LEHMAN BROTHERS DAILY INCOME FUND
PROSPECTUS
NOVEMBER 29, 1995
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. ("Lehman Brothers" or the
"Distributor") sponsors the Fund
and acts as Distributor of the Fund's shares. LEHMAN
BROTHERS GLOBAL ASSET MANAGEMENT
INC. ("LBGAM" or the "Investment Adviser") serves as the
Fund's Investment Adviser.
The Fund's address 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 1-800-861-4171.
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 29,
1995, as may be
amended or supplemented from time to time, has been filed
with the Securities
and Exchange Commission (the "SEC") and is available to
investors without charge
by calling 1-800-861-4171. 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
[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
7
Purchase of Shares
14
Redemption of Shares
15
Exchange Privilege
18
Valuation of Shares
19
Management of the Fund
20
Dividends
22
Taxes
23
Yields
24
Additional Information
25
</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.
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.
Two classes of shares,
Select Shares and CDSC Shares, are offered by this
Prospectus. The Fund reserves
the right to cease offering shares of any class at any time
and it anticipates
ceasing to offer CDSC Shares on or about January 19, 1996.
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").
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SELECT CDSC
SHAREHOLDER TRANSACTION EXPENSES
SHARES SHARES
<S> <C>
<C>
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)**
0.24% 0.24%
Rule 12b-1 Fees (after waivers)***
0.18% 0.18%
Other Expenses -- including Administration Fees
(after waivers)+
0.33% 0.33%
Total Fund Operating Expenses (after waivers)++
0.75% 0.75%
</TABLE>
* 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 herein). 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.
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
will not be changed
without 60-days prior notice to shareholders.
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.
Absent such voluntary waivers,
the ratio of other expenses to average net assets would
be 0.38%.
++ Absent the
voluntary waivers referred to above, the ratio of total fund
operating expenses to average net assets would be 0.96%. The
voluntary waivers referred to above will not be changed so
that the
ratio of total fund operating expenses to average net assets
would exceed
0.75% without 60-days prior notice to shareholders.
EXAMPLE
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 3
5 10
YEAR YEARS
YEARS YEARS
<S> <C> <C>
<C> <C>
Select Shares:
(assuming complete redemption at the end
of each time period) $ 8 $24
$42 $93
CDSC Shares:
Assuming complete redemption at the end
of each time period* $28 $24
$42 $93
Assuming no redemption $ 8 $24
$42 $93
</TABLE>
* Assumes deduction at the time of redemption of the maximum
CDSC applicable
for that period.
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, 1995 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, 1995. 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 Select Share outstanding throughout each period:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
07/31/95 07/31/94*
<S>
<C> <C>
Net asset value, beginning of period
$ 1.00 $ 1.00
Net investment income+
0.0505 0.0297
Dividends from net investment income
(0.0505) (0.0297)
Dividends from net realized gains
- -- ## --
Total dividends
(0.0505) (0.0297)
Net asset value, end of period
$ 1.00 $ 1.00
Total return++
5.14% 3.03%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)
$704,332 $818,555
Ratio of net investment income to average net assets
5.01% 3.01%**
Ratio of operating expenses to average net assets+++
0.74% 0.66%**
</TABLE>
* Select Shares commenced operations on August 2, 1993.
** Annualized.
+ Net investment income per share before waiver of fees by
Investment Adviser,
Administrator and Distributor for the year ended July
31, 1995 and the
period ended July 31, 1994 was $0.0483 and $0.0269,
respectively.
++ Total return represents aggregate total return for the
period indicated.
+++ Annualized operating expense ratios before waiver of
fees by Investment
Adviser, Administrator and Distributor for the year
ended July 31, 1995
and the period ended July 31, 1994 were 0.96% and
0.95%, respectively.
## Amount is less than $0.0001 per share.
For a CDSC Share outstanding throughout the period:
<TABLE>
<CAPTION>
PERIOD ENDED
07/31/95*
<S>
<C>
Net asset value, beginning of period
$ 1.00
Net investment income+
0.0379
Dividends from net investment income
(0.0379)
Net asset value, end of period
$ 1.00
Total return++
3.85%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)
$ 23
Ratio of net investment income to average net assets
5.01%**
Ratio of operating expenses to average net assets+++
0.74%**
</TABLE>
* CDSC Shares commenced operations on November 16, 1994.
** Annualized.
+ Net investment income per share before waiver of fees by
Investment Adviser,
Administrator and Distributor for the period ended
July 31, 1995 was $0.0362.
++ Total return represents aggregate total return for the
period indicated
and does not reflect the effect of any sales charge.
+++ Annualized operating expense ratio before waiver of fees
by Investment
Adviser, Administrator and Distributor for the period
ended July 31, 1995
was 0.96%.
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 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 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'
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 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.") 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 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.
(2) 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, 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.
(3) 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.
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 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.
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 and yield. The Fund generally will
not pay for such securities
or start earning interest 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 and 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.
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.
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) 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 Objectives and
Policies--Additional
Information on Portfolio Instruments and Investment
Practices--Illiquid and
Restricted Securities" in the Statement of Additional
Information.
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.
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. By investing in another money market fund,
the Fund bears a ratable
share of the money market fund's expenses, as well as
continuing to bear the
Fund's advisory and administrative fees with respect to the
amount of the investment.
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.
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 Investment
Adviser's judgment,
the income to be earned from the loans justifies the
attendant risks.
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.
PURCHASE OF SHARES
Purchases of Select and CDSC Shares of the Fund must be made
through a brokerage
account maintained through Lehman Brothers or a broker that
clears securities
transactions through Lehman Brothers on a fully disclosed
basis (an "Introducing
Broker"). Introducing Brokers through whom shares are
purchased may charge fees
for their services. 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 Select and CDSC Shares 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
401(k) or 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.
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 the Fund's Transfer Agent receives from
Lehman Brothers or an
Introducing Broker 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. See "Valuation of
Shares." 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 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 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 on which 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 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. The Fund
will normally transmit 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 day following the
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.
Holders of Select Shares who purchase securities through
Lehman Brothers or
an 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 the settlement date, the number of
Select Shares necessary
to cover the debit will be redeemed automatically as of the
settlement date,
which currently occurs three business days after the trade
date. Shareholders
not wishing to participate in these arrangements should
notify their Lehman
Brothers Investment Representatives.
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 BROKERS
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 First Data Investor Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
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 been exchanged through a CDSC Fund
Exchange. The following
table sets forth the rates of the CDSC for redemptions of
CDSC Shares:
<TABLE>
<CAPTION>
YEARS 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 Shares 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.
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 this exchange privilege should review the
prospectus of the fund
they are exchanging into carefully prior to making an
exchange. The Fund's
Distributor 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 current
prospectuses, investors should contact the Fund at 1-800-
861-4171.
VALUATION OF SHARES
The net asset value per share of each class of the Fund is
calculated on each
day, Monday through Friday, except on days on which the New
York Stock Exchange
(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, 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 calculated at noon, Eastern time,
on each day on which
the Fund computes its net asset value. The net asset value
per share of each
class of the Fund 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, First
Data Investor Services Group, Inc. ("First Data," formerly
known as 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.
LBGAM serves as the Investment Adviser to the Fund. LBGAM,
together with other
Lehman Brothers investment advisory affiliates, had
approximately $11.7 billion
in assets under management as of September 30, 1995. 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, 1995, LBGAM received a fee of 0.21% 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--
FIRST DATA INVESTOR SERVICES GROUP, INC.
First Data, located at 53 State Street, Boston,
Massachusetts 02109, serves
as the Fund's Administrator and Transfer Agent. First Data
is a wholly-owned
subsidiary of First Data Corporation. As Administrator,
First Data 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 First Data's
services as Administrator, First Data 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. First Data is also entitled to receive a monthly
fee from the Fund
for its services as Transfer Agent.
On May 6, 1994, First Data 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 First Data its agreement with Lehman
Brothers (then named
Shearson Lehman Brothers Inc.) that Lehman Brothers and its
affiliates, consistent
with their fiduciary duties and assuming certain service
quality standards are
met, would recommend First Data as the provider of
administration services to
the Fund. This duty to recommend expires on May 21, 2000.
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 or servicing shares
of the Fund may receive different levels of compensation for
selling or servicing
one particular class of shares in the Fund over another.
CUSTODIAN--BOSTON SAFE DEPOSIT
AND TRUST COMPANY
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. 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 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.
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 First Data 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 declared 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.
The Fund does not
expect to realize net long-term capital gains.
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 Subchapter M of 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 not anticipated that a significant portion
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.
Dividends and distributions by the Fund are generally
taxable to the
shareholders at the time the dividend or distribution is
made. 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.
Dividends and distributions of capital gains paid to
shareholders by the Fund
will be subject to federal income tax, whether such
dividends are paid in the
form of cash or additional shares, and may also be subject
to state and local
taxes.
