transactions
between their issuers and their purchasers and
that are neither listed on an exchange
nor traded over the counter. These factors may
have an adverse effect on the Fund's
ability to dispose of particular securities and
may limit the Fund's ability to obtain
accurate market quotations for purposes of
valuing securities and calculating net
asset value and to sell securities at fair
value. If any privately placed securities held by the Fund are required to be
registered under the securities laws of
one or more jurisdictions before being resold,
the Fund may be required to bear the
expenses of registration. The Fund may also
purchase securities that are not registered
under the Securities Act of 1933, as
amended (the "1933 Act"), but which can
be sold to qualified institutional buyers in
accordance with Rule 144A under that
Act ("Rule 144A securities"). Rule 144A
6
<PAGE>
securities generally must be sold to
other qualified institutional buyers. The Fund may
also invest in commercial obligations
issued in reliance on the so-called "private
placement" exemption from registration
afforded by Section 4(2) of the 1933 Act
("Section 4(2) paper"). Section 4(2)
paper is restricted as to disposition under the
federal securities laws, and generally is
sold to institutional investors such as the
Fund who agree that they are purchasing
the paper for investment and not with a view to
public distribution. Any resale by the
purchaser must be in an exempt transaction.
Section 4(2) paper normally is resold to
other institutional investors like the Fund
through or with the assistance of the
issuer or investment dealers who make a market in
the Section 4(2) paper, thus providing
liquidity. If a particular investment in Rule
144A securities, Section 4(2) paper
or private placement securities is not determined
to be liquid, that investment will be
included within the 15% limitation on investment
in illiquid securities. The ability to
sell Rule 144A securities to qualified
institutional buyers is a recent
development and it is not possible to predict how this
market will mature. LBGAM will
monitor the liquidity of such restricted securities
under the supervision of the Board of
Directors. See "Investment Objective and Policies
- - Additional Information on Portfolio
Instruments and Certain Investment Practices -
Illiquid and Restricted Securities" in
the Statement of Additional Information.
WARRANTS. The Fund may invest up to 5% of
the value of its net assets (valued at the
lower of cost or market) in warrants for
equity securities, which are securities
permitting, but not obligating, their
holder to subscribe for other equity securities.
Warrants do not carry with them the
right to dividends or voting rights with respect to
the securities that they entitle their
holder to purchase, and they do not represent
any rights in the assets of the issuer.
As a result, an investment in warrants may be
considered more speculative than
certain other types of investments. In addition, the
value of a warrant does not necessarily
change with the value of the underlying
securities and a warrant ceases to
have value if it is not exercised prior to its
expiration date. The Fund will not
invest more than 2% of the value of its net assets
(valued as described above) in warrants
which are not listed on the New York or
American Stock Exchanges.
CONVERTIBLE SECURITIES. Convertible
securities are fixed-income securities that may be
converted into or exchanged for, at
either a stated price or stated rate, underlying
shares of common stock. Convertible
securities have general characteristics similar to
both fixed-income and equity securities. Although
to a lesser extent than with fixed-
income securities generally, the
market value of convertible securities tends to
decline as interest rates increase and,
conversely, tends to increase as interest rates
decline. In addition, because of the
conversion feature, the market value of
convertible securities tends to vary
with fluctuations in the market value of the
underlying common stocks and therefore
also will react to variations in the general
market for equity securities.
A unique feature of convertible securities is that as the
market price of the underlying common
stock 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 common
stock. When the market price of the underlying
common stock increases, the prices of
the convertible securities tend to rise as a
reflection of the value of the underlying
common stock. While no securities investments
are without risk, investments in convertible
securities generally entail less risk than
investments in common stock of the same issuer.
HEDGING AND DERIVATIVES. The Fund is
authorized to use various hedging and investment
strategies described below to hedge
broad or specific market movements, or to seek to
increase the Fund's income or gains.
The Fund may purchase and sell (or write)
exchange-listed and over-the-counter
put and call options on securities, financial
futures contracts, equity indices and
other financial instruments and enter into
financial futures contracts (collectively,
these transactions are referred to in this
Prospectus as "Derivatives").
Derivatives may be used to attempt to
protect against possible changes in the market
value of securities held or to be
purchased by the Fund resulting from securities
market to protect the Fund's unrealized
gains in the value of its securities, to
facilitate the sale of those securities
for investment purposes, to establish a
position in the derivatives markets
as a temporary substitute for purchasing or selling
particular securities or to seek to
enhance the Fund's income or gain. The Fund may use
any or all types of Derivatives at
any time; no particular strategy will dictate the
use of one type of transaction
rather than another, as use of any Derivatives will be a
function of numerous variables,
including market conditions. The ability of the Fund to
utilize Derivatives successfully
will depend on, in addition to the factors described
above, LBGAM's ability to predict
pertinent market movements, which cannot be assured.
These skills are different from
those needed to select the Fund's securities. The Fund
is not a "commodity pool" (i.e.,
a pooled investment vehicle which trades in commodity
futures contracts and options
thereon and the operator of which is registered with the
Commodity Futures Trading
Commission (the "CFTC")) and Derivatives involving futures
contracts and options on futures
contracts will be purchased, sold or entered into only
for bona fide hedging purposes,
provided that the Fund may enter into such transactions
for purposes other than bona fide
hedging if, immediately thereafter, the sum of the
7 <PAGE>
amount of its initial margin and
premiums on open contracts and options would not
exceed 5% of the liquidation
value of the Fund's portfolio, provided, further, that, in
the case of an option that is in-the-money,
the in-the-money amount may be excluded in
calculating the 5% limitation. The use of
certain Derivatives will require that the
Fund segregate cash, liquid high grade
debt obligations or other assets to the extent
the Fund's obligations are not otherwise
"covered" through ownership of the underlying
security or financial instrument. See
"Risk Factors and Special Considerations."
A detailed discussion of Derivatives,
including applicable requirements of the CFTC,
the requirement to segregate assets
with respect to these transactions and special
risks associated with such strategies,
appears in the Statement of Additional
Information.
The degree of the Fund's use of Derivatives
may be limited by certain provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). See "Taxes."
SHORT SALES. The Fund may make short sales of
securities "against the box." A short
sale is a transaction in which the Fund sells a security it does not own in
anticipation that the market price of
that security will decline. In a short sale
"against the box," at the time of sale,
the Fund owns or has the immediate and
unconditional right to acquire at no
additional cost the identical security. Short
sales against the box are a form of
hedging to offset potential declines in long
positions in similar securities.
INVESTMENT LIMITATIONS
The investment limitations enumerated
below are fundamental and may not be changed by
the Company's Board of Directors
without the affirmative vote of the holders of a
majority of the Fund's outstanding shares.
The Fund's investment objectives and the
other investment policies described
herein may be changed by the Board of Directors at
any time. If there is a change in the
investment objectives of the Fund, shareholders
of the Fund should consider whether
the Fund remains an appropriate investment in light
of their then current financial
position and needs. (A complete list of Fund's
investment limitations that cannot
be changed without a vote of shareholders is
contained in the Statement of
Additional Information under "Investment Objective and
Policies.") The percentage limitations
set forth below, as well as those contained
elsewhere in this Prospectus and the
Statement of Additional Information, apply at the
time a transaction is effected, and
a subsequent change in a percentage resulting from
market fluctuations or any other cause
other than an action by the Fund will not
require the Fund to dispose of portfolio
securities or to take other action to satisfy
the percentage limitation.
1. The 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.
2. The Fund may not borrow money,
except (a) from banks or by entering into reverse
repurchase agreements, in aggregate
amounts not exceeding 33-1/3% of the value of its
total assets at the time of such
borrowing and (b) in amounts not exceeding 5% of the
value of its total assets at the
time of such borrowing for temporary or emergency
purposes (including for clearance
of securities transactions or payment of redemptions
or dividends). 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.
3. The 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Securities of the kinds of companies in
which the Fund invests may be subject to
significant price fluctuation and
above-average risk. Stocks of small-and medium-sized
companies are more volatile than
stocks of larger companies. The Fund may invest in
relatively new or unseasoned companies
which are in their early states of development,
or small companies positioned in new
and emerging industries. Securities of small and
unseasoned companies present greater
risks than securities of larger, more established
companies. The companies in which the
Fund may invest may have relatively small
revenues and limited product lines,
and may have a small share of the market for their
products or services. Smaller companies
may lack depth of management. They may be
unable internally to generate funds
necessary for growth or potential development or to
generate such funds through external
financing on favorable terms. They may be
developing or marketing new products
or services for which markets are not yet
established and may never become
established. Due to these and other factors, smaller
companies may incur significant losses.
In addition, the Fund may invest in
illiquid securities and engage in hedging and other
strategic transactions and certain
8
<PAGE>
other investment practices, which may
entail certain risks. See "Investment Objective
and Policies - Other Investments and Investment Practices."
Derivatives involve special risks,
including possible default by the other party to the
transaction, illiquidity and, to the
extent LBGAM's view as to certain market movements
is incorrect, the risk that the use of
Derivatives could result in greater losses than
if they had not been used. Use of put
and call options could result in losses to the
Fund, force the purchase or sale of
portfolio securities at inopportune times or for
prices higher or lower than current
market values or cause the Fund to hold a security
it might otherwise sell. The use of
options and futures transactions entails certain
special risks. In particular, the
variable degree of correlation between price
movements of futures contracts and
price movements in the related portfolio position of
the Fund could create the possibility
that losses on the Derivative will be greater
than gains in the value of the Fund's
position. In addition, futures and options
markets could be illiquid in some
circumstances and certain over-the-counter options
could have no markets. The Fund might
not be able to close out certain positions
without incurring substantial losses.
To the extent the Fund utilizes futures and
options transactions for hedging,
such transactions should tend to minimize the risk of
loss due to a decline in the value of
the hedged position and, at the same time, limit
any potential gain to the Fund that
might result form an increase in value of the
position. Finally, the daily variation
margin requirements for futures contracts create
a greater ongoing potential financial
risk than would purchases of options, in which
case the exposure is limited to the
cost of the initial premium and transaction costs.
Losses resulting from the use of
Derivatives will reduce the Fund's net asset value,
and possibly income, and the losses
may be greater than if Derivatives had not been
used. Additional information regarding
the risks and special considerations associated
with Derivatives appears in the Statement of Additional Information.
PURCHASE OF SHARES
Purchases of Fund shares must be made
through a brokerage account maintained through
Lehman Brothers or a broker or
dealer (each, an "Introducing Broker") that (i) clears
securities transactions through
Lehman Brothers on a fully disclosed basis or (ii) has
entered into an agreement with
Lehman Brothers with respect to the sale of Fund shares.
The Fund's shares are offered with
no sales charge imposed at the time of purchase but
are subject to a CDSC upon redemption.
See "Redemption of Shares." The Fund reserves
the right to reject any purchase
order and to suspend the offering of shares for a
period of time.
The Fund engages in a continuous
offering of its shares. Fund shares may be purchased
through Lehman Brothers or an
Introducing Broker at the net asset value next determined
after the purchase order is
received by Lehman Brothers or an Introducing Broker. See
"Valuation of Shares."
Purchase orders received by Lehman
Brothers or an Introducing Broker prior to the close
of regular trading on the New York
Stock Exchange, Inc. (the "NYSE"), currently 4:00
p.m., New York time, on any day
the Fund's net asset value is calculated are priced
according to the net asset value
determined on that day. Purchase orders received after
the close of regular trading on
the NYSE are priced as of the time the net asset value
per share is next determined.
See "Valuation of Shares." Payment is generally due to
Lehman Brothers or an Introducing
Broker on the fifth business day (the "Settlement
Date") after the trade date.
Investors who make payment prior to a Settlement Date may
permit the payment to be held
in their brokerage accounts or may designate a temporary
investment (such as a money
market fund in the Lehman Brothers Group of Funds) for such
payment until the Settlement
Date. The Fund reserves the right to reject any purchase
order and to suspend the
offering of shares for a period of time.
SYSTEMATIC INVESTMENT PLAN
The Fund offers shareholders a
Systematic Investment Plan under which shareholders may
authorize Lehman Brothers or an
Introducing Broker to place a purchase order each month
or quarter for shares of the
Fund in an amount not less than $100. The purchase price
is paid automatically from cash
held in the shareholder's Lehman Brothers brokerage
account or through the automatic
redemption of the shareholder's shares of a Lehman
Brothers money market fund.
For further information regarding the Systematic Investment
Plan, shareholders should contact
their Lehman Brothers Investment Representative.
MINIMUM INVESTMENTS
The minimum initial investment in the
Fund is $5,000 and the minimum subsequent
investment is $1,000, except for
purchases through (i) Individual Retirement Accounts
("IRAs") and Self-Employed
Retirement Plans, for which the minimum initial and
subsequent investments are
$2,000 and $1,000, respectively, (ii) retirement plans
qualified under Section 403(b)(7)
of the Code ("Qualified Retirement Plan"), for which
the minimum and subsequent
investment is $500 and (iii) the Fund's Systematic
Investment Plan, for which the
minimum and subsequent investment is $100. For employees
of Lehman Brothers and its
affiliates, the minimum initial investment is $1,000 and the
minimum subsequent investment
is $500. The Fund reserves the right at any time to vary
the initial and subsequent investment minimums.
9 <PAGE>
REDEMPTION OF SHARES
Shareholders may redeem their shares
on any day the Fund calculates its net asset
value. See "Valuation of Shares."
Redemption requests received in proper form prior to
the close of regular trading on the
NYSE are priced at the net asset value per share
determined on that day. Redemption
requests received after the close of regular trading
on the NYSE are priced at the net
asset value as next determined. The Fund normally
transmits redemption proceeds for
credit to the shareholder's account at Lehman
Brothers or the Introducing Broker
at no charge (other than any applicable CDSC) within
seven days after receipt of a
redemption request. Generally, these funds will not be
invested for the shareholder's
benefit without specific instruction, and Lehman
Brothers or the Introducing Broker
will benefit from the use of temporarily uninvested
funds. A shareholder who pays for Fund
shares by personal check will be credited with
the proceeds of a redemption of those
shares only after the purchase check has been
collected, which may take up to 15
days or more. A shareholder who anticipates the need
for more immediate access to his or her
investment should purchase shares with federal
funds, by bank wire or with a certified or cashier's check.
A Fund account that is reduced by a
shareholder to a value of $1,000 or less ($500 for
IRAs and Self-Employed Retirement
Plans) may be subject to redemption by the Fund, but
only after the shareholder has been
given at least 30 days in which to increase the
account balance to more than $1,000
($500 for IRAs, Self-Employed Retirement Plans and
Qualified Retirement Plans). In addition,
the Fund may redeem shares involuntarily or
suspend the right of redemption as
permitted under the 1940 Act, as described in the
Statement of Additional Information
under "Additional Purchase and Redemption
Information."
Fund shares may be redeemed in one of the following ways:
REDEMPTION THROUGH LEHMAN BROTHERS OR AN INTRODUCING BROKER
Redemption requests may be made through
Lehman Brothers or an Introducing Broker.
REDEMPTION BY MAIL
Shares held by Lehman Brothers as
custodian must be redeemed by submitting a written
request to a Lehman Brothers Investment
Representative. All other shares may be
redeemed by submitting a written
request for redemption to the Fund's transfer agent:
Lehman Selected Growth Stock
Portfolio c/o The Shareholder Services Group, Inc. P.O.
Box 9184
Boston, Massachusetts 02009-9184
A written redemption request to the
Fund's transfer agent or a Lehman Brothers
Investment Representative must
(i) state the number of shares to be redeemed, (ii)
identify the shareholder's account
number and (iii) be signed by each registered owner
exactly as the shares are registered.
Any signature appearing on a redemption request
must be guaranteed by a domestic bank,
a savings and loan institution, a domestic
credit union, a member bank of the Federal Reserve System or a member firm of a
national securities exchange. The
Fund's transfer agent may require additional
supporting documents for redemptions
made by corporations, executors, administrators,
trustees and guardians. A redemption
request will not be deemed to be properly received
until the Fund's transfer agent receives
all required documents in proper form.
CONTINGENT DEFERRED SALES CHARGE
A CDSC payable to Lehman Brothers is
imposed on any redemption of Fund shares, however
effected, that causes the current
value of a shareholder's account to fall below the
dollar amount of all payments by the
shareholder for the purchase of Fund shares
("purchase payments") during the
preceding two years. No charge is imposed to the
extent that the net asset value of
the Fund shares redeemed does not exceed (i) the
current net asset value of Fund
shares purchased through reinvestment of dividends or
capital gains distributions, plus
(ii) the current net asset value of Fund shares
purchased more than two years
prior to the redemption, plus (iii) increases in the net
asset value of the shareholder's
Fund shares above the purchase payments made during
the preceding two years.
In circumstances in which the CDSC
is imposed, the amount of the charge will depend on
the number of years since the
shareholder made the purchase payment from which the
amount is being redeemed.
Solely for purposes of determining the number of years since
a purchase payment was made,
all purchase payments made during a month will be
aggregated and deemed to have
been made on the last Friday of the preceding Lehman
Brothers statement month.
The following table sets forth the rates of the CDSC for
redemptions of Fund shares:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
- -------------------------------------------------------------------First
2.00%
Second
1.00%
Third
0.00%
- -------------------------------------------------------------------</TABLE>
The purchase payment from which a redemption
of Fund shares is made is assumed to be
the earliest purchase payment from
which a full redemption has not already been
effected. In the case of redemptions
of shares of other funds in the Lehman Brothers
Group of Funds issued in exchange for shares of the
10
<PAGE>
Fund, the term "purchase payments" refers
to the purchase payments for the shares given
in exchange. In the event of an exchange
of shares of funds with differing CDSC
schedules, the shares will be, in all
cases, subject to the higher CDSC schedule. See
"Exchange Privilege."
WAIVERS OF CDSC. The CDSC will be waived
on: (i) exchanges (see "Exchange Privilege");
(ii) redemptions of shares following
the death or disability of the shareholder; (iii)
redemptions of shares in connection
with certain post-retirement distributions and
withdrawals from retirement plans or IRAs; (iv) involun-
tary redemptions; (v) redemption
proceeds from other funds in the Lehman Brothers Group
of Funds that are reinvested within
30 days of the redemption; (vi) redemptions of
shares in connection with a combination
of any investment company with the Fund by
merger, acquisition of assets or
otherwise; and (vii) redemptions of shares owned by
employees of Lehman Brothers and its affiliates.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged
for shares of the following funds in the Lehman
Brothers Group of Funds, to the
extent shares are offered for sale in the shareholder's
state of residence.
LEHMAN BROTHERS DAILY INCOME FUND,
a money market fund which seeks as high a level of
current income as is consistent
with stability of principal. Shares of the Fund may be
exchanged for CDSC Shares of this fund.
LEHMAN BROTHERS MUNICIPAL INCOME FUND,
a money market fund which seeks as high a level
of current income exempt from federal
income tax as is consistent with stability of
principal. Shares of the Fund may be exchanged for CDSC Shares of this fund.
ADDITIONAL FUNDS. It is contemplated that
additional funds will become available into
which Fund shareholders will exchange
their Fund shares. To obtain information
regarding the availability of such
additional funds, investors should contact a Lehman
Brothers Investment Representative.
TAX EFFECT. The exchange of shares of
one fund for shares of another fund is treated
for federal income tax purposes as a
sale of the shares given in exchange by the
shareholder. Therefore, an exchanging
shareholder may realize a taxable gain or loss in
connection with an exchange.
CDSC. Shareholders may exchange their
fund shares without the imposition of an
exchange fee. In the event shareholders
of the Fund exchange all or a portion of their
Fund shares for shares in any of the
funds listed above imposing a CDSC higher than
that imposed by the Fund, the
exchanged shares will be subject to the higher applicable
CDSC. Upon an exchange, the new
shares will be deemed to have been purchased on the
same date as the shares of the Fund which have been exchanged.
ADDITIONAL INFORMATION REGARDING
THE EXCHANGE PRIVILEGE. Shareholders exercising the
exchange privilege with any of
the other funds in the Lehman Brothers Group of Funds
should review the prospectus of
that fund carefully prior to making an exchange. Lehman
Brothers reserves the right to
reject any exchange request. The exchange privilege may
be modified or terminated at any
time after notice to shareholders. For further
information regarding the exchange
privilege or to obtain the current prospectuses for
members of the Lehman Brothers Group
of Funds, investors should contact their Lehman
Brothers Investment Representative.
VALUATION OF SHARES
The net asset value per share is
calculated on each day, Monday through Friday, except
on days on which the NYSE is closed.
The NYSE currently is scheduled to be closed on
New Year's Day, Presidents'
Day (observed), Good Friday, Memorial Day (observed),
Independence Day, Labor Day
(observed), Thanksgiving and Christmas and on the preceding
Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday,
respectively.
The net asset value per share of the
Fund is determined as of the close of regular
trading on the NYSE, and is
computed by dividing the value of the net assets of the
Fund by the total number of Fund
shares outstanding. Generally, the Fund's investments
are valued at market value or,
in the absence of a market value with respect to any
securities, at fair value as
determined by or under the direction of the Company's
Board of Directors. Short-term
investments that mature in 60 days or less are valued at
amortized cost whenever the
Board of Directors determines that amortized cost reflects
fair value of those investments.
Further information regarding the Fund's valuation
policies is contained in the Statement of Additional Information.
MANAGEMENT OF THE FUND
The business and affairs of the
Fund are managed under the direction of the Company's
Board of Directors.
The Board of Directors approves all significant agreements between
the Company and the persons or
companies that furnish services to the Fund, including
agreements with its Distributor,
Investment Adviser, Administrator, Custodian and
Transfer Agent. The day-to-day
operations of the Fund are delegated to the Fund's
Investment Adviser and
Administrator. One of the directors and all of the Company's
officers are affiliated with
Lehman Brothers, The Shareholders Services Group, Inc. or
one
11 <PAGE>
of their affiliates. The Statement of
Additional Information relating to the Fund
contains general background
information regarding each director and executive officer
of the Company.
INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
LBGAM serves as Investment
Adviser to the Fund. LBGAM, together with other Lehman
Brothers investment advisory
affiliates, had approximately $11 billion in assets under
management as of September 30, 1994.
Subject to the supervision and direction of the
Company's Board of Directors,
LBGAM manages the portfolio of the Fund in accordance
with the Fund's investment objective
and policies, makes investment decisions for the
Fund and places orders to purchase
and sell securities. As compensation for its
services as Investment Adviser
to the Fund, LBGAM is entitled to receive a monthly fee
from the Fund at the annual
rate of 0.75% of the value of the Fund's average daily net
assets. During the fiscal period
ended July 31, 1994, LBGAM received no fees for
managing the Fund.
Ms. Susan Hirsch, a Portfolio Manager
for LBGAM, has primary responsibility for the
management of the Fund's investment
portfolio. Prior to joining LBGAM in 1994, Ms.
Hirsch was a Senior Vice President at Lehman Brothers, where she had primary
responsibility for the selection of
investments for the Lehman Brothers Selected Growth
Stock List (the "List"). Although the
investment approach used in managing the Fund's
portfolio is generally similar to that
which had been used by Ms. Hirsch in selecting
investments for the List, the approach
in managing the Fund differs because, among
other things, (i) the Fund may invest
in a broader range of investments than those
eligible for the List, (ii) the Fund
may employ certain additional investment
techniques, as described under
"Investment Objective and Policies - Other Investments
and Investment Practices," (iii)
shares of the Fund will be purchased and sold by
shareholders on an ongoing basis,
and (iv) the Fund will be subject to various
limitations on its operations, including those imposed under the Code.
LBGAM is located at 3 World Financial
Center, New York, New York 10285. LBGAM is a
wholly-owned subsidiary of Lehman Brothers Holdings, Inc. ("Holdings").
ADMINISTRATOR - THE SHAREHOLDER SERVICES GROUP, INC.
The Shareholder Services Group, Inc.
("TSSG") serves as the Fund's Administrator. As
Administrator, TSSG calculates the
net asset value of the Fund's shares and generally
assists in all aspects of the Fund's
administration and operation. As compensation for
TSSG's services as Administrator, TSSG is entitled to
receive a monthly fee at the annual
rate of 0.20% of the value of the Fund's average
daily net assets. TSSG is a wholly-owned
subsidiary of First Data Corporation. TSSG is
located at 53 State Street, Boston, Massachusetts 02109.
On May 6, 1994, TSSG acquired the third
party mutual fund administration business of
The Boston Company Advisors, Inc.,
an indirect wholly-owned subsidiary of Mellon Bank
Corporation ("Mellon").
In connection with this transaction, Mellon assigned to TSSG
its agreement with Lehman Brothers
that Lehman Brothers and its affiliates, consistent
with their fiduciary duties and
assuming certain service quality standards are met,
would recommend TSSG as the
provider of administration services to the Fund. This duty
to recommend expires on May 21, 2000.
In addition, under the terms of the Stock
Purchase Agreement dated September 14, 1992
between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.),
Lehman Brothers agreed to recommend Boston Safe
Deposit and Trust Company ("Boston Safe"),
an indirect wholly-owned subsidiary of
Mellon, as custodian of mutual funds
affiliated with Lehman Brothers until May 21, 2000
to the extent consistent with its fiduciary duties and other applicable law.
DISTRIBUTOR
Lehman Brothers, located at 3 World
Financial Center, New York, New York 10285, is
Distributor of the Fund's shares.
Lehman Brothers, a leading full service investment
firm serving U.S. and foreign
securities and commodities markets, meets the diverse
financial needs of individuals,
institutions and governments around the world. Lehman
Brothers is a wholly-owned subsidiary of Holdings.
The Company has adopted a services
and distribution plan with respect to the Fund (the
"Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the Fund has agreed
to pay Lehman Brothers a service fee,
accrued daily and paid monthly, at an annual rate
of .25% of the value of the Fund's
average daily net assets, and a distribution fee,
accrued daily and paid monthly, at an
annual rate of .75% of the value of the Fund's
average daily net assets. The service
fee is used by Lehman Brothers to pay its
Investment Representatives or Introducing
Brokers for servicing shareholder accounts.
The distribution fee is paid to Lehman
Brothers for advertising, marketing and
distributing Fund shares, including compensation
for its initial expense of paying
Investment Representatives or Introducing
Brokers a commission upon the sale of Fund
shares and accruals for interest on the
amount of the foregoing expenses that exceed
the amount of the distribution fee and
the CDSC received by the Distributor. Under the
Plan, Lehman Brothers may retain all
or a portion of the distribution fee, and may make
payments out of its distribution fee to Investment
12
<PAGE>
Representatives or Introducing Brokers
that engage in the sale of Fund shares or
provide support services in connection
with the distribution of the shares. The
payments to Lehman Brothers Investment
Representatives and Introducing Brokers for
selling shares of the Fund may
include a commission paid at the time of sale and a
continuing fee based upon the value of
the average daily net assets of the Fund's
shares sold that remain invested in
the Fund. The service fee is credited at the rate
of .25% of the value of the average
daily net assets of the Fund's shares that remain
invested in the Fund. The Plan also
provides that Lehman Brothers may make payments to
assist in the distribution of the Fund's
shares out of the other fees received by it or
its affiliates from the Fund, its past
profits or any other sources available to it.
From time to time, Lehman Brothers may
waive receipt of fees under the Plan while
retaining the ability to be paid under
the Plan thereafter. The fees payable to Lehman
Brothers under the Plan and payments by Lehman Brothers to its Investment
Representatives or Introducing Brokers are
payable without regard to actual expenses
incurred.
EXPENSES
The Fund's expenses include taxes, interest,
fees and salaries of the directors and
officers who are not directors, officers
or employees of the Fund'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, transfer
agent and dividend disbursing agent,
certain insurance premiums, outside auditing and
legal expenses, costs of shareholder reports
and shareholder meetings and any
extraordinary expenses. The Fund also pays
for brokerage fees and commissions (if any)
in connection with the purchase and
sale of portfolio securities. LBGAM and TSSG have
agreed to reimburse the Fund to the
extent required by applicable state law for certain
expenses that are described in the
Statement of Additional Information relating to the
Fund. In addition, LBGAM and
TSSG have agreed to reimburse the Fund for total operating
expenses in excess of 2.10% of
average net assets for a period of at least one year
from the date of this Prospectus.
DIVIDENDS
The Fund's policy is to distribute
its investment income and net realized capital
gains, if any, once a year,
normally at the end of the year in which earned or at the
beginning of the next year.
Unless a shareholder instructs the Fund to pay dividends or
capital gains distributions in
cash and credit them to the shareholder's account at
Lehman Brothers, dividends and
distributions will be reinvested automatically in
additional shares of the Fund at
net asset value. Shares redeemed during the month are
entitled to dividends and
distributions declared up to and including the date of
redemption.
Each shareholder or its authorized
representative will receive an annual statement
designating the amount of any
dividends and distributions made during the year and
their federal tax qualification.
TAXES
The Fund intends to qualify and
elect to be treated as a regulated investment company
for federal income tax purposes
under Subchapter M of the Code. If so qualified, the
Fund will not be subject to federal
income taxes on its investment company taxable
income (as that term is defined
in the Code, determined without regard to the deduction
for dividends paid) and net capital
gain (the excess of the Fund's net long-term
capital gain over its net short-term
capital loss), if any, that it distributes to its
shareholders in each taxable year.
To qualify as a regulated investment company, the
Fund must, among other things, distribute
to its shareholders at least 90% of its net
investment company taxable income for
such taxable year. However, the Fund would be
subject to corporate income tax at a
rate of 35% on any undistributed income or net
capital gain. The Fund must also derive
less than 30% of its gross income in each
taxable year from the sale or other
disposition of certain securities held for less
than three months (the "30% limitation").
If in any year the Fund should fail to
qualify as a regulated investment company,
the Fund would be subject to federal income
tax in the same manner as an ordinary
corporation, and distributions to shareholders
would be taxable to such holders as
ordinary income to the extent of the earnings and
profits of the Fund. Distributions in
excess of earnings and profits will be treated as
a tax-free return of capital, to the
extent of a holder's basis in its shares, and any
excess, as a long- or short-term capital gain.
The Fund intends to distribute
substantially all of its investment company taxable
income each year. Such distributions,
whether paid in cash or reinvested in additional
shares, of net investment income
will be taxable as ordinary income. Federal income
taxes for distributions to an
IRA or a qualified retirement plan are deferred under the
Code. A portion of such dividends
may qualify for the dividends-received deduction
generally available for corporate
shareholders under the Code. Distributions to
shareholders of net capital gains,
whether paid in cash or reinvested in additional
shares, that are designated by the
Fund as "capital gains dividends" will be taxable as
long-term capital gains, regardless
of how long the shares have been held by such
shareholders. Shareholders receiving
distributions from the Fund in the form of
additional shares will be treated
13 <PAGE>
for federal income tax purposes as receiving
a distribution in an amount equal to the
fair market value of the additional shares
on the date of such a distribution.
Gain or loss, if any, recognized on the
sale or other disposition of shares of the Fund
will be taxed as capital gain or loss if
the shares are capital assets in the
shareholder's hands. 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
the 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.
A loss realized on a sale or exchange of shares may be
disallowed if other shares
are acquired within a 61-day period beginning 30 days before
the ending 30 days after the
date that the shares are disposed of.
Dividends and distributions by the
Fund are generally taxable to the shareholders at
the time the dividend or
distribution is made. Any dividend declared by the Fund in
October, November or December of
any calendar year, however, which is payable to
shareholders of record on a
specified date in such a month and not paid on or before
December 31 of such year will
be treated as received by the shareholders as of December
31 of such year, provided that the
dividend is paid during January of the following
year.
The Fund may engage in hedging
involving forward contracts, options and futures
contracts. See "Investment
Objective and Policies - Other Investments and Investment
Practices - Hedging and Derivatives."
Such transactions will be subject to special
provisions of the Code that, among
other things, may affect the character of gains and
losses realized by the Fund (that is,
may affect whether gains or losses are ordinary
or capital), accelerate recognition of
income to the Fund and defer recognition of
certain of the Fund's losses.
These rules could therefore affect the character, amount
and timing of distributions to
shareholders. In addition, these provisions (i) will
require the Fund to "mark-to-market"
certain types of positions in its portfolio (that
is, treat them as if they were closed
out) and (ii) may cause the Fund to recognize
income without receiving cash with
which to pay dividends or make distributions in
amounts necessary to satisfy the
distribution requirements for avoiding income and
excise taxes. The extent to which the
Fund may be able to use such hedging techniques
and continue to qualify as a regulated
investment company may be limited by the 30%
limitation discussed above.
The Fund intends to monitor its transactions, will make the
appropriate tax elections and will
make the appropriate entries in its books and
records when it acquires any forward
contracts, option, futures contract, or hedged
investment in order to mitigate the
effect of these rules and prevent disqualification
of the Fund as a regulated investment company.
The Fund may be required to withhold
federal income tax at a rate of 31% ("backup
withholding") from dividends and
redemption proceeds paid to non-corporate
shareholders. This tax may be
withheld from dividends if (i) the shareholder fails to
furnish the Fund with the
shareholder's correct taxpayer identification number, (ii)
the Internal Revenue Services ("IRS")
notifies the Fund that the shareholder has failed
to report properly certain interest
and dividend income to the IRS and to respond to
notices to that effect, or (iii)
when required to do so, the shareholder fails to
certify that he or she is not subject to backup withholding.
Ordinary income dividends paid by the
Fund to shareholders who are non-resident aliens
or foreign entities will be subject
to a 30% withholding tax unless a reduced rate of
withholding or a withholding exemption
is provided under applicable treaty law or the
income is "effectively connected"
with a U.S. trade or business. Generally, subject to
certain exceptions, capital gain
dividends paid to non-resident shareholders or foreign
entities will not be subject to
U.S. tax. Non-resident shareholders are urged to
consult their own tax advisers
concerning the applicability of the U.S. withholding
tax.
- --------------------------
The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting the
Fund and its shareholders. As noted above, IRAs
receive special tax treatment.
No attempt is made to present a detailed explanation of
the federal, state or local income
tax treatment of the Fund or its shareholders, and
this discussion is not intended as a
substitute for careful tax planning. Accordingly,
potential investors in the Fund
should consult their tax advisers with specific
reference to their own tax situation.
THE FUND'S PERFORMANCE
From time to time, the "total return"
for shares may be quoted in advertisements or
reports to shareholders. Total return
figures show the average percentage change in the
value of an investment in the Fund
from the beginning date of the measuring period to
the end of the measuring period.
These figures reflect changes in the price of the
shares and assume that any income
dividends and/or capital gains distributions made by
the Fund during the period were
reinvested in shares of the Fund. Total return figures
include any applicable CDSC.
These figures also take into account the service and
distribution fees payable with respect to Fund shares.
14
<PAGE>
Total return figures will be
given for the recent one-, five-and ten-year periods, or
the life of the Fund to
the extent it has not been in existence for any such periods,
and may be given for
other periods as well, such as on a year-by-year basis. When
considering average annual
total return figures for periods longer than one year, it is
important to note that the total
return for any one year in the period might have been
greater or less than the average
for the entire period. "Aggregate total return"
figures may be used for various
periods, representing the cumulative change in value of
an investment in Fund shares for
the specific period (again reflecting changes in share
prices and assuming reinvestment
of dividends and distributions). Aggregate total
return may be calculated either
with or without the effect of any applicable CDSC, may
be shown by means of schedules,
charts or graphs and may indicate subtotals of the
various components of total return
(that is, change in the value of initial investment,
income dividends and capital gains distributions).
In reports or other communications to
shareholders or in advertising materials,
performance of Fund shares may be
compared with that of other mutual funds or classes
of shares of other mutual funds, as
listed in the rankings prepared by Lipper
Analytical Services, Inc. or similar
independent services that monitor the performance
of mutual funds, or other industry or
financial publications such as BARRON'S, BUSINESS
WEEK, CDA INVESTMENT TECHNOLOGIES,
INC., CHANGING TIMES, FORBES, FORTUNE, INSTITUTIONAL
INVESTOR, INVESTORS DAILY, MONEY,
MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES,
USA TODAY and THE WALL STREET JOURNAL.
The Fund may also compare its performance to
relevant indices such as the Standard
& Poor's 500 Composite Stock Price Index and the
Russell 2000 Small Capitalization
Index. Performance figures are based on historical
earnings and are not intended to
indicate future performance. The Statement of
Additional Information contains a
further description of the methods used to determine
performance. Investors may call
800-861-4171 to obtain current performance figures.
ADDITIONAL INFORMATION
The Company was incorporated under
the laws of the State of Maryland on May 5, 1993.
The authorized capital stock of
the Company consists of 10,000,000,000 shares having a
par value of $.001 per share.
The Company's Articles of Incorporation currently
authorize the issuance of several
series of shares, corresponding to shares of the Fund
and other investment portfolios of
the Company. The Company's Board of Directors may,
in the future, authorize the issuance
of additional series of capital stock
representing shares of additional
investment portfolios or additional classes of shares
of the Fund or the Company's other
investment portfolios. The Company has received an
order from the SEC permitting it,
subject to certain terms and conditions, to establish
multiple classes of shares within each series.
All shares of the Company have equal
voting rights and will be voted in the aggregate,
and not by series or class, except
where voting by series or class is required by law
or where the matter involved affects
one series or class. Under the corporate law of
Maryland, the Company's state of
incorporation, and the Company's By-Laws (except as
required under the 1940 Act), the
Company is not required and does not currently intend
to hold annual meetings of
shareholders for the election of directors. Shareholders,
however, do have the right to
call for a meeting to consider the removal of one or more
of the Company's directors if such
a request is made, in writing, by the holders of at
least 10% of the Company's outstanding voting securities.
All shares of the Company, when issued, will be fully paid and nonassessable.
Boston Safe, an indirect wholly-owned
subsidiary of Mellon, is located at One Boston
Place, Boston, Massachusetts 02108,
and serves as custodian of the Fund's investments.
TSSG, a subsidiary of First Data Corporation, is
located at 53 State Street, Boston,
Massachusetts 02109, and serves as the Fund's transfer agent.
The Fund sends shareholders a semi-annual
and audited annual report, which includes
listings of investment securities held
by the Fund at the end of the period covered. In
an effort to reduce the Fund's printing and
mailing costs, the Fund may consolidate the
mailing of its semi-annual and annual reports
by household. This consolidation means
that a household having multiple accounts
with the identical address of record would
receive a single copy of each report.
In addition, the Fund may consolidate the mailing
of its Prospectus so that a shareholder
having multiple accounts (e.g., individual, IRA
and/ or Self-Employed Retirement Plan
accounts) would receive a single Prospectus
annually. Any shareholder who does not
want this consolidation to apply to his or her
account should contact his or her Lehman Brothers
Investment Representative or the
Fund's transfer agent. Shareholders may direct
inquiries regarding the Fund to a Lehman
Brothers Investment Representative.
15
<PAGE>
MF2073A4 -C-1994 Lehman Brothers Inc. All Rights
Reserved
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN BROTHERS DAILY INCOME FUND
PROSPECTUS BEGINS ON PAGE ONE. DATED NOVEMBER 28, 1994
<PAGE>
LEHMAN BROTHERS DAILY INCOME FUND
- ------------------------------------------
PROSPECTUS NOVEMBER 28,
1994
This Prospectus describes LEHMAN BROTHERS
DAILY INCOME FUND (the "Fund"), a
separate, diversified money market
portfolio of Lehman Brothers Funds, Inc. (the
"Company"), an open-end management
investment company. This Prospectus relates to
Select Shares and CDSC Shares, two classes of shares offered by the Fund.
[CONTINUED ON NEXT PAGE.]
SHARES OF THE FUND ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE
FUND INVOLVE CERTAIN INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THERE
CAN BE NO ASSURANCE THAT THE FUND
WILL BE ABLE TO MAINTAIN A NET ASSET VALUE OF $1.00
PER SHARE.
LEHMAN BROTHERS INC. sponsors the Fund
and acts as Distributor of the Fund's
shares. LEHMAN BROTHERS GLOBAL ASSET
MANAGEMENT INC. serves as the Fund's
Investment Adviser.
The address of the Fund is 3
World Financial Center, New York, New York 10285. Yield
and other information regarding
the Fund may be obtained through a Lehman Brothers
Investment Representative or by calling 800-861-4171.
This Prospectus briefly sets forth
certain information about the Fund that
investors should know before
investing. Investors are advised to read this
Prospectus and retain it for
future reference. Additional information about the Fund,
contained in a Statement of
Additional Information dated November 28, 1994, as may
be amended or supplemented
from time to time, has been filed with the Securities and
Exchange Commission and is
available to investors without charge by calling 800-
861-4171. The Statement of
Additional Information is incorporated in its entirety
by reference into this Prospectus.
- ----------------------------
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION
OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------
LEHMAN BROTHERS <PAGE>
[CONTINUED FROM PREVIOUS PAGE.]
The Fund's investment objective
is to provide investors with as high a level of
current income as is consistent with
stability of principal. The Fund invests in a
portfolio consisting of a broad range
of U.S. dollar-denominated short-term
instruments, including U.S. government
and U.S. and non-U.S. bank and commercial
obligations and repurchase agreements
relating to such obligations. Under normal market
conditions, at least 25% of the Fund's
total assets will be invested in obligations of
issuers in the banking industry
and repurchase agreements relating to such
obligations.
- ----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE <S>
<C> Benefits to Investors
3
Background and Expense Information 3
Financial Highlights 5
Investment Objective and Policies 6
Purchase of Shares 14
Redemption of Shares 16
Exchange Privilege 19
Valuation of Shares 20
Management of the Fund 21
Dividends 24
Taxes 25
Yields 26
Additional Information 27
</TABLE>
NO PERSON HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS, OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED
HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
2
<PAGE>
- ---------------------------------------------------------
BENEFITS TO INVESTORS
The Fund offers investors several important benefits:
/ / A professionally managed portfolio of high quality money market
instruments, providing investment
diversification that is otherwise beyond the
means of many individual investors.
/ / Investment liquidity through convenient purchase and redemption
procedures.
/ / Stability of principal through maintenance
of a constant net asset value of $1.00
per share (although there is no assurance
that it can do so on a continuing basis).
/ / A convenient way to invest without the
administrative and recordkeeping burdens
normally associated with the direct ownership of securities.
- ------------------------------BACKGROUND AND EXPENSE
INFORMATION
The Fund is authorized to offer
multiple classes of shares. As of the date of this
Prospectus, the Fund offers two classes
of shares, Select Shares and CDSC Shares, each
of which is offered by this Prospectus.
The Fund contemplates that it will in the
future also offer an additional class of
shares, Global Clearing Shares. Each share of
the Fund accrues income in the same
manner, but certain expenses differ based
upon the class. See "Additional
Information." The following Expense Summary lists
the costs and expenses that a
shareholder can expect to incur as an investor in
Select Shares and CDSC Shares
of the Fund based upon, in the case of Select Shares,
the Fund's operating expenses for
the most recent fiscal year, restated to reflect
current fee waivers, and, in the
case of CDSC Shares, estimated operating expenses
for the current fiscal year. The
Expense Summary for CDSC Shares assumes payment of
the maximum contingent deferred sales charge ("CDSC").
3 <PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
<S> <C> <C>
SHAREHOLDER TRANSACTION SELECT CDSC
EXPENSES SHARES SHARES
Maximum CDSC
(as a percentage of proceeds)* None 2.00%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after
waivers)** 0.28% 0.28%
Rule 12b-1 Fees (after
waivers)*** 0.18% 0.18%
Other Expenses--including
Administration
Fees (after waivers)+ 0.29% 0.29%
Total Fund Operating Expenses
(after waivers)++ 0.75% 0.75%
<FN>
* The Fund's CDSC Shares are
subject to a maximum CDSC of 2% of redemption
proceeds during the first year
after the date of purchase, 1% of redemption proceeds
during the second year, and
no CDSC thereafter. The Fund's CDSC Shares will be deemed
to have been purchased on the
same date as the shares of the funds which have been
exchanged through a CDSC Fund
Exchange (as defined under "Purchase of Shares"). The
CDSC set forth in the table above
is the maximum charge imposed on redemptions of CDSC
Shares, and investors may pay an
actual CDSC of less than 2%. See "Redemption of
Shares."
** Reflects voluntary waivers of
advisory fees which are expected to continue in
effect until at least one year from
the date of this Prospectus. Absent such
voluntary waivers, the ratio of
advisory fees to average net assets would be 0.30%.
*** Reflects voluntary waivers of
Rule 12b-1 fees which are expected to
continue in effect until at least
one year from the date of this Prospectus.
Absent such voluntary waivers, the ratio of
Rule 12b-1 fees to average net assets
would be 0.25%.
+ Reflects voluntary waivers of
administration fees which are expected to continue
in effect until at least one
year from the date of this Prospectus. Absent
such voluntary waivers, the ratio
of other expenses to average net assets would be
0.31%.
++ Absent the voluntary waivers referred
to above, the ratio of total fund
operating expenses to average net assets would be 0.86%.
</TABLE>
4 <PAGE>
EXAMPLE
You would pay the following
expenses on a $1,000 investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
<S> <C> <C>
1 3
YEAR YEARS Select Shares:
(assuming complete redemption at the end of each time period) $ 8
$24
CDSC Shares:
Assuming complete redemption at end of each time period* $28
$24
Assuming no redemption $ 8 $24
<FN>
* Assumes deduction at the time of
redemption of the maximum CDSC applicable
for that period. </TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED
A REPRESENTATION OF ACTUAL EXPENSES AND RATES
OF RETURN, WHICH MAY BE GREATER OR LESS
THAN THOSE SHOWN. The foregoing table has
not been audited by the Fund's independent auditors.
- --------------------------------------------------------FINANCIAL HIGHLIGHTS
The following financial highlights
for the fiscal year ended July 31, 1994 are
derived from the Fund's financial
statements audited by Ernst & Young LLP,
independent auditors, whose report
thereon appears in the Company's Annual Report
dated July 31, 1994. This information
should be read in conjunction with the
financial statements and notes thereto
that also appear in the Company's Annual
Report, which are incorporated
by reference into the Statement of Additional
Information.
5
<PAGE>
Selected data for a Select Share outstanding throughout the period:
<TABLE>
<CAPTION>
PERIOD ENDED
7/31/94* <S>
<C> Net asset value, beginning of
period......... $ 1.00
----------Income from
investment operations:
Net investment income (1).................... 0.0297
Dividends from net investment income......... (0.0297)
-----------
Net asset value, end of period............... $ 1.00
- ---------------------
Total return (2)............................. 3.03% -----------
- -----------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's).......
$818,555 Ratio of net investment income
to average
net assets (3)............................ 3.01%
Ratio of operating expenses to average net
assets (3)(4)............................. 0.66%
<FN>
- ------------------------------
* The Fund commenced selling Select Shares to the public on August 2, 1993.
As of the date of this Prospectus,
the Fund had not yet sold any CDSC Shares to
the public.
(1) Net investment income before waiver
of fees by the Investment Adviser,
Administrator and Distributor was $0.0269.
(2) Total return represents aggregate total return for the period indicated.
(3) Annualized.
(4) Annualized expense ratio before waiver
of fees by the Investment Adviser,
Administrator and Distributor was 0.95%.
</TABLE>
- --------------------------------INVESTMENT OBJECTIVE AND
POLICIES
The Fund's investment objective is to
provide investors with as high a level of
current income as is consistent with
stability of principal. In pursuing its
investment objective, the Fund,
which operates as a diversified investment
company, invests in a broad
range of U.S. dollar-denominated short-term
instruments, including U.S.
government and U.S. and non-U.S. bank and commercial
obligations. There can be no
assurance that the Fund will achieve its investment
objective.
The Fund invests only in securities
which are purchased with and payable in U.S.
dollars and which have (or,
pursuant to regulations adopted by the Securities and
Exchange Commission (the "SEC"),
will be deemed to have) remaining maturities
of thirteen months or less at the
date of purchase by the Fund. The Fund maintains a
dollar-weighted average portfolio maturity of 90 days or less. The
6
<PAGE>
Fund follows these policies to maintain
a constant net asset value of $1.00 per share,
although there is no assurance that it can do so on a continuing basis.
The Fund will limit its portfolio
investments to securities that are determined by its
Investment Adviser to present
minimal credit risks pursuant to guidelines established
by the Company's Board of
Directors and which are "Eligible Securities" at the
time of acquisition by the
Fund. The term "Eligible Securities" includes
securities rated by the "Requisite NRSROs"
in one of the two highest short-term
rating categories, securities of
issuers that have received such ratings with
respect to other short-term debt
securities and comparable unrated securities.
"Requisite NRSROs" means (a) any two
nationally recognized statistical rating
organizations ("NRSROs") that have
issued a rating with respect to a security or class
of debt obligations of an issuer, or (b)
one NRSRO, if only one NRSRO has issued
such a rating at the time that the Fund
acquires the security. A discussion of the
ratings categories of the NRSROs
is contained in the Appendix to the Statement of
Additional Information.
The Fund generally may not invest more
than 5% of its total assets in the
securities of any one issuer, except
for securities issued or guaranteed by the U.S.
government, its agencies or
instrumentalities ("U.S. government securities").
In addition, the Fund may not
invest more than 5% of its total assets in Eligible
Securities that have not received
the highest rating from the Requisite NRSROs and
comparable unrated securities
("Second Tier Securities") and may not invest more
than 1% of its total
assets in the Second Tier Securities of any one issuer. The
Fund may invest more than
5% (but no more than 25%) of the then-current value of the
Fund's total assets in the
securities of a single issuer for a period of up to three
business days, provided that
(a) the securities either are rated by the Requisite
NRSROs in the highest
short-term rating category or are securities of issuers that
have received such rating with respect
to other short-term debt securities or
are comparable unrated securities,
and (b) the Fund does not make more than one such
investment at any one time.
The following descriptions
illustrate the kinds of instruments in which the Fund
invests:
The Fund may purchase obligations
of issuers in the banking industry, such as
commercial paper, notes, certificates of deposit, bankers'
7
<PAGE>
acceptances and time deposits and U.S.
dollar-denominated instruments issued or
supported by the credit of U.S.
or non-U.S. banks or savings institutions having total
assets at the time of purchase
in excess of $1 billion. The Fund may also make
interest-bearing savings deposits
in commercial and savings banks in amounts not
in excess of 5% of its assets.
The Fund may invest in
commercial paper, other short-term obligations and
repurchase agreements. The
Fund may invest without limit in U.S.
dollar-denominated commercial paper and obligations of non-U.S. issuers.
The Fund may invest substantially
in U.S. dollar-denominated securities of non-
U.S. issuers, including obligations of
non-U.S. banks or non-U.S. branches of U.S.
banks and debt securities of
non-U.S. issuers, where the Investment Adviser deems
the instrument to present minimal
credit risks. Investments in non-U.S. banks or
non-U.S. issuers present certain
risks, including those resulting from future
political and economic developments and
the possible imposition of non-U.S.
governmental laws or restrictions and reduced availability of public
information. Non-U.S. issuers are not
generally subject to uniform accounting,
auditing and financial reporting
standards or to other regulatory practices and
requirements applicable to domestic issuers.
The Fund may purchase obligations
issued or guaranteed by the U.S. government or its
agencies and instrumentalities. Obligations of certain agencies and
instrumentalities of the U.S. government
are backed by the full faith and credit of
the United States. Others are backed by
the right of the issuer to borrow from the
U.S. Treasury or are backed only by
the credit of the agency or instrumentality
issuing the obligation.
In addition, the Fund may, when
deemed appropriate in light of the Fund's
investment objective, invest in high
quality, short-term obligations issued by state
and local governmental issuers which
carry yields that are competitive with those of
other types of money market instruments of comparable quality.
INVESTMENT LIMITATIONS
The investment limitations enumerated
below are fundamental and may not be
changed by the Company's Board of Directors without
8
<PAGE>
the affirmative vote of the
holders of a majority of the Fund's outstanding
shares. The Fund's investment
objective and the other investment policies
described herein may be changed
by the Board of Directors at any time. If there is a
change in the investment objective
of the Fund, shareholders of the Fund should
consider whether the Fund remains
an appropriate investment in light of their then
current financial position and needs.
(A complete list of the Fund's investment
limitations that cannot be changed
without a vote of shareholders is contained in the
Statement of Additional Information
under "Investment Objectives and Policies.")
- 1The Fund may not borrow money, except
from banks for
temporary purposes and then in amounts not exceeding one-third of the value of
its total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in
connection with any such borrowing and in amounts
not in excess of the lesser
of the dollar amounts borrowed or one-third of the
value of its total assets at
the time of such borrowing. Additional investments
will not be made by the Fund when borrowings exceed 5% of its total assets.
- - 2The 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,
except that the Fund will invest 25% or more of
the value of its total assets in
obligations of issuers in the banking industry or
in obligations, such as
repurchase agreements, secured by such obligations (unless
the Fund is in a temporary
defensive position); provided that there is no limitation
with respect to investments in U.S. government securities.
- - 3The 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.
The third investment limitation
listed above will give the Fund the ability to
invest, with respect to 25% of
the value of its total assets, more than 5% of its
assets in any one issuer (excluding investments
9
<PAGE>
in U.S. government securities)
only in the event that Rule 2a-7 under the
Investment Company Act of 1940,
as amended (the "1940 Act"), is amended in the
future. The Fund's operating policy,
which complies with Rule 2a-7 as currently in
effect, provides that, with certain
exceptions, the Fund may not invest more than 5% of
its total assets in the securities of
any one issuer, except for U.S. government
securities.
OTHER INVESTMENT PRACTICES
FLOATING AND VARIABLE RATE NOTES. The
Fund may purchase variable or floating rate
notes, which are instruments that
provide for adjustments in the interest rate on
certain reset dates or whenever a
specified interest rate index changes, respectively.
Such notes might not be actively
traded in a secondary market but, in some cases, the
Fund may be able to resell such
notes in the dealer market. Variable and floating
rate notes typically are rated by
credit rating agencies, and their issuers must
satisfy the same quality criteria as
set forth above. The Fund invests in variable or
floating rate notes only when the
Investment Adviser deems the investment to involve
minimal credit risk.
Certain of the floating or variable
rate notes that may be purchased by the Fund may
carry a demand feature that would
permit the holder to tender them back to the issuer
of the underlying instrument, or to
a third party, at par value prior to maturity.
Where necessary to ensure that such
a note is an Eligible Security, the Fund will
require that the issuer's
obligation to pay the principal of the note be backed by
an unconditional third-party letter or
line of credit, guarantee or commitment
to lend. If a floating or variable rate
demand note is not actively traded in a
secondary market, it may be difficult
for the Fund to dispose of the note if the
issuer were to default on its payment
obligation or during periods that the Fund is
not entitled to exercise its demand rights,
and the Fund could, for this or other
reasons, suffer a loss to the extent
of the default. While, in general, the Fund will
invest only in securities that mature within
thirteen months of purchase, the Fund
may invest in floating or variable rate
demand notes which have nominal maturities in
excess of thirteen months, if such
instruments carry demand features that comply with
conditions established by the SEC.
10
<PAGE>
REPURCHASE AGREEMENTS. The Fund may
purchase instruments from financial
institutions, such as banks and
broker-dealers, subject to the seller's
agreement to repurchase them at an
agreed upon time and price ("repurchase
agreements"). The seller under a
repurchase agreement will be required to
maintain the value of the securities
subject to the agreement at not less than the
repurchase price. Default by the
seller would, however, expose the Fund to possible
loss because of adverse market action
or delay in connection with the disposition of
the underlying obligations.
REVERSE REPURCHASE AGREEMENTS. The
Fund may borrow funds for temporary purposes by
entering into reverse repurchase
agreements in accordance with its investment
limitations described above. Pursuant
to such agreements, the Fund would sell
portfolio securities to financial institutions
and agree to repurchase them at an
agreed upon date and price. The
Fund would consider entering into reverse repurchase
agreements to avoid otherwise selling securities during
unfavorable market conditions
to meet redemptions. Reverse repurchase
agreements involve the risk that the market
value of the portfolio securities sold by
the Fund may decline below the price of
the securities the Fund is obligated to repurchase.
LOANS OF PORTFOLIO SECURITIES. The Fund
may lend its portfolio securities
consistent with its investment policies.
The Fund may lend portfolio securities
against collateral, consisting of cash
or securities which are consistent with its
permitted investments, which is equal at all
times to at least 100% of the value of
the securities loaned. There is no
limitation on the amount of securities that
may be loaned. Such loans would involve
risks of delay in receiving additional
collateral or in recovering the securities
loaned or even loss of rights in the
collateral should the borrower of
the securities fail financially. However, loans
will be made only to borrowers deemed by the
Fund's Investment Adviser to be of
good standing and only when, in
the Adviser's judgment, the income to be earned
from the loans justifies the attendant risks.
WHEN-ISSUED SECURITIES. The Fund
may purchase securities on a "when-issued" basis.
When-issued securities are securities
purchased for delivery beyond the normal
settlement date at a stated price and
yield. The Fund will generally not pay for
such securities or start earning
interest on them until they are received.
Securities purchased on a when-issued
basis are recorded as an asset and are
11
<PAGE>
subject to changes in value based upon changes
in the general level of interest rates.
The Fund expects that commitments to
purchase when-issued securities will not exceed
25% of the value of its total
assets absent unusual market conditions. The
Fund does not intend to purchase
when-issued securities for speculative purposes
but only in furtherance of its investment objectives.
STAND-BY COMMITMENTS. The Fund may enter
into put transactions, including
transactions sometimes referred to
as stand-by commitments, with respect to
securities held in its portfolio.
In a put transaction, the Fund acquires the right
to sell a security at an agreed upon
price within a specified period prior to its
maturity date, and a stand-by commitment
entitles the Fund to same-day settlement and
to receive an exercise price
equal to the amortized cost of the underlying security
plus accrued interest, if any,
at the time of exercise. In the event that the party
obligated to purchase the underlying security from
the Fund defaults on its
obligation to purchase the
underlying security, then the Fund might be unable to
recover all or a portion of any
loss sustained from having to sell the security
elsewhere. Acquisition of puts will have
the effect of increasing the cost of
securities subject to the put and
thereby reducing the yields otherwise available from
such securities.
STRIPS. The Fund may invest in
separately traded principal and interest
components of securities backed by
the full faith and credit of the U.S.
Treasury. The principal and interest
components of U.S. Treasury bonds with
remaining maturities of longer than
ten years are eligible to be traded
independently under the Separate Trading
of Registered Interest and Principal of
Securities ("STRIPS") program.
Under the STRIPS program, the principal and
interest components are separately
issued by the U.S. Treasury at the request of
depository financial institutions,
which then trade the component parts
separately. Under the stripped bond
rules of the Internal Revenue Code of 1986, as
amended (the "Code"), investments
by the Fund in STRIPS will result in the accrual of
interest income on such investments
in advance of the receipt of the cash
corresponding to such income.
The interest component of STRIPS may be more volatile
than that of U.S. Treasury bills
with comparable maturities. In accordance with
Rule 2a-7, the Fund's investments in
STRIPS are limited to those with maturity
components not exceeding thirteen
months. The Fund will not actively trade in
STRIPS. The Fund will limit investments
in STRIPS to 20% of its total assets.
12
<PAGE>
PARTICIPATION INTERESTS. The Fund may purchase
participation certificates issued by a
bank, insurance company or other financial
institution in obligations owned by such
institutions or affiliated organizations
that may otherwise be purchased by the Fund,
and loan participation certificates.
A participation certificate gives the Fund an
undivided interest in the
underlying obligations in the proportion that the
Fund's interest bears to the total
principal amount of such obligations. Certain of
such participation certificates
may carry a demand feature that would permit the
holder to tender them back to the
issuer or to a third party prior to maturity. See
"Floating and Variable Rate Notes"
for additional information with respect to
demand instruments that may be purchased
by the Fund. The Fund may invest in
participation certificates even if
the underlying obligations carry stated
maturities in excess of thirteen months,
upon compliance with certain conditions
contained in Rule 2a-7.
Loan participation certificates are considered by the
Fund to be "illiquid" for purposes
of its investment policies with respect to
illiquid securities as set forth under Illiquid Securities below.
OTHER MONEY MARKET FUNDS. The Fund may
invest up to 10% of the value of its total
assets in shares of other money market
funds. The Fund will invest in other money
market funds only if such funds are
subject to the requirements of Rule 2a-7 and are
considered to present minimal credit
risks. The Fund's Investment Adviser will
monitor the policies and investments of
other money market funds in which it
invests, based on information furnished
to shareholders of those funds, with
respect to their compliance with
their investment objectives and Rule 2a-7.
ILLIQUID SECURITIES. The Fund will
not knowingly invest more than 10% of the value
of its total assets in illiquid
securities, including time deposits and repurchase
agreements having maturities
longer than seven days. Securities that have readily
available market quotations are
not deemed illiquid for purposes of this limitation
(irrespective of any legal or
contractual restrictions on resale). The Fund may
invest in commercial obligations
issued in reliance on the so-called "private
placement exemption" from
registration afforded by Section 4(2) of the Securities Act
of 1933, as amended ("Section 4(2) paper"). The
Fund may also purchase securities that
are not registered under the Securities Act
of 1933, as amended, but which can be
sold to qualified institutional buyers
in accordance with Rule 144A under that Act
("Rule 144A securities"). Section 4(2)
13
<PAGE>
paper is restricted as to disposition
under the federal securities laws, and
generally is sold to institutional
investors such as the Fund who agree that they
are purchasing the paper for investment
and not with a view to public
distribution. Any resale by the
purchaser must be in an exempt transaction.
Section 4(2) paper normally is resold
to other institutional investors like the Fund
through or with the assistance of the
issuer or investment dealers who make a market
in the Section 4(2) paper, thus
providing liquidity. Rule 144A securities
generally must be sold to other qualified
institutional buyers. If a particular
investment in Section 4(2) paper
or Rule 144A securities is not determined to
be liquid, that investment will
be included within the 10% limitation on
investment in illiquid securities.