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, 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 Ad ditional
Information. Investors may call 1-800-861-4171 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
Charter currently
authorizes 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
and multiple classes of shares in each series. 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's Board of Directors has authorized the
establishment of multiple
classes of shares in the Fund. This Prospectus relates only
to Select Shares
and CDSC Shares, two classes of shares that the Fund is
authorized to issue,
and the Fund may offer other classes of shares. The
categories of investors
that are eligible to purchase shares may be different for
each class of Fund
shares. In addition, other classes of Fund shares may be
subject to differences
in sales charge arrangements, exchange privileges, ongoing
distribution and
service fee levels, and levels of certain other expenses,
which may affect the
relative performance of the different classes of Fund
shares. 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.
Investors may call
the Company at 1-800-861-4171 to obtain additional
information about other classes
of shares of the Fund that are offered.
The shares of each class of the Fund represent interests in
the Fund in proportion
to their relative net asset values. 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 their Lehman
Brothers Investment Representatives.
LEHMAN BROTHERS
MEMBER SIPC
3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK
10285
LBP212K5
Lehman Brothers Daily Income Fund
Prospectus
November 29, 1995
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
Global Clearing Shares, a class 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. ("Lehman Brothers" or the
"Distributor") sponsors the Fund and acts as Distributor of
the Fund's shares. Lehman Brothers Global Asset Management
Inc. ("LBGAM" or the "Investment Adviser") serves as the
Fund's Investment Adviser. The Fund's address is 3 World
Financial Center, New York, New York 10285. Yield and other
information regarding the Fund may be obtained by calling 1-
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 29, 1995, as amended or supplemented from time to
time, has been filed with the Securities and Exchange
Commission (the "SEC") and is available to investors without
charge by calling 1-800-861-4171. 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
[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
Page
Benefits to Investors
3
Background and Expense Information
3
Investment Objective and Policies
4
Purchase of Shares
9
Redemption of Shares
10
Exchange Privilege
11
Valuation of Shares
11
Management of the Fund
12
Dividends
14
Taxes
14
Yields
15
Additional Information
16
_____________
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.
Benefits to Investors
The Fund offers investors several important benefits:
o A professionally managed portfolio of high quality
money market instruments, providing investment
diversification that is otherwise beyond the means of many
individual investors.
o Investment liquidity through convenient purchase and
redemption procedures.
o 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).
o 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.
One class of shares, Global Clearing Shares, is offered by
this Prospectus. 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 estimated expenses that a
shareholder can expect to incur as an investor in Global
Clearing Shares of the Fund based upon estimated operating
expenses for the current fiscal year.
Expense Summary
SHAREHOLDER TRANSACTION EXPENSES
GLOBAL CLEARING SHARES
ANNUAL FUND OPERATING EXPENSES
[as a percentage of average net
assets]
Advisory Fees [after waivers]*
0.24%
Rule 12b-1 Fees [after waivers]**
0.30%
Other Expenses - including
Administration Fees [after waivers]
0.23%
Total Fund Operating Expenses [after
waivers]
0.77%
* Reflects voluntary waivers of advisory fees. 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
Rule 12b-1 fees may be charged at levels up to 0.50% of
average net assets.
As of the date of this Prospectus, the Fund had not
commenced selling Global Clearing Shares to the public. The
amount set forth for "Other Expenses" is, therefore, based
on estimates for the current fiscal year after giving effect
to voluntary waivers of administration fees. Absent such
voluntary waivers, the ratio of other expenses to average
net assets would be 0.33%.
Absent the voluntary waivers referred to above, the
ratio of total fund operating expenses to average net assets
would be 1.07%. The voluntary waivers referred to above will
not be changed so that the ratio of total fund operating
expenses to average net assets would exceed 0.77% without
60-days prior notice to shareholders.
Example
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return and complete redemption at the
end of each time period:
Global Clearing Shares:
1 YEAR
$8
3 YEARS
$25
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.
Long-term holders of mutual fund shares which bear 12b-1
fees, such as Global Clearing Shares, 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.
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 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 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' 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 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.") 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 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.
* The 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.
* 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, 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.
* 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.
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 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.
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 and yield. The Fund
generally will not pay for such securities or start earning
interest 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
and 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.
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.
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) 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 Objectives and Policies - Additional
Information on Portfolio Instruments and Investment
Practices - Illiquid and Restricted Securities" in the
Statement of Additional Information.
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.
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.
By investing in another money market fund, the Fund bears a
ratable share of the money market fund's expenses, as well
as continuing to bear the Fund's advisory and administrative
fees with respect to the amount of the investment.
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.
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 Investment Adviser's judgment, the income to be
earned from the loans justifies the attendant risks.
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.
Purchase of Shares
Purchases of Global Clearing Shares may only be made through
certain brokers that clear transactions through Lehman
Brothers on a fully disclosed basis (an "Introducing
Broker"). Introducing Brokers through whom Global Clearing
Shares are purchased may charge fees for their services. 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 Global Clearing Shares of
the Fund is $5,000 and the minimum subsequent investment is
$1,000. For participants with an automatic purchase
arrangement in connection with their brokerage accounts,
there is no minimum initial or subsequent investment. The
Fund reserves the right at any time to vary the initial and
subsequent investment minimums. No certificates are issued
for Fund shares.
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 for Global Clearing
Shares becomes effective when the Fund's Transfer Agent
receives from the Introducing Broker 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. See "Valuation of
Shares." Investors should note that there may be a delay
between the time when an Introducing Broker receives
purchase proceeds and the time when those proceeds are
transmitted to the Fund and that the Introducing Broker may
benefit from the use of temporarily uninvested funds.
Shares will begin to accrue income dividends on the day the
purchase order becomes effective.
Redemption of Shares
Holders of Global Clearing Shares may redeem their shares
without charge on any day on which the Fund calculates its
net asset value. 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. The Fund will normally
transmit redemption proceeds on Global Clearing Shares for
credit to the shareholder's account at the Introducing
Broker at no charge on the day following the 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.
Shareholders who purchase securities through an 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 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 the settlement date,
the number of Global Clearing Shares necessary to cover the
debit will be redeemed automatically as of the settlement
date, which currently occurs three business days after the
trade date. Shareholders not wishing to participate in these
arrangements should notify their Introducing Brokers.
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."
Requests for the redemption of Global Clearing Shares must
be made through an Introducing Broker. Shares held by an
Introducing Broker on behalf of investors may be redeemed by
submitting a written request for redemption to the Fund's
Transfer Agent:
Lehman Brothers Funds, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
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.
Exchange Privilege
Global Clearing Shares of the Fund may be exchanged without
charge for shares of the same class of certain other funds
offered by Lehman Brothers through an Introducing Broker. 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.
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 their Investment Representatives.
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.
Additional Information Regarding the Exchange Privilege.
Shareholders exercising this exchange privilege should
review the prospectus of the fund they are exchanging into
carefully prior to making an exchange. The Fund's
Distributor 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 current prospectuses, investors should contact the
Fund at 1-800-861-4171.
Valuation of Shares
The net asset value of a Global Clearing Share is calculated
on each day, Monday through Friday, except on days on which
the New York Stock Exchange (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, 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 Global Clearing Share is calculated at
noon, Eastern time, on each day on which the Fund computes
its net asset value. The net asset value per Global Clearing
Share is computed by dividing the value of the net assets of
the Fund attributable to the Global Clearing Shares by the
total number of such shares 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, First Data Investor Services
Group, Inc. ("First Data," formerly known as 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.
LBGAM serves as the Investment Adviser to the Fund. LBGAM,
together with other Lehman Brothers investment advisory
affiliates, had approximately $11.7 billion in assets under
management as of September 30, 1995. 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,
1995, LBGAM received a fee of 0.21% 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 -
FIRST DATA INVESTOR SERVICES GROUP, INC.
First Data, located at 53 State Street, Boston,
Massachusetts 02109, serves as the Fund's Administrator and
Transfer Agent. First Data is a wholly-owned subsidiary of
First Data Corporation. As Administrator, First Data
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 First
Data's services as Administrator, First Data 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.
First Data is also entitled to receive a monthly fee from
the Fund for its services as Transfer Agent.
On May 6, 1994, First Data 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 First Data its agreement with Lehman
Brothers (then named Shearson Lehman Brothers Inc.) that
Lehman Brothers and its affiliates, consistent with their
fiduciary duties and assuming certain service quality
standards are met, would recommend First Data as the
provider of administration services to the Fund. This duty
to recommend expires on May 21, 2000.
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 Global
Clearing Shares to pay Lehman Brothers monthly for
advertising, marketing and distributing its shares at an
annual rate of up to 0.50% 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. Investment
Representatives of Lehman Brothers, Introducing Brokers and
any other person entitled to receive compensation for
selling or servicing shares of the Fund may receive
different levels of compensation for selling or servicing
one particular class of shares in the Fund over another.
CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY
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. 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 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.
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 the other classes of Fund shares. LBGAM and First
Data 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 brokerage account,
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 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. The Fund does not expect to
realize net long-term capital gains.
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 Subchapter M of 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 individual retirement account ("IRA") or
a qualified retirement plan are deferred under the Code.) It
is not anticipated that a significant portion 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.