The Fund's Investment Adviser will monitor the
liquidity of such restricted
securities under the supervision of the Board of
Directors. See "Investment
Objective and Policies--Additional Information on
Portfolio Instruments and
Investment Practices--Illiquid and Restricted Securities"
in the Statement of Additional Information.
- ---------------------------------------------------PURCHASE OF SHARES
Purchases of Fund shares must be
made through a brokerage account maintained
through Lehman Brothers Inc.
("Lehman Brothers") or a broker that clears
securities transactions through
Lehman Brothers on a fully disclosed basis (an
"Introducing Broker"). The Fund
reserves the right to reject any purchase order and to
suspend the offering of shares for a period of time.
The minimum initial investment in
each class of the Fund is $5,000 and the
minimum subsequent investment
is $1,000, except for purchases of the Fund
through (a) Individual Retirement Accounts ("IRAs")
and Self-Employed Retirement Plans,
for which the minimum initial
and subsequent investments are $1,000 and $500,
respectively, and (b) retirement
plans qualified under Section 403(b)(7) of the Code,
for which the minimum and
subsequent investment is $500. In addition, for
participants with an automatic
purchase arrangement in connection with their brokerage
accounts, there is no minimum
initial or subsequent investment. There are no
minimum investment requirements
for employees of Lehman Brothers and its affiliates.
The Fund reserves the right at any
time to vary the initial and subsequent investment
minimums. No certificates are issued for Fund shares.
14
<PAGE>
The Fund's shares are sold continuously
at their net asset value next determined after
a purchase order is received
and becomes effective. A purchase order becomes
effective when Lehman Brothers or
an Introducing Broker receives, or converts the
purchase amount into, federal
funds (I.E., monies of member banks within the Federal
Reserve System held on deposit at
a Federal Reserve Bank). When orders for the
purchase of Fund shares are paid
for in federal funds, or are placed by an investor
with sufficient federal funds or
cash balance in the investor's brokerage account with
Lehman Brothers or the Introducing Broker,
the order becomes effective on the day of
receipt if received prior to the close
of regular trading on the New York Stock
Exchange, Inc. (the "NYSE"), currently 4:00 p.m.,
Eastern time, on any day the Fund
calculates its net asset value. See "Valuation of
Shares." Purchase orders received
after the close of regular trading
on the NYSE are effective as of the time the
net asset value is next determined.
When orders for the purchase of Fund shares are
paid for other than in federal funds,
Lehman Brothers or the Introducing Broker,
acting on behalf of the investor, will
complete the conversion into, or itself
advance, federal funds, and the order
becomes effective on the day following its
receipt by Lehman Brothers or
the Introducing Broker. Shares purchased begin to
accrue income dividends on the
next business day following the day that the purchase
order becomes effective.
On or about February 21,
1995, the Fund will begin processing purchase orders and
redemption requests for
the Fund's shares on a new processing system (the "System
Transfer"). After the
System Transfer a purchase order will become effective on
the day the Fund
receives sufficient federal funds to cover the purchase price and
will be priced at the net
asset value next determined after the Fund's Transfer Agent
receives such federal funds.
Investors should note that there may be a delay
between the time when Lehman Brothers
or an Introducing Broker receives purchase
proceeds and the time when those
proceeds are transmitted to the Fund and that
Lehman Brothers or the Introducing Broker,
as applicable, may benefit from the use of
temporarily uninvested funds.
Shares purchased after the System Transfer will begin to
accrue income dividends on the day the purchase order becomes effective.
The Fund's Select Shares are
available on a no-load basis to all investors except
for investors who are investing through
a CDSC Fund Exchange (as defined below).
Investors who are investing in
15
<PAGE>
the Fund in connection with a CDSC
Fund Exchange may purchase only CDSC Shares
pursuant to such exchange. For
purposes of this Prospectus, a "CDSC Fund
Exchange" is an exchange of shares
of another fund in the Lehman Brothers Group of
Funds which are subject to a CDSC upon redemption for shares in the Fund.
- --------------------------------------REDEMPTION OF SHARES
Holders of Select Shares may
redeem their shares without charge on any day on which
the Fund calculates its
net asset value. Holders of CDSC Shares may also redeem their
shares on any day the Fund
calculates its net asset value, subject to any applicable
CDSC as described below.
See "Valuation of Shares." Redemption requests received in
proper form prior to
the close of regular trading on the NYSE are priced at the
net asset value per share
determined on that day. Redemption requests received
after the close of regular
trading on the NYSE are priced at the net asset value as
next determined. The Fund
normally transmits redemption proceeds for credit to the
shareholder's account at
Lehman Brothers or the Introducing Broker at no charge (other
than any applicable CDSC in
the case of CDSC Shares) on the business day
following receipt of a
redemption request. Generally, these funds will not be
invested for the
shareholder's benefit without specific instruction, and Lehman
Brothers or the Introducing Broker
will benefit from the use of temporarily uninvested
funds.
Effective after the System Transfer,
redemption requests received in proper form prior
to noon, Eastern time, on any
day the Fund calculates its net asset value will be
priced at the net asset value
per share determined at noon on that day and redemption
requests received after such time will be priced at the net asset value next
determined. Commencing on the
date of the System Transfer and thereafter, the
Fund will normally transmit redemption
proceeds for credit to the shareholder's
account on the day of receipt of the redemption request.
A shareholder who pays for Fund shares
by personal check will be credited with the
proceeds of a redemption of those
shares only after the purchase check has been
collected, which may take
up to 15 days or more. A shareholder who anticipates
the need for more immediate access
to his or her investment should purchase shares
with federal funds by bank wire or with a certified or cashier's check.
16
<PAGE>
Holders of Select Shares who
purchase securities through Lehman Brothers or the
Introducing Broker may
take advantage of special redemption procedures under which
Fund shares will be
redeemed automatically to the extent necessary to satisfy
debit balances arising
in the shareholder's account with Lehman Brothers or the
Introducing Broker.
One example of how an automatic redemption may occur involves the
purchase of securities.
If a shareholder purchases securities but does not pay for
them by settlement date,
the number of Select Shares necessary to cover the debit will
be redeemed automatically as
of the settlement date, which usually occurs five
business days after the
trade date. Shareholders not wishing to participate in these
arrangements should notify
a Lehman Brothers Investment Representative.
A Fund account that
is reduced by a shareholder to a value of $1,000 or less ($500
for IRAs and Self-Employed
Retirement Plans) may be subject to redemption by the
Fund, but only after the shareholder
has been given at least 30 days in which to
increase the account balance to
more than $1,000 ($500 for IRAs and Self-Employed
Retirement Plans). In addition,
the Fund may redeem shares involuntarily or
suspend the right of redemption
as permitted under the 1940 Act, as described in
the Statement of Additional
Information under "Additional Purchase and Redemption
Information."
Fund shares may be redeemed in one of the following ways:
REDEMPTION THROUGH LEHMAN BROTHERS
Redemption requests may be made
through Lehman Brothers or an Introducing
Broker.
REDEMPTION BY MAIL
Shares held by Lehman Brothers on
behalf of investors must be redeemed by
submitting a written request to a Lehman
Brothers Investment Representative. All other
shares may be redeemed by submitting
a written request for redemption to the Fund's
transfer agent:
Lehman Brothers Funds, Inc. c/o
The Shareholder Services Group, Inc. P.O. Box 9184
Boston, Massachusetts 02009-9184
17
<PAGE>
A written redemption request
to the Fund's transfer agent must (a) state the class
and number of shares to be
redeemed, (b) indicate the name of the Fund from which
such shares are to be
redeemed, (c) identify the shareholder's account number and
(d) be signed by each registered
owner exactly as the shares are registered. Any
signature appearing on a
redemption request must be guaranteed by a domestic
bank, a savings and loan
institution, a domestic credit union, a member bank of the
Federal Reserve System or a
member firm of a national securities exchange. The
Fund's transfer agent may
require additional supporting documents for redemptions
made by corporations,
executors, administrators, trustees and guardians. A
redemption request will not
be deemed to be properly received until the Fund's
transfer agent receives all required documents in proper form.
CONTINGENT DEFERRED SALES CHARGE ON CDSC SHARES
A CDSC payable to Lehman Brothers is
imposed on any redemption of CDSC Shares,
however effected, that causes
the current value of a shareholder's CDSC Share
account to fall below the dollar amount
of all payments by the shareholder for the
purchase of CDSC Shares ("purchase payments")
during the preceding two years. No
charge is imposed to the extent
that the net asset value of the CDSC Shares redeemed
does not exceed (a) the current
net asset value of CDSC Shares purchased through
reinvestment of dividends or
capital gains distributions, plus (b) the current net
asset value of CDSC Shares purchased
more than two years prior to the redemption,
plus (c) increases in the net
asset value of the shareholder's CDSC Shares above
the purchase payments made during the preceding two years.
In circumstances in which the CDSC is
imposed, the amount of the charge will depend
on the number of years since the shareholder
made the purchase payment from which the
amount is being redeemed. Solely for
purposes of determining the number of years
since a purchase payment was made,
all purchase payments made during a month will be
aggregated and deemed to have
been made on the last Friday of the preceding Lehman
Brothers statement month. The Fund's
CDSC Shares will be deemed to have been
purchased on the same date as the shares of the funds which have
18
<PAGE>
been exchanged through a CDSC Fund Exchange.
The following table sets forth the rates
of the CDSC for redemptions of CDSC Shares:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C> First
2.00%
Second 1.00%
Third 0.00%
</TABLE>
The purchase payment from which a
redemption of CDSC Shares is made is assumed
to be the earliest purchase
payment from which a full redemption has not already been
effected. In the case of
redemptions of shares of other funds in the Lehman Brothers
Group of Funds issued in
exchange for CDSC Shares of the Fund, the term "purchase
payments" refers to the
purchase payments for the shares given in exchange. In the
event of an exchange
of shares of funds with differing CDSC schedules, the shares
will be, in all cases, subject
to the higher CDSC schedule. See "Exchange
Privilege."
WAIVERS OF CDSC. The CDSC will
be waived on: (a) exchanges (see "Exchange
Privilege"); (b) redemptions of
shares following the death or disability of the
shareholder; (c) redemptions
of shares in connection with certain post-
retirement distributions and
withdrawals from retirement plans or IRAs; (d) involuntary
redemptions; (e) redemption
proceeds from other funds in the Lehman Brothers Group of
Funds that are reinvested within
30 days of the redemption; (f) redemptions of
shares in connection with a
combination of any investment company with the Fund by
merger, acquisition of assets
or otherwise; and (g) redemptions of shares owned by
employees of Lehman Brothers and its affiliates.
- --------------------------------------EXCHANGE PRIVILEGE
CDSC and Select Shares of the
Fund may be exchanged without charge for shares of the
same class of certain other
funds in the Lehman Brothers Group of Funds. In exchanging
shares, a shareholder must
meet the minimum initial investment requirement of
the fund into which the
exchange is being made and the shares involved must be
legally available for sale in the state where the shareholder resides.
19
<PAGE>
Orders for exchanges will be
accepted only on days on which both funds involved
determine their respective
net asset values. To obtain information regarding the
availability of funds into which
shares of the Fund may be exchanged, investors should
contact a Lehman Brothers Investment Representative.
TAX EFFECT. The exchange
of shares of one fund for shares of another fund is
treated for federal income
tax purposes as a sale of the shares given in
exchange by the shareholder.
Therefore, an exchanging shareholder may realize a
taxable gain or loss in connection with an exchange.
CDSC. Holders of CDSC Shares may
exchange their shares without the imposition of an
exchange fee. In the event
holders of CDSC Shares of the Fund exchange all or a portion
of their CDSC Shares for shares
in any of the funds in the Lehman Brothers Group
of Funds imposing a CDSC higher
than that imposed by the Fund on the CDSC Shares, the
exchanged shares will be subject
to the higher applicable CDSC. Upon an exchange,
the new shares will be deemed to
have been purchased on the same date as the CDSC
Shares which have been exchanged.
ADDITIONAL INFORMATION REGARDING
THE EXCHANGE PRIVILEGE. Shareholders exercising the
exchange privilege with any of
the other funds in the Lehman Brothers Group of Funds
should review the prospectus of
that fund carefully prior to making an exchange. Lehman
Brothers reserves the right to
reject any exchange request. The exchange privilege may
be modified or terminated at any
time after notice to shareholders. For further
information regarding
the exchange privilege or to obtain the current prospectuses
for members of the Lehman
Brothers Group of Funds, investors should contact a
Lehman Brothers Investment Representative.
- -----------------------------------------VALUATION OF SHARES
The net asset value per
share of each class is calculated on each day, Monday
through Friday, except
on days on which the NYSE or the Federal Reserve Bank of Boston
is closed. Currently one or both
of these institutions are scheduled to be closed on
the customary national business
holidays of New Year's Day, Martin Luther King, Jr's.
Birthday (observed), Presidents' Day (observed),
Good Friday, Memorial Day (observed),
Independence Day, Labor Day,
20
<PAGE>
Columbus Day (observed), Veterans Day,
Thanksgiving and Christmas and on the
preceding Friday or subsequent Monday
when one of these holidays falls on a
Saturday or Sunday, respectively.
The net asset value per share of each class of the
Fund is currently determined as of
the close of regular trading on the NYSE (currently
4:00 p.m., Eastern time). After the
System Transfer, the net asset value per share
of each class of the Fund will be determined
at noon on each day on which the Fund
computes its net asset value. The net
asset value per each Select Share and CDSC
Share is computed by dividing the value of
the net assets of the Fund attributable to
the relevant class of shares by the total
number of shares of that class outstanding.
The Fund's assets are valued on the basis
of amortized cost, which involves valuing
a portfolio instrument at its cost 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. The Fund seeks to maintain a
constant net asset value of $1.00 per share,
although there can be no assurance that
it can do so on a continuing basis.
Further information regarding the Fund's valuation
policies is contained in the Statement of Additional Information.
- --------------------------------------MANAGEMENT OF THE FUND
The business and affairs of the
Fund are managed under the direction of the
Company's Board of Directors. The
Board of Directors approves all significant
agreements between the Company
and the persons or companies that furnish
services to the Fund, including
agreements with its Distributor, Investment
Adviser, Administrator, Custodian and
Transfer Agent. The day-to-day operations of
the Fund are delegated to its
Investment Adviser and Administrator. One of the
directors and all of the
Company's officers are affiliated with Lehman Brothers,
The Shareholder Services Group, Inc.
or one of their affiliates. The Statement of
Additional Information relating to
the Fund contains general background
information regarding each
director and executive officer of the Company.
INVESTMENT ADVISER--LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
Lehman Brothers Global Asset Management
Inc. ("LBGAM") serves as the Investment
Adviser to the Fund. LBGAM, together
21
<PAGE>
with other Lehman Brothers
investment advisory affiliates, had approximately $11
billion in assets under management
as of September 30, 1994. Subject to the
supervision and direction of
the Company's Board of Directors, LBGAM manages the Fund's
portfolio in accordance with
the Fund's investment objective and policies,
makes investment decisions for
the Fund and places orders to purchase and sell
securities. As compensation for
the services of LBGAM as Investment Adviser to the
Fund, LBGAM is entitled to receive a
monthly fee from the Fund at the annual rate of
0.30% of the value of the
Fund's average daily net assets. During the fiscal year
ended July 31, 1994, LBGAM
received advisory fees at the annual rate of 0.17% of the
value of the Fund's average daily net assets.
LBGAM is located at 3 World
Financial Center, New York, New York 10285. LBGAM is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
ADMINISTRATOR AND TRANSFER AGENT-THE SHAREHOLDER SERVICES GROUP, INC.
The Shareholder Services Group,
Inc. ("TSSG"), located at 53 State Street,
Boston, Massachusetts 02109,
serves as the Fund's Administrator and Transfer Agent.
TSSG is a wholly-owned
subsidiary of First Data Corporation. As Administrator,
TSSG calculates the net
asset value of the Fund's shares and generally assists in
all aspects of the Fund's
administration and operation. As compensation for TSSG's
services as Administrator,
TSSG is entitled to receive a monthly fee from the Fund at
the annual rate of 0.20% of
the value of the Fund's average daily net assets. TSSG is
also entitled to receive a
fee from the Fund for its services as Transfer Agent.
On May 6, 1994, TSSG acquired
the third party mutual fund administration
business of The Boston
Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank
Corporation ("Mellon"). In connection with this
transaction, Mellon assigned
to TSSG its agreement with Lehman Brothers that Lehman
Brothers and its affiliates,
consistent with their fiduciary duties and assuming
certain service quality standards
are met, would recommend TSSG as the provider of
administration services to the Fund.
This duty to recommend expires on May 21,
2000. In addition, under the termsofthe
22
<PAGE>
Stock Purchase Agreement dated September
14, 1992 between Mellon and Lehman
Brothers (then named Shearson Lehman
Brothers Inc.), Lehman Brothers agreed to
recommend Boston Safe Deposit and
Trust Company ("Boston Safe"), an indirect
wholly-owned subsidiary of Mellon, as
Custodian of mutual funds affiliated with Lehman
Brothers until May 21, 2000 to
the extent consistent with its fiduciary duties and
other applicable law.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Lehman Brothers, located at 3 World Financial Center,
New York, New York 10285, is the
Distributor of the Fund's shares. Lehman Brothers,
a leading full service investment
firm, meets the diverse financial needs of
individuals, institutions and governments
around the world.
The Company has adopted a plan of
distribution with respect to each class of the Fund
(the "Plan of Distribution") pursuant
to Rule 12b-1 under the 1940 Act. Under the
Plan of Distribution, the Fund
has agreed with respect to the Select Shares and the
CDSC Shares to pay Lehman
Brothers monthly for advertising, marketing and
distributing its shares at an annual
rate of 0.25% of its average daily net assets.
Under the Plan of Distribution,
Lehman Brothers may retain all or a portion of the
payments made to it pursuant to
the Plan and may make payments to its Investment
Representatives or Introducing Brokers
that engage in the sale of such classes of Fund
shares. The Plan of Distribution also
provides that Lehman Brothers may make payments
to assist in the distribution of
each class of the Fund's shares out of the
other fees received by it
or its affiliates from the Fund, its past profits or any
other sources available to it.
From time to time, Lehman Brothers may waive receipt of
fees under the Plan of Distribution
while retaining the ability to be paid under such
Plan thereafter. The fees payable
to Lehman Brothers under the Plan of
Distribution for advertising,
marketing and distributing such shares of the Fund and
payments by Lehman Brothers to
its Investment Representatives or Introducing Brokers
are payable without regard to actual
expenses incurred. Lehman Brothers Investment
Representatives and any other
person entitled to receive compensation for
selling shares of the Fund
may receive different levels of compensation for
selling one particular class of shares over another in the Fund.
23 <PAGE>
CUSTODIAN--BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe, an indirect
wholly-owned subsidiary of Mellon, is located at One Boston
Place, Boston, Massachusetts 02108, and serves as the Fund's Custodian.
EXPENSES
The Fund's expenses include taxes,
interest, fees and salaries of the directors and
officers who are not directors,
officers or employees of the Fund'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,
transfer agent and
dividend disbursing agent, certain insurance premiums,
outside auditing and legal
expenses, costs of shareholder reports and shareholder
meetings and any extraordinary
expenses. The Fund also pays for brokerage fees and
commissions (if any)
in connection with the purchase and sale of portfolio securities.
Fund expenses are allocated
to a particular class based on either expenses identifiable
to the class or relative
net assets of the class and other classes of Fund shares.
LBGAM and TSSG have
agreed to reimburse the Fund to the extent required by applicable
state law for certain expenses
that are described in the Statement of Additional
Information relating to the Fund.
- -------------------------------------------DIVIDENDS
The Fund declares dividends
from its net investment income (I.E., income other than
net realized long- and
short-term capital gains) on each day the Fund is open for
business and pays
dividends monthly. Distributions of net realized long- and short-
term capital gains,
if any, are declared and paid annually after the close of the
Fund's fiscal year
in which they have been earned. Unless a shareholder instructs
the Fund to pay
dividends or capital gains distributions in cash and credit them to
the shareholder's account at
Lehman Brothers, dividends and distributions from
the Fund will be reinvested
automatically in additional shares of the same class of
the Fund at net asset value.
Shares redeemed during the month are entitled to
dividends and distributions declared
up to and including the date of redemption. The
Fund does not expect to realize net
24
<PAGE>
long-term capital gains. Commencing
on the date of the System Transfer and
thereafter, shares redeemed during a
month will be entitled to dividends up to, but
not including, the date of redemption,
and purchased shares will be entitled to
dividends and distributions declared
on the day the purchase order becomes effective.
- -----------------------------------------TAXES
The Fund will be treated as a separate entity for
federal income tax purposes, and
thus the provisions of the Code
applicable to regulated investment companies generally
will be applied to each series of
the Company separately, rather than to the Company as
a whole. In addition,
net realized long-term capital gains, net investment income
and operating expenses
will be determined separately for each series of the Company.
The Fund intends to qualify
each year as a "regulated investment company" under the
Code. A regulated investment
company is exempt from federal income tax on amounts
distributed to its shareholders.
Qualification as a regulated investment company
under the Code for a taxable year
requires, among other things,
that the Fund distribute to its shareholders each taxable
year (a) at least 90% of its
investment company taxable income for such year and (b)
at least 90% of the excess of
its tax-exempt interest income over certain deductions
disallowed with respect to
such income. In general, the Fund's investment company
taxable income will be its
taxable income (including dividends and short-term capital
gains, if any) 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. The Fund
intends to distribute substantially all of its investment
company taxable income each year.
Such distributions will be taxable as ordinary
income to Fund shareholders
who are not currently exempt from federal income
taxes, whether such income is
received in cash or reinvested in additional shares.
(Federal income taxes
for distributions to an IRA or a qualified retirement plan
are deferred under the Code.)
It is anticipated that none of the Fund's distributions
will be eligible for
the dividends received deduction for corporations. The Fund does
not expect to realize
long-term capital gains and, therefore, does not contemplate
payment of any
"capital gain dividends" as described in the Code.
25
<PAGE>
Dividends declared in October,
November or December of any year payable to
shareholders of record on a
specified date in such months will be deemed to have been
received by the shareholders
and paid by the Fund on December 31 of such year in
the event such dividends are
actually paid during January of the following year.
Shareholders will be advised at
least annually as to the federal income tax status
of distributions made to them each year.
- ----------------------------
The foregoing discussion is
only a brief summary of some of the important
federal tax considerations
generally affecting the Fund and its shareholders. As noted
above, IRAs receive special
tax treatment. No attempt is made to present a detailed
explanation of the federal,
state or local income tax treatment of the Fund or its
shareholders, and this
discussion is not intended as a substitute for careful tax
planning. Accordingly,
potential investors in the Fund should consult their tax
advisers with specific reference to their own tax situation.
- --------------------------------------------------------YIELDS
From time to time, the "yields"
and "effective yields" for each class of shares of the
Fund may be quoted in
advertisements or in reports to shareholders. Yield quotations
are computed separately for each
class of shares of the Fund. The "yield" quoted
in advertisements for each class
of the Fund's shares refers to the income generated
by an investment in that class over
a specified period (such as a seven-day
period) identified in the advertisement.
This income is then "annualized"; that is,
the amount of income generated by the
investment during that period is assumed to be
generated each such period over a
52-week or one-year period and is shown as a
percentage of the investment.
The "effective yield" is calculated similarly but, when
annualized, the income earned by
an investment in a given class of shares is
assumed to be reinvested. The
"effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment.
The Fund's yields may be
compared to those of other mutual funds with similar
objectives, to bond or other
relevant indices, or to rankings prepared by
independent services or other
financial or industry publications that monitor the
performance of mutual funds,
26
<PAGE>
or to the average yields reported by
the Bank Rate Monitor from money market
deposit accounts offered by the
50 leading banks and thrift institutions in the top
five standard metropolitan statistical
areas. For example, such data are reported
in national financial
publications such as IBC/DONOGHUE'S MONEY FUND REPORT-R-,
IBBOTSON ASSOCIATES OF
CHICAGO, THE WALL STREET JOURNAL and THE NEW YORK TIMES,
reports prepared by Lipper
Analytical Service, Inc. and publications of a local or
regional nature.
THE FUND'S YIELD FIGURES REPRESENT
PAST PERFORMANCE, WILL FLUCTUATE AND SHOULD NOT BE
CONSIDERED AS REPRESENTATIVE
OF FUTURE RESULTS. The yield of any investment is
generally a function of
portfolio quality and maturity, type of investment and
operating expenses. The methods
used to compute the yields on each class of the
Fund's shares are described in
more detail in the Statement of Additional Information.
Investors may call 800-861-4171
to obtain current yield information.
- ----------------------------------------ADDITIONAL INFORMATION
The Company was incorporated under the laws
of the State of Maryland on May 5, 1993.
The authorized capital stock of
the Company consists of 10,000,000,000 shares having
a par value of $.001 per share. The
Company's Articles of Incorporation
currently authorize the issuance of
several series of shares, corresponding to
shares of the Fund as well as
shares of other investment portfolios of the
Company. The Company's Board of
Directors may, in the future, authorize the issuance of
additional series of capital stock
representing shares of additional investment
portfolios or additional classes of
shares of the Fund or the Company's other
investment portfolios.
The Company has received an order from
the SEC permitting it, subject to certain terms
and conditions, to establish
multiple classes of shares within each series. The
Board of Directors of
the Company has authorized the establishment of three classes
of shares in the Fund: "Select Shares," "CDSC Shares"
and "Global Clearing Shares."
As of the date of this Prospectus, the Fund offers
two classes of shares, Select Shares
and CDSC Shares. The Fund contemplates that
it will in the future also offer an
additional class of shares,
Global Clearing Shares. This Prospectus relates to Select
Shares and CDSC Shares of the
Fund. The shares of each class of the Fund
represent interests in the Fund in proportion to their
27
<PAGE>
relative net asset values.
CDSC Shares of the Fund are subject to a CDSC as
described under
"Redemption of Shares." If offered by the Fund, Global Clearing Shares
would be subject
to a distribution fee payable under the Plan of Distribution
at the annual rate of
up to 0.50% of the Fund's average daily net assets attributable
to that class.
Global Clearing Shares would be available only through Introducing
Brokers and would be
exchangeable only for Global Clearing Shares of other funds
in the Lehman Brothers Group of Funds.
Certain Fund expenses, such as transfer
agency expenses, are allocated
separately to each class of the Fund's shares based on
expenses identifiable by class.
All shares of the Company have
equal voting rights and will be voted in the
aggregate, and not by series or class,
except where voting by series or class is
required by law or where the matter
involved affects only one series or class. Under
the corporate law of Maryland,
the Company's state of incorporation, and the
Company's By-Laws (except as
required under the 1940 Act), the Company is not
required and does not currently intend to hold annual meetings of
shareholders for the election of directors.
Shareholders, however, do have the right
to call for a meeting to consider the
removal of one or more of the Company's
directors if such a request is made,
in writing, by the holders of at least 10% of the
Company's outstanding voting securities.
All shares of the Company, when issued, will be fully paid and nonassessable.
The Fund sends shareholders a
semi-annual and audited annual report, which
includes listings of investment
securities held by the Fund at the end of the period
covered. In an effort to reduce the
Fund's printing and mailing costs, the Fund may
consolidate the mailing of its semi-annual
and annual reports by household. This
consolidation means that a
household having multiple accounts with the identical
address of record would receive a
single copy of each report. In addition, the Fund
may consolidate the mailing of
its Prospectus so that a shareholder having multiple
accounts (E.G., individual IRA and/or
Self-Employed Retirement Plan accounts) would
receive a single Prospectus
annually. Any shareholder who does not want this
consolidation to apply to his or her
account should contact his or her Lehman
Brothers Investment Representative
or the Fund's transfer agent. Shareholders may
direct inquiries regarding the
Fund to a Lehman Brothers Investment Representative.
28 <PAGE>
LEHMAN BROTHERS MEMBER SIPC
3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285 MF5001
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
LEHMAN BROTHERS MUNICIPAL INCOME FUND
PROSPECTUS BEGINS ON PAGE ONE. DATED NOVEMBER 28, 1994
<PAGE>
LEHMAN BROTHERS MUNICIPAL INCOME FUND
- ------------------------------------------
PROSPECTUS NOVEMBER 28,
1994
This Prospectus describes LEHMAN
BROTHERS MUNICIPAL INCOME FUND (the "Fund"), a
separate, diversified money
market portfolio of Lehman Brothers Funds, Inc. (the
"Company"), an open-end management
investment company. This Prospectus relates to
Select Shares and CDSC Shares, two classes of shares offered by the Fund.
[CONTINUED ON NEXT PAGE.]
SHARES OF THE FUND ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND SUCH SHARES ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE
FUND INVOLVE CERTAIN
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THERE
CAN BE NO ASSURANCE THAT
THE FUND WILL BE ABLE TO MAINTAIN A NET ASSET VALUE OF $1.00
PER SHARE.
LEHMAN BROTHERS INC.
sponsors the Fund and acts as Distributor of the Fund's
shares. LEHMAN BROTHERS
GLOBAL ASSET MANAGEMENT INC. serves as the Fund's
Investment Adviser.
The address of the Fund is 3
World Financial Center, New York, New York 10285. Yield
and other information
regarding the Fund may be obtained through a Lehman Brothers
Investment Representative or by calling 800-861-4171.
This Prospectus briefly sets forth
certain information about the Fund that
investors should know before
investing. Investors are advised to read this
Prospectus and retain it for
future reference. Additional information about the Fund,
contained in a Statement of Additional
Information dated November 28, 1994, and as
may be amended or supplemented from time
to time, has been filed with the
Securities and Exchange Commission
and is available to investors without charge by
calling 800-861-4171.
The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
- ----------------------------
THESE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION
OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------
LEHMAN BROTHERS <PAGE>
[CONTINUED FROM PREVIOUS PAGE.]
The Fund's investment objective is to
provide investors with as high a level of
current income exempt from federal
income tax as is consistent with stability of
principal. The Fund invests
substantially all of its assets in short-term tax-
exempt obligations issued by
state and local governments and tax-exempt derivative
securities. All or a portion
of the Fund's dividends may be a specific
preference item for purposes of the
federal individual and corporate alternative
minimum taxes.
- ----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE <S>
<C> Benefits to Investors
3
Background and Expense Information 3
Financial Highlights 5
Investment Objective and Policies 6
Purchase of Shares 16
Redemption of Shares 18
Exchange Privilege 21
Valuation of Shares 22
Management of the Fund 23
Dividends 26
Taxes 27
Yields 29
Additional Information 30
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS, OR IN THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED
HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
2
<PAGE>
- ---------------------------------------------------------
BENEFITS TO INVESTORS
The Fund offers investors several important benefits:
/ / A professionally managed portfolio of high quality money market
instruments exempt from federal income taxes, providing investment
diversification that is otherwise
beyond the means of many individual investors.