Dividends and distributions by the Fund are generally
taxable to the shareholders at the time the dividend or
distribution is made. 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.
Dividends and distributions of capital gains paid to
shareholders by the Fund will be subject to federal income
tax, whether such dividends are paid in the form of cash or
additional shares, and may also be subject to state and
local taxes.
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
Global Clearing 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 Global
Clearing Shares of the Fund refers to the income generated
by an investment in such shares 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 Global Clearing 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, 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, 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 1-800-861-4171 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 Charter currently
authorizes 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 and multiple
classes of shares in each series. 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's Board of Directors has authorized the
establishment of multiple classes of shares in the Fund.
This Prospectus relates only to Global Clearing Shares, one
class of shares that the Fund is authorized to issue, and
the Fund offers other classes of shares. The categories of
investors that are eligible to purchase shares may be
different for each class of Fund shares. In addition, other
classes of Fund shares may be subject to differences in
sales charge arrangements, exchange privileges, ongoing
distribution and service fee levels, and levels of certain
other expenses, which may affect the relative performance of
the different classes of Fund shares. 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. Investors may call the Company at 1-
800-861-4171 to obtain additional information about other
classes of shares of the Fund that are offered.
The shares of each class of the Fund represent interests in
the Fund in proportion to their relative net asset values.
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 would receive a single Prospectus annually. Any
shareholder who does not want this consolidation to apply to
his or her account should contact the Fund's Transfer Agent.
Shareholders may direct inquiries regarding the Fund to
their Introducing Broker, or to the Fund at 1-800-861-4171.
LEHMAN BROTHERS
Member SIPC
3 THREE WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285
16
G:\SHARED\LEHMAN\RETAIL\PROSPECT\DLYINGC3.DOC
G:\SHARED\LEHMAN\RETAIL\PROSPECT\DLYINGCS.DOC
LEHMAN BROTHERS MUNICIPAL INCOME FUND
PROSPECTUS
NOVEMBER 29, 1995
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. ("Lehman Brothers" or the
"Distributor") sponsors the Fund
and acts as Distributor of the Fund's shares. LEHMAN
BROTHERS GLOBAL ASSET MANAGEMENT
INC. ("LBGAM" or the "Investment Adviser") serves as the
Fund's Investment Adviser.
The Fund's address 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 1-800-861-4171.
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 29,
1995, as may be
amended or supplemented from time to time, has been filed
with the Securities
and Exchange Commission (the "SEC") and is available to
investors without charge
by calling 1-800-861-4171. 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
[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
7
Purchase of Shares
16
Redemption of Shares
17
Exchange Privilege
20
Valuation of Shares
21
Management of the Fund
22
Dividends
24
Taxes
25
Yields
27
Additional Information
28
</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.
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.
Two classes of shares,
Select Shares and CDSC Shares, are offered by this
Prospectus. The Fund
reserves the right to cease offering shares of any class at
any time and it
anticipates ceasing to offer CDSC Shares on or about January
19, 1996. 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 the
Fund's operating
expenses for the most recent fiscal year, restated to
reflect current fee waivers.
The Expense Summary for CDSC Shares
assumes payment of the maximum contingent deferred sales
charge ("CDSC").
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SELECT CDSC
SHAREHOLDER TRANSACTION EXPENSES
SHARES SHARES
<S> <C>
<C>
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)**
0.24% 0.24%
Rule 12b-1 Fees (after waivers)***
0.18% 0.18%
Other Expenses--including Administration Fees
(after waivers)+
0.28% 0.28%
Total Fund Operating Expenses
(after waivers)++
0.70% 0.70%
</TABLE>
* 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 herein). 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.
Absent such voluntary waivers, the
ratio of advisory fees to average net assets would have
been 0.30%.
*** Reflects voluntary waivers of Rule 12b-1 fees, which
will not be changed
without 60-days prior notice to shareholders. Absent
such voluntary waivers,
the ratio of Rule 12b-1 fees to average net assets would
have been 0.25%.
+ Reflects voluntary waivers of administration fees.
Absent such voluntary waivers,
the ratio of other expenses to average net assets would
have been 0.33%.
++ Absent the voluntary waivers referred to above,
the ratio of total fund operating expenses to average net
assets would
have been 0.90%. The voluntary waivers referred to above
will not
be changed so that the ratio of total fund operating
expenses to average
net assets would exceed 0.70% without 60-days prior notice
to shareholders.
EXAMPLE
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 3
5 10
YEAR YEARS
YEARS YEARS
<S> <C> <C>
<C> <C>
Select Shares:
(assuming complete redemption at
the end of each time period) $ 7 $22
$39 $87
CDSC Shares:
Assuming complete redemption at
the end of each time period* $27 $22
$39 $87
Assuming no redemption $ 7 $22
$39 $87
</TABLE>
* Assumes deduction at the time of redemption of the maximum
CDSC applicable
for that period.
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, 1995
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, 1995. 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.
For a Select Share outstanding throughout each period:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
07/31/95 07/31/94*
<S>
<C> <C>
Net asset value, beginning of period
$ 1.00 $ 1.00
Net investment income+
0.0318 0.0207
Dividends from net investment income
(0.0318) (0.0207)
Net asset value, end of period
$ 1.00 $ 1.00
Total return++
3.23% 2.09%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)
$296,822 $264,425
Ratio of net investment income to average net assets
3.21% 2.06%**
Ratio of operating expenses to average net assets+++
0.69% 0.64%**
</TABLE>
* Select Shares commenced operations on August 2, 1993.
** Annualized.
+ Net investment income per share before waiver of fees by
Investment Adviser,
Administrator and Distributor for the year ended July
31, 1995 and the
period ended July 31, 1994 was $0.0296 and $0.0182,
respectively.
++ Total return represents aggregate total return for the
period indicated.
+++ Annualized operating expense ratios before waiver of
fees by Investment
Adviser, Administrator and Distributor for the year
ended July 31, 1995
and the period ended July 31, 1994 were 0.90% and
0.89%, respectively.
For a CDSC Share outstanding throughout each period:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
07/31/95 07/31/94*
<S>
<C> <C>
Net asset value, beginning of period
$ 1.00 $ 1.00
Net investment income+
0.0317 0.0018
Dividends from net investment income
(0.0317) (0.0018)
Net asset value, end of period
$ 1.00 $ 1.00
Total return++
3.23% 0.18%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)
- -- # $ 10
Ratio of net investment income to average net assets
3.21% 2.06%**
Ratio of operating expenses to average net assets+++
0.69% 0.64%**
</TABLE>
* CDSC Shares commenced operations on July 6, 1994.
** Annualized.
+ Net investment income per share before waiver of fees by
Investment Adviser,
Administrator and Distributor for the year ended July
31, 1995 and the
period ended July 31, 1994 was $0.0293 and $0.0017,
respectively.
++ Total return represents aggregate total return for the
period indicated
and does not reflect the effect of any sales charge.
+++ Annualized operating expense ratios before waiver of
fees by Investment
Adviser, Administrator and Distributor for the year
ended July 31, 1995
and the period ended July 31, 1994 were 0.90% and
0.89%, respectively.
# Total net assets for CDSC Shares were $101 at July 31,
1995.
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 tax
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 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 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 the
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 payments received
by the Fund from
tax-exempt derivative securities are rendered by bond
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.
TYPES OF MUNICIPAL OBLIGATIONS
The two principal classifications of Municipal Obligations
that 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. Such
bonds may be issued
by or on behalf of public authorities to finance various
privately operated
facilities and are not payable from the unrestricted
revenues of the issuer.
As a result, the credit quality of private activity bonds is
frequently related
directly to the credit standing of private corporations or
other entities.
The Fund's portfolio may also include "moral obligation"
securities, which are
normally issued by special purpose public authorities. If
the issuer of moral
obligation securities 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 that created
the issuer.
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 with
respect to 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 Objectives 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 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.
(2) 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
or Municipal Obligations (other than those backed
only by the assets
and revenues of non-governmental users).
(3) 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.
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.
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 and yield. The Fund generally will
not pay for such securities
or start earning interest 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 and 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.
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 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. LBGAM 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
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.
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.
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) 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 Objectives and
Policies--Additional
Information on Portfolio Instruments and Investment
Practices--Illiquid and
Restricted Securities" in the Statement of Additional
Information.
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.
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. By investing in another money market fund,
the Fund bears a ratable
share of the money market fund's expenses, as well as
continuing to bear the
Fund's advisory and administrative fees with respect to the
amount of the investment.
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.
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 Investment
Adviser's judgment,
the income to be earned from the loans justifies the
attendant risks.
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.
PURCHASE OF SHARES
Purchases of Select and CDSC Shares of the Fund must be made
through a brokerage
account maintained through Lehman Brothers or a broker that
clears securities
transactions through Lehman Brothers on a fully disclosed
basis (an "Introducing
Broker"). Introducing Brokers through whom shares are
purchased may charge fees
for their services. 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 Select and CDSC Shares of
the Fund is $5,000
and the minimum subsequent investment is $1,000. 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.