/ / Investment liquidity through convenient purchase and redemption
procedures.
/ / Stability of principal
through maintenance of a constant net asset value of $1.00
per share (although there is no
assurance that it can do so on a continuing basis).
/ / A convenient way to invest
without the administrative and recordkeeping burdens
normally associated with the direct ownership of securities.
- -----------------------------BACKGROUND AND EXPENSE
INFORMATION
The Fund is authorized to
offer multiple classes of shares. As of the date of this
Prospectus, the Fund offers two
classes of shares, Select Shares and CDSC Shares,
each of which is offered by
this Prospectus. The Fund contemplates that it will in the
future also offer an additional
class of shares, Global Clearing Shares. Each share
of the Fund accrues income in
the same manner, but certain expenses differ based
upon the class. See "Additional Information."
The following Expense Summary
lists the costs and expenses
that a shareholder can expect to incur as an investor
in Select Shares and CDSC Shares
of the Fund based upon, in the case of Select
Shares, the Fund's operating expenses for
the most recent fiscal year, restated to
reflect current fee waivers, and, in
the case of CDSC Shares, estimated operating
expenses for the current fiscal year.
The Expense Summary for CDSC Shares assumes
payment of the maximum contingent deferred sales charge ("CDSC").
3 <PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
<S> <C> <C>
SHAREHOLDER TRANSACTION SELECT CDSC
EXPENSES SHARES SHARES
Maximum CDSC
(as a percentage of proceeds)* None 2.00%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after
waivers)** 0.25% 0.25%
Rule 12b-1 Fees (after
waivers)*** 0.18% 0.18%
Other Expenses--including
Administration Fees
(after waivers)+ 0.27% 0.27%
Total Fund Operating Expenses
(after waivers)++ 0.70% 0.70%
<FN>
* The Fund's CDSC Shares are subject
to a maximum CDSC of 2% of redemption
proceeds during the first year
after the date of purchase, 1% of redemption proceeds
during the second year, and no CDSC
thereafter. The Fund's CDSC Shares will be
deemed to have been purchased on
the same date as the shares of the funds which have
been exchanged through a CDSC
Fund Exchange (as defined under "Purchase of Shares").
The CDSC set forth in the table
above is the maximum charge imposed on redemptions of
CDSC Shares, and investors may pay
an actual CDSC of less than 2%. See "Redemption of
Shares."
** Reflects voluntary waivers of
advisory fees which are expected to continue in
effect until at least one year
from the date of this Prospectus. Absent such voluntary
waivers, the ratio of advisory fees
to average net assets would be 0.30%.
*** Reflects voluntary waivers of
Rule 12b-1 fees which are expected to
continue in effect until at least
one year from the date of this Prospectus.
Absent such voluntary waivers, the ratio
of Rule 12b-1 fees to average net assets would
be 0.25%.
+ Reflects voluntary waivers of
administration fees which are expected to continue
in effect until at least one
year from the date of this Prospectus. Absent
such voluntary waivers, the ratio of
other expenses to average net assets would be
0.31%.
++ Absent the voluntary waivers
referred to above, the ratio of total fund
operating expenses to average net assets would be 0.86%.
</TABLE>
4 <PAGE>
EXAMPLE
You would pay the
following expenses on a $1,000 investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
<S> <C> <C>
1 3
YEAR YEARS Select Shares:
(assuming complete redemption at the end of each time period) $ 7
$22
CDSC Shares:
Assuming complete redemption at end of each time period* $27
$22
Assuming no redemption $ 7 $22
<FN>
* Assumes deduction at the time of redemption of the maximum CDSC applicable
for that period. </TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED
A REPRESENTATION OF ACTUAL EXPENSES AND RATES
OF RETURN, WHICH MAY BE GREATER OR LESS
THAN THOSE SHOWN. The foregoing table has not
been audited by the Fund's independent auditors.
- --------------------------------------------FINANCIAL HIGHLIGHTS
The following financial highlights
for the fiscal period ended July 31, 1994, are
derived from the Fund's financial
statements audited by Ernst & Young LLP, independent
auditors, whose report thereon
appears in the Company's Annual Report dated July
31, 1994. This information should be
read in conjunction with the Financial Statements
and Notes thereto that appear in the Company's Annual Report, which are
incorporated by reference into the Statement of Additional Information.
5
<PAGE>
Selected data for a Select Share and
CDSC Share outstanding throughout the
period:
<TABLE>
<CAPTION>
PERIOD ENDED
7/31/94* PERIOD ENDED SELECT 7/31/94* SHARES CDSC SHARES
<S> <C> <C>
Net asset value, beginning of period......... $ 1.00 $ 1.00
----------- ------------
Income from investment operations:
Net investment income (1).................... 0.0207 0.0018
Dividends from net investment income......... (0.0207) (0.0018)
----------- ------------
Net asset value, end of period............... $ 1.00 $ 1.00
- ----------- ------------
- ----------- ------------
Total return (2)............................. 2.09% 0.18% ----------- ---
- ---------
- ----------- ------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)....... $264,425 $ 10
Ratio of net investment income to average
net
assets (3)................................ 2.06% 2.06%
Ratio of operating expenses to average net
assets (3)(4)............................. 0.64% 0.64%
<FN>
- ------------------------------
* The Fund commenced selling Select Shares and CDSC Shares to the public on
August 2, 1993 and July 6, 1994, respectively.
(1) Net investment income before
waiver of fees by the Investment Adviser,
Administrator, and Distributor
for Select Shares and CDSC Shares was $0.0182 and
$0.0017, respectively.
(2) Total return represents aggregate total return for the period indicated.
(3) Annualized.
(4) Annualized expense ratio before
waiver of fees by the Investment Adviser,
Administrator and Distributor for
both Select Shares and CDSC Shares was 0.89%.
</TABLE>
- -------------------------------------INVESTMENT OBJECTIVE AND
POLICIES
The Fund's investment objective is to
provide investors with as high a level of
current income exempt from federal
income tax as is consistent with stability of
principal. All or a portion of the Fund's
dividends may be a specific preference item
for purposes of the federal individual
and corporate alternative minimum taxes. There
can be no assurance that the Fund will
achieve its investment objective.
The Fund invests only in securities which
are purchased with and payable in U.S.
dollars and which have (or, pursuant to
regulations adopted by the Securities and
Exchange Commission (the "SEC"),
6
<PAGE>
will be deemed to have) remaining
maturities of thirteen months or less at the date
of purchase by the Fund. The Fund
maintains a dollar-weighted average portfolio
maturity of 90 days or less. The Fund
follows these policies to maintain a
constant net asset value of $1.00 per share,
although there is no assurance that it
can do so on a continuing basis.
The Fund will limit its portfolio
investments to securities that are determined by its
Investment Adviser to present minimal
credit risks pursuant to guidelines established
by the Company's Board of Directors
and which are "Eligible Securities" at the
time of acquisition by the Fund.
The term "Eligible Securities" includes
securities rated by the "Requisite NRSROs"
in one of the two highest short-term
rating categories, securities of
issuers that have received such ratings with
respect to other short-term debt
securities and comparable unrated securities.
"Requisite NRSROs" means (a) any two
nationally recognized statistical rating
organizations ("NRSROs") that have
issued a rating with respect to a security or class
of debt obligations of an issuer,
or (b) one NRSRO, if only one NRSRO has issued
such a rating at the time
that the Fund acquires the security. A discussion of the
ratings categories of the NRSROs
is contained in the Appendix to the Statement of
Additional Information.
In pursuing its investment objective,
the Fund, which operates as a diversified
investment company, invests
substantially all of its assets in a diversified
portfolio of short-term tax-exempt
obligations issued by or on behalf of states,
territories and possessions of
the United States, the District of Columbia, and their
respective authorities, agencies,
instrumentalities and political subdivisions
and tax-exempt derivative securities
such as tender option bonds, participations,
beneficial interests in trusts
and partnership interests (collectively
"Municipal Obligations").
Except as described below, the Fund will not knowingly
purchase securities
the interest on which is subject to federal income tax. (See,
however, "Taxes" below concerning treatment of dividends
paid by the Fund for
purposes of the federal alternative
minimum tax applicable to particular categories
of investors.)
Opinions relating to the validity of
Municipal Obligations and to the exemption of
interest thereon from federal income
tax are rendered by bond counsel to the respective
issuers at the time of issuance,
and opinions relating to the validity of and
the tax-exempt status of
7
<PAGE>
payments received by the Fund
from tax-exempt derivative securities are rendered by
counsel to the respective
sponsors of such securities. The Fund and its Investment
Adviser will rely on such opinions
and will not review independently the underlying
proceedings relating
to the issuance of Municipal Obligations, the creation of any
tax-exempt derivative
securities or the bases for such opinions.
Except during temporary defensive
periods, the Fund will invest substantially all,
but in no event less
than 80%, of its total assets in Municipal
Obligations. The Fund may hold uninvested
cash reserves pending investment and during
temporary defensive periods
including when suitable tax-exempt obligations
are unavailable. There is
no percentage limitation on the amount of assets which may
be held uninvested. Uninvested
cash reserves will not earn income. In addition to
or in lieu of holding uninvested
cash reserves under the aforementioned circumstances,
the Fund may elect to invest
in high quality, short-term instruments, including
U.S. government and U.S.
and non-U.S. bank and commercial obligations, and
repurchase agreements
with respect to such instruments, the income from which is
subject to federal income tax.
The two principal classifications
of Municipal Obligations which may be held by the
Fund are "general obligation"
securities and "revenue" securities. General obligation
securities are secured by
the issuer's pledge of its full faith, credit and
taxing power for the payment of
principal and interest. Revenue securities are
payable only from the revenues
derived from a particular facility or class of
facilities or, in some cases,
from the proceeds of a special excise tax or other
specific revenue source such as
the user of the facility being financed. Revenue
securities include private activity
bonds which are not payable from the
unrestricted revenues of
the issuer. Consequently, the credit quality of private
activity bonds is usually
directly related to the credit standing of the corporate
user of the facility involved.
The Fund's portfolio may also
include "moral obligation" bonds, which are
normally issued by special
purpose public authorities. If the issuer of moral
obligation bonds is
unable to meet its debt service obligations from current
revenues, it may draw
on a reserve fund, the restoration of which is a moral
commitment but not a legal
obligation of the state or municipality which created the
issuer.
8
<PAGE>
Although the Fund may invest
more than 25% of its net assets in (a) Municipal
Obligations whose issuers are
in the same state and (b) Municipal Obligations the
interest on which is paid
solely from revenues of similar projects, it does not
presently intend to do
so on a regular basis. To the extent the Fund's assets
are concentrated in
Municipal Obligations that are payable from the revenues of
similar projects, are
issued by issuers located in the same state or are private
activity bonds,
the Fund will be subject to the peculiar risks presented by the
laws and economic
conditions relating to such states, projects and bonds to a greater
extent than it
would be if its assets were not so concentrated.
INVESTMENT LIMITATIONS
The investment limitations
enumerated below, as well as the Fund's policy of
investing at least 80% of
its total assets in Municipal Obligations, are
fundamental and may not
be changed by the Company's Board of Directors without the
affirmative vote of the
holders of a majority of the Fund's outstanding shares.
The Fund's investment
objective and the other investment policies described
herein may be changed by
the Board of Directors at any time. If there is a change in
the investment objective of the
Fund, shareholders of the Fund should consider
whether the Fund remains
an appropriate investment in light of their then current
financial position and needs.
(A complete list of the Fund's investment limitations
that cannot be changed without a
vote of shareholders is contained in the Statement of
Additional Information under "Investment Objective and Policies.")
- 1The Fund may not borrow money, except
from banks for
temporary purposes and then in amounts not exceeding one-third of the value of
its total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except
in connection with any such borrowing and in amounts
not in excess of the lesser
of the dollar amounts borrowed or one-third of the
value of its total assets at
the time of such borrowing. Additional investments
will not be made by the Fund when borrowings exceed 5% of its total assets.
- - 2The 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
9 <PAGE>
conducting their
principal business activities in the same industry, provided
that there is no limitation
with respect to investments in U.S. government
securities or Municipal
Obligations (other than those backed only by the assets and
revenues of non-governmental users).
- - 3The 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.
OTHER INVESTMENT PRACTICES
FLOATING AND VARIABLE
RATE NOTES. The Fund may purchase variable or floating rate
notes, which are
instruments that provide for adjustments in the interest rate on
certain reset
dates or whenever a specified interest rate index changes, respectively.
Such notes
might not be actively traded in a secondary market but, in some cases, the
Fund may be able
to resell such notes in the dealer market. Variable and floating rate
notes typically
are rated by credit rating agencies, and their issuers must satisfy
the same quality
criteria as set forth above. The Fund invests in variable or floating
rate notes
only when the Investment Adviser deems the investment to involve minimal
credit risk.
Certain of the
floating or variable rate notes that may be purchased by the Fund may
carry a demand
feature that would permit the holder to tender them back to the issuer
of the underlying
instrument, or to a third party, at par value prior to maturity.
Where necessary
to ensure that such a note is an Eligible Security, the Fund will
require that the
issuer's obligation to pay the principal of the note be backed by
an unconditional
third-party letter or line of credit, guarantee or commitment to
lend. If a
floating or variable rate demand note is not actively traded in a
secondary market, it
may be difficult for the Fund to dispose of the note if the
issuer were to default
on its payment obligation or during periods that the Fund is
not entitled to exercise
its demand rights, and the Fund could, for this or other
reasons, suffer a
loss to the extent of the default. While, in general, the Fund
will invest only in securities that mature within
10
<PAGE>
thirteen months of purchase,
the Fund may invest in floating or variable rate demand
notes which have nominal
maturities in excess of thirteen months, if such instruments
carry demand features that comply with conditions established by the SEC.
REPURCHASE AGREEMENTS.
The Fund may purchase instruments from financial
institutions, such as
banks and broker-dealers, subject to the seller's
agreement to repurchase them
at an agreed upon time and price ("repurchase
agreements"). The seller
under a repurchase agreement will be required to
maintain the value of the
securities subject to the agreement at not less than the
repurchase price. Default by the
seller would, however, expose the Fund to possible
loss because of adverse market action
or delay in connection with the disposition of
the underlying obligations.
REVERSE REPURCHASE AGREEMENTS.
The Fund may borrow funds for temporary purposes by
entering into reverse repurchase
agreements in accordance with its investment
limitations described above.
Pursuant to such agreements, the Fund would sell
portfolio securities to financial
institutions and agree to repurchase them at an
agreed upon date and price.
The Fund would consider entering into reverse repurchase
agreements to avoid otherwise
selling securities during unfavorable market conditions
to meet redemptions.
Reverse repurchase agreements
involve the risk that the market value of the
portfolio securities sold
by the Fund may decline below the price of the
securities the Fund is obligated to repurchase.
LOANS OF PORTFOLIO SECURITIES.
The Fund may lend its portfolio securities
consistent with its investment policies.
The Fund may lend portfolio securities
against collateral, consisting
of cash or securities which are consistent with its
permitted investments, which is
equal at all times to at least 100% of the value of
the securities loaned.
There is no limitation on the amount of securities that
may be loaned. Such loans
would involve risks of delay in receiving additional
collateral or in recovering
the securities loaned or even loss of rights in the
collateral should the borrower of
the securities fail financially. However, loans
will be made only to borrowers
deemed by the Fund's Investment Adviser to be of good
standing and only when, in
the Adviser's judgment, the income to be earned from the
loans justifies the attendant risks.
11
<PAGE>
WHEN-ISSUED SECURITIES. The Fund
may purchase securities on a "when-issued" basis.
When-issued securities are securities
purchased for delivery beyond the normal
settlement date at a stated
price and yield. The Fund will generally not pay for such
securities or start
earning interest on them until they are received. Securities
purchased on a when-issued
basis are recorded as an asset and are subject to changes
in value based upon changes
in the general level of interest rates. The Fund
expects that commitments
to purchase when-issued securities will not exceed 25% of
the value of its total assets absent
unusual market conditions. The Fund does not
intend to purchase when-issued
securities for speculative purposes but only in
furtherance of its investment objective.
STAND-BY COMMITMENTS.
The Fund may enter into put transactions, including
transactions sometimes
referred to as stand-by commitments, with respect to
securities held in its
portfolio. In a put transaction, the Fund acquires the right
to sell a security at an
agreed upon price within a specified period prior to its
maturity date, and
a stand-by commitment entitles the Fund to same-day settlement and
to receive an exercise price
equal to the amortized cost of the underlying security
plus accrued interest,
if any, at the time of exercise. In the event that the party
obligated to purchase
the underlying security from the Fund defaults on its
obligation to purchase the
underlying security, then the Fund might be unable to
recover all or a
portion of any loss sustained from having to sell the security
elsewhere.
Acquisition of puts will have the effect of increasing the cost of
securities subject to the
put and thereby reducing the yields otherwise available from
such securities.
TENDER OPTION BONDS.
The Fund may purchase tender option bonds. A tender option bond
is a municipal
obligation (generally held pursuant to a custodial arrangement)
having a maturity longer than
13 months and bearing interest at a fixed rate
substantially higher than
prevailing short-term tax-exempt rates, that has been
coupled with the agreement
of a third party, such as a bank, broker-dealer or
other financial institution,
pursuant to which such institution grants the security
holders the option,
at periodic intervals, to tender their securities to the
institution and
receive the face value thereof. As consideration for
providing the option,
the financial institution receives periodic fees equal to the
difference between
the municipal obligation's fixed coupon rate and the rate, as
determined by remarketing
or similar agent at or near the commencement of
12
<PAGE>
such period, that would cause
the securities coupled with the tender option, to trade
at or near par on the date
of such determination. Thus, after payment of this fee, the
security holder effectively
holds a demand obligation that bears interest at the
prevailing short-end
tax exempt rate. The Fund's Investment Adviser will consider on
an ongoing basis the
creditworthiness of the issuer of the underlying municipal
obligation, of any
custodian and of
the third party provider of the tender option.
In certain instances
and for certain tender option bonds, the option may be
terminable in the event
of a default in payment of principal or interest on the
underlying municipal
obligation and for other reasons.
MUNICIPAL LEASE OBLIGATIONS.
The Fund may invest in municipal obligations that
constitute participations
in a lease obligation or installment purchase contract
obligation (hereafter
collectively called "municipal lease obligations") of a
municipal authority
or entity. Although municipal lease obligations do not
constitute general
obligations of the municipality for which the municipality's taxing
power is pledged,
a municipal lease obligation is ordinarily backed by the
municipality's
covenant to budget for, appropriate and make the payments due under the
lease obligation.
However, certain municipal lease obligations contain "non-
appropriation"
clauses which provide that the municipality has no obligation
to make lease or
installment purchase payments in future years unless money is
appropriated
for such purpose on a yearly basis. Although non-appropriation
municipal lease
obligations are secured by the leased property, disposition of
the property in the event
of foreclosure might prove difficult. The Fund will seek to
minimize the special
risks associated with such securities by not investing more than
10% of its assets
in municipal lease obligations that contain non-appropriation
clauses,
and by only investing in those non-appropriation leases where (a) the
nature of the
leased equipment or property is such that its ownership or use is
essential to a
governmental function of the municipality, (b) appropriate covenants
will be obtained
from the municipal obligor prohibiting the substitution or
purchase of
similar equipment if lease payments are not appropriated, (c) the
lease obligor
has maintained good market acceptability in the past, (d) the
investment
is of a size that will be attractive to institutional investors, and (e)
the underlying leased
equipment has elements of portability and/or use that
enhance its marketability in
13
<PAGE>
the event foreclosure
on the underlying equipment were ever required. Municipal lease
obligations provide a
premium interest rate which along with regular amortization
of the principal
may make them attractive for a portion of the assets of the Fund.
CUSTODIAL RECEIPTS AND CERTIFICATES.
The Fund may acquire custodial receipts or
certificates underwritten by
securities dealers or banks that evidence ownership of
future interest payments,
principal payments or both, on certain municipal
obligations. The
underwriter of these certificates or receipts typically
purchases municipal
obligations and deposits the obligations in an irrevocable trust
or custodial account
with a custodian bank, which then issues receipts or certificates
that evidence ownership of
the periodic unmatured coupon payments and the final
principal payment on the
obligations. Although under the terms of a custodial receipt,
the Fund typically would
be authorized to assert its rights directly against the
issuer of the underlying
obligation, the Fund could be required to assert through
the custodian bank
those rights as may exist against the underlying issuer. Thus, in
the event the underlying
issuer fails to pay principal and/or interest when due,
the Fund may be subject to
delays, expenses and risks that are greater than those that
would have been involved if the
Fund had purchased a direct obligation of the issuer.
In addition, in the event
that the trust or custodial account in which the
underlying security has
been deposited is determined to be an association taxable as
a corporation instead of a
non-taxable entity, the yield on the underlying security
would be reduced in recognition of any taxes paid.
STRIPS. The Fund may invest
in separately traded principal and interest
components of securities backed
by the full faith and credit of the U.S.
Treasury. The principal and
interest components of U.S. Treasury bonds with
remaining maturities of
longer than ten years are eligible to be traded
independently under the
Separate Trading of Registered Interest and Principal of
Securities ("STRIPS")
program. Under the STRIPS program, the principal and
interest components are
separately issued by the U.S. Treasury at the request of
depository financial
institutions, which then trade the component parts
separately. Under the
stripped bond rules of the Internal Revenue Code of 1986, as
amended (the "Code"),
investments by the Fund in STRIPS will result in the accrual of
interest income on such
investments in advance of the receipt of the cash
corresponding to such income.
The interest component of STRIPS may be more
14
<PAGE>
volatile than that of U.S.
Treasury bills with comparable maturities. In
accordance with Rule 2a-7,
the Fund's investments in STRIPS are limited to those with
maturity components
not exceeding
thirteen months. The Fund will not actively
trade in STRIPS. The
Fund will limit investments in STRIPS to 20% of its total
assets.
PARTICIPATION INTERESTS. The
Fund may purchase participation certificates issued by a
bank, insurance company or
other financial institution in obligations owned by such
institutions or affiliated
organizations that may otherwise be purchased by the Fund,
and loan participation certificates.
A participation certificate gives the Fund an
undivided interest in the
underlying obligations in the proportion that the
Fund's interest bears to the
total principal amount of such obligations. Certain of
such participation certificates
may carry a demand feature that would permit the
holder to tender
them back to the issuer or to a third party prior to maturity. See
"Floating and
Variable Rate Notes" for additional information with respect to
demand instruments
that may be purchased by the Fund. The Fund may invest in
participation certificates
even if the underlying obligations carry stated
maturities in excess
of thirteen months, upon compliance with certain conditions
contained in Rule 2a-7.
Loan participation certificates are considered by the
Fund to be "illiquid" for
purposes of its investment policies with respect to
illiquid securities as
set forth under Illiquid Securities below.
OTHER MONEY MARKET FUNDS.
The Fund may invest up to 10% of the value of its total
assets in shares of other
money market funds. The Fund will invest in other money
market funds only if such
funds are subject to the requirements of Rule 2a-7 and are
considered to present
minimal credit risks. The Fund's Investment Adviser will
monitor the policies and
investments of other money market funds in which it
invests, based on
information furnished to shareholders of those funds, with
respect to their
compliance with their investment objectives and Rule 2a-7.
ILLIQUID SECURITIES. The Fund
will not knowingly invest more than 10% of the value
of its total assets in
illiquid securities, including time deposits and repurchase
agreements having
maturities longer than seven days. Securities that have readily
available market
quotations are not deemed illiquid for purposes of this limitation
(irrespective of
any legal or contractual restrictions on resale). The Fund may
invest in commercial obligations issued in reliance on the so-
15
<PAGE>
called "private placement exemption"
from registration afforded by Section 4(2) of the
Securities Act of 1933, as
amended ("Section 4(2) paper"). The Fund may also
purchase securities
that are not registered under the Securities Act of 1933, as
amended, but which can
be sold to qualified institutional buyers in accordance
with Rule 144A under
that Act ("Rule 144A securities"). Section 4(2) paper is
restricted as to disposition
under the federal securities laws, and generally is
sold to institutional
investors such as the Fund who agree that they are purchasing
the paper for investment
and not with a view to public distribution. Any resale
by the purchaser must
be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional
investors like the Fund through or with the assistance
of the issuer or
investment dealers who make a market in the Section 4(2) paper,
thus providing liquidity.
Rule 144A securities generally must be sold to other
qualified institutional buyers.
If a particular investment in Section 4(2) paper
or Rule 144A securities
is not determined to be liquid, that investment will be
included within
the 10% limitation on investment in illiquid securities. The
Fund's Investment Adviser
will monitor the liquidity of such restricted securities
under the supervision of
the Board of Directors. See "Investment Objective and
Policies--Additional Information on
Portfolio Instruments and Investment Practices-
- -Illiquid and Restricted Securities" in
the Statement of Additional Information.
- ------------------------------------------PURCHASE OF SHARES
Purchases of Fund
shares must be made through a brokerage account maintained
through Lehman Brothers Inc.
("Lehman Brothers") or a broker that clears
securities transactions
through Lehman Brothers on a fully disclosed basis (an
"Introducing Broker").
The Fund reserves the right to reject any purchase order and to
suspend the offering of shares for a period of time.
The minimum initial
investment in each class of the Fund is $5,000 and the
minimum subsequent
investment is $1,000. In addition, for participants with an
automatic purchase
arrangement in connection with their brokerage accounts, there
is no minimum initial or
subsequent investment. There are no minimum investment
requirements for employees of
Lehman Brothers and its affiliates. The Fund reserves
the right at any time to
vary the initial and subsequent investment minimums.
No certificates are issued for Fund shares.
16
<PAGE>
The Fund's shares
are sold continuously at their net asset value next determined after
a purchase order
is received and becomes effective. A purchase order becomes
effective when
Lehman Brothers or an Introducing Broker receives, or converts the
purchase amount into,
federal funds (I.E., monies of member banks within the Federal
Reserve System
held on deposit at a Federal Reserve Bank). When orders for the
purchase of Fund
shares are paid for in federal funds, or are placed by an investor
with sufficient
federal funds or cash balance in the investor's brokerage account with
Lehman Brothers
or the Introducing Broker, the order becomes effective on the day of
receipt if
received prior to the close of regular trading on the New York Stock
Exchange, Inc.
(the "NYSE"), currently 4:00 p.m., Eastern time, on any day the Fund
calculates
its net asset value. See "Valuation of Shares." Purchase orders received
after the close
of regular trading on the NYSE are effective as of the time the
net asset value is next determined.
When orders for the purchase of Fund shares are
paid for other
than in federal funds, Lehman Brothers or the Introducing Broker,
acting on behalf of the
investor, will complete the conversion into, or itself
advance, federal funds, and
the order becomes effective on the day following its
receipt by Lehman
Brothers or the Introducing Broker. Shares purchased begin to
accrue income dividends on the
next business day following the day that the purchase
order becomes effective.
On or about February 21, 1995,
the Fund will begin processing purchase orders and
redemption requests for
the Fund's shares on a new processing system (the "System
Transfer"). After the
System Transfer a purchase order will become effective on
the day the Fund
receives sufficient federal funds to cover the purchase price and
will be priced at
the net asset value next determined after the Fund's Transfer Agent
receives such federal funds.
Investors should note that there may be a delay
between the time when
Lehman Brothers or an Introducing Broker receives purchase
proceeds
and the time when those proceeds are transmitted to the Fund and that
Lehman Brothers or the Introducing Broker,
as applicable, may benefit from the use of
temporarily uninvested funds.
Shares purchased after the System Transfer will begin to
accrue income dividends on the day the purchase order becomes effective.
The Fund's Select Shares are
available on a no-load basis to all investors except
for investors who are investing
through a CDSC Fund Exchange (as defined below).
Investors who are investing in
17
<PAGE>
the Fund in connection with a
CDSC Fund Exchange may purchase only CDSC Shares
pursuant to such exchange. For
purposes of this Prospectus, a "CDSC Fund
Exchange" is an exchange
of shares of another fund in the Lehman Brothers Group of
Funds which are subject to a
CDSC upon redemption for shares in the Fund.
- ----------------------------------REDEMPTION OF SHARES
Holders of Select Shares may
redeem their shares without charge on any day on which
the Fund calculates its net asset
value. Holders of CDSC Shares may also redeem their
shares on any day the Fund
calculates its net asset value, subject to any applicable
CDSC as described below. See
"Valuation of Shares." Redemption requests received in
proper form prior to the close of
regular trading on the NYSE are priced at the
net asset value per share
determined on that day. Redemption requests received
after the close of regular trading on the
NYSE are priced at the net asset value as
next determined. The Fund normally
transmits redemption proceeds for credit to the
shareholder's account at Lehman Brothers
or the Introducing Broker at no charge (other
than any applicable CDSC in
the case of CDSC Shares) on the business day
following receipt of
a redemption request. Generally, these funds will not be
invested for the
shareholder's benefit without specific instruction, and Lehman
Brothers or the Introducing Broker will
benefit from the use of temporarily uninvested
funds.
Effective after the System Transfer,
redemption requests received in proper form prior
to noon, Eastern time, on any day the
Fund calculates its net asset value will be
priced at the net asset value
per share determined at noon on that day and redemption
requests received after such time
will be priced at the net asset value next
determined. Commencing on the date
of the System Transfer, and thereafter, the
Fund will normally transmit redemption
proceeds for credit to the shareholder's
account on the day of receipt of the redemption request.
A shareholder who pays for Fund shares
by personal check will be credited with the
proceeds of a redemption of those
shares only after the purchase check has been
collected, which may take up
to 15 days or more. A shareholder who anticipates
the need for more immediate access
to his or her investment should purchase shares
with federal funds by bank wire or with a certified or cashier's check.
18
<PAGE>
Holders of Select Shares who purchase
securities through Lehman Brothers or the
Introducing Broker may take advantage
of special redemption procedures under which
Fund shares will be redeemed automatically
to the extent necessary to satisfy
debit balances arising in the
shareholder's account with Lehman Brothers or the
Introducing Broker. One example of
how an automatic redemption may occur involves the
purchase of securities. If a
shareholder purchases securities but does not pay for
them by settlement date, the
number of Select Shares necessary to cover the debit will
be redeemed automatically as
of the settlement date, which usually occurs five
business days after the trade date.
Shareholders not wishing to participate in these
arrangements should notify a Lehman
Brothers Investment Representative.
A Fund account that is reduced by a
shareholder to a value of $1,000 or less may be
subject to redemption by the Fund,
but only after the shareholder has been given at
least 30 days in which to increase
the account balance to more than $1,000. In
addition, the Fund may redeem shares involuntarily or suspend the right of
redemption as permitted under
the 1940 Act, as described in the Statement of
Additional Information under
"Additional Purchase and Redemption Information."
Fund shares may be redeemed in one of the following ways:
REDEMPTION THROUGH LEHMAN BROTHERS
Redemption requests may be made
through Lehman Brothers or an Introducing
Broker.