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 the Fund's Transfer Agent receives from
Lehman Brothers or an
Introducing Broker 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. See "Valuation of
Shares." 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 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 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 on which 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 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. The Fund
will normally transmit 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 day following the
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.
Holders of Select Shares who purchase securities through
Lehman Brothers or
an 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 currently occurs three business days after the trade
date. Shareholders
not wishing to participate in these arrangements should
notify their Lehman
Brothers Investment Representatives.
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 BROKERS
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 First Data Investor Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
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 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 Shares 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.
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 this exchange privilege should review the
prospectus of the fund
they are exchanging into carefully prior to making an
exchange. The Fund's
Distributor 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 current
prospectuses, investors should contact the Fund at 1-800-
861-4171.
VALUATION OF SHARES
The net asset value per share of each class of the Fund is
calculated on each
day, Monday through Friday, except on days on which the New
York Stock Exchange
(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, 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 calculated at noon, Eastern time,
on each day on which
the Fund computes its net asset value. The net asset value
per share of each
class of the Fund 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, First
Data Investor Services Group, Inc. ("First Data," formerly
known as 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.
LBGAM serves as the Investment Adviser to the Fund. LBGAM,
together with other
Lehman Brothers investment advisory affiliates, had
approximately $11.7 billion
in assets under management as of September 30, 1995. 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, 1995, LBGAM received a fee of 0.22% 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 --
FIRST DATA INVESTOR SERVICES GROUP, INC.
First Data, located at 53 State Street, Boston,
Massachusetts 02109, serves
as the Fund's Administrator and Transfer Agent. First Data
is a wholly-owned
subsidiary of First Data Corporation. As Administrator,
First Data 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 First Data's
services as Administrator, First Data 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. First Data is also entitled to a monthly fee
from the Fund for its
services as Transfer Agent.
On May 6, 1994, First Data 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 First Data its agreement with Lehman
Brothers (then named
Shearson Lehman Brothers Inc.) that Lehman Brothers and its
affiliates, consistent
with their fiduciary duties and assuming certain service
quality standards are
met, would recommend First Data as the provider of
administration services to
the Fund. This duty to recommend expires on May 21, 2000.
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 or servicing shares
of the Fund may receive different levels of compensation for
selling or servicing
one particular class of shares in the Fund over another.
CUSTODIAN--BOSTON SAFE DEPOSIT
AND TRUST COMPANY
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. 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 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.
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 the
other classes of Fund
shares. LBGAM and First Data 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 declared 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.
The Fund does not
expect to realize net long-term capital gains.
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 Subchapter M of 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. 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.
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 federal alternative
minimum tax.
Noncorporate taxpayers, depending on their individual tax
status, may be subject
to alternative minimum tax at a blended rate between 26% and
28%. Corporate
taxpayers may be subject to (1) alternative minimum tax at a
rate of 20% of
the excess of their alternative minimum taxable income over
the exemption amount,
and (2) the environmental tax. Corporate investors must also
take all
exempt-interest dividends into account in determining
certain adjustments for
federal alternative minimum and environmental tax purposes.
The environmental
tax applicable to corporations is imposed at the rate of
0.12% 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.
Dividends and distributions by the Fund are generally
taxable to the shareholders
at the time the dividend or distribution is made. 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.
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.")
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 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.
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. 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 shares of 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."
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 1-800-861-4171 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
Charter currently
authorizes 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
and multiple classes of shares in each series. 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's Board of Directors has authorized the
establishment of multiple
classes of shares in the Fund. This Prospectus relates only
to Select Shares
and CDSC Shares, two classes of shares that the Fund is
authorized to issue,
and the Fund may offer other classes of shares. The
categories of investors
that are eligible to purchase shares may be different for
each class of Fund
shares. In addition, other classes of Fund shares may be
subject to differences
in sales charge arrangements, exchange privileges, ongoing
distribution and
service fee levels, and levels of certain other expenses,
which may affect the
relative performance of the different classes of Fund
shares. 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.
Investors may call
the Company at 1-800-861-4171 to obtain additional
information about other classes
of shares of the Fund that are offered.
The shares of each class of the Fund represent interests in
the Fund in proportion
to their relative net asset values. 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 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 their
Lehman Brothers Investment Representatives.
LEHMAN BROTHERS
MEMBER SIPC
3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK
10285
LBP215K5
Lehman Brothers Municipal Income Fund
Prospectus
November 29, 1995
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 Global Clearing Shares, a class 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. ("Lehman Brothers" or the
"Distributor") sponsors the Fund and acts as Distributor of
the Fund's shares. Lehman Brothers Global Asset Management
Inc. ("LBGAM" or the "Investment Adviser") serves as the
Fund's Investment Adviser. The Fund's address is 3 World
Financial Center, New York, New York 10285. Yield and other
information regarding the Fund may be obtained by calling 1-
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 29, 1995, as may be amended or supplemented from
time to time, has been filed with the Securities and
Exchange Commission (the "SEC") and is available to
investors without charge by calling 1-800-861-4171. 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
[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
Page
Benefits to Investors
3
Background and Expense Information
3
Investment Objective and Policies
4
Purchase of Shares
10
Redemption of Shares
11
Exchange Privilege
12
Valuation of Shares
12
Management of the Fund
13
Dividends
15
Taxes
15
Yields
16
Additional Information
17
_____________
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.
Benefits to Investors
The Fund offers investors several important benefits:
o 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.
o Investment liquidity through convenient purchase and
redemption procedures.
o 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).
o 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.
One class of shares, Global Clearing Shares, is offered by
this Prospectus. 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 estimated expenses that a
shareholder can expect to incur as an investor in Global
Clearing Shares of the Fund based upon estimated operating
expenses for the current fiscal year.
Expense Summary
SHAREHOLDER TRANSACTION EXPENSES
GLOBAL CLEARING SHARES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees [after waivers]*
0.24%
Rule 12b-1 Fees [after waivers]**
0.30%
Other Expenses - including Administration Fees
[after waivers]
0.23%
Total Fund Operating Expenses
[after waivers]
0.77%
* Reflects voluntary waivers of advisory fees. 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
Rule 12b-1 fees may be charged at levels up to 0.50 % of
average net assets.
As of the date of this Prospectus, the Fund had not
commenced selling Global Clearing Shares to the public. The
amount set forth for "Other Expenses" is, therefore, based
on estimates for the current fiscal year after giving effect
to voluntary waivers of administration fees. Absent such
voluntary waivers, the ratio of other expenses to average
net assets would be 0.33%.
Absent the voluntary waivers referred to above, the
ratio of total fund operating expenses to average net assets
would be 1.07%. The voluntary waivers referred to above will
not be changed so that the ratio of total fund operating
expenses to average net assets would exceed 0.77% without
60-days prior notice to shareholders.
Example
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return and complete redemption at the
end of each time period:
Global Clearing Shares:
1 YEAR
$8
3 YEARS
$25
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.
Long-term holders of mutual fund shares which bear 12b-1
fees, such as Global Clearing Shares, 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.
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 tax
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 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 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 the 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 payments received
by the Fund from tax-exempt derivative securities are
rendered by bond 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.
Types of Municipal Obligations
The two principal classifications of Municipal Obligations
that 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. Such bonds may be issued by or on
behalf of public authorities to finance various privately
operated facilities and are not payable from the
unrestricted revenues of the issuer. As a result, the credit
quality of private activity bonds is frequently related
directly to the credit standing of private corporations or
other entities.
The Fund's portfolio may also include "moral obligation"
securities, which are normally issued by special purpose
public authorities. If the issuer of moral obligation
securities 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 that created the
issuer.
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 with respect to 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 Objectives 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.
* The 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.
* 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 or Municipal Obligations (other than those backed
only by the assets and revenues of non-governmental users).
* 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.
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.
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 and yield. The Fund
generally will not pay for such securities or start earning
interest 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
and 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.
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 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.
LBGAM 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 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.
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.
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) 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 Objectives and Policies - Additional
Information on Portfolio Instruments and Investment
Practices - Illiquid and Restricted Securities" in the
Statement of Additional Information.
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.
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.
By investing in another money market fund, the Fund bears a
ratable share of the money market fund's expenses, as well
as continuing to bear the Fund's advisory and administrative
fees with respect to the amount of the investment.
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.
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 Investment Adviser's judgment, the income to be
earned from the loans justifies the attendant risks.
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.
Purchase of Shares
Purchases of Global Clearing Shares may only be made through
certain brokers that clear transactions through Lehman
Brothers on a fully disclosed basis (an "Introducing
Broker"). Introducing Brokers through whom Global Clearing
Shares are purchased may charge fees for their services. 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 Global Clearing Shares of
the Fund is $5,000 and the minimum subsequent investment is
$1,000. For participants with an automatic purchase
arrangement in connection with their brokerage accounts,
there is no minimum initial or subsequent investment. The
Fund reserves the right at any time to vary the initial and
subsequent investment minimums. No certificates are issued
for Fund shares.