REDEMPTION BY MAIL
Shares held by Lehman Brothers on
behalf of investors must be redeemed by
submitting a written request to a
Lehman Brothers Investment Representative. All other
shares may be redeemed by
submitting a written request for redemption to the Fund's
Transfer Agent:
Lehman Brothers Funds, Inc. c/o The
Shareholder Services Group, Inc. P.O. Box 9184
Boston, Massachusetts 02009-9184
19
<PAGE>
A written redemption request
to the Fund's transfer agent must (a) state the class
and number of shares to be
redeemed, (b) indicate the name of the Fund from which
such shares are to be
redeemed, (c) identify the shareholder's account number and
(d) be signed by each registered
owner exactly as the shares are registered. Any
signature appearing on a
redemption request must be guaranteed by a domestic
bank, a savings and loan
institution, a domestic credit union, a member bank of the
Federal Reserve System
or a member firm of a national securities exchange. The
Fund's transfer agent may require
additional supporting documents for redemptions
made by corporations,
executors, administrators, trustees and guardians. A
redemption request will
not be deemed to be properly received until the Fund's
transfer agent receives all
required documents in proper form.
CONTINGENT DEFERRED SALES CHARGE ON CDSC SHARES
A CDSC payable to Lehman Brothers is
imposed on any redemption of CDSC Shares,
however effected, that causes
the current value of a shareholder's CDSC Share
account to fall below the dollar amount
of all payments by the shareholder for the
purchase of CDSC Shares
("purchase payments") during the preceding two years. No
charge is imposed to the extent
that the net asset value of the CDSC Shares redeemed
does not exceed (a) the
current net asset value of CDSC Shares purchased through
reinvestment of dividends or
capital gains distributions, plus (b) the current net
asset value of CDSC Shares purchased
more than two years prior to the redemption,
plus (c) increases in the net
asset value of the shareholder's CDSC Shares above
the purchase payments made during the preceding two years.
In circumstances in which the CDSC is
imposed, the amount of the charge will depend
on the number of years since the
shareholder made the purchase payment from which the
amount is being redeemed.
Solely for purposes of determining the number of years
since a purchase payment was made,
all purchase payments made during a month will be
aggregated and deemed to have
been made on the last Friday of the preceding Lehman
Brothers statement month.
The Fund's CDSC Shares will be deemed to have been
purchased on the same date as the shares of the funds which have
20
<PAGE>
been exchanged through a CDSC Fund Exchange.
The following table sets forth the rates
of the CDSC for redemptions of CDSC Shares:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C> First
2.00%
Second 1.00%
Third 0.00%
</TABLE>
The purchase payment from which a
redemption of CDSC Shares is made is assumed
to be the earliest purchase
payment from which a full redemption has not already been
effected. In the case of
redemptions of shares of other funds in the Lehman Brothers
Group of Funds issued in
exchange for CDSC Shares of the Fund, the term "purchase
payments" refers to the
purchase payments for the shares given in exchange. In the
event of an exchange
of shares of funds with differing CDSC schedules, the shares
will be, in all cases, subject
to the higher CDSC schedule. See "Exchange
Privilege."
WAIVERS OF CDSC. The CDSC will
be waived on: (a) exchanges (see "Exchange
Privilege"); (b) redemptions of
shares following the death or disability of the
shareholder; (c) redemptions
of shares in connection with certain post-
retirement distributions and
withdrawals from retirement plans or IRAs; (d) involuntary
redemptions; (e) redemption
proceeds from other funds in the Lehman Brothers Group of
Funds that are reinvested within
30 days of the redemption; (f) redemptions of
shares in connection
with a combination of any investment company with the Fund by
merger, acquisition
of assets or otherwise; and (g) redemptions of shares owned by
employees of Lehman Brothers and its affiliates.
- ------------------------------------------EXCHANGE PRIVILEGE
CDSC and Select Shares of the
Fund may be exchanged without charge for shares of the
same class of certain other
funds in the Lehman Brothers Group of Funds. In exchanging
shares, a shareholder must
meet the minimum initial investment requirement of
the fund into which the
exchange is being made and the shares involved must be
legally available for sale in the state where the shareholder resides.
21
<PAGE>
Orders for exchanges will only be
accepted on days on which both funds involved
determine their respective net asset
values. To obtain information regarding the
availability of funds into which
shares of the Fund may be exchanged, investors should
contact a Lehman Brothers Investment Representative.
TAX EFFECT. The exchange of shares of one
fund for shares of another fund is
treated for federal income tax
purposes as a sale of the shares given in
exchange by the shareholder.
Therefore, an exchanging shareholder may realize a
taxable gain or loss in connection with an exchange.
CDSC. Holders of CDSC Shares may exchange
their shares without the imposition of an
exchange fee. In the event holders of
CDSC Shares of the Fund exchange all or a portion
of their CDSC Shares for shares in
any of the funds in the Lehman Brothers Group
of Funds imposing a CDSC higher than that
imposed by the Fund on the CDSC Shares, the
exchanged shares will be subject to the
higher applicable CDSC. Upon an exchange,
the new shares will be deemed to have been
purchased on the same date as the CDSC
Shares which have been exchanged.
ADDITIONAL INFORMATION REGARDING THE
EXCHANGE PRIVILEGE. Shareholders exercising the
exchange privilege with any of the other
funds in the Lehman Brothers Group of Funds
should review the prospectus of that fund
carefully prior to making an exchange. Lehman
Brothers reserves the right to reject
any exchange request. The exchange privilege may
be modified or terminated at any
time after notice to shareholders. For further
information regarding the exchange
privilege or to obtain the current prospectuses
for members of the Lehman Brothers Group
of Funds, investors should contact a
Lehman Brothers Investment Representative.
- -------------------------------------VALUATION OF SHARES
The net asset value per share of each
class is calculated on each day, Monday
through Friday, except on days on
which the NYSE or the Federal Reserve Bank of Boston
is closed. Currently one or both of
these institutions are scheduled to be closed on
the customary national business
holidays of New Year's Day, Martin Luther King, Jr's.
Birthday (observed), Presidents' Day (observed), Good Friday,
22
<PAGE>
Memorial Day (observed), Independence Day,
Labor Day, Columbus Day (observed),
Veterans Day, Thanksgiving and
Christmas and on the preceding Friday or
subsequent Monday when one of
these holidays falls on a Saturday or Sunday,
respectively. The net asset value
per share of each class of the Fund is
currently determined as of the close of
regular trading on the NYSE (currently 4:00
p.m., Eastern time). After the
System Transfer, the net asset value per share of
each class of the Fund will be
determined at noon on each day on which the Fund
computes its net asset value.
The net asset value per each Select Share and CDSC Share
is computed by dividing the
value of the net assets of the Fund attributable to the
relevant class of shares by the
total number of shares of that class outstanding. The
Fund's assets are valued on the basis of
amortized cost, which involves valuing a
portfolio instrument at its cost 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. The Fund seeks to maintain a
constant net asset value of $1.00 per
share, although there can be no assurance that it
can do so on a continuing basis.
Further information regarding the Fund's valuation
policies is contained in the Statement of Additional Information.
- -----------------------------------------MANAGEMENT OF THE FUND
The business and affairs of the
Fund are managed under the direction of the
Company's Board of Directors.
The Board of Directors approves all significant
agreements between the Company and
the persons or companies that furnish
services to the Fund, including
agreements with its Distributor, Investment
Adviser, Administrator, Custodian and
Transfer Agent. The day-to-day operations of
the Fund are delegated to its
Investment Adviser and Administrator. One of the
directors and all of the Company's
officers are affiliated with Lehman Brothers,
The Shareholder Services Group, Inc.
or one of their affiliates. The Statement of
Additional Information relating to
the Fund contains general background
information regarding each director
and executive officer of the Company.
23
<PAGE>
INVESTMENT ADVISER--LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
Lehman Brothers Global Asset Management Inc. ("LBGAM")
serves as the Investment
Adviser to the Fund. LBGAM, together
with other Lehman Brothers investment
advisory affiliates, had approximately
$11 billion in assets under management as of
September 30, 1994. Subject to the
supervision and direction of the Company's Board of
Directors, LBGAM manages the Fund's
portfolio in accordance with the Fund's
investment objective and policies,
makes investment decisions for the Fund and
places orders to purchase and sell
securities. As compensation for the services of
LBGAM as Investment Adviser to the Fund,
LBGAM is entitled to receive a monthly
fee from the Fund at the annual rate of
0.30% of the value of the Fund's average daily
net assets. During the fiscal year
ended July 31, 1994, LBGAM received advisory fees
at the annual rate of 0.19% of
the value of the Fund's average daily net assets.
LBGAM is located at 3 World Financial
Center, New York, New York 10285. LBGAM is a
wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
ADMINISTRATOR AND TRANSFER AGENT-THE SHAREHOLDER SERVICES GROUP, INC.
The Shareholder Services Group, Inc.
("TSSG"), located at 53 State Street,
Boston, Massachusetts 02109,
serves as the Fund's Administrator and Transfer Agent.
TSSG is a wholly-owned subsidiary
of First Data Corporation. As Administrator,
TSSG calculates the net asset value
of the Fund's shares and generally assists in
all aspects of the Fund's administration
and operation. As compensation for TSSG's
services as Administrator, TSSG is
entitled to receive a monthly fee from the Fund at
the annual rate of 0.20% of the value
of the Fund's average daily net assets. TSSG is
also entitled to a monthly fee from
the Fund for its services as Transfer Agent.
On May 6, 1994, TSSG acquired
the third party mutual fund administration
business of The Boston Company Advisors, Inc.,
an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon").
In connection with this
transaction, Mellon assigned to TSSG its
agreement with Lehman Brothers that Lehman
Brothers and its affiliates, consistent
with their fiduciary duties and assuming
certain
24
<PAGE>
service quality standards are met, would
recommend TSSG as the provider of
administration services to the Fund. This
duty to recommend expires on May 21, 2000.
In addition, under the terms of
the Stock Purchase Agreement dated September 14,
1992 between Mellon and Lehman
Brothers (then named Shearson Lehman Brothers
Inc.). Lehman Brothers agreed
to recommend Boston Safe Deposit and Trust Company
("Boston Safe"), an indirect
wholly-owned subsidiary of Mellon, as Custodian of
mutual funds affiliated with
Lehman Brothers until May 21, 2000 to the extent
consistent with its fiduciary duties and other applicable law.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Lehman Brothers, located at 3 World Financial Center,
New York, New York 10285, is the
Distributor of the Fund's shares.
Lehman Brothers, a leading full service investment
firm, meets the diverse financial
needs of individuals, institutions and governments
around the world.
The Company has adopted a plan of
distribution with respect to each class of the Fund
(the "Plan of Distribution")
pursuant to Rule 12b-1 under the 1940 Act. Under the
Plan of Distribution, the Fund
has agreed with respect to the Select Class and the
CDSC Class to pay Lehman Brothers
monthly for advertising, marketing and
distributing its shares at an annual
rate of 0.25% of its average daily net assets.
Under the Plan of Distribution,
Lehman Brothers may retain all or a portion of the
payments made to it pursuant to
the Plan and may make payments to its Investment
Representatives or Introducing Brokers
that engage in the sale of such classes of Fund
shares. The Plan of Distribution also
provides that Lehman Brothers may make payments
to assist in the distribution of
each class of the Fund's shares out of the
other fees received by it or its
affiliates from the Fund, its past profits or any
other sources available to it.
From time to time, Lehman Brothers may waive receipt of
fees under the Plan of Distribution
while retaining the ability to be paid under such
Plan thereafter. The fees payable to
Lehman Brothers under the Plan of
Distribution for advertising,
marketing and distributing such shares of the Fund and
payments by Lehman Brothers to
its Investment Representatives or Introducing Brokers
are payable without regard to actual
expenses incurred. Lehman Brothers Investment
Representatives and any other person entitled
25
<PAGE>
to receive compensation for selling
shares of the Fund may receive different levels
of compensation for selling one
particular class of shares over another in the Fund.
CUSTODIAN--BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe, an indirect
wholly-owned subsidiary of Mellon, is located at One Boston
Place, Boston, Massachusetts 02108
and serves as the Fund's Custodian.
EXPENSES
The Fund's expenses include taxes,
interest, fees and salaries of the directors and
officers who are not directors,
officers or employees of the Fund'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,
transfer agent and dividend disbursing
agent, certain insurance premiums,
outside auditing and legal expenses,
costs of shareholder reports and shareholder
meetings and any extraordinary expenses.
The Fund also pays for brokerage fees and
commissions (if any) in connection with the
purchase and sale of portfolio securities.
Fund expenses are allocated to a
particular class based on either expenses identifiable
to the class or relative net assets
of the class and other classes of Fund shares.
LBGAM and TSSG have agreed to
reimburse the Fund to the extent required by applicable
state law for certain expenses
that are described in the Statement of Additional
Information relating to the Fund.
- -----------------------------------------DIVIDENDS
The Fund declares dividends from its
net investment income (I.E., income other than
net realized long- and
short-term capital gains) on each day the Fund is open for
business and pays dividends monthly.
Distributions of net realized long- and short-
term capital gains, if any, are
declared and paid annually after the close of the
Fund's fiscal year in which they have
been earned. Unless a shareholder instructs
the Fund to pay dividends or capital
gains distributions in cash and credit them to
the shareholder's account at
Lehman Brothers, dividends and distributions from the
Fund will be
26
<PAGE>
reinvested automatically in
additional shares of the same class of the Fund at net
asset value. Shares redeemed
during the month are entitled to dividends and
distributions declared up to
and including the date of redemption. The Fund does not
expect to realize net
long-term capital gains. Commencing on the date of the System
Transfer and thereafter,
shares redeemed during a month will be entitled to dividends
up to, but not including,
the date of redemption, and purchased shares will be
entitled to dividends and
distributions declared on the day the purchase order becomes
effective.
- ---------------------------------------TAXES
The Fund will be treated as a
separate entity for federal income tax purposes, and
thus the provisions of
the Code applicable to regulated investment companies generally
will be applied to each
series of the Company separately, rather than to the Company as
a whole. In addition,
net realized long-term capital gains, net investment income
and operating expenses
will be determined separately for each series of the Company.
The Fund intends to qualify each
year as a "regulated investment company" under the
Code. A regulated investment
company is exempt from federal income tax on amounts
distributed to its shareholders.
Qualification as a regulated investment company
under the Code for a taxable year
requires, among other things,
that the Fund distribute to its shareholders each taxable
year (a) at least 90% of its
investment company taxable income for such year and (b)
at least 90% of the excess of
its tax-exempt interest income over certain deductions
disallowed with respect to such
income. In general, the Fund's investment company
taxable income will
be its taxable income (including dividends and short-term capital
gains, if any) 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.
The Fund intends to distribute substantially all of its investment
company taxable income each year.
Such distributions will be taxable as ordinary
income to Fund shareholders who are not
currently exempt from federal income
taxes, whether such income is received
in cash or reinvested in additional shares.
(Federal income taxes for distributions
to an IRA or a qualified retirement plan
are deferred under the Code.)
It is anticipated that none of the Fund's
27
<PAGE>
distributions will be eligible
for the dividends received deduction for
corporations. The Fund does not expect
to realize long-term capital gains and,
therefore, does not contemplate
payment of any "capital gain dividends" as
described in the Code.
Dividends declared in October,
November or December of any year payable to
shareholders of record on a
specified date in such months will be deemed to have been
received by the shareholders
and paid by the Fund on December 31 of such year in
the event such dividends are
actually paid during January of the following year.
Shareholders will be
advised at least annually as to the federal income tax status
of distributions made to them each year.
Dividends paid by the Fund which
are derived from exempt-interest income may be
treated by the Fund's
shareholders as items of interest excludable from their gross
income under Section
103(a) of the Code, unless under the circumstances applicable to
the particular shareholder
the exclusion would be disallowed. (See the Statement of
Additional Information under "Additional Information Concerning Taxes.")
The Fund may hold without
limit certain private activity bonds issued after August
7, 1986. Shareholders
must include, as an item of tax preference, the portion of
dividends paid by the Fund
that is attributable to interest on such bonds in their
federal alternative minimum
taxable income for purposes of determining liability
(if any) for the 26% or
28% alternative minimum tax applicable to individuals
and the 20% alternative
minimum tax and the environmental tax applicable to
corporations. Corporate
shareholders must also take all exempt-interest dividends
into account in
determining certain adjustments for federal alternative minimum
tax and environmental tax
purposes. The environmental tax applicable to corporations
is imposed at the rate of
.12% on the excess of the corporation's modified federal
alternative minimum
taxable income over $2,000,000. Shareholders receiving Social
Security benefits should note
that all exempt-interest dividends will be taken
into account
in determining the taxability of such benefits.
To the extent, if any,
dividends paid to shareholders by the Fund are derived from
taxable income or
from long-term or short-term capital gains, such dividends
will not be exempt
from federal income tax, whether such dividends are paid in the form
of cash or additional
28
<PAGE>
shares, and may also be
subject to state and local taxes. Under state or local law,
the Fund's distributions of
net investment income may be taxable to investors
as dividend income though a
substantial portion of such distributions may be derived
from interest on
tax-exempt obligations which, if realized directly, would be
exempt from such income taxes.
- ----------------------------
The foregoing discussion is
only a brief summary of some of the important
federal tax considerations
generally affecting the Fund and its shareholders. As noted
above, IRAs receive special
tax treatment. No attempt is made to present a detailed
explanation of the federal,
state or local income tax treatment of the Fund or its
shareholders, and
this discussion is not intended as a substitute for careful tax
planning. Accordingly,
potential investors in the Fund should consult their tax
advisers with specific reference to their own tax situation.
- --------------------------------------------------------YIELDS
From time to time, the
"yields," "effective yields" and "tax-equivalent yields" for
each class of shares
of the Fund may be quoted in advertisements or in reports to
shareholders. Yield
quotations are computed separately for each class of shares of the
Fund. The "yield"
quoted in advertisements for each class of the Fund's shares refers
to the income generated
by an investment in that class over a specified period
(such as a seven-day period)
identified in the advertisement. This income is then
"annualized"; that is,
the amount of income generated by the investment during that
period is assumed to
be generated each such period over a 52-week or one-year period
and is shown as a
percentage of the investment. The "effective yield" is
calculated similarly
but, when annualized, the income earned by an investment in a
given class of shares
is assumed to be reinvested. The "effective yield" will be
slightly higher
than the "yield" because of the compounding effect of this assumed
reinvestment.
The "tax-equivalent yield" demonstrates the level of taxable yield
necessary to produce an
after tax yield equivalent to the Fund's tax-free yield.
It is calculated by
increasing the yield (calculated as above) by the amount necessary
to reflect the payment
of federal taxes at a stated rate. The "tax-equivalent yield"
will always be higher than the "yield."
29
<PAGE>
The Fund's yields may be
compared to those of other mutual funds with similar
objectives, to bond or other
relevant indices, or to rankings prepared by
independent services or other
financial or industry publications that monitor the
performance of mutual funds, or to
the average yields reported by the Bank Rate
Monitor from money market deposit
accounts offered by the 50 leading banks and thrift
institutions in the top five
standard metropolitan statistical areas. For example, such
data are reported in
national financial publications such as IBC/DONOGHUE'S MONEY
FUND REPORT-R-,
IBBOTSON ASSOCIATES OF CHICAGO, THE WALL STREET JOURNAL and THE NEW
YORK TIMES, reports prepared
by Lipper Analytical Service, Inc. and publications of
a local or regional nature.
THE FUND'S YIELD FIGURES REPRESENT PAST
PERFORMANCE, WILL FLUCTUATE AND SHOULD NOT BE
CONSIDERED AS REPRESENTATIVE
OF FUTURE RESULTS. The yield of any investment is
generally a function of portfolio
quality and maturity, type of investment and
operating expenses. The methods
used to compute the yields on each class of the
Fund's shares are described
in more detail in the Statement of Additional Information.
Investors may call 800-861-4171 to obtain current yield information.
- -------------------------------------ADDITIONAL INFORMATION
The Company was incorporated under the
laws of the State of Maryland on May 5, 1993.
The authorized capital stock
of the Company consists of 10,000,000,000 shares having
a par value of $.001 per
share. The Company's Articles of Incorporation
currently authorize the
issuance of several series of shares, corresponding to
shares of the Fund as well as
shares of the other investment portfolios of the
Company. The Company's Board
of Directors may, in the future, authorize the issuance of
additional series of capital stock
representing shares of additional investment
portfolios or additional classes
of shares of the Fund or the Company's other
investment portfolios.
The Company has received an order
from the SEC permitting it, subject to certain terms
and conditions, to establish
multiple classes of shares within each series. The
Board of Directors of
the Company has authorized the establishment of three classes
of shares in the Fund: "Select Shares,"
"CDSC Shares" and "Global Clearing Shares."
As of the date of this Prospectus, the Fund offers two
30
<PAGE>
classes of shares, Select Shares and
CDSC Shares. The Fund contemplates that it will
in the future also offer an
additional class of shares, Global Clearing Shares. This
Prospectus relates to Select
Shares and CDSC Shares of the Fund. The shares of
each class of the Fund
represent interests in the Fund in proportion to their
relative net asset
values. CDSC Shares of the Fund are subject to a CDSC as
described under
"Redemption of Shares." If offered by the Fund, Global Clearing
Shares would be subject to a distribution fee payable under the Plan of
Distribution at the annual
rate of up to 0.50% of the Fund's average daily net assets
attributable to that class.
Global Clearing Shares would be available only through
Introducing Brokers and would be
exchangeable only for Global Clearing Shares of other
funds in the Lehman Brothers Group of Funds.
Certain Fund expenses, such as transfer
agency expenses, are allocated separately
to each class of the Fund's shares based on
expenses identifiable by class.
All shares of the Company have
equal voting rights and will be voted in the
aggregate, and not by series or class,
except where voting by series or class is
required by law or where the matter
involved affects only one series or class. Under
the corporate law of Maryland,
the Company's state of incorporation, and the Company's
By-Laws (except as required under the 1940 Act),
the Company is not required and
does not currently intend
to hold annual meetings of shareholders for the
election of directors.
Shareholders, however, do have the right to call for a
meeting to consider the
removal of one or more of the Company's directors if such a
request is made, in writing, by
the holders of at least 10% of the Company's
outstanding voting securities.
All shares of the Company,
when issued, will be fully paid and nonassessable.
The Fund sends shareholders a semi-annual
and audited annual report, which
includes listings of investment securities
held by the Fund at the end of the period
covered. In an effort to reduce the
Fund's printing and mailing costs, the Fund may
consolidate the mailing of its semi-annual
and annual reports by household. This
consolidation means that a household
having multiple accounts with the identical
address of record would receive a single
copy of each report. In addition, the Fund may
consolidate the mailing of its Prospectus
so that a shareholder having multiple
accounts (E.G.,
31
<PAGE>
individual IRA and/or Self-Employed Retirement Plan accounts)
would receive a single
Prospectus annually. When the Fund's annual
report is combined with the Prospectus
into a single document, the Fund will
mail the combined document to each shareholder
to comply with legal requirements. Any
shareholder who does not want this consolidation
to apply to his or her account should
contact his or her Lehman Brothers Investment
Representative or the Fund's transfer
agent. Shareholders may direct inquiries
regarding the Fund to a Lehman Brothers Investment Representative.
32 <PAGE>
LEHMAN BROTHERS MEMBER SIPC
3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285 MF5002
Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund
Investment Portfolios of Lehman Brothers Funds, Inc.
Statement of
Additional
Information
November 28, 1994
This Statement of Additional Information is meant to be read in
conjunction with the Prospectuses for the Lehman Brothers Daily Income Fund
(the "Daily Income Fund") and the Lehman Brothers Municipal Income Fund (the
"Municipal Income Fund" and, together with the Daily Income Fund, the
"Funds"), each dated November 28, 1994 as amended or supplemented from time to
time, and is incorporated by reference in its entirety into each of the
Prospectuses. Each of the Funds is a separate, diversified money market
portfolio of Lehman Brothers Funds, Inc. (the "Company"), an open-end,
management investment company. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of the Funds
should be made solely upon the information contained herein. Copies of the
Prospectuses may be obtained by calling 800-861-4171. Capitalized terms used
but not defined herein have the same meanings as in the Prospectuses.
TABLE OF CONTENTS
Investment Objectives and Policies
2
Additional Information Concerning Municipal Obligations -
The Municipal Income Fund
9
Additional Purchase and Redemption Information
1
1
Exchange Privilege
1
2
Management of the Funds
1
3
Additional Information Concerning Taxes
1
7
Dividends
1
9
Additional Yield Information
1
9
Additional Information Concerning Fund Shares
2
1
Counsel
2
1
Auditors
2
1
Financial Statements ..
2
2
Appendix
A
- -
1
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Daily Income Fund is to provide investors with
as high a level of current income as is consistent with stability of
principal. The investment objective of the Municipal Income Fund is to provide
investors with as high a level of current income exempt from federal income
tax as is consistent with stability of principal. The following policies
supplement the description of each Fund's investment objective and policies in
the applicable Prospectus.
The Funds are managed to provide stability of capital while achieving
competitive yields. The investment adviser intends to follow a value-oriented,
research-driven and risk-averse investment strategy, engaging in a full range
of economic, strategic, credit and market-specific analyses in researching
potential investment opportunities.
Portfolio Transactions
Subject to the general control of the Company's Board of Directors, Lehman
Brothers Global Asset Management Inc. ("LBGAM"), the Funds' investment
adviser, is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for a Fund. LBGAM
generally purchases portfolio securities for the Funds either directly from
the issuer or from dealers who specialize in money market instruments. Such
purchases are usually without brokerage commissions. In making portfolio
investments, LBGAM seeks 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 dealer are comparable, LBGAM may, in its discretion, effect
transactions in portfolio securities with dealers who provide the Company 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 LBGAM in servicing accounts in addition to the Funds, and not all
such services will necessarily benefit the Funds.
Transactions in the over-the-counter market are generally principal
transactions with dealers, and the costs of such transactions involve dealer
spreads rather than brokerage commissions. 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.
LBGAM may seek to obtain an undertaking from issuers of commercial paper
or dealers selling commercial paper to consider the repurchase of such
securities from the Daily Income Fund prior to their maturity at their
original cost plus interest (interest may sometimes be adjusted to reflect the
actual maturity of the securities) if LBGAM believes that the Fund's
anticipated need for liquidity makes such action desirable. Certain dealers
(but not issuers) have charged and may in the future charge a higher price for
commercial paper where they undertake to repurchase prior to maturity. The
payment of a higher price in order to obtain such an undertaking reduces the
yield which might otherwise be received by the Fund on the commercial paper.
The Company's Board of Directors has authorized LBGAM to pay a higher price
for commercial paper where it secures such an undertaking if LBGAM believes
that the prepayment privilege is desirable to assure the Fund's liquidity and
such an undertaking cannot otherwise be obtained.
Investment decisions for each Fund are made independently from those for
the other Fund or other investment company portfolio or accounts advised by
LBGAM. 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
LBGAM believes to be equitable to each portfolio, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtainable for a Fund. To the
extent permitted by law, LBGAM may aggregate the securities to be sold or
purchased for a Fund 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 Lehman Brothers Inc. ("Lehman Brothers"), LBGAM or
any affiliated person (as such term is defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of either of them, except to the extent
permitted by the Securities and Exchange Commission (the "SEC"). However,
pursuant to an exemption granted by the SEC, the Funds may engage in
transactions involving certain money market instruments with Lehman Brothers
and certain of its affiliates acting as principal. The Funds will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which Lehman Brothers 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 a similar investment objective but
are not subject to such limitations.
The Municipal Income Fund may participate, if and when practicable, in
bidding for the purchase of "Municipal Obligations" directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. The Municipal Income Fund will engage in this practice,
however, only when LBGAM, in its sole discretion, believes such practice to be
in the Fund's interest. "Municipal Obligations" consist of municipal
obligations (as defined in the Municipal Income Fund's Prospectus) and
tax-exempt derivatives such as tender option bonds, participations, beneficial
interests in trusts and partnership interests.
The Funds do not intend to seek profits through short-term trading. Each
Fund's annual portfolio turnover will be relatively high, but is not expected
to have a material effect on its net income. Each Fund's portfolio turnover
rate is expected to be zero for regulatory reporting purposes.
Additional Information on Portfolio Instruments and Investment Practices
U.S. Government Obligations. Examples of the types of U.S. government
obligations that may be held by the Daily Income Fund 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.
Bank Obligations. For purposes of the Daily Income Fund's investment
policies with respect to obligations of issuers in the banking industry, the
assets of a bank or savings institution will be deemed to include the assets
of its domestic and foreign branches. The Daily Income Fund's investments in
the obligations of foreign branches of U.S. banks and of foreign banks and
other foreign issuers may subject the Daily Income Fund to investment risks
that are different in some respects from those of investment in obligations of
U.S. domestic issuers. Such risks include future political and economic
developments, the possible seizure or nationalization of foreign deposits, 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 foreign issuers generally are subject to
different accounting, auditing, reporting and record keeping standards than
those applicable to U.S. issuers. The Daily Income Fund will acquire
securities issued by foreign branches of U.S. banks or foreign issuers only
when the Fund's investment adviser believes that the risks associated with
such instruments are minimal.
Among the bank obligations in which the Daily Income Fund may invest are
notes issued by banks. These notes, which are exempt from registration under
federal securities laws, are not deposits of the banks and are not insured by
the Federal Deposit Insurance Corporation or any other insurer. Holders of
notes rank on a par with other unsecured and unsubordinated creditors of the
banks. Notes may be sold at par or sold on a discount basis and may bear fixed
or floating rates of interest.
Variable and Floating Rate Instruments. Securities purchased by the Funds
may include variable and floating rate instruments, which provide for
adjustments in the interest rate on certain reset dates or whenever a
specified interest rate index changes, respectively. Variable and floating
rate instruments are subject to the credit quality standards described in the
Prospectuses. In some cases the Funds may require that the obligation to pay
the principal of the instrument be backed by a letter or line of credit or
guarantee. Such instruments may carry stated maturities in excess of 397 days
provided that the maturity-shortening provisions stated in Rule 2a-7 under the
1940 Act are satisfied. Although a particular variable or floating rate demand
instrument might not be actively traded in a secondary market, in some cases,
the Funds may be entitled to principal on demand and may be able to resell
such notes in the dealer market. With respect to the floating and variable
rate notes and demand notes described in the Prospectuses, a Fund's investment
adviser will consider the earning power, cash flows and other liquidity ratios
of the issuers of such notes and will continuously monitor their financial
ability to meet payment obligations when due.
Variable and floating rate demand instruments held by a Fund may have
maturities of more than thirteen months provided: (i) the Fund is entitled to
the payment of principal at any time, or during specified intervals not
exceeding 13 months, upon giving the prescribed notice (which may not exceed
30 days), and (ii) the rate of interest on such instruments is adjusted at
periodic intervals which may extend up to 13 months (397 days). Variable and
floating rate notes that do not provide for payment within seven days may be
deemed illiquid and subject to the 10% limitation on such investments.