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 for Global Clearing
Shares becomes effective when the Fund's Transfer Agent
receives from the Introducing Broker 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. See "Valuation of
Shares." Investors should note that there may be a delay
between the time when an Introducing Broker receives
purchase proceeds and the time when those proceeds are
transmitted to the Fund and that the Introducing Broker may
benefit from the use of temporarily uninvested funds.
Shares will begin to accrue income dividends on the day the
purchase order becomes effective.
Redemption of Shares
Holders of Global Clearing Shares may redeem their shares
without charge on any day on which the Fund calculates its
net asset value. 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. The Fund will
normally transmit redemption proceeds on Global Clearing
Shares for credit to the shareholder's account at the
Introducing Broker at no charge on the day following the
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.
Shareholders who purchase securities through an 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 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 the settlement date,
the number of Global Clearing Shares necessary to cover the
debit will be redeemed automatically as of the settlement
date, which currently occurs three business days after the
trade date. Shareholders not wishing to participate in
these arrangements should notify their Introducing Brokers.
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 Investment Company Act of 1940, as
amended (the "1940 Act"), as described in the Statement of
Additional Information under "Additional Purchase and
Redemption Information."
Requests for the redemption of Global Clearing Shares must
be made through an Introducing Broker. Shares held by an
Introducing Broker on behalf of investors may be redeemed by
submitting a written request for redemption to the Fund's
Transfer Agent:
Lehman Brothers Funds, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
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.
Exchange Privilege
Global Clearing Shares of the Fund may be exchanged without
charge for shares of the same class of certain other funds
offered by Lehman Brothers through an Introducing Broker. 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.
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 their Investment Representatives.
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.
Additional Information Regarding the Exchange Privilege.
Shareholders exercising this exchange privilege should
review the prospectus of the fund they are exchanging into
carefully prior to making an exchange. The Fund's
Distributor 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 current prospectuses, investors should contact the
Fund at 1-800-861-4171.
Valuation of Shares
The net asset value of a Global Clearing Share is calculated
on each day, Monday through Friday, except on days on which
the New York Stock Exchange (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, 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 Global Clearing Share is calculated at
noon, Eastern time, on each day on which the Fund computes
its net asset value. The net asset value per Global Clearing
Share is computed by dividing the value of the net assets of
the Fund attributable to the Global Clearing Shares by the
total number of such shares 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, First Data Investor Services Group,
Inc. ("First Data," formerly known as 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.
LBGAM serves as the Investment Adviser to the Fund. LBGAM,
together with other Lehman Brothers investment advisory
affiliates, had approximately $11.7 billion in assets under
management as of September 30, 1995. 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,
1995, LBGAM received a fee of 0.22% 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 -
FIRST DATA INVESTOR SERVICES GROUP, INC.
First Data, located at 53 State Street, Boston,
Massachusetts 02109, serves as the Fund's Administrator and
Transfer Agent. First Data is a wholly-owned subsidiary of
First Data Corporation. As Administrator, First Data
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 First
Data's services as Administrator, First Data 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.
First Data is also entitled to a monthly fee from the Fund
for its services as Transfer Agent.
On May 6, 1994, First Data 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 First Data its agreement with Lehman
Brothers (then named Shearson Lehman Brothers Inc.) that
Lehman Brothers and its affiliates, consistent with their
fiduciary duties and assuming certain service quality
standards are met, would recommend First Data as the
provider of administration services to the Fund. This duty
to recommend expires on May 21, 2000.
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 Global
Clearing Shares to pay Lehman Brothers monthly for
advertising, marketing and distributing its shares at an
annual rate of up to 0.50% 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. Investment
Representatives of Lehman Brothers, Introducing Brokers and
any other person entitled to receive compensation for
selling or servicing shares of the Fund may receive
different levels of compensation for selling or servicing
one particular class of shares in the Fund over another.
CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY
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. 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 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.
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 the other classes of Fund shares. LBGAM and First
Data 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 brokerage account,
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 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. The Fund does not expect to realize
net long-term capital gains.
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 Subchapter M of 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. It is not anticipated that
a significant portion 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.
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 determining liability (if any) for the
federal alternative minimum tax. Noncorporate taxpayers,
depending on their individual tax status, may be subject to
alternative minimum tax at a blended rate between 26% and
28%. Corporate taxpayers may be subject to (1) alternative
minimum tax at a rate of 20% of the excess of their
alternative minimum taxable income over the exemption
amount, and (2) the environmental tax. Corporate investors
must also take all exempt-interest dividends into account in
determining certain adjustments for federal alternative
minimum and environmental tax purposes. The environmental
tax applicable to corporations is imposed at the rate of
0.12% 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.
Dividends and distributions by the Fund are generally
taxable to the shareholders at the time the dividend or
distribution is made. 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.
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.")
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 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.
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. 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 Global Clearing 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 Global Clearing Shares of the Fund refers
to the income generated by an investment in such shares 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 Global Clearing 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."
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, 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 1-800-861-4171 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 Charter currently
authorizes 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 and multiple
classes of shares in each series. 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's Board of Directors has authorized the
establishment of multiple classes of shares in the Fund.
This Prospectus relates only to Global Clearing Shares, one
class of shares that the Fund is authorized to issue, and
the Fund offers other classes of shares. The categories of
investors that are eligible to purchase shares may be
different for each class of Fund shares. In addition, other
classes of Fund shares may be subject to differences in
sales charge arrangements, exchange privileges, ongoing
distribution and service fee levels, and levels of certain
other expenses, which may affect the relative performance of
the different classes of Fund shares. 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. Investors may call the Company at 1-
800-861-4171 to obtain additional information about other
classes of shares of the Fund that are offered.
The shares of each class of the Fund represent interests in
the Fund in proportion to their relative net asset values.
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 would receive a single Prospectus annually. Any
shareholder who does not want this consolidation to apply to
his or her account should contact the Fund's Transfer Agent.
Shareholders may direct inquiries regarding the Fund to
their Introducing Broker, or to the Fund at 1-800-861-4171.
LEHMAN BROTHERS
Member SIPC
3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285
- - 17 -
lehman\retail\prospectus\munigc3.doc
lehman\retail\prospectus\munigcs.doc
Lehman Selected Growth
Stock Portfolio
Prospectus
November 29, 1995
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.
Table of Contents
2
Prospectus Summary
4
Background and Expense
Information
5
Financial Highlights
6
Investment Objective and
Policies
13
Purchase of Shares
14
Redemption of Shares
16
Exchange Privilege
16
Valuation of Shares
17
Management of the Fund
19
Dividends
19
Taxes
21
The Fund's Performance
22
Additional Information
LEHMAN BROTHERS
Prospectus
Lehman Selected Growth Stock Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
November 29, 1995
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. ("Lehman Brothers" or the
"Distributor") sponsors the Fund and acts as Distributor of
the Fund's shares. Lehman Brothers Global Asset Management
Inc. ("LBGAM" or the "Investment Adviser") serves as the
Fund's Investment Adviser. The Fund's address 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 1-
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 29, 1995, as amended or supplemented from time to
time, has been filed with the Securities and Exchange
Commission (the "SEC") and is available to investors without
charge by calling 1-800-861-4171. 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.
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 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."
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."
Management of the Fund
LBGAM serves as Investment Adviser to the Fund. LBGAM,
together with other Lehman Brothers investment advisory
affiliates, had approximately $11.7 billion in assets under
management as of September 30, 1995. It is contemplated that
AMT Capital Advisers, Inc. will assume investment advisory
responsibility for the Fund in early 1996. See "Management
of the Fund."
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."
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."
Risk Factors and Special Considerations
There is no assurance that the Fund will achieve its
investment objectives. 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, invest in
derivatives and engage in hedging 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 the Fund's operating
expenses for the most recent fiscal year.
Expense Summary
Shareholder Transaction Expenses
Maximum CDSC
(as a percentage of redemption proceeds) 2.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Advisory Fees (after waivers)* 0.46%
Rule 12b-1 Fees** 1.00%
Other Expenses - including Administration Fees
(after waivers)*** 0.64%
Total Fund Operating Expenses
(after waivers)**** 2.10%
* Reflects voluntary waivers of advisory fees, which
will not be changed without 60-days prior notice to
shareholders. Absent such voluntary waivers, the ratio of
advisory fees to average net assets would have been 0.75%.
** 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 0.75% distribution fee and a 0.25% service
fee. See "Management of the Fund - Distributor."
*** Reflects voluntary waivers of administration fees,
which will not be changed without 60-days prior notice to
shareholders. Absent such voluntary waivers, the ratio of
other expenses to average net assets would have been 0.71%.
**** 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% of average net
assets, which will not be changed without 60-days prior
notice to shareholders. Absent these voluntary expense
reimbursements, the ratio of "Total Fund Operating Expenses"
to average net assets would have been 2.46%.
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:
Expenses, assuming
complete redemption at
end of each time
period*
Expenses, assuming no
redemption
1 YEAR
$41
$21
3 YEARS
$66
$66
5 YEARS
$113
$113
10 YEARS
$244
$244
*Assumes deduction at the time of redemption of the maximum
CDSC applicable for that period.