In determining a Fund's average weighted portfolio maturity and whether
a variable or floating rate demand instrument has a remaining maturity of 13
months or less, each instrument will be deemed by the Fund to have a maturity
equal to the longer of the period remaining until its next interest rate
adjustment or the period remaining until the principal amount can be recovered
through demand. In determining whether an unrated variable or floating rate
demand instrument is of comparable quality at the time of purchase to
securities in which a Fund may invest, LBGAM will follow guidelines adopted by
the Company's Board of Directors.
Repurchase Agreements. The repurchase price under the repurchase agreements
described in the Prospectuses 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.
Reverse Repurchase Agreements. Whenever the Funds enter into reverse
repurchase agreements as described in the Prospectuses, they will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor
the account to ensure such equivalent value is maintained. Reverse repurchase
agreements are considered to be borrowings by the Funds under the 1940 Act.
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. A Fund may not lend its portfolio securities to Lehman Brothers or its
affiliates without specific authorization from the SEC. Loans of portfolio
securities by 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, a Fund 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 Fund or Lehman Brothers, and which is acting as a "finder." With
respect to loans by the Funds of their portfolio securities, the Funds 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 Securities. As stated in the Prospectus for the Daily Income
Fund, the Daily Income Fund may purchase securities on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When the Daily Income Fund agrees to purchase when-issued 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 the Daily Income 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 the Daily Income Fund's commitment. It
may be expected that the Daily Income 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. Because the Daily Income Fund will
set aside cash or liquid assets to satisfy its purchase commitments in the
manner described, the Daily Income Fund's liquidity and ability to manage its
portfolio might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its assets. When the
Daily Income Fund engages in when-issued transactions, it relies on the seller
to consummate the trade. Failure of the seller to do so may result in the
Daily Income Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous. The Daily Income Fund does not intend to
purchase when-issued securities for speculative purposes but only in
furtherance of its investment objective. The Daily Income Fund reserves the
right to sell these securities before the settlement date if it is deemed
advisable.
Tender Option Bonds. The Municipal Income Fund may invest in tender option
bonds. The Municipal Income Fund will not purchase tender option bonds unless
(a) the demand feature applicable thereto is exercisable by the Municipal
Income Fund within 13 months of the date of such purchase upon no more than 30
days' notice and thereafter is exercisable by the Municipal Income Fund no
less frequently than annually upon no more than 30 days' notice and, (b) at
the time of such purchase, LBGAM reasonably expects that, (i) based upon its
assessment of current and historical interest rate trends, prevailing
short-term tax-exempt rates will not exceed the stated interest rate on the
underlying Municipal Obligations at the time of the next tender fee
adjustment, and (ii) the circumstances which might entitle the grantor of a
tender option to terminate the tender option would not occur prior to the time
of the next tender opportunity. At the time of each tender opportunity, the
Municipal Income Fund will exercise the tender option with respect to any
tender option bonds unless LBGAM reasonably expects that, (a) based upon its
assessment of current and historical interest rate trends, prevailing
short-term tax-exempt rates will not exceed the stated interest rate on the
underlying Municipal Obligations at the time of the next tender fee
adjustment, and (b) the circumstances which might entitle the grantor of a
tender option to terminate the tender option would not occur prior to the time
of the next tender opportunity. The Municipal Income Fund will exercise the
tender feature with respect to tender option bonds, or otherwise dispose of
their tender option bonds, prior to the time the tender option is scheduled to
expire pursuant to the terms of the agreement under which the tender option is
granted. The Municipal Income Fund otherwise will comply with the provisions
of Rule 2a-7 under the 1940 Act in connection with the purchase of tender
option bonds, including, without limitation, the requisite determination by
the Board of Directors that the tender option bonds in question meet the
quality standards described in Rule 2a-7. In the event of a default of the
Municipal Obligation underlying a tender option bond, or the termination of
the tender option agreement, the Municipal Income Fund would look to the
maturity date of the underlying security for purposes of compliance with
Rule 2a-7 and, if its remaining maturity was greater than 13 months, the
Municipal Income Fund would sell the security as soon as would be practicable.
The Municipal Income Fund will purchase tender option bonds only when it is
satisfied that (a) the custodial and tender option arrangements, including the
fee payment arrangements, will not adversely affect the tax-exempt status of
the underlying Municipal Obligations and (b) payment of any tender fees will
not have the effect of creating taxable income for the Municipal Income Fund.
Based on the tender option bond arrangement, the Municipal Income Fund expects
to value the tender option bond at par; however, the value of the instrument
will be monitored to assure that it is valued at fair value.
Stand-By Commitments. Each of the Funds may acquire rights to "put" its
securities at an agreed upon price within a specified period prior to their
maturity date. The Funds may also enter into put transactions sometimes
referred to as "stand-by commitments," which entitle the holder to same-day
settlement and to receive an exercise price equal to the amortized cost of the
underlying security plus accrued interest, if any, at the time of exercise.
Each Fund's right to exercise a stand-by commitment will be unconditional and
unqualified.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for certain stand-by commitments either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to a stand-by commitment (thus reducing the yield to
maturity otherwise available for the same securities). The Funds intend to
enter into stand-by commitments solely to facilitate portfolio liquidity and
do not intend to exercise their rights thereunder for trading purposes. The
acquisition of a stand-by commitment will not affect the valuation of the
underlying security, which will continue to be valued in accordance with the
amortized cost method. The actual stand-by commitment will be valued at zero
in determining net asset value. Where a Fund pays any consideration directly
or indirectly for a stand-by commitment, its cost will be reflected as
unrealized depreciation for the period during which the stand-by commitment is
held by the Fund and will be reflected in realized gain or loss when the
stand-by commitment is exercised or expires.
In the event that the issuer of a stand-by commitment acquired by a Fund
defaults on its obligation to purchase the underlying security, then that Fund
might be unable to recover all or a portion of any loss sustained from having
to sell the security elsewhere.
If the value of the underlying security increases, the potential for
unrealized or realized gain is reduced by the cost of the stand-by commitment.
The maturity of a portfolio security will not be considered shortened by a
stand-by commitment to which such obligation is subject. Therefore, stand-by
commitment transactions will not affect the average weighted maturity of a
Fund's portfolio.
Asset-Backed and Receivable-Backed Securities. The Daily Income Fund may
invest in asset-backed and receivable-backed securities. Several types of
asset-backed and receivable-backed securities have been offered to investors,
including interests in pools of credit card receivables and motor vehicle
retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on these securities
are passed through to certificate holders. In addition, asset-backed
securities often carry credit protection in the form of extra collateral,
subordinate certificates, cash reserve accounts and other enhancements. An
investor's return on these securities may be affected by early prepayment of
principal on the underlying receivables or sales contracts. Any asset-backed
or receivable-backed securities held by the Daily Income Fund must comply with
the portfolio maturity and quality requirements contained in Rule 2a-7 under
the 1940 Act. The Daily Income Fund will monitor the performance of these
investments and will not acquire any such securities unless rated in the
highest rating category by at least two nationally recognized statistical
rating organizations ("NRSROs").
Illiquid and Restricted Securities. Neither Fund may invest more than 10% of
its net 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
purposes 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 Funds' investment adviser anticipates 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 foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers Inc.
LBGAM 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, LBGAM 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 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).
The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by NRSROs for obligations that
may be purchased by each Fund.
Investment Limitations
The Prospectus of each Fund summarizes certain investment limitations that may
not be changed without the affirmative vote of the holders of a majority of
such Fund's outstanding shares (as defined below under "Additional Information
Concerning Fund Shares"). Investment limitations numbered 1 through 7 may not
be changed without such a vote of shareholders; investment limitations 8
through 13 may be changed by a vote of the Company's Board of Directors at any
time.
1. Neither Fund may purchase securities of any one issuer if as a
result more than 5% of the value of the Fund's total assets would be invested
in the securities of such issuer, except that up to 25% of the value of the
Fund's total assets may be invested without regard to such 5% limitation and
provided that there is no limitation with respect to investments in U.S.
government securities.
2. Neither Fund may borrow money, except from banks for temporary
purposes and then in amounts not exceeding one-third of the value of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or one-third of the value
of its total assets at the time of such borrowing. Additional investments will
not be made by a Fund when borrowings exceed 5% of its total assets.
3. Neither Fund may 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, except that the Daily Income Fund
will invest 25% or more of the value of its total assets in obligations of
issuers in the banking industry or in obligations, such as repurchase
agreements, secured by such obligations (unless the Daily Income Fund is in a
temporary defensive position); provided that there is no limitation with
respect to investments in U.S. government securities or, in the case of the
Municipal Income Fund, Municipal Obligations (other than those backed only by
the assets and revenues of non-governmental users).
4. Neither Fund may make loans, except that each Fund may purchase or
hold debt instruments in accordance with its investment objective and
policies, and the Daily Income Fund may enter into repurchase agreements with
respect to portfolio securities.
5. Neither Fund may act as an underwriter of securities, except
insofar as a Fund may be deemed an underwriter under applicable securities
laws in selling portfolio securities.
6. Neither Fund may purchase or sell real estate or real estate
limited partnerships, provided that a Fund may purchase securities of issuers
which invest in real estate or interests therein.
7. Neither Fund may purchase or sell commodities contracts, or invest
in oil, gas or mineral exploration or development programs or in mineral
leases.
8. Neither Fund may knowingly invest more than 10% of the value of its
net assets in securities that may be illiquid because of legal or contractual
restrictions on resale or securities for which there are no readily available
market quotations.
9. Neither Fund may purchase securities on margin, make short sales of
securities or maintain a short position.
10. Neither Fund may write or sell puts, calls, straddles, spreads or
combinations thereof.
11. Neither Fund may invest in securities if as a result the Fund would
then have more than 5% of its total assets in securities of companies
(including predecessors) with less than three years of continuous operation.
12. Neither Fund may purchase securities of other investment companies
except as permitted under the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization.
13. Neither Fund may invest in warrants.
In addition, without the affirmative vote of the holders of a majority
of the Municipal Income Fund's outstanding shares, that Fund may not change
its policy of investing at least 80% of its total assets (except during
temporary defensive periods) in Municipal Obligations.
In order to permit the sale of shares of the Funds in certain states,
the Funds 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 interests, it will revoke the commitment by terminating
sales of its shares in the state involved. Further, with respect to the
above-stated third limitation, each Fund will consider wholly owned finance
companies to be in the industries of their parents, if their activities are
primarily related to financing the activities of their parents, and will
divide utility companies according to their services; for example, gas, gas
transmission, electric and gas, electric, and telephone will each be
considered a separate industry.
ADDITIONAL INFORMATION CONCERNING MUNICIPAL OBLIGATIONS -
THE MUNICIPAL INCOME FUND
Municipal Obligations include debt obligations issued by governmental entities
to obtain funds for various public purposes, including the construction of a
wide range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds that are or were issued by
or on behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Obligations if the interest
paid thereon is exempt from federal income tax. Opinions relating to the
validity of Municipal Obligations and to the exemption of interest thereon
from federal income taxes are rendered by counsel to the issuers or bond
counsel to the respective issuing authorities at the time of issuance. Neither
the Municipal Income Fund nor its investment adviser will review independently
the underlying proceedings relating to the issuance of Municipal Obligations
or the bases for such opinions.
The Municipal Income Fund may hold tax-exempt derivatives which may be
in the form of tender option bonds, participations, beneficial interests in a
trust, partnership interests or other forms. A number of different structures
have been used. For example, interests in long-term fixed rate Municipal
Obligations held by a bank as trustee or custodian are coupled with tender
option, demand and other features when tax-exempt derivatives are created.
Together, these features entitle the holder of the interest to tender (or put)
the underlying Municipal Obligation to a third party at periodic intervals and
to receive the principal amount thereof. In some cases, Municipal Obligations
are represented by custodial receipts evidencing rights to receive specific
future interest payments, principal payments or both, on the underlying
municipal securities held by the custodian. Under such arrangements, the
holder of the custodial receipt has the option to tender the underlying
municipal securities at its face value to the sponsor (usually a bank or
broker-dealer or other financial institution), which is paid periodic fees
equal to the difference between the bond's fixed coupon rate and the rate that
would cause the bond, coupled with the tender option, to trade at par on the
date of a rate adjustment. The Municipal Income Fund may hold tax-exempt
derivatives, such as participation interests and custodial receipts, for
Municipal Obligations which give the holder the right to receive payment of
principal subject to the conditions described above. The Internal Revenue
Service has not ruled on whether the interest received on tax-exempt
derivatives in the form of participation interests or custodial receipts is
tax-exempt, and accordingly, purchases of any such interests or receipts are
based on the opinion of counsel to the sponsors of such derivative securities.
Neither the Municipal Income Fund nor its investment adviser will review
independently the underlying proceedings related to the creation of any
tax-exempt derivatives or the bases for such opinions.
As described in the Prospectus for the Municipal Income Fund, the two
principal classifications of Municipal Obligations consist of "general
obligation" and "revenue" issues, and the Municipal Income Fund's portfolio
may include "moral obligation" issues, which are normally issued by special
purpose authorities. There are, of course, variations in the quality of
Municipal Obligations both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of other issuer, general conditions of the municipal bond market, the size of
a particular offering, the maturity of the obligation and the rating of the
issue. The ratings of NRSROs represent their opinions as to the quality of
Municipal Obligations. It should be recognized, however, that ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields
while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by the
Municipal Income Fund, an issue of Municipal Obligations may cease to be rated
or its rating may be reduced below the minimum rating required for purchase by
the Municipal Income Fund. LBGAM will consider such an event in determining
whether the Municipal Income Fund should continue to hold the obligation.
An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.
Among other instruments, the Municipal Income Fund may purchase
short-term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction
Loan Notes and other forms of short-term loans. Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds
of bond placements or other revenues. In addition, the Municipal Income Fund
may invest in other types of tax-exempt instruments such as municipal bonds,
private activity bonds and pollution control bonds, provided they have
remaining maturities of 13 months or less at the time of purchase.
The payment of principal and interest on most securities purchased by
the Municipal Income Fund will depend upon the ability of the issuers to meet
their obligations. The District of Columbia, each state, each of their
political subdivisions, agencies, instrumentalities, and authorities and each
multi-state agency of which a state is a member is a separate "issuer" as that
term is used in this Statement of Additional Information and the Prospectus
for the Municipal Income Fund. The non-governmental user of facilities
financed by private activity bonds is also considered to be an "issuer."
The Tax Reform Act of 1986 (the "Act") substantially revised provisions
of prior law affecting the issuance and use of proceeds of certain tax-exempt
obligations. A new definition of private activity bonds was applied to many
types of bonds, including those which were industrial development bonds under
prior law. Interest on private activity bonds is tax-exempt only if the bonds
fall within certain defined categories of qualified private activity bonds and
meet the requirements specified in those respective categories. The Act
generally did not change the tax treatment of bonds issued to finance
governmental operations. The changes generally apply to bonds issued after
August 15, 1986, with certain transitional rule exemptions. As used in this
Statement of Additional Information, the term "private activity bonds" also
includes industrial development revenue bonds issued pursuant to the Internal
Revenue Code of 1986, as amended (the "Code"). The portion of dividends paid
by the Fund that is attributable to interest on certain private activity bonds
is an item of tax preference for purposes of the federal individual and
corporate alternative minimum taxes.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem each Fund's shares is included in
the applicable Prospectus. The issuance of shares is recorded on a Fund's
books, but share certificates are not issued for Fund shares.
The Funds offer their shares to the public on a continuous basis.
Purchase of Fund shares must be made through a brokerage account maintained
through Lehman Brothers or with a broker that clears securities transactions
through Lehman Brothers on a fully disclosed basis (an "Introducing Broker").
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 that Fund determines net asset
value. See "Net Asset Value" below for an example of when such redemption or
form of payment might be appropriate. 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.
The Funds normally transmit payment of redemption proceeds for credit to
the shareholder's account at Lehman Brothers or the Introducing Broker on the
business day following receipt of the redemption request but, in any event,
payment will be made within seven days thereafter.
The Prospectuses describe special redemption procedures for certain
shareholders who engage in purchases of securities through Lehman Brothers or
an Introducing Broker, under which Fund shares are redeemed automatically to
satisfy debit balances arising in the shareholder's account on the settlement
date of other securities transactions. A shareholder may choose not to redeem
Fund shares automatically by notifying Lehman Brothers or the Introducing
Broker, and by making payment for securities purchased by the settlement date,
which is usually five business days after the trade date.
Net Asset Value
The Prospectuses discuss the time at which the net asset value of shares of
each class of the applicable Fund is determined for purposes of sales and
redemptions. The following is a description of the procedures used by the
Funds in valuing their assets.
The valuation of each Fund's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at
its cost 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. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if it
sold the instrument.
Pursuant to the 1940 Act, each Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments
having remaining maturities of thirteen months or less and invest only in
securities determined by LBGAM to be of eligible quality with minimal credit
risks.
Pursuant to Rule 2a-7, the Company's Board of Directors also have
established procedures designed to stabilize, to the extent reasonably
possible, the price per share of each Fund as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of each Fund's
portfolio holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by
using available market quotations or market equivalents deviates from $1.00
per share based on amortized cost.
Rule 2a-7 also provides that the extent of any deviation between a
Fund's net asset value based upon available market quotations or market
equivalents and the $1.00 per share net asset value based on amortized cost
must be examined by the Board of Directors. In the event the Board of
Directors determines that a deviation exists which may result in material
dilution or other unfair results to investors or existing shareholders,
pursuant to Rule 2a-7 the Board of Directors must cause the Fund to take such
corrective action as the Board of Directors regards as necessary and
appropriate, including: selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding dividends or paying distributions from capital or capital gains;
redeeming shares in kind; or establishing a net asset value per share by using
available market quotations.
EXCHANGE PRIVILEGE
Holders of a Fund's CDSC Shares may exchange all or part of their CDSC Shares
for shares of certain other funds in the Lehman Brothers Group of Funds, as
indicated in the Prospectuses, to the extent such shares are offered for sale
in the shareholder's state of residence. There currently is no charge for this
service, and exchanges are made on the basis of relative net asset value per
share at the time of exchange. CDSC Shares of a Fund exchanged for shares of
another fund will be subject to the higher applicable CDSC of the two funds
and, for purposes of calculating CDSC rates, will be deemed to have been held
since the date the CDSC Shares being exchanged were purchased.
The exchange privilege enables holders of a Fund's CDSC Shares to
acquire shares in a fund with different investment objectives when they
believe that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any state in which the fund
shares being acquired may legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the current prospectus of each
fund into which an exchange is to be made. Prospectuses may be obtained from
any Lehman Brothers Investment Representative.
Exercise of the exchange privilege is treated as a sale and repurchase
for federal income tax purposes and, depending on the circumstances, a short-
or long-term capital gain or loss may be realized. The price of the shares of
the fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting
documents, a Fund's CDSC Shares submitted for exchange are redeemed at the
then-current net asset value and the proceeds immediately invested in shares
of the fund being acquired subject to any applicable CDSC. Lehman Brothers
reserves the right to reject any exchange request. The exchange privilege may
be modified or terminated at any time after notice to shareholders.
MANAGEMENT OF THE FUNDS
Directors and Officers
The Company's directors and executive officers, their addresses, principal
occupations during the past five years and other affiliations are as follows:
Name and Address
Position
with the
Company
Principal
Occupation
During Past
5 Years and
Other
Affiliations
Kirk Hartman (1)
3 World
Financial Center
New York, New
York 10285
Chairman
of the
Board and
Director
Managing
Director,
Lehman
Brothers.
Burt N. Dorsett
(2)(3)
201 East 62nd
Street
New York, New
York 10021
Director
Managing
Partner,
Dorsett
McCabe
Capital
Management,
Inc.;
Director,
Research
Corporation
Technologies
; formerly
President,
Westinghouse
Pension
Investments
Corporation;
formerly
Executive
Vice
President
and Trustee,
College
Retirement
Equities
Fund, Inc.;
formerly
Investment
Officer,
University
of
Rochester.
Name and Address
Position
with the
Company
Principal
Occupation
During Past
5 Years and
Other
Affiliations
Kathleen C.
Holmes(2)(3)
Wharton
Financial
Institutions
Center
3620 Locust
Walk
3301 Steinberg
Hall
Dietrich Hall
Philadelphia,
Pennsylvania
19104-6367
Director
Managing
Director,
Wharton
School
Financial
Institutions
Center,
University
of
Pennsylvania
; Senior
Partner and
Management
Consultant,
Furash &
Company.
John N.
Hatsopoulos(2)(3
)
Thermo
Electron Corp.
81 Wyman
Street
Waltham,
Massachusetts
02254
Director
Executive
Vice
President
and Chief
Financial
Officer,
Thermo
Electron
Corp.
Andrew Gordon
3 World
Financial Center
New York, New
York 10285
President
Managing
Director,
Lehman
Brothers.
John M. Winters
3 World
Financial Center
New York, New
York 10285
Vice
President
Senior Vice
President,
Lehman
Brothers.
Michael Kardok
53 State
Street
Boston,
Massachusetts
02109
Treasurer
and Chief
Financial
Officer
Vice
President,
The
Shareholder
Services
Group, Inc.
Patricia L.
Bickimer
53 State
Street
Boston,
Massachusetts
02109
Secretary
Vice
President
and
Associate
General
Counsel, The
Shareholder
Services
Group, Inc.
___________
1. Director considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
2. Audit Committee Member.
3. Nominating Committee Member.
Three directors of the Company, Messrs. Hartman and Dorsett and Ms.
Holmes, serve as directors or trustees of other investment companies for which
Lehman Brothers, LBGAM or one of their affiliates serves as distributor or
investment adviser.
No employee of Lehman Brothers, LBGAM or The Shareholders Services
Group, Inc. ("TSSG") 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 Lehman Brothers, LBGAM or TSSG or any
of their affiliates, a fee of $20,000 per annum plus $500 per meeting attended
and reimburses them for travel and out-of-pocket expenses.
By virtue of the responsibilities assumed by Lehman Brothers, LBGAM,
TSSG and their affiliates under their respective agreements with the Company,
the Company itself requires no employees in addition to its officers.
Investment Adviser
LBGAM serves as investment adviser to the Funds pursuant to separate written
advisory agreements 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 LBGAM, on July 26, 1993. The services provided by
LBGAM under its advisory agreements and the fees paid to LBGAM are described
in the Prospectuses. LBGAM bears all expenses in connection with the
performance of its services and pays the salaries of all officers or employees
who are employed by both it and the Company. Unless sooner terminated, each
advisory agreement will continue in effect until July 25, 1995 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 Description 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
will be terminable by the Company or LBGAM on 60 days' written notice, and
will terminate immediately in the event of its assignment.
Administrator
As the Funds' administrator, TSSG has agreed to provide the following
services: (i) assist generally in supervising a Fund's operations, providing
and supervising the operation of an automated data processing system to
process purchase and redemption orders, providing information concerning a
Fund to its shareholders of record, handling shareholder problems, supervising
the services of employees whose principal responsibility and function is to
preserve and strengthen shareholder relations; (ii) prepare reports to a
Fund's shareholders and prepare tax returns and reports to and filings with
the SEC; (iii) compute the respective net asset value per share 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 a Fund's shares for sale
under state securities laws.
Distributor and Plan of Distribution
Lehman Brothers acts as distributor of each Fund's shares. Each Fund's shares
are sold on a continuous basis by Lehman Brothers as agent, although Lehman
Brothers is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of a Fund (excluding preparation and printing
expenses necessary for the continued registration of a Fund's shares) and of
preparing, printing and distributing all sales literature.
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. The Company's Board of Directors has adopted such a plan with respect to
each Fund (the "Plan of Distribution"). The Board of Directors believes that
there is a reasonable likelihood that the Plan of Distribution will benefit
the Funds and their shareholders.
A quarterly report of the amounts expended with respect to each class of
each Fund under the Plan of Distribution, and the purposes for which such
expenditures were incurred, must be made to the Board of Directors for its
review. In addition, the Plan of Distribution provides that it may not be
amended with respect to a class of a Fund to increase materially the costs
which may be borne for distribution pursuant to the Plan of Distribution
without the approval of shareholders of that class, and that other material
amendments of the Plan of Distribution must be approved by the Board of
Directors, and by the Directors who are neither "interested person" (as
defined in the 1940 Act) of the Company nor have any direct or indirect
financial interest in the operation of the Plan of Distribution or any related
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Plan of Distribution and any related
agreements are subject to annual approval by such vote cast in person at a
meeting called for the purpose of voting on the Plan. The Plan of Distribution
may be terminated with respect to a class of a Fund at any time 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 the Plan of Distribution or
in any related agreement or by vote of a majority of the shares of that class.
Custodian and Transfer Agent
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect wholly
owned subsidiary of Mellon Bank Corporation, is located at One Boston Place,
Boston, Massachusetts 02108, and serves as the Company's custodian pursuant to
a custody agreement. Under the custody agreement, Boston Safe holds each
Fund's portfolio securities and keeps all necessary accounts and records. For
its services, Boston Safe 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.
TSSG, a subsidiary of First Data Corporation, is located at 53 State
Street, Boston, Massachusetts 02019, and serves as the Company's transfer
agent. Under the transfer agency agreement, TSSG maintains the shareholder
account records for the Company, handles certain communications between
shareholders and the Company and 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, TSSG
receives a monthly fee computed separately for each class of the Fund's shares
on the basis of the number of shareholder accounts that it maintains for the
Company during the month and is reimbursed separately by each class for
out-of-pocket expenses.
Expenses
A 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.
The Funds also pay for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities. Fund expenses are
allocated to a particular class of Fund shares based on other expenses
identifiable to the class or the relative net assets of the class and other
classes of Fund shares. LBGAM and TSSG have agreed that if, in any fiscal
year, the expenses borne by a Fund exceed the applicable expense limitations
imposed by the securities regulations of any state in which shares of that
Fund are registered or qualified for sale to the public, they will reimburse
that Fund for any excess to the extent required by such regulations in the
same proportion that each of their fees bears to the Fund's aggregate fees for
investment advice and administrative services. Unless otherwise required by
law, such reimbursement would be accrued and paid on the same basis that the
advisory and administration fees are accrued and paid by that Fund. To each
Fund's knowledge, of the expense limitations in effect on the date of this
Statement of Additional Information, none is more restrictive than two and
one-half percent (2%) of the first $30 million of a Fund's average annual net
assets, two percent (2%) of the next $70 million of the average annual net
assets and one and one-half percent (1%) of the remaining average annual net
assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting a Fund and its shareholders that are not described in the
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of a Fund or its shareholders or possible legislative changes, and
the discussion here and in the Prospectuses is not intended as a substitute
for careful tax planning.
As stated in the Prospectuses, each Fund intends to qualify as a
regulated investment company under the Code. In order to so qualify under the
Code for a taxable year, a Fund must satisfy the distribution requirement
described in the Prospectuses, derive at least 90% of its gross income for the
year from certain qualifying sources, comply with certain diversification
tests and derive less than 30% of its gross income for the year from the sale
or other disposition of securities and certain other investments held for less
than three months. Interest (including original issue discount plus accrued
market discount) received by a Fund at maturity or disposition of a security
held for less than three months will not be treated as gross income derived
from the sale or other disposition of such security within the meaning of the
30% requirement. However, any income in excess of such interest will be
treated as gross income from the sale of other disposition of securities for
this purpose.
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.
If for any taxable year a Fund does not qualify for tax treatment as a
regulated investment company, all of that Fund's taxable income will be
subject to tax at regular corporate rates without any deduction for
distributions to Fund shareholders. In such event, dividend distributions to
shareholders would be taxable as ordinary income to the extent of that 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, or 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 a Fund that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income tax,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, a Fund
may be subject to the tax laws of such states or localities. In addition, in
those states and localities which have income tax laws, the treatment of a
Fund and its shareholders under such laws may differ from the treatment under
federal income tax laws. Shareholders are advised to consult their tax
advisers concerning the application of state and local taxes.
The Municipal Income Fund
As described above and in the Prospectus for the Municipal Income Fund, the
Municipal Income Fund is designed to provide institutions with current
tax-exempt interest income. The Municipal Income Fund is not intended to
constitute a balanced investment program and is not designed for investors
seeking capital appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Municipal Income Fund would not be
suitable for tax-exempt institutions and may not be suitable for retirement
plans qualified under Section 401 of the Code, H.R. 10 plans and individual
retirement accounts since such plans and accounts are generally tax-exempt
and, therefore, not only would not gain any additional benefit from the
Municipal Income Fund's dividends being tax-exempt but also such dividends
would be taxable when distributed to the beneficiary. In addition, the
Municipal Income Fund may not be an appropriate investment for entities which
are "substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his or her trade or business and whose gross revenues derived
with respect to the facilities financed by the issuance of bonds are more than
5% of the total revenues derived by all users of such facilities, or who
occupies more than 5% of the usable area of such facilities or for whom such
facilities or a part thereof were specifically constructed, reconstructed or
acquired. "Related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S Corporation
and its shareholders.
In order for the Municipal Income Fund to pay exempt-interest dividends
for any taxable year, at the close of each quarter of its taxable year at
least 50% of the aggregate value of the Municipal Income Fund's assets must
consist of exempt-interest obligations. After the close of its taxable year,
the Municipal Income Fund will notify its shareholders of the portion of the
dividends paid by the Municipal Income Fund which constitutes an
exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by a fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code
received by the Municipal Income Fund for the taxable year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the Code. The
percentage of total dividends paid by the Municipal Income Fund with respect
to any taxable year which qualifies as federal exempt-interest dividends will
be the same for all shareholders of the Municipal Income Fund receiving
dividends for such year.
Interest on indebtedness incurred by a shareholder to purchase or carry
the Municipal Income Fund's shares is not deductible for federal income tax
purposes if the Fund distributes exempt-interest dividends during the
shareholder's taxable year.
Under the Revenue Reconciliation Act of 1993, all or a portion of the
Municipal Income Fund's gain from the sale or redemption of tax exempt
obligations attributable to accrued market discount will be treated as
ordinary income rather than capital gain.
While the Municipal Income Fund does not expect to realize long-term
capital gains, any net realized long-term capital gains will be distributed at
least annually. The Municipal Income Fund will generally have no tax liability
with respect to such gains, and the distributions will be taxable to the
Municipal Income Fund's shareholders as long-term capital gains, regardless of
how long a shareholder has held the Municipal Income Fund's shares. Such
distributions will be designated as a capital gain dividend in a written
notice mailed by the Municipal Income Fund to its shareholders not later than
60 days after the close of the Municipal Income Fund's taxable year.
Similarly, while the Municipal Income Fund does not expect to earn
significant investment company taxable income, taxable income earned by the
Municipal Income Fund will be distributed to its shareholders. In general, the
Municipal Income Fund's investment company taxable income will be its taxable
income (for example, any short-term capital gains or ordinary income) 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. The Municipal Income Fund will be taxed on any undistributed
investment company taxable income of the Municipal Income Fund. To the extent
such income is distributed by the Municipal Income Fund (whether in cash or
additional shares), it will be taxable to the Municipal Income Fund's
shareholders as ordinary income.