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.
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.
Financial Highlights
The financial highlights for the year ended July 31, 1995
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, 1995. 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 CDSC Share outstanding throughout each period:
Year
Ended Period Ended
07/31/95 07/31/94*
Net asset value, beginning of period $ 9.73
$10.00
Income from investment operations:
Net investment income/(loss) (0.15) 0.01
Net realized and unrealized gain/(loss) on investments
3.77 (0.28)
Total from investment operations 3.62
(0.27)
Dividends from net investment income (0.01)
---
Dividends from net realized gains ---## --
- -
Total dividends (0.01) ---
Net asset value, end of period $13.34 $
9.73
Total return 37.27% (2.70)%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)
$39,124 $26,341
Ratio of net investment income/(loss) to average net
assets (1.32)% 1.06%**
Ratio of operating expenses to average net assets
2.10% 2.04%**
Portfolio turnover rate 192% 33%
________________________________
* Selected Growth Stock Portfolio CDSC Shares commenced
operations on May 20, 1994.
** Annualized.
Net investment income/(loss) per share before waiver
of fees and/or expenses reimbursed by Investment Adviser and
Administrator for the year ended July 31, 1995 and the
period ended July 31, 1994 was ($0.19) and $0.00,
respectively.
Total return represents aggregate total return for the
period indicated and does not reflect the effect of any
sales charge.
Annualized operating expense ratios before waiver of
fees and/or expenses reimbursed by Investment Adviser and
Administrator for the year ended July 31, 1995 and the
period ended July 31, 1994 were 2.46% and 3.42%,
respectively.
## Amount is less than $0.01 per share.
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 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 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 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 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 fluctuations in
the 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 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 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.
During the continuous offering, 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 third
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.
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 401(k) or 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.
Redemption of Shares
Shareholders may redeem their shares on any day on which 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) 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 Brokers
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 Selected Growth Stock Portfolio
c/o First Data Investor 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 (a) state
the number of shares to be redeemed, (b) identify the
shareholder's account number and (c) 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 (a) the current net asset value of Fund shares
purchased through reinvestment of dividends or capital gains
distributions, plus (b) the current net asset value of Fund
shares purchased more than two years prior to the
redemption, plus (c) 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:
Year Since Purchase Payment Was Made
CDSC
First 2.00%
Second 1.00%
Third 0.00%
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 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 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.
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. 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 in the Lehman Brothers Group
of Funds 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 this exchange privilege
should review the prospectus of the fund they are exchanging
into carefully prior to making an exchange. The Fund's
Distributor 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 current prospectuses, investors should contact the
Fund at 1-800-861-4171.
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, First Data Investor
Services Group, Inc. ("First Data," formerly known as 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.
LBGAM serves as investment adviser to the Fund. LBGAM,
together with other Lehman Brothers investment advisory
affiliates, had approximately $11.7 billion in assets under
management as of September 30, 1995. 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
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 0.75% of the value of the Fund's average
daily net assets. During the fiscal year ended July 31,
1995, LBGAM received a fee of 0.46% of the value of the
Fund's average daily net assets.
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 may be purchased and sold by shareholders on an ongoing
basis, and (iv) the Fund is 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").
LBGAM entered into an Asset Purchase Agreement on October 9,
1995 with AMT Capital Advisers, Inc. ("AMT Capital
Advisers") and Delphi Asset Management, Inc. (Delphi Asset
Management") to transfer its business relating to the Fund
to AMT Capital Advisers. The Asset Purchase Agreement
contemplates that the Fund would be reorganized as a new
portfolio of AMT Capital Fund, Inc. ("AMT Capital Fund")
pursuant to an Agreement and Plan of Reorganization (the
"Reorganization Plan"). The Reorganization Plan was
approved by the Board of Directors of the Company on
November 1, 1995 and is subject to approval by the
shareholders of the Fund. It is contemplated that the
transaction would be completed by early 1996. The new AMT
Capital Fund portfolio would continue to be managed by Susan
Hirsch, who would join Delphi Asset Management, the sub-
adviser for the newly created portfolio. AMT Capital
Advisers would be the investment adviser and AMT Capital
Services, Inc. would serve as distributor for the new
portfolio.
Administrator and Transfer Agent - First Data
Investor Services Group, Inc.
First Data, located at 53 State Street, Boston,
Massachusetts 02109, serves as the Fund's Administrator and
Transfer Agent. First Data is a wholly-owned subsidiary of
First Data Corporation. As Administrator, First Data
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 First
Data's services as Administrator, First Data 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. First Data is
also entitled to receive a fee from the Fund for its
services as Transfer Agent.
On May 6, 1994, First Data 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 First Data its agreement with Lehman
Brothers (then named Shearson Lehman Brothers Inc.) that
Lehman Brothers and its affiliates, consistent with their
fiduciary duties and assuming certain service quality
standards are met, would recommend First Data as the
provider of administration services to the Fund. This duty
to recommend expires on May 21, 2000.
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 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 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
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 0.25% 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.
Custodian - Boston Safe Deposit and Trust
Company
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. 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 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.
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 First
Data 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 First Data have
agreed to reimburse the Fund for total operating expenses in
excess of 2.10% of average net assets, which will not be
changed without 60-days prior notice to shareholders.
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 each year as a "regulated
investment company" for federal income tax purposes under
Subchapter M of the Code. A regulated investment company is
not 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. However, the Fund would be subject to
corporate income tax on any undistributed income or net
capital gain. 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. 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 would 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 gain, 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 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 and 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 (1) 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 (2) 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.
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.
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 1-800-861-4171 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 Charter currently
authorizes 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.
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.
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 their Lehman Brothers Investment
Representative.
- - 7-
Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund
Investment Portfolios of Lehman Brothers Funds, Inc.
Statement
of
Additional
Information
November 29, 1995
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 29, 1995 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 1-
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
11
Exchange Privilege
12
Management of the Funds
13
Additional Information Concerning Taxes
20
Dividends
22
Additional Yield Information
23
Additional Information Concerning Fund Shares
24
Counsel
25
Auditors
25
Financial Statements ..
26
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 Prospectuses.
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 Prospectuses) 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 13
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 (based upon a pre-selected market sensitive
index such as the prime rate of a major commercial
bank) 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.
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.
When-Issued and Delayed Delivery Securities. As
stated in each Fund's Prospectuses, a 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 and yield). When a
Fund agrees to purchase when-issued or delayed
delivery securities, the Custodian will set aside
cash or liquid portfolio securities equal to the
amount of the commitment in a separate account.
Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment, and in
such a case that 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 a Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than
when it sets aside cash. Because a Fund will set
aside cash or liquid assets to satisfy its purchase
commitments in the manner described, the Fund's
liquidity and ability to manage its portfolio might
be affected in the event its commitments to purchase
when-issued or delayed delivery securities ever
exceeded 25% of the value of its assets. When a Fund
engages in when-issued or delayed delivery
transactions, it relies on the seller to consummate
the trade. Failure of the seller to do so may result
in a Fund's incurring a loss or missing an
opportunity to obtain a price considered to be
advantageous. Neither Fund intends to purchase
when-issued or delayed delivery securities for
speculative purposes but only in furtherance of its
investment objective. Each Fund reserves the right to
sell these securities before the settlement date if
it is deemed advisable.
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.
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. LBGAM 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).
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.
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").
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 Prospectuses of each Fund summarize 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 regular 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
LBGAM will independently review the underlying
proceedings related to the creation of any tax-exempt
derivatives or the bases for such opinions.
As described in the Prospectuses 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 types of Municipal Obligations, 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
Prospectuses 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, and how such shares are priced, is
included in the applicable Prospectuses. 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. Purchases of Select Shares and CDSC
Shares of the Funds may 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"). Purchases of Global Clearing
Shares of the Funds may be made only through 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 ("Exchange") is closed, other than
customary weekend and holiday closings, or during
which trading on the 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
(in the case of Global Clearing Shares, to 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 three 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 has 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 each class of a Fund's Shares may
exchange all or part of their shares for shares of
the same class 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 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 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
James A. Carbone (1)
Lehman Brothers
Global Asset Management, Inc.
3 World Financial Center, 10th Floor
New York, New York 10285
Age: 43
Chairman of the Board
and Director
Director,
Lehman Brothers
Global Asset Management K.K.;
Managing
Director,
Lehman Brothers Inc.;
formerly Branch Manager,
Lehman Brothers Japan Inc.;
formerly Chairman,
Lehman Brothers Asia Holdings
Limited; and formerly Manager -- Debt
Syndicate, Origination &
Corporate Bonds, Lehman
Brothers Inc.
Name and
Address
Position with the
Company
Principal Occupation
During Past 5 Years
and Other
Affiliations
Burt N. Dorsett (2)(3)
Dorsett McCabe Capital
Management, Inc.
540 Madison Avenue - 7th Floor
New York, New York 10022
Age: 64
Director
Managing
Partner, Dorsett
McCabe Capital Management, Inc.,
an investment counseling
firm; Director, Research
Corporation Technologies,
a non-profit patent-clearing and
licensing firm; formerly
President, Westinghouse Pension
Investments Corporation;
formerly Executive Vice
President and Trustee, College
Retirement Equities Fund, Inc., a
variable annuity fund; and
formerly Investment Officer,
University of Rochester.
Kathleen C. Holmes(2)(3)
26 Murray Hill Square
New Providence, New Jersey 07974
Age: 47
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
Age: 61
Director
Executive Vice
President and Chief
Financial Officer,
Thermo Electron Corp.
Andrew D. Gordon
3 World Financial Center
New York, New York 10285
Age: 41
President
Managing Director,
Lehman Brothers.
John M. Winters
3 World Financial Center
New York, New York 10285
Age: 46
Vice President &
Investment Officer
Senior Vice President and
Senior Money Market
Portfolio Manager,
Lehman Brothers
Global Asset Management,
Inc.; formerly Product
Manager with Lehman Brothers
Capital Markets Group.
Name and
Address
Position with the
Company
Principal Occupation
During Past 5
Years and Other
Affiliations
Nicholas Rabiecki, III
3 World Financial Center
New York, New York 10285
Age: 37
Vice President &
Investment Officer
Vice President and
Senior Portfolio Manager,
Lehman Brothers
Global Asset Management, Inc.;
formerly Senior Fixed Income
Portfolio Manager with Chase Private
Banking.
Michael C. Kardok
53 State Street
Boston, Massachusetts 02109
Age: 35
Treasurer
Vice President,
First Data Investor
Services Group, Inc.;
formerly Vice President, The
Boston Company.
Patricia L. Bickimer
53 State Street
Boston, Massachusetts 02109
Age: 42
Secretary
Vice President and
Associate General Counsel, First
Data Investor Services Group, Inc.;
formerly Vice President and
Associate General Counsel, The
Boston Company Advisors, 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. Carbone
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 First
Data Investor Services Group, Inc. ("First Data")
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 First Data 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. As of November
6, 1995, directors and officers of the Company as a
group beneficially owned less than 1% of the
outstanding shares of each Fund.
By virtue of the responsibilities assumed by
Lehman Brothers, LBGAM, First Data and their
affiliates under their respective agreements with the
Company, the Company itself requires no employees in
addition to its officers.
The following table sets forth certain
information regarding the compensation of the
Company's directors during the fiscal year ended July
31, 1995. No executive officer or person affiliated
with the Company received compensation from the
Company during the fiscal year ended July 31, 1995 in
excess of $60,000. For purposes of this table, "Fund
Complex" means regulated investment companies,
including the Company, which have common or
affiliated investment advisers.
COMPENSATION TABLE
Name of Person
and Position
Aggregate Compensation from
the Company
Pension or Retirement Benefits
Accrued as Part of Company Expenses
Estimated Annual Benefits
Upon Retirement
Total Compensation From the
Company and Fund Complex
Paid to Directors*
James A. Carbone,
Chairman of the Board
$0
$0
N/A
$0 (2)
Burt N. Dorsett,
Director
$22,000.00
$0
N/A
$47,000.00 (2)
Kathleen C. Holmes,
Director
$23,116.75**
$0
N/A
$34,208.25** (2)
John N. Hatsopoulos,
Director
$22,000.00
$0
N/A
$22,000.00 (1)
_____________
* Represents the total compensation paid to such
persons by all investment companies (including the
Company) from which such person received compensation
during the fiscal year ended July 31, 1995 that are
considered part of the same "fund complex" as the
Company. The parenthetical number represents the
number of such investment companies, including the
Company.
** Includes $1,208.25 for reimbursement of out-of-
pocket expenses.
Investment Adviser
LBGAM serves as Investment Adviser to the Funds
pursuant to separate written investment 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 May 11, 1995. LBGAM
is a wholly owned subsidiary of Lehman Brothers
Holdings Inc. 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 August 2,
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 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.
As compensation for investment advisory services
rendered, LBGAM is entitled to receive from each Fund
a fee computed daily and paid monthly at the annual
rate of 0.30% of the value of the Fund's average
daily net assets. For the fiscal period ended July
31, 1994 and the fiscal year ended July 31, 1995, the
Daily Income Fund paid to LBGAM advisory fees with
respect to the Daily Income Fund of $1,266,949 and
$1,384,344, respectively. For the same periods, LBGAM
voluntarily waived investment advisory fees with
respect to the Daily Income Fund of $918,678 and
$676,511, respectively. For the fiscal period ended
July 31, 1994 and the fiscal year ended July 31,
1995, the Municipal Income Fund paid to LBGAM
advisory fees of $424,511 and $552,423, respectively.
For the same periods, LBGAM voluntarily waived
investment advisory fees with respect to the
Municipal Income Fund of $245,504 and $239,023,
respectively.
Administrator
First Data serves as each Fund's administrator
pursuant to a written agreement dated August 2, 1993
(the "Administration Agreement") between the Company
and The Boston Company Advisors, Inc. ("Boston
Advisors"), which was assigned by Boston Advisors to
First Data on May 6, 1994. As the Funds'
administrator, First Data 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.
As compensation for administrative services
rendered to each Fund, First Data is entitled to
receive from each Fund a fee computed daily and paid
monthly at the annual rate of 0.20% of the value of
the Fund's average daily net assets. For the fiscal
period ended July 31, 1994 and the fiscal year ended
July 31, 1995, the Daily Income Fund paid
administrative fees to Boston Advisors and/or First
Data in the amount of $830,566 and $987,211,
respectively. For the same periods, Boston Advisors
and/or First Data voluntarily waived administration
fees with respect to the Daily Income Fund of
$626,519 and $386,692, respectively. For the fiscal
period ended July 31, 1994 and the fiscal year ended
July 31, 1995, the Municipal Income Fund paid
administrative fees to Boston Advisors and/or First
Data in the amount of $292,606 and $386,712,
respectively. For the same periods, Boston Advisors
and/or First Data voluntarily waived administration
fees with respect to the Municipal Income Fund of
$154,070 and $140,919, respectively.
Distributor and Plan of Distribution
Lehman Brothers acts as distributor of each
Fund's shares. Lehman Brothers, located at 3 World
Financial Center, New York, New York 10285, is a
wholly-owned subsidiary of Lehman Brothers Holdings
Inc. ("Holdings"). As of September 30, 1995, FMR
Corp. beneficially owned approximately 12.4% and
Nippon Life Insurance Company beneficially owned
approximately 8.7% of the outstanding voting
securities of Holdings. 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. For the fiscal period from November 16,
1994 (commencement of CDSC Share operations) to July
31, 1995, Lehman Brothers received $1,000 in CDSCs on
redemptions of the Daily Income Fund's CDSC Shares.
For the fiscal period from July 6, 1994 (commencement
of CDSC Share operations) to July 31, 1994 and the
fiscal year ended July 31, 1995, Lehman Brothers
received no CDSCs with respect to the Municipal
Fund's CDSC Shares.
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") pursuant to
which Lehman Brothers has agreed to advertise, market
and distribute shares of the Funds. The Board of
Directors believes that there is a reasonable
likelihood that the Plan of Distribution will benefit
the Funds and their shareholders. The Daily Income
Fund and the Municipal Income Fund have agreed under
the Plan of Distribution to pay Lehman Brothers
monthly at an annual rate of 0.25% of the value of
the Funds' average daily net assets attributable to
their Select Shares and CDSC Shares and at the annual
rate of 0.50% of the value of the Funds' average
daily net assets attributable to Global Clearing
Shares.
For the fiscal period from August 2, 1993
(commencement of Select Share operations) to July 31,
1994 and the fiscal year ended July 31, 1995, the
Daily Income Fund paid to Lehman Brothers
distribution fees with respect to its Select Shares
of $1,311,376 and $1,236,477, respectively. For the
same periods, Lehman Brothers, pursuant to the Plan
of Distribution, waived distribution fees with
respect to the Daily Income Fund in the amount of
$509,633 and $480,866, respectively. For the fiscal
period from November 16, 1994 (commencement of CDSC
Share operations) to July 31, 1995, the Daily Income
Fund paid to Lehman Brothers distribution fees with
respect to its CDSC Shares of $36.
For the fiscal period from August 2, 1993
(commencement of Select Share operations) to July 31,
1994 and the fiscal year ended July 31, 1995, the
Municipal Income Fund paid to Lehman Brothers
distribution fees with respect to its Select Shares
of $402,007 and $474,859, respectively. For the same
periods, Lehman Brothers, pursuant to the Plan of
Distribution, waived distribution fees with respect
to the Municipal Income Fund in the amount of
$156,345 and $184,671, respectively. For the fiscal
period from July 6, 1994 (commencement of CDSC Share
operations) to July 31, 1994 and the fiscal year
ended July 31, 1995, the Municipal Income Fund paid
to Lehman Brothers distribution fees with respect to
its CDSC Shares of $2 and $7, respectively.
As of the date of this Statement of Additional
Information, neither Fund had sold any Global
Clearing Shares to the public.