DIVIDENDS
Each Fund's net investment income for dividend purposes consists of:
(i) interest accrued and original issue discount earned on that particular
Fund's assets, plus (ii) the amortization of market discount and minus the
amortization of market premium on such assets, and less (iii) accrued expenses
directly attributable to that Fund and the general expenses (e.g., legal,
accounting and directors' fees) of the Company prorated to such Fund on the
basis of its relative net assets. The amortization of market discount on a
Fund's assets is not included in the calculation of net income. Any realized
short-term capital gains may also be distributed as dividends to Fund
shareholders.
The Company uses its best efforts to maintain the net asset value per
share of each Fund at $1.00. As a result of a significant expense or realized
or unrealized loss incurred by a Fund, it is possible that a Fund's net asset
value per share may fall below $1.00.
ADDITIONAL YIELD INFORMATION
The "yields" and "effective yields" are calculated separately for each class
of shares of each of the Funds and "tax-equivalent yields" are calculated
separately for each class of shares of the Municipal Income Fund. The seven
day yield for shares in a Fund is calculated by determining the net change in
the value of a hypothetical preexisting account in a Fund having a balance of
one share at the beginning of the period, dividing the net change by the value
of the account at the beginning of the period to obtain the base period
return, and multiplying the base period return by 365/7. The net change in the
value of an account in a Fund includes the value of additional shares
purchased with dividends from the original share and dividends declared on the
original share and any such additional shares, net of all fees charged to all
shareholder accounts in proportion to the length of the base period and the
Fund's average account size, but does not include gains and losses or
unrealized appreciation and depreciation. In addition, the effective
annualized yield may be computed on a compounded basis (calculated as
described above) by adding 1 to the base period return, raising the sum to a
power equal to 365/7, and subtracting 1 from the result. A tax-equivalent
yield for the Municipal Income Fund's shares is computed by dividing the
portion of the yield (calculated as above) that is exempt from federal income
tax by one minus a stated federal income tax rate and adding that figure to
that portion, if any, of the yield that is not exempt from federal income tax.
Similarly, based on the calculations described above, 30-day (or one-month)
yields, effective yields and tax-equivalent yields may also be calculated.
Based on the period ended July 31, 1994, the yields and effective yields for
each of the Funds were as follows:
7
- -
d
a
y
Y
i
e
l
d
7
- -
d
a
y
E
f
f
e
c
t
i
v
e
Y
i
e
l
d
Daily Income
Fund*
Select
Shares
3
.
7
6
%
3
.
8
3
%
Select
Shares**
4
.
5
1
%
4
.
6
0
%
Municipal
Income Fund*
Select
Shares
2
.
4
7
%
2
.
5
0
%
Select
Shares**
3
.
1
7
%
3
.
2
2
%
CDSC Shares
2
.
4
7
%
2
.
5
0
%
CDSC
Shares**
3
.
1
7
%
3
.
2
2
%
*As of the date of this Statement of Additional Information, the Daily Income
Fund had not sold any CDSC Shares to the public. The Municipal Income Fund
commenced selling CDSC Shares to the public on July 6, 1994.
** Without fee waivers and/or expense reimbursements.
From time to time, in advertisements or in reports to shareholders, a
Fund's yield may be quoted and compared to that of other money market funds or
accounts with similar investment objectives and to bond or other relevant
indices. For example, the yield of a Fund may be compared to the
IBC/Donoghue's Money Fund Average, which is an average compiled by
IBC/Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely recognized
independent publication that monitors the performance of money market funds,
or to the average yields reported by the Bank Rate Monitor from money market
deposit accounts offered by the 50 leading banks and thrift institutions in
the top five standard metropolitan statistical areas.
Yield will fluctuate, and any quotation of yield should not be
considered as representative of the future performance of a Fund. Since yields
fluctuate, yield data cannot necessarily be used to compare an investment in a
Fund's shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Shareholders should remember that performance and yield
are generally functions of the kind and quality of the investments held in a
portfolio, portfolio maturity, operating expenses and market conditions.
ADDITIONAL INFORMATION CONCERNING FUND SHARES
As used in this Statement of Additional Information and the Prospectuses, a
"majority of the outstanding shares", when referring to the 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 plans of
distribution) means the lesser of (1) 67% of the shares of that particular 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 Fund 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 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
them 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 of the Company that are
available for distribution. Shareholders are not entitled to any preemptive
rights.
Subject to the provisions of the Company's Articles of Incorporation,
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.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), 425 Lexington Avenue, New York, New York 10017-3594, serves as
counsel to the Company.
AUDITORS
The financial statements of the Funds which are incorporated by reference in
this Statement of Additional Information have been audited by Ernst & Young
LLP, independent auditors, whose report thereon appears in the Company's
annual report and has been included herein in reliance upon the report of said
firm as independent auditors. Ernst & Young LLP has offices at 200 Clarendon
Street, Boston, Massachusetts 02116-5072.
FINANCIAL STATEMENTS
The Company's annual report for the fiscal period ended July 31, 1994, which
contains audited financial statements for the Funds for the fiscal period
ended July 31, 1994, is incorporated into this Statement of Additional
Information by reference in its entirety.
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper and Bank Money Market Instruments
A Standard & Poor's Ratings Group commercial paper rating
is a current assessment of the likelihood of timely
payment of debt having an original maturity of no more
than 365 days. The following summarizes the two highest
rating categories used by Standard & Poor's Ratings Group
for commercial paper:
A-1 - Issue's degree of safety regarding timely
payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted
"A-1+."
A-2 - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1."
Moody's commercial paper ratings are opinions of the
ability of issuers to repay punctually promissory
obligations not having an original maturity in excess of 9
months. The following summarizes the two highest rating
categories used by Moody's for commercial paper:
Prime-1 - Issuer or related supporting institutions
are considered to have a superior capacity for repayment
of short-term promissory obligations. Principal repayment
capacity will normally be evidenced by the following
characteristics: leading market positions in
well-established industries; high rates of return on funds
employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection;
broad margins in earning coverage of fixed financial
charges and high internal cash generation; and
well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2 - Issuer or related supporting institutions
are considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample
alternative liquidity is maintained.
The two highest rating categories of Duff & Phelps
for investment grade commercial paper are "Duff 1" and
"Duff 2." Duff & Phelps employs three designations, "Duff
1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the two highest rating
categories used by Duff & Phelps for commercial paper:
Duff 1+ - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal
operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1 - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are
minor.
Duff 1- - Debt possesses high certainty of timely
payment. Liquidity factors are strong and supported by
good fundamental protection factors. Risk factors are very
small.
Duff 2 - Debt possesses good certainty of timely
payment. Liquidity factors and company fundamentals are
sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good.
Risk factors are small.
Fitch short-term ratings apply to debt obligations
that are payable on demand or have original maturities of
up to three years. The two highest rating categories of
Fitch for short-term obligations are "F-1" and "F-2."
Fitch employs two designations, "F-1+" and "F-1," within
the highest rating category. The following summarizes the
two highest rating categories used by Fitch for short-term
obligations:
F-1+ - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as
having the strongest degree of assurance for timely
payment.
F-1 - Securities possess very strong credit quality.
Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated
"F-1+."
F-2 - Securities possess good credit quality. Issues
carrying this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is
not as great as the "F-1+" and "F-1" categories.
Fitch may also use the symbol "LOC" with its
short-term ratings to indicate that the rating is based
upon a letter of credit issued by a commercial bank.
Thomson BankWatch commercial paper ratings assess the
likelihood of an untimely payment of principal or interest
of debt having a maturity of one year or less which is
issued by a bank holding company or an entity within the
holding company structure. The following summarizes the
two highest ratings used by Thomson BankWatch:
TBW-1 - This designation represents Thomson
BankWatch's highest rating category and indicates a very
high degree of likelihood that principal and interest will
be paid on a timely basis.
TBW-2 - This designation indicates that while the
degree of safety regarding timely payment of principal and
interest is strong, the relative degree of safety is not
as high as for issues rated "TBW-1."
IBCA assesses the investment quality of unsecured
debt with an original maturity of less than one year which
is issued by bank holding companies and their principal
bank subsidiaries. The highest rating category of IBCA for
short-term debt is "A." IBCA employs two designations,
"A1+" and "A1," within the highest rating category. The
following summarizes the two highest rating categories
used by IBCA for short-term debt ratings:
A1+ - Obligations are supported by the highest
capacity for timely repayment.
A1 - Obligations are supported by a strong capacity
for timely repayment.
A2 - Obligations are supported by a satisfactory
capacity for timely repayment, although such capacity may
be susceptible to adverse changes in business, economic,
or financial conditions.
Note: Various NRSROs utilize rankings within rating
categories indicated by a + or -. The Funds, in accordance
with industry practice, recognize such rankings within
categories as gradations, viewing the example S&P's
ratings of A-1 + and A-1 as being in S&P's highest rating
category.
Corporate Bonds
S&P. Bonds rated AAA have the highest rating assigned by
S&P to a debt obligation. Capacity to pay interest and
repay principal is extremely strong. Bonds rated AA have a
strong capacity to pay interest and repay principal and
differ from the highest rated issues only in a small
degree.
Moody's. Bonds rated Aaa by Moody's are judged to be of
the best quality. Interest payments are protected by a
large or by an exceptionally stable margin and principal
is secure. Bonds rated Aa are judged to be of high quality
by all standards. They are rated lower than the best bonds
because the 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. 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; the modifier 2
indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its
generic rating category.
IBCA. Bonds rated AAA by IBCA are obligations for which
there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business,
economic or financial conditions are unlikely to increase
investment risk significantly. Bonds rated AA are
obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in
business, economic or financial conditions may increase
investment risk, albeit not very significantly.
Fitch. Bonds rated AAA by Fitch are considered to be
investment grade and of the highest quality. The obligor
has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by
reasonably foreseeable events. Bonds rated AA are
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.
Duff & Phelps. Bonds rated AAA by Duff & Phelps are
deemed to be of the highest credit quality: the risk
factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt. AA indicates high credit
quality: protection factors are strong, and risk is modest
but may vary slightly from time to time because of
economic conditions.
Municipal Long-Term Debt Ratings
The following summarizes the two highest ratings used by
Standard & Poor's Ratings Group for municipal long-term
debt:
AAA - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and
indicates an extremely strong capacity to pay interest and
repay principal.
AA - Debt is considered to have a very strong
capacity to pay interest and repay principal and differs
from AAA issues only in small degree.
PLUS (+) or MINUS (-) _ The rating of "AA" may be
modified by the addition of a plus or minus sign to show
relative standing within this rating category.
The following summarizes the two highest ratings used
by Moody's for municipal long-term debt:
Aaa - Bonds are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable
margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds 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 the best bonds because margins of
protection may not be as large as in "Aaa" securities 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.
Moody's applies numerical modifiers 1, 2 and 3 in
generic classification of "Aa" in its bond rating system.
The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks at the lower end of its
generic rating category.
The following summarizes the two highest ratings used
by Duff & Phelps for municipal long-term debt:
AAA - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - Debt is considered of high credit quality.
Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions.
To provide more detailed indications of credit
quality, the "AA" rating may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing
within this rating category.
Con. (- - -) - Bonds for which the security depends
upon the completion of some act or the fulfillment of some
condition are rated conditionally. These are bonds secured
by (a) earnings of projects under construction,
(b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or
elimination of basis of condition.
The following summarizes the two highest ratings used
by Fitch for municipal bonds:
AAA - Bonds considered to be investment 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+."
To provide more detailed indications of credit
quality, the Fitch rating of "AA" may be modified by the
addition of a plus (+) or minus (-) sign to show relative
standing within this rating category.
Thomson BankWatch assesses the likelihood of an
untimely repayment of principal or interest over the term
to maturity of long-term debt and preferred stock which
are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the two highest
rating categories used by Thomson BankWatch for long-term
debt ratings:
AAA - This designation represents the highest
category assigned by Thomson BankWatch to long-term debt
and indicates that the ability to repay principal and
interest on a timely basis is very high.
AA - This designation indicates a superior ability to
repay principal and interest on a timely basis with
limited incremental risk versus issues rated in the
highest category.
PLUS (+) or MINUS (-) - The ratings may include a
plus or minus sign designation which indicates where
within the respective category the issue is placed.
IBCA assesses the investment quality of unsecured
debt with an original maturity of more than one year which
is issued by bank holding companies and their principal
bank subsidiaries. The following summarizes the two
highest rating categories used by IBCA for long-term debt
ratings:
AAA - Obligations for which there is the lowest
expectation of investment risk. Capacity for timely
repayment of principal and interest is substantial such
that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk
significantly.
AA - Obligations for which there is a very low
expectation of investment risk. Capacity for timely
repayment of principal and interest is substantial.
Adverse changes in business, economic or financial
conditions may increase investment risk albeit not very
significantly.
IBCA may append a rating of plus (+) or minus (-) to
a rating to denote relative status within these rating
categories.
Municipal Note Ratings
A Standard & Poor's Ratings Group rating reflects the
liquidity concerns and market access risks unique to notes
due in three years or less.
The following summarizes the two highest rating
categories used by Standard & Poor's Ratings Group for
municipal notes:
SP-1 - The issuers of these municipal notes exhibit
very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics are given a plus (+) designation.
SP-2 - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
Moody's ratings for state and municipal notes and
other short-term loans are designated Moody's Investment
Grade ("MIG") and variable rate demand obligations are
designated Variable Moody's Investment Grade ("VMIG").
Such ratings recognize the differences between short-term
credit risk and long-term risk. The following summarizes
the two highest ratings used by Moody's Investors
Service, Inc. for short term notes:
MIG-1/VMIG-1 - Loans bearing this designation are of
the best quality, enjoying strong protection by
established cash flows, superior liquidity support or
demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2 - Loans bearing this designation are of
high quality, with margins of protection ample although
not so large as in the preceding group.
Duff & Phelps and Fitch use the short-term ratings
described under Commercial Paper and Bank Money Market
Instruments for municipal notes.
Lehman Selected Growth Stock Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
Statement of
Additional
Information
November 28, 1994
This Statement of Additional Information is meant to be read
in conjunction with the Prospectus for the Lehman Selected Growth
Stock Portfolio (the "Fund"), dated November 28, 1994, as amended
or supplemented from time to time, and is incorporated by
reference in its entirety into the Prospectus. The Fund is a
diversified portfolio of Lehman Brothers Funds, Inc. (the
"Company"), an open-end management investment company. Because
this Statement of Additional Information is not itself a
prospectus, no investment in shares of the Fund should be made
solely upon the information contained herein. Copies of the
Prospectus may be obtained by calling 800-861-4171. Capitalized
terms used but not defined herein have the same meanings as in the
Prospectus.
TABLE OF CONTENTS
Investment Objective and Policies
2
Additional Purchase and Redemption Information
1
3
Exchange Privilege
1
4
Valuation of Shares
1
5
Management of the Fund
1
5
Additional Information Concerning Taxes
2
0
Performance Data
2
1
Additional Information Concerning Fund Shares
2
2
Counsel
2
3
Auditors
2
3
Financial Statements
2
3
Appendix
A
- -
1
INVESTMENT OBJECTIVE AND POLICIES
As stated in the Prospectus, the investment objective of the Fund
is to seek long-term capital appreciation. The following policies
supplement the description of the Fund's investment objective and
policies in the Prospectus.
Portfolio Transactions
Subject to the general control of the Company's Board of
Directors, Lehman Brothers Global Asset Management Inc. ("LBGAM"),
the Fund's investment adviser, is responsible for, makes decisions
with respect to, and places orders for all purchases and sales of
portfolio securities for the Fund. Transactions on domestic stock
exchanges involve the payment of negotiated brokerage commissions,
which may vary among different brokers. 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 in the over-the-counter ("OTC") market
include an undisclosed dealer spread. In making portfolio
investments, LBGAM seeks 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, LBGAM may, in its discretion, effect transactions in
portfolio securities with brokers or dealers who provide the
Company with research advice or other services. Research advice
and other services furnished by brokers through whom the Fund
effects securities transactions may be used by LBGAM in servicing
accounts in addition to the Fund, and not all such services will
necessarily benefit the Fund.
With respect to over-the-counter transactions, the Fund,
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 the Fund are made independently
from those for the other investment company portfolios or accounts
advised by LBGAM. Such other portfolios may also invest in the
same securities as the Fund. 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
LBGAM believes to be equitable to each portfolio, including the
Fund. In some instances, this investment procedure may adversely
affect the price paid or received by the Fund or the size of the
position obtainable for the Fund. To the extent permitted by law,
LBGAM may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for such other portfolios
in order to obtain best execution.
The Fund will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in,
or enter into repurchase agreements with Lehman Brothers Inc.
("Lehman Brothers"), LBGAM or any affiliated person (as such term
is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of either of these entities except to the extent
permitted by the Securities and Exchange Commission (the "SEC").
However, pursuant to an exemption granted by the SEC, the Fund may
engage in transactions involving certain money market instruments
with Lehman Brothers and certain of its affiliates acting as
principal. The Fund will not purchase securities during the
existence of any underwriting or selling group relating thereto of
which Lehman Brothers or any affiliate thereof is a member, except
to the extent permitted by the SEC. Under certain circumstances,
the Fund may be at a disadvantage because of these limitations in
comparison with other investment company portfolios which have a
similar investment objective but are not subject to such
limitations.
It is anticipated that the Fund's annual portfolio turnover
rate generally will not exceed 100%. 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 the Fund. In addition, the sale of
securities held by the 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 the 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 the Fund's ability to dispose of its securities. See
"Additional Information Concerning Taxes."
Additional Information on Portfolio Instruments and Certain
Investment Practices
U.S. Government Obligations. Examples of the types of U.S.
government securities that may be held by the Fund 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.
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 U.S.
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
eighth 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 foreign issuers
generally are subject to different accounting, auditing, reporting
and record-keeping standards than those applicable to U.S.
issuers.
Convertible Securities. As fixed income securities, 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 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 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 common stock. 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 the 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 the Fund under the 1940 Act. The 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. Whenever the Fund enters into
reverse repurchase agreements as described in the Prospectus, it
will place liquid assets in a segregated custodian account having
a value equal to the repurchase price (including accrued interest)
and will subsequently monitor the account to ensure such
equivalent value is maintained. The Fund will enter into reverse
repurchase agreements only with counterparties determined to be
creditworthy by LBGAM.
Loans of Portfolio Securities. The 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 Fund may not lend its
portfolio securities to Lehman Brothers or its affiliates without
specific authorization from the SEC. Loans of portfolio securities
by the 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 Fund 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 Fund or Lehman Brothers, and which is acting as a
"finder." With respect to loans by the Fund of its portfolio
securities, the Fund would continue to accrue interest on loaned
securities and would also earn income on loans. Any cash
collateral received by the Fund in connection with such loans
would be invested in securities in which the Fund is permitted to
invest.
When-Issued and Delayed Delivery Securities. As stated in the
Prospectus, the 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 the 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 the 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 the Fund's commitment. It may be expected that the
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 the 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
the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous. The Fund does not intend to
purchase when-issued or delayed delivery securities for
speculative purposes but only in furtherance of its investment
objective. The Fund reserves the right to sell these securities
before the settlement date if it is deemed advisable.
Illiquid and Restricted Securities. The Fund may not invest more
than 15% of its net 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 purposes 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 Fund's investment adviser anticipates
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 foreign
issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
LBGAM 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, LBGAM 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 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).
The Appendix to this Statement of Additional Information
contains a description of the relevant rating symbols used by
nationally recognized rating agencies for obligations that may be
purchased by the Fund.
Additional Information Regarding Derivatives
As described in the Prospectus under "Investment Objective and
Policies - Other Investments and Investment Practices - Hedging
and Derivatives", the Fund is authorized to use a variety of
investment strategies to hedge broad or specific market movements
or, with respect to certain strategies, to seek to increase the
Fund's income or gain. A detailed discussion of Derivatives (as
defined in the Fund's Prospectus) that may be used by LBGAM on
behalf of the Fund follows below. The Fund is not obligated,
however, to use any Derivatives and makes no representation as to
the availability of these techniques at this time or at any time
in the future.
The Fund's ability to pursue certain of these strategies may be
limited by the Commodity Exchange Act, as amended, applicable
regulations of the Commodity Futures Trading Commission ("CFTC")
thereunder and the federal income tax requirements applicable to
regulated investment companies which are not operated as commodity
pools.
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. The 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 the 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. The Fund's purchase of a call option on a
security, financial futures contract, index or other instrument
might be intended to protect the 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.
OCC-issued and exchange-listed options, with certain
exceptions, generally settle by physical delivery of the
underlying security or currency, 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.
The 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 the Fund will 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
the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit
of the transaction. Thus, LBGAM 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 met. The 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 LBGAM deems to be creditworthy. In the
absence of a change in the current position of the staff of the
SEC, OTC options purchased by the Fund and the amount of the
Fund's obligation pursuant to an OTC option sold by the 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 the 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 the Fund or will increase the
Fund's income. Similarly, the sale of put options can also provide
Fund gains.
The Fund may purchase and sell call options on securities
that are traded on U.S. securities exchanges and in the OTC
markets, and on securities indices and futures contracts. All
calls sold by the Fund must be "covered" (that is, the Fund must
own the securities or futures contract subject to the call), or
must otherwise meet the asset segregation requirements described
below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a
call sold by the Fund will expose the 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 the Fund to hold a security or instrument that it might
otherwise have sold.
The 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, the Fund's investment
objective and the restrictions set forth herein.
The Fund may purchase and sell put options on securities
(whether or not it holds the securities in its portfolio) and on
securities indices and futures contracts. The Fund will not sell
put options if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover its potential
obligations under put options other than those with respect to
futures contracts. In selling put options, the Fund faces the risk
that it may be required to buy the underlying security at a
disadvantageous price above the market price.
General Characteristics of Futures Contracts and Options on
Futures Contracts. The Fund may trade financial futures contracts
or purchase or sell put and call options on those contracts as a
hedge against anticipated market changes, and for risk management
purposes, or the Fund may seek to increase the Fund's income or
gain. Futures contracts are generally bought and sold on the
commodities exchanges on which they are listed with payment of
initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller,
to deliver to the buyer the specific type of financial instrument
called for in the contract at a specific future time for a
specified price (or, with respect to certain instruments, the net
cash amount). Options on futures contracts are similar to options
on securities except that an option on a futures contract gives
the purchaser the right, in return for the premium paid, to assume
a position in a futures contract and obligates the seller to
deliver that position.
The Fund's use of financial futures contracts and options
thereon will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the
CFTC. Maintaining a futures contract or selling an option on a
futures contract will typically require the Fund to deposit with a
financial intermediary, as security for its obligations, an amount
of cash or other specified assets ("initial margin") that
initially is from 1% to 10% of the face amount of the contract
(but may be higher in some circumstances). Additional cash or
assets ("variation margin") may be required to be deposited
thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial
futures contract involves payment of a premium for the option
without any further obligation on the part of the Fund. If the
Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potentially variation
margin) for the resulting futures position just as it would for
any futures position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction, but
no assurance can be given that a position can be offset prior to
settlement or that delivery will occur.
The Fund will not enter into a futures contract or option
thereon if, immediately thereafter, the sum of the amount of its
initial margin and premiums required to maintain permissible
non-bona fide hedging positions in futures contracts and options
thereon would exceed 5% of the current fair market value of the
Fund's net assets; however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. The value of all
futures contracts sold by the Fund (adjusted for the historical
volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The
segregation requirements with respect to futures contracts and
options thereon are described below under "Use of Segregated and
Other Special Accounts."
Options on Securities Indices and Other Financial Indices. The
Fund may purchase and sell call and put options on securities
indices and other financial indices. In so doing, the 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 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.
Combined Transactions. The Fund may enter into multiple
transactions, including multiple options transactions, multiple
futures transactions, and any combination of futures and options,
instead of a single Derivative, as part of a single or combined
strategy when, in the judgment of LBGAM, it is in the best
interests of the 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 the Fund based on LBGAM'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 the Fund management objective.
Swaps, Caps, Floors and Collars. Swap agreements can be
individually negotiated and structured to include exposure to a
variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or
decrease the Fund's exposure to factors such as security prices.
Swap agreements can take many different forms and are known by a
variety of names. The Fund is not limited to any particular form
of swap agreement if LBGAM determines it is consistent with the
Fund's investment objective and policies.
The Fund may enter into equity swaps, the purchase or sale of
related caps, floors and collars and other similar arrangements.
The Fund will enter into these transactions primarily to protect
against any increase in the price of securities the Fund
anticipates purchasing or selling at a later date. The Fund will
use these transactions for non-speculative purposes and will not
sell caps or floors if it does not own securities or other
instruments providing the income the Fund may be obligated to pay.
An equity swap is an agreement to exchange cash flows on a
notional principal amount based on changes in the values of the
reference index. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party
selling the cap to the extent that a specified index exceeds a
predetermined rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specified index
falls below a predetermined rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return
with a predetermined range of values.
The Fund will usually enter into swaps on a net basis, that
is, the two payment streams are netted out in a cash settlement on
the payment date or dates specified in the instrument, with the
Fund receiving or paying, as the case may be, only the net amount
of the two payments. Inasmuch as these swaps, caps, floors,
collars and other similar types of instruments are entered into
for good faith hedging or other non- speculative purposes, they do
not constitute senior securities under the 1940 Act, and, thus,
will not be treated as being subject to the Fund's borrowing
restrictions. The Fund will not enter into any swap, cap, floor,
collar or other similar type of transaction unless LBGAM deems the
Counterparty to be creditworthy. If a Counterparty defaults, the
Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are
more recent innovations for which standardized documentation has
not yet been fully developed and, for that reason, they are less
liquid than swaps. Swap agreements will tend to shift the Fund's
investment exposure from one type of investment to another. Caps
and floors have an effect similar to buying or writing options.
Depending on how they are used, swap agreements may increase or
decrease the overall volatility of the Fund's investments and its
share price and yield.
The most significant factor in the performance of swap
agreements is the change in the specific factors that determine
the amounts of payments due to and from the Fund. If a swap
agreement calls for payments by the Fund, the Fund must be
prepared to make such payments when due. In addition, if the
Counterparty's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in
losses. The Fund expects to be able to eliminate its exposure
under swap agreements either by assignment or other disposition,
or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party.
The liquidity of swap agreements will be determined by LBGAM
based on various factors, including: (1) the frequency of trades
and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or
tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and
obligations relating to the investment). Such determination will
govern whether a swap will be deemed within the 15% restriction on
investments in securities that are illiquid.
The Fund will maintain cash and appropriate liquid assets
(i.e., high grade debt securities) in a segregated custodial
account to cover its current obligations under swap agreements. If
the Fund enters into a swap agreement on a net basis, it will
segregate assets with a daily value at least equal to the excess,
if any, of the Fund's accrued obligations under the swap agreement
over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than
a net basis, it will segregate assets with a value equal to the
full amount of the Fund's accrued obligations under the agreement.
See "Use of Segregated and Other Special Accounts" below.
Risk Factors. Derivatives have special risks associated with
them, including possible default by the Counterparty to the
transaction, illiquidity and, to the extent LBGAM's view as to
certain market movements is incorrect, the risk that the use of
Derivatives could result in losses greater than if they had not
been used. Use of put and call options could result in losses to
the 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 the Fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain
special risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements
in the related securities position of the Fund could create the
possibility that losses on the hedging instrument are greater than
gains in the value of the Fund's position. In addition, futures
and options markets could be illiquid in some circumstances and
certain over-the-counter options could have no markets. As a
result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses. Although
the Fund's use of futures and 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. Finally, the daily variation
margin requirements for futures contracts create a greater ongoing
potential financial risk than would purchases of options, in which
case the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Derivatives will reduce the
Fund's net asset value, and possibly income, and the losses can be
greater than if Derivatives had not been used.
Use of Segregated and Other Special Accounts. Use of many
Derivatives by the Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other
assets with its custodian, or a designated sub-custodian, to the
extent the 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 the 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 the Fund, for example, will require the 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 the Fund on an index will require the 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 the Fund will require the Fund
to segregate liquid high grade debt obligations equal to the
exercise price.
OTC options entered into by the Fund, including those on
securities, financial instruments or indices, and OCC-issued and
exchange-listed index options will generally provide for cash
settlement, although the Fund will not be required to do so. As a
result, when the 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 the Fund other than
those described above generally settle with physical delivery, and
the 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.
In the case of a futures contract or an option on a futures
contract, the Fund must deposit initial margin and, in some
instances, daily variation margin in addition to segregating
assets sufficient to meet its obligations to purchase or provide
securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may
consist of cash, cash equivalents, liquid debt, equity securities
or other acceptable assets. The Fund will accrue the net amount of
the excess, if any, of its obligations relating to swaps over its
entitlements with respect to each swap on a daily basis and will
segregate with its custodian, or designated sub-custodian, an
amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors
and collars require segregation of assets with a value equal to
the Fund's net obligation, if any.
Derivatives may be covered by means other than those
described above when consistent with applicable regulatory
policies. The Fund may also enter into offsetting transactions so
that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and
Derivatives. The 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 the Fund. Moreover, instead
of segregating assets if it holds a futures contract or forward
contract, the Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher
than the price of the contract held. 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.
Investment Limitations
The Prospectus summarizes certain investment limitations that may
not be changed without the affirmative vote of the holders of a
majority of the Fund's outstanding shares (as defined below under
"Additional Information Concerning Fund Shares"). Investment
limitations numbered 1 through 7 may not be changed without such
vote of shareholders; investment limitations 8 through 12 may be
changed by a vote of the Company's Board of Directors at any time.
1. The 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.
2. The Fund may not borrow money, except (a) from
banks or by entering into reverse repurchase agreements, in
aggregate amounts not exceeding 33.3% of the value of its total
assets at the time of such borrowing and (b) in amounts not
exceeding 5% of the value of its total assets at the time of such
borrowing for temporary or emergency purposes (including for
clearance of securities transactions or payment of redemptions or
dividends). 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.
3. The 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.
4. The Fund may not make loans, except that it may
purchase or hold debt instruments in accordance with its
investment objectives and policies, and may enter into repurchase
agreements with respect to portfolio securities.
5. The 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.
6. The 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.
7. The Fund may not purchase or sell commodities
contracts except in connection with Derivatives, or invest in oil,
gas or mineral exploration or development programs or in mineral
leases.
8. The Fund may not knowingly invest more than 15%
of the value of its net assets in securities that may be illiquid
because of legal or contractual restrictions on resale or
securities for which there are no readily available market
quotations.
9. The Fund may not purchase securities on margin,
make short sales of securities or maintain a short position,
except that the Fund may make short sales against the box and
except in connection with Derivatives.
10. The Fund may not write or sell puts, calls,
straddles, spreads or combinations thereof except in connection
with Derivatives.
11. The Fund may not invest in securities if as a
result the Fund would then have more than 5% of its total assets
in securities of companies (including predecessors) with less than
three years of continuous operation, except that this restriction
will not apply to U.S. government securities.
12. The 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 Fund shares in certain
states, the Fund may make commitments more restrictive than the
investment policies and limitations above. Should the 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem the Fund's shares is
included in the Prospectus. The issuance of shares is recorded on
the Fund's books, and certificates for Fund shares are not issued
unless expressly requested in writing to the Fund's transfer
agent. Certificates are not issued for fractional shares.
Under the 1940 Act, the 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. (The Fund may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of
any of the foregoing conditions.) The Fund is obligated to redeem
shares solely in cash up to $250,000 or 1% of the 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, the Fund may make payment wholly or
partly in readily marketable securities or other property, valued
in the same way as the 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.
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their Fund shares for
shares of certain other funds in the Lehman Brothers Group of
Funds, as indicated in the Prospectus, to the extent such shares
are offered for sale in the shareholder's state of residence.
Exchanges of Fund shares for shares of the Lehman Brothers Daily
Income Fund or the Lehman Brothers Municipal Income Fund can only
be made for CDSC Shares of such funds. There currently is no
charge for this service, and exchanges are made on the basis of
relative net asset value per share at the time of exchange. Shares
of the Fund exchanged for shares of another fund will be subject
to the higher applicable CDSC of the two funds and, for purposes
of calculating CDSC rates, will be deemed to have been held since
the date the Fund shares being exchanged were purchased.
The exchange privilege enables shareholders of the Fund to
acquire shares in a fund with different investment objectives when
they believe that a shift between funds is an appropriate
investment decision. This privilege is available to shareholders
residing in any state in which the fund shares being acquired may
legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund
into which an exchange is to be made. Prospectuses for these funds
may be obtained in the manner indicated in the Fund's Prospectus.
Exercise of the exchange privilege is treated as a sale and
repurchase for federal income tax purposes and, depending on the
circumstances, a short- or long-term capital gain or loss may be
realized. The price of the shares of the fund into which shares
are exchanged will be the new cost basis for tax purposes.
Upon receipt of proper instructions and all necessary
supporting documents, Fund shares submitted for exchange are
redeemed at the then-current net asset value and the proceeds
immediately invested in shares of the fund being acquired subject
to any applicable CDSC. Lehman Brothers reserves the right to
reject any exchange request. The exchange privilege may be
modified or terminated at any time after notice to shareholders.
VALUATION OF SHARES
The Prospectus discusses the time at which the net asset value of
the Fund is determined for purposes of sales and redemptions. The
following is a description of the procedures used by the 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. OTC securities will be valued on
the basis of the bid price 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 OTC 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 the 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 other
securities and other assets of the Fund will be valued at fair
value as determined in good faith by the Company's Board of
Directors.
MANAGEMENT OF THE FUND
Directors and Officers
The Company's directors and executive officers, their addresses,
principal occupations during the past five years and other
affiliations are as follows:
Name and Address
Position
with the
Company
Principal
Occupation
During
Past 5
Years and
Other
Affiliatio
ns
Kirk Hartman(1)
3 World
Financial Center
New York, New
York 10285
Chairman
of the
Board and
Director
Managing
Director,
Lehman
Brothers.
Name and Address
Position
with the
Company
Principal
Occupation
During
Past 5
Years and
Other
Affiliatio
ns
Burt N.
Dorsett(2)(3)
201 East 62nd
Street
New York, New
York 10021
Director
Managing
Partner,
Dorsett
McCabe
Capital
Management
, Inc.;
Director,
Research
Corporatio
n
Technologi
es;
formerly
President,
Westinghou
se Pension
Investment
s
Corporatio
n;
formerly
Executive
Vice
President
and
Trustee,
College
Retirement
Equities
Fund,
Inc.;
formerly
Investment
Officer,
University
of
Rochester.
Kathleen C.
Holmes(2)(3)
Wharton
Financial
Institutions
Center
3620 Locust
Walker
3301 Steinberg
Hall
Dietrich Hall
Philadelphia,
Pennsylvania
19104-6367
Director
Managing
Director,
Wharton
School
Financial
Institutio
ns Center,
University
of
Pennsylvan
ia; Senior
Partner
and
Management
Consultant
, Furash &
Company.
John N.
Hatsopoulos(2)(3)
Thermo Electron
Corp.
81 Wyman Street
Waltham,
Massachusetts
02254
Director
Executive
Vice
President
and Chief
Financial
Officer,
Thermo
Electron
Corp.
Andrew Gordon
3 World
Financial Center
New York, New
York 10285
President
Managing
Director,
Lehman
Brothers.
John M. Winters
3 World
Financial Center
New York, New
York 10285
Vice
President
Senior
Vice
President,
Lehman
Brothers.
Michael Kardok
53 State Street
Boston,
Massachusetts
02109
Treasurer
and Chief
Financial
Officer
Vice
President,
The
Shareholde
r Services
Group,
Inc.
Name and Address
Position
with the
Company
Principal
Occupation
During
Past 5
Years and
Other
Affiliatio
ns
Patricia L.
Bickimer
53 State Street
Boston,
Massachusetts
02109
Secretary
Vice
President
and
Associate
General
Counsel,
The
Shareholde
r Services
Group,
Inc.
1. Director considered by the Company to be an "interested
person" of the Company as defined in the 1940 Act.
2. Audit Committee Member.
3. Nominating Committee Member.
Three directors of the Company, Messrs. Hartman and Dorsett
and Ms. Holmes, serve as directors or trustees of other investment
companies for which Lehman Brothers, LBGAM or one of their
affiliates serves as distributor or investment adviser.
No employee of Lehman Brothers, LBGAM or The Shareholders
Services Group, Inc. ("TSSG") 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 Lehman Brothers, LBGAM or TSSG or any of their
affiliates, a fee of $20,000 per annum plus $500 per meeting
attended and reimburses them for travel and out-of-pocket
expenses.
By virtue of the responsibilities assumed by Lehman
Brothers, LBGAM, TSSG and their affiliates under their respective
agreements with the Company, the Company itself requires no
employees in addition to its officers.
Investment Adviser
LBGAM serves as investment adviser to the Fund pursuant to a
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 LBGAM, on January 27, 1994. The services provided by LBGAM
under its advisory agreement and the fees paid to LBGAM are
described in the Prospectus under "Management of the Fund." LBGAM
bears all expenses in connection with the performance of its
services and pays the salaries of all officers or employees who
are employed by both it and the Company. Unless sooner terminated,
the advisory agreement will continue in effect until January 27,
1996 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 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. The
advisory agreement is terminable by the Company or LBGAM on 60
days' written notice, and will terminate immediately in the event
of its assignment.
Administrator
As the Fund's administrator, TSSG has agreed to provide the
following services: (i) assist generally in supervising the Fund's
operations, providing and supervising the operation of an
automated data processing system to process purchase and
redemption orders, providing information concerning the Fund to
its shareholders of record, handling shareholder problems,
supervising the services of employees whose principal
responsibility and function is to preserve and strengthen
shareholder relations; (ii) prepare reports to the Fund's
shareholders and prepare tax returns and reports to and filings
with the SEC; (iii) compute the net asset value per share of the
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 the Fund's shares for sale under state securities
laws.
Distributor
Lehman Brothers acts as distributor of the Fund's shares. The
Fund's shares are sold on a continuous basis by Lehman Brothers as
agent, although Lehman Brothers is not obliged to sell any
particular amount of shares. The distributor pays the cost of
printing and distributing prospectuses to persons who are not
shareholders of the Fund (excluding preparation and printing
expenses necessary for the continued registration of the Fund's
shares) and of preparing, printing and distributing all sales
literature.
Lehman Brothers forwards investors' funds for the purchase
of shares five business days after placement of purchase orders
(the "Settlement Date"). When payment is made by the investor
before the 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 Lehman Brothers may benefit from
the temporary use of the funds. The investor may designate another
use for the funds prior to the Settlement Date such as an
investment in a money market fund in the Lehman Brothers Group of
Funds. If the investor instructs Lehman Brothers 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 Fund
and the money market fund, and affiliates of Lehman Brothers which
serve the funds in an investment advisory capacity will benefit
from the fact that they are receiving fees from both such
investment companies 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 Lehman Brothers
resulting from delayed settlement procedures and will take such
benefits into consideration when reviewing the advisory and
distribution agreements for continuance.
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. The Company's Board of
Directors has adopted a services and distribution plan with
respect to the Fund pursuant to Rule 12b-1 (the "Plan"). The Board
of Directors has determined that there is a reasonable likelihood
that the Plan will benefit the Fund and its shareholders.
A quarterly report of the amounts expended with respect to
the Fund under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Board of Directors
for its review. In addition, the Plan provides that it may not be
amended with respect to the Fund to increase materially the costs
which may be borne for distribution pursuant to the Plan without
the approval of shareholders of the Fund, and that other material
amendments of the Plan must be approved by the Board of Directors,
and by the Directors who are neither "interested persons" (as
defined in the 1940 Act) of the Company nor have any direct or
indirect financial interest in the operation of the Plan or any
related agreements, by vote cast in person at a meeting called for
the purpose of considering such amendments. The Plan and any
related agreements are subject to annual approval by such vote
cast in person at a meeting called for the purpose of voting on
the Plan. The Plan may be terminated with respect to the Fund at
any time 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 the Plan or in any related agreement
or by vote of a majority of the shares of the Fund.
Custodian and Transfer Agent
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect
wholly owned subsidiary of Mellon Bank Corporation, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as the
Company's custodian pursuant to a custody agreement. Under the
custody agreement, Boston Safe holds the Fund's portfolio
securities and keeps all necessary accounts and records. For its
services, Boston Safe 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.
TSSG, a subsidiary of First Data Corporation, is located at
53 State Street, Boston, Massachusetts 02019, and serves as the
Company's transfer agent. Under the transfer agency agreement,
TSSG 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, TSSG
receives a monthly fee computed on the basis of the number of
shareholder accounts that it maintains for the Company during the
month and is reimbursed for out-of-pocket expenses.
Expenses
The 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. The Fund also pays for
brokerage fees and commissions (if any) in connection with the
purchase and sale of portfolio securities. LBGAM and TSSG have
agreed that if, in any fiscal year, the expenses borne by the Fund
exceed the applicable expense limitations imposed by the
securities regulations of any state in which shares of the Fund
are registered or qualified for sale to the public, they will
reimburse the Fund for any excess to the extent required by such
regulations in the same proportion that each of their fees bears
to the Fund's aggregate fees for investment advice and
administrative services. Unless otherwise required by law, such
reimbursement would be accrued and paid on the same basis that the
advisory and administration fees are accrued and paid by the Fund.
To the Fund's knowledge, of the expense limitations in effect on
the date of this Statement of Additional Information, none is more
restrictive than two and one-half percent (2%) of the first
$30 million of the Fund's average annual net assets, two percent
(2%) of the next $70 million of the average annual net assets and
one and one-half percent (1%) of the remaining average annual net
assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following discussion is only a brief summary of certain
additional tax considerations affecting the Fund and its
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 tax advisers with specific questions relating to
federal, state or local taxes.
In General
The Fund intends to qualify as a regulated investment
company (a "RIC") under Subchapter M of the Internal Revenue Code
of 1986, as amended and to continue to so qualify. Qualification
as a RIC requires, among other things, that the 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) stocks 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 the Fund's assets is represented
by cash, cash items, U.S. government securities, securities of
other RICs and other securities with such other securities
limited, in respect of any issuer, to an amount not greater than
5% of the value of the 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 RICs) of any
one issuer.
Investors should consider the tax implications of buying
shares just prior to a distribution. Although the price of shares
purchased at the time may reflect the amount of the forthcoming
distribution, those purchasing just prior 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 the 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 the 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 RICs 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). The 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.
If for any taxable year the Fund does not qualify for tax
treatment as a RIC, all of the Fund's taxable income will be
subject to tax at regular corporate rates without any deduction
for distributions to Fund shareholders. In such event, dividend
distributions to shareholders would be taxable as ordinary income
to the extent of the Fund's earnings and profits, and would be
eligible for the dividends received deduction in the case of
corporate shareholders.
The 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 the Fund that they are not subject to backup
withholding when required to do so or that they are "exempt
recipients."
The Fund's net long-term capital gains will be distributed
at least annually. The Fund 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 the
Fund's shareholders as long-term capital gains, regardless of how
long a shareholder has held the Fund's shares. Such distributions
will be designated as a capital gain dividend in a written notice
mailed by the Fund to its shareholders not later than 60 days
after the close of the Fund's taxable year.
Investment company taxable income earned by the Fund will be
distributed to its shareholders. In general, the 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. The Fund will be taxed on any undistributed
investment company taxable income of the Fund. To the extent such
income is distributed by the Fund, it will be taxable to the
Fund's shareholders as ordinary income, whether paid in cash or
reinvested in additional shares.
PERFORMANCE DATA
From time to time, the Fund may quote total return in
advertisements or in reports and other communications to
shareholders and compare its total return to that of other funds
or accounts with similar objectives and to relevant indices.
Average Annual Total Return
The Fund's "average annual total return" figures, as described in
the Prospectus, are computed according to a formula prescribed by
the SEC. The formula can be expressed as follows:
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5-, or 0- period at the
end of the 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of 11 dividends and distributions.
The Fund's total return figures calculated in accordance
with the above formula will assume that the maximum applicable
CDSC has been deducted from the hypothetical $1,000 initial
investment.
Aggregate Total Return
The Fund's "aggregate total return" figures, as described in the
Prospectus, represent the cumulative change in the value of an
investment in Fund shares for the specified period and are
computed by the following formula:
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 (or
fractional portion thereof), assuming reinvestment
of all dividends and distributions.
The Fund's performance will vary from time to time depending
upon market conditions, the composition of the Fund's portfolio
and operating expenses. Consequently, any given performance
quotation should not be considered representative of the
performance of Fund shares for any specified period in the future.
Because performance will vary, it may not provide a basis for
comparing an investment in Fund shares with certain bank deposits
or other investments that pay a fixed yield for a stated period of
time. Investors comparing the 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" of the Fund
means the lesser of (1) 67% of the Fund's shares represented at a
meeting at which the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of the Fund.
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.
Each share of the Fund is entitled to such dividends and
distributions out of the assets belonging to the Fund as are
declared in the discretion of the Company's Board of Directors. In
determining the Fund's net asset value, assets belonging to the
Fund are credited with a proportionate share of any general assets
of the Company not belonging to a particular fund of the Company
and are charged with the direct liabilities in respect of the Fund
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 funds of the Company at the time of
allocation.
In the event of the liquidation or dissolution of the
Company, shares of the Fund are entitled to receive the assets
attributable to the Fund that are available for distribution, and
a proportionate distribution, based upon the relative net assets
of the Fund, of any general assets not attributable to a fund of
the Company, that are available for distribution. Shareholders are
not entitled to any preemptive rights.
Subject to the provisions of the Company's Articles of
Incorporation, 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 the Fund are
conclusive.
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.
AUDITORS
The statement of assets and liabilities of the Fund dated July 31,
1994 which is incorporated by reference in this Statement of
Additional Information has been audited by Ernst & Young LLP,
independent auditors, whose report thereon appears in the
Company's annual report, and has been included herein in reliance
upon the report of said firm as independent auditors. Ernst &
Young LLP has offices at 200 Clarendon Street, Boston,
Massachusetts 02116-5072.
FINANCIAL STATEMENTS
The Company's annual report for the fiscal period ended July 31,
1994, which contains audited financial statements of the Fund for
the fiscal period ended July 31, 1994, is incorporated into this
Statement of Additional Information by reference in its entirety.
The Fund's unaudited financial statements for the period from
August 1, 1994 to September 30, 1994 are attached hereto.
APPENDIX A
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's and S&P with
respect to bonds and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa - Bonds which are rated "Aaa" are judged to be of the
best quality and 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 are likely to 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 the best bonds because margins of protection may
not be as large as in Aaa securities 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 qualities and are to be considered as upper medium
grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated "Baa" are considered as medium
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated "Ba" are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated "B" generally lack characteristics
of a desirable investment. Assurance of interest and principal
payments or of maintenance and other terms of the contract over
any long period of time may be small.
Caa - Bonds which are rated "Caa" are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca - Bonds which are rated "Ca" represent obligations which
are speculative in high degree. Such issues are often in default
or have other marked shortcomings.
C - Bonds which are rated "C" are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to
certain of its rating classifications. The modifier "1" indicates
that the security ranks in the higher end of its generic rating
category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end of
its generic rating category.
Standard & Poor's Ratings Group Corporate Bond Ratings
AAA - This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong
capacity to repay principal and pay interest.
AA - Bonds rated "AA" also qualify as high quality debt
obligations. Capacity to pay principal and interest is very
strong, and differs from "AAA" issues only in small degree.
A - Bonds rated "A" have a strong capacity to repay
principal and pay interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB - Bonds rated "BBB" are regarded as having an adequate
capacity to repay principal and pay interest. Whereas they
normally exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to repay principal and pay interest for bonds in
this category than for higher rated categories.
BB-B-CCC-CC-C - Bonds rated "BB", "B", "CCC", "CC" and "C"
are regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CI - Bonds rated "CI" are income bonds on which no interest
is being paid.
D - Bonds rated "D" are in default. The "D" category is used
when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired
unless S&P believes that such payments will be made during such
grace period. The "D" rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition
of a plus or minus to show relative standing within the major
rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1 - Issuers (or related supporting institutions) rated
"Prime-1" have a superior ability for repayment of senior
short-term debt obligations. "Prime-1" repayment ability will
often be evidenced by many of the following characteristics:
leading market positions in well- established industries, high
rates of return on funds employed, conservative capitalization
structures with moderate reliance on debt and ample asset
protection, broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and well- established
access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 - Issuers (or related supporting institutions) rated
"Prime-2" have a strong ability for repayment of senior short-term
debt obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
Prime-3 - Issuers (or related supporting institutions) rated
"Prime-3" have an acceptable ability for repayment of senior
short-term obligations. The effect of industry characteristics and
market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is
maintained.
Not Prime - Issuers rated "Not Prime" do not fall within any
of the Prime rating categories.
Standard & Poor's Ratings Group Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity
of no more than 365 days. Ratings are graded into several
categories, ranging from "A-1" for the highest quality obligations
to "D" for the lowest. The four categories are as follows:
A-1 - This highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are denoted
with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated "A-1".
A-3 - Issues carrying this designation have adequate
capacity for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B - Issues rated "B" are regarded as having only speculative
capacity for timely payment.
C - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
D - Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal payments are
not made on the date due, even if the applicable grace period has
not expired, unless S&P believes that such payments will be made
during such grace period.
Lehman Selected Growth Stock Portfolio
Statement of Assets and Liabilities September 30, 1994
(unauditied)
ASSETS:
Investments, at value (cost $30,945,909)(Note1)
See accompanying schedule:
Securities $ 25,281,174
Repurchase Agreements 6,804,000
$ 32,085,174
Cash 300
Receivable for investment securities sold
575,000
Unamortized organization costs (Note 6)
117,042
Receivable for Fund shares sold 25,812
Dividends and interest receivable 8,258
Other assets 2,000
Total Assets 32,813,586
LIABILITIES:
Payable for investment securities purchased
2,230,228
Distribution fee payable (Note 3) 18,775
Organization costs payable 16,671
Accrued Directors' fees and expenses (Note 2)
9,167
Service fee payable (Note 3) 6,258
Option written, at value (Premium received $34,749) (Note 1)
See accompanying schedule 5,938
Custodian fees payable (Note 2) 5,400
Investment advisory fee payable (Note 2)
3,821
Transfer agent fees payable (Note 2)
1,150
Administration fee payable (Note 2) 1,019
Accrued expenses and other payables 35,170
Total Liabilities 2,333,597
NET ASSETS $ 30,479,989
NET ASSETS consist of:
Undistributed net investment income
$ 42,712
Accumulated net realized loss on securities sold
(8,570)
Unrealized appreciation of securities
1,168,076
Par value 2,966
Paid-in capital in excess of par value
29,274,805
Total Net Assets $ 30,479,989
NET ASSET VALUE and offering price per share +
($30,479,989 * 2,966,398 shares outanding)
$ 10.27
Lehman Selected Growth Stock Portfolio
Statement of Operations September 30, 1994 (unauditied)
INVESTMENT INCOME:
Interest $ 82,944
Dividends 26,713
Total Investment Income 109,657
EXPENSES:
Investment advisory fee (Note 2) $ 47,808
Distribution fee (Note 3) 36,368
Registration and filings fees 14,190
Administration fee (Note 2) 12,749
Service fee (Note 3) 12,122
Legal and audit fees 6,363
Amortization of organization costs (Note 6)
4,225
Directors' fees and expenses (Note 2)
3,667
Custodian fees (Note 2) 3,000
Transfer agent fees (Note 2) 2,336
Other 3,454
Fees waived by investment adviser and adminstrator
(Note 2) (41,225)
Total Expenses 105,057
NET INVESTMENT INCOME 4,600
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
(Notes 1 and 4):
Net realized gain on securities sold during the
period 211,384
Net change in unrealized appreciation of
Securities 1,283,914
Written options 13,437
Net unrealized appreciation of investments during
the period 1,297,351
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 1,508,735
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS
$ 1,513,33
Lehman Selected Growth Stock Portfolio
Statement of Changes in Net Assets September 30, 1994 (unauditied)
Period
Ended
09/30/1994
(unaudited)
Net investment income $ 4,600
Net realized gains on securities sold during
the period 211,384
Net unrealized apprecation of securities and
written options during the period 1,297,351
Net increase in net assets resulting
from operations 1,513,335
Net increase in net assets from Fund share
transactions (Note 5) 2,625,460
Net increase in net assets 4,138,795
NET ASSETS:
Beginning of period 26,341,194
End of period (including undistributed net investment
income of $42,712) $ 30,479,989
Lehman Selected Growth Stock Portfolio
Notes to Financial Statements (unaudited)
1. Significant Accounting Policies
Lehman Brothers Funds, Inc. (the "Company") was incorporated
under the laws of the State of Maryland on May 5, 1993. It is an
open-end management investment company, which currently offers
three funds. Information presented in these financial statements
pertains only to the Lehman Brothers Selected Growth Stock
Portfolio ("Selected Growth Stock Portfolio") (the "Fund"). The
following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its
financial statements.
Portfolio valuation: Portfolio securities held by the
Fund which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the
national securities market or in the absence of sales in such
market, at the mean between the closing bid and asked prices.
Securities traded only on over-the-counter markets are valued on
the basis of the closing over-the-counter bid prices or if no sale
occurred on such day at the mean of the current bid and ask
prices. Certain securities may be valued by one or more principal
market makers. Restricted securities, securities for which market
quotations are not readily available, and other assets are valued
at fair value under the supervision of the Board of Directors.
Short-term investments that mature in 60 days or less are valued
at amortized cost.
Repurchase agreements: The Fund will not enter into a
futures contract or opctions. The Fund values repurchase
agreements at cost and accrues interest into interest receivable.
Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation subject to an
obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. There is
potential loss to the Fund in the event of default by the seller,
including the risk of adverse market action or delay in connection
with the disposition of the underlying obligations. The Fund
reviews the creditworthiness of those banks and dealers with which
the Fund enters into repurchase agreements to evaluate potential
risks.
Option contracts: The Fund may engage in option
contracts. Upon the purchase of a put option or a call option by
the Fund, the premium paid is recorded as an investment, the value
of which is marked-to-market daily. When a purchased option
expires, the Fund will realize a loss in the amount of the cost of
the option. When the Fund enters into a closing sale transaction,
the Fund will realize a gain or loss depending on whether the
sales proceeds from the closing sale transaction are greater or
less than the cost of the option. When the Fund exercises a put
option, it will realize a gain or loss from the sale of the
underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When the Fund exercises
a call option, the cost of the security which the Fund purchases
upon exercise will be increased by the premium originally paid.
When a Fund writes a call option or a put option, an
amount equal to the premium received by the Fund is recorded as a
liability, the value of which is marked-to-market daily. When a
written option expires, the Fund realizes a gain equal to the
amount of the premium received. When the Fund enters into a
closing purchase transaction, the Fund realizes a gain (or loss if
the cost of the closing purchase transaction exceeds the premium
received when the option was sold) without regard to any
unrealized gain or loss on the underlying security, and the
liability related to such option is eliminated. When a call
option is exercised, the Fund realizes a gain or loss from the
sale of the underlying security and the proceeds from such sale
are increased by the premium originally received. When a put
option is exercised, the amount of the premium originally received
will reduce the cost of the security which the Fund purchased upon
exercise.
The risk associated with purchasing options is limited
to the premium originally paid. The risk in writing a call option
is the Fund may forego the opportunity of profit if the market
price of the underlying security increases and the option is
exercised. The risk in writing a put option is that the Fund may
incur a loss if the market price of the underlying security
decreases and the option is exercised.
Securities transactions and investment income:
Securities transactions are recorded as of the trade date.
Interest income is recorded on the accrual basis. Dividend income
is recorded on the ex-dividend date. Realized gains and losses on
investments sold are recorded on the basis of identified cost.
Federal income taxes: The Fund intends to qualify as
a regulated investment company by complying with the requirements
of the Internal Revenue Code of 1986, as amended and applicable to
regulated investment companies and by distributing substantially
all of its taxable income to its shareholders. Therefore, no
Federal income tax provision is required.
Dividends and distributions to shareholders: It is the
policy of the Fund to declare and pay dividends from net
investment income annually. Capital gains, unless offset by any
available capital loss carryforward, are distributed to
shareholders annually after the close of the fiscal year in which
earned. In order to avoid the application of a 4% non-deductible
excise tax on certain undistributed amounts of ordinary income and
capital gains, the Fund may make additional distributions of any
undistributed ordinary income or capital gains before each
December 31, and expects to make any other distributions as are
necessary to avoid the application of this tax.
2. Investment Advisory Fee, Administration Fee and Other
Related Party Transactions
Lehman Brothers Global Asset Management Inc. ("LBGAM")
serves as the Fund's investment adviser pursuant to an investment
advisory agreement. LBGAM is a wholly owned subsidiary of Lehman
Brothers Holdings Inc. ("Holdings"). Under the investment
advisory agreement, the Fund pays a monthly fee at an annual rate
of 0.75% of the value of the Fund's average daily net assets.
LBGAM may voluntarily waive fees and reimburse expenses. For the
period ended September 30, 1994, LBGAM voluntarily waived fees of
$32,546.
The Shareholder Services Group, Inc. ("TSSG"), a wholly
owned subsidiary of First Data Corporation, serves as the Fund's
administrator pursuant to an administration agreement. Under the
administration agreement the Fund pays a monthly fee at the annual
rate of 0.20% of the value of its average daily net assets. TSSG
may voluntarily waive fees and reimburse expenses. For the period
ended September 30, 1994, TSSG voluntarily waived fees of $8,679.
For the period ended September 30, 1994, the Fund incurred
total brokerage commissions of $29,948, of which none was paid to
Lehman Brothers Inc. ("Lehman Brothers").
A contingent deferred sales charge ("CDSC") may be imposed
upon the redemption of Fund Shares within two years after the date
of purchase. The amount of the CDSC will depend on the number of
years since the shareholder made the purchase payment from which
the amount is being redeemed. During the period ended September
30, 1994, Lehman Brothers received $3,498 in CDSC Fees on the
redemption of Fund Shares.
No employee of Lehman Brothers, LBGAM or TSSG receives any
compensation from the Company for serving as an officer or
Director of the Company. The Company pays each Director who is
not a director, an officer or employee of Lehman Brothers, LBGAM
or TSSG or their affiliates a fee of $20,000 per annum, plus $500
per meeting attended, and reimburses each of them for travel and
out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly
owned subsidiary of Mellon Bank Corporation, serves as the Fund's
custodian. TSSG serves as the Fund's transfer agent.
3. Service Agreements
Lehman Brothers acts as the distributor of Fund shares.
Pursuant to Rule 12b-1 under the Investment Company Act of
1940, the Company has adopted a services and distribution plan
(The "Plan") with respect to the Fund. Under the Plan, the Fund
has agreed to pay Lehman Brothers a service fee, accrued daily and
paid monthly, at an annual rate of 0.25% of the value of the
Fund's average daily net assets, and a distribution fee, accrued
daily and paid monthly, at an annual rate of 0.75% of the value of
the Fund's average daily net assets. The service fee is used by
Lehman Brothers to pay Investment Representatives or Introducing
Brokers for servicing shareholder accounts. The distribution fee
is paid to Lehman Brothers for advertising, marketing and
distributing Fund shares. For the period ended September 30,
1994, the Fund incurred distribution fees and service fees of
$36,368 and $12,122, respectively.
4. Purchase and Sales of Securities
Cost of purchases and proceeds from sales of securities,
excluding short-term investments, aggregated $18,783,824 and
$5,375,203, respectively, for the period ended September 30, 1994.
At September 30, 1994, aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost
was $1,591,599 and aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over value was
$452334. Net unrealized appreciation was $1,139,265 at September
30, 1994.
Written option activity for the Fund for the period ended
September 30, 1994 was as follows:
Nu
mb
er
of
Co
nt
ra
ct
s
P
r
e
m
i
u
m
s
Options outstanding at
July 31, 1994, 1994
50
$
3
4
,
7
4
9
Options outstanding at
September 30, 1994
50
$
3
4
,
7
4
9
5. Shares of Capital Stock
At September 30, 1994, the Board of Directors have authority
to issue 10,000,000,000 shares of capital stock ($0.001 par value)
for the Lehman Brothers Funds, Inc. Changes in common stock
outstanding were as follows:
Period Ended
Period Ended
09/30/94
07/31/94*
Shares
Amount
Shares
Amount
Sold
2
9
1
,
7
2
2
$
2
,
9
4
9
,
1
6
9
2
,
7
1
2
,
2
5
7
$
2
6
,
7
1
1
,
9
3
7
Rede
emed
(
3
1
,
7
3
6
)
(
3
2
3
,
7
0
9
)
(
5
,
8
4
5
)
(
5
7
,
6
1
1
)
Net
incr
ease
2
,
7
0
6
,
4
1
2
$
2
,
6
2
5
,
4
6
0
2
,
7
0
6
,
4
1
2
$
2
6
,
6
5
4
,
3
2
6
______________
* The Fund commenced operations on May 20, 1994.
6. Organization Costs
The Fund bears all costs in connection with its organization
including fees and expenses of registering and qualifying its
shares for distribution under Federal and state securities
regulations. All such costs are being amortized on the straight-
line method over a period of five years from the commencement of
operations. In the event that any of the initial shares of the
Fund are redeemed during such amortization period, the Fund will
be reimbursed for any unamortized organization costs in the same
proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.
+ Redemption price per share is
equal to net asset value less any
applicable contingent deferred sales charge.
- - 22 -
A-6
- - 1 -
SEE NOTES TO FINANCIAL STATEMENTS
F-1
F-7