For the fiscal year ended July 31, 1995, Lehman
Brothers incurred distribution expenses totalling
approximately $2,299,839, consisting of approximately
$260,000 for advertising and printing and mailing of
prospectuses, $877,000 for support services, and
$1,162,839 to Lehman Brothers Investment
Representatives and Introducing Brokers.
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 persons"
(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.
First Data, 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,
First Data 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, First Data 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.
Principal Holders
At November 6, 1995, the principal holder of
Select Shares of the Municipal Income Fund was
Richmont Capital Partners I LP, 4300 Westgrove Drive,
Dallas, TX 75248, holding of record 10.15% of the
outstanding shares. At November 6, 1995, 99.56% of
the outstanding CDSC Shares of the Daily Income Fund
were held of record by Lehman Brothers. As of
November 6, 1995, there were no investors in CDSC
Shares of the Municipal Income Fund and all
outstanding shares were held by Lehman Brothers.
Lehman Brothers holds shares on behalf of
various accounts and not as a beneficial owner. To
the extent that any investor is the beneficial owner
of more than 25% of the outstanding shares of a Fund,
such investor may be deemed to be a "control person"
of that Fund for purposes of the 1940 Act.
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 investors, 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 First Data 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 1/2%) 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 1/2%) 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 Funds and their shareholders. No attempt is made
to present a detailed explanation of all federal,
state and local tax concerns, and the discussion set
forth here and in the Prospectuses is not intended as
a substitute for careful tax planning. Investors are
urged to consult their own tax adviser with specific
questions relating to federal, state or local taxes.
In General
Each Fund intends to qualify as a regulated
investment company (a "RIC") under Subchapter M of
the Code and to continue to so qualify.
Qualification as a RIC requires, among other things,
that each Fund: (a) derive at least 90% of its gross
income in each taxable year from dividends, interest,
payments with respect to securities loans and gains
from the sale or other disposition of stock,
securities or foreign currencies, or other income
(including gains from options, futures or forward
contracts) derived with respect to its business of
investing in such stocks or securities; (b) derive
less than 30% of its gross income in each taxable
year from the sale or other disposition of any of the
following held for less than three months: (i) stock
or securities, (ii) options, futures, or forward
contracts, or (iii) foreign currencies (or foreign
currency options, futures or forward contracts) that
are not directly related to its principal business of
investing in stock or securities (or options and
futures with respect to stocks or securities) (the
"30% limitation"); and (c) diversify its holdings so
that, at the end of each quarter of each taxable
year, (i) at least 50% of the market value of 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 distribution.
Although the price of shares purchased at that 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 a Fund will generally result
in capital gain or loss to shareholders. Generally,
a shareholder's gain or loss will be a long-term gain
or loss if the shares have been held for more than
one year. If a shareholder sells or otherwise
disposes of a share of a Fund before holding it for
more than six months, any loss on the sale or other
disposition of such shares 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). 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 RIC, 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, 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 that Fund that they are not subject to
backup withholding when required to do so or that
they are "exempt recipients."
The Municipal Income Fund
As described above and in the Prospectuses 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 for the applicable dividend period,
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 each
class of 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 of the class 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, 1995, the yields
and effective yields for each of the Funds and the
tax-equivalent yields for the Municipal Income Fund
were as follows:
7-day
Yield
7-day
Effective
Yield
7-day Tax-
Equivalent
Yield#
Daily
Income Fund*
Select Shares
5.35%
5.48%
N/A
Select Shares**
5.13%
5.25%
N/A
CDSC Shares
5.35%
5.48%
N/A
CDSC Shares**
5.13%
5.25%
N/A
Municipal
Income Fund*
Select Shares
3.41%
3.46%
4.94%
Select Shares**
3.20%
3.25%
4.64%
CDSC Shares
3.41%
3.46%
4.94%
CDSC Shares**
3.20%
3.25%
4.64%
* As of the date of this Statement of Additional
Information, neither Fund had sold any Global
Clearing Shares to the public.
** Without fee waivers and/or expense reimbursements.
# Note: Tax-equivalent yields assume a maximum
Federal Tax Rate of 31%.
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.
In addition, the Funds may also include in
advertisements, sales literature, communications to
shareholders and other materials (collectively,
"Materials") discussions and/or illustrations of the
potential investment goals of a prospective investor,
investment management strategies, techniques,
policies or investment suitability of a Fund (such as
value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and
disadvantages of investing in tax-deferred and
taxable investments), economic conditions, the
relationship between sectors of the economy and the
economy as a whole, various securities markets, and
the effects of inflation and historical performance
of various asset classes, including but not limited
to, stocks, bonds and Treasury securities. From time
to time, Materials may summarize the substance of
information contained in shareholder reports
(including the investment composition of a Fund), as
well as the views of the adviser as to current
market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments,
investment strategies and related matters believed to
be of relevance to a Fund. The Funds may also include
in Materials charts, graphs or drawings which compare
the investment objective, return potential, relative
stability and/or growth possibilities of the Funds
and/or other mutual funds, or illustrate the
potential risks and rewards of investment in various
investment vehicles, including but not limited to,
stocks, bonds, Treasury securities and shares of a
Fund and/or other mutual funds. Materials may include
a discussion of certain attributes or benefits to be
derived by an investment in a Fund and/or other
mutual funds, shareholder profiles and hypothetical
investor scenarios, timely information on financial
management, tax and retirement planning and
investment alternatives to certificates of deposit
and other financial instruments. Such Materials may
include symbols, headlines or other materials which
highlight or summarize the information discussed in
more detail therein.
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 portfolio or class, as appropriate,
represented at a meeting at which the holders of more
than 50% of the outstanding shares of such portfolio
or class, as appropriate, are present in person or by
proxy, or (2) more than 50% of the outstanding shares
of such portfolio or class, as appropriate.
The By-Laws of the Company provide that the
Company shall not be required to hold an annual
meeting of shareholders in any year in which the
election of directors to the Company's Board of
Directors is not required to be acted upon under the
1940 Act. The law under certain circumstances
provides shareholders with the right to call for a
meeting of shareholders to consider the removal of
one or more directors. To the extent required by law,
the Company will assist in shareholder communication
in such matters.
Shares of each class of a particular portfolio
of the Company (such as each Fund) are entitled to
such dividends and distributions out of the assets
belonging to that class as are declared in the
discretion of the Company's Board of Directors. In
determining the net asset value of a class of a
portfolio, assets belonging to a particular 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 given on their authority as experts in
accounting and auditing. Ernst & Young LLP has
offices at 200 Clarendon Street, Boston,
Massachusetts 02116-5072.
FINANCIAL STATEMENTS
The Company's annual report for the fiscal year
ended July 31, 1995, which contains audited financial
statements for the Funds for the fiscal year ended
July 31, 1995, 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.
- - 26 -
lehman\retail\filings\sai95-3.doc
A-6
lehman\retail\filings\sai95-1.doc
Lehman Selected Growth Stock Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
Statement of
Additional
Information
November 29, 1995
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
29, 1995, 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 1-800-861-4171. 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
14
Exchange Privilege
14
Valuation of Shares
15
Management of the Fund
15
Additional Information Concerning Taxes
22
Performance Data
24
Additional Information Concerning Fund Shares
26
Counsel
27
Auditors
27
Financial Statements
27
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. The Fund's
portfolio turnover rate for the fiscal year ended July 31,
1995 was 192%. This anomalous percentage reflects the
Investment Adviser's repositioning of the Fund's broadly
diversified portfolio in response to a period of changing
interest rates coupled with expectations of an imminent
economic slowdown. 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 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.
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. Securities traded only on over-the-counter markets
are valued on the basis of the closing over-the-counter
sales prices or, if no sale occurred on such day, at the
mean of the current bid and asked prices. 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
Affiliations
James A. Carbone (1)
Lehman Brothers
Global Asset Management, Inc.
3 World Financial Center, 10th Floor
New York, New York 10285
Age: 43
Chairman of the Board
and Director
Director,
Lehman Brothers
Global Asset Management K.K.;
Managing
Director,
Lehman Brothers Inc.;
formerly Branch Manager,
Lehman Brothers Japan Inc.;
formerly Chairman,
Lehman Brothers Asia Holdings
Limited; and formerly Manager -- Debt
Syndicate, Origination &
Corporate Bonds, Lehman
Brothers Inc.
Burt N. Dorsett (2)(3)
Dorsett McCabe Capital
Management, Inc.
540 Madison Avenue - 7th Floor
New York, New York 10022
Age: 64
Director
Managing
Partner, Dorsett
McCabe Capital Management, Inc.,
an investment counseling
firm; Director, Research
Corporation Technologies,
a non-profit patent-clearing and
licensing firm; formerly
President, Westinghouse Pension
Investments Corporation;
formerly Executive Vice
President and Trustee, College
Retirement Equities Fund, Inc., a
variable annuity fund; and
formerly Investment Officer,
University of Rochester.
Kathleen C. Holmes(2)(3)
26 Murray Hill Square
New Providence, New Jersey 07974
Age: 47
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
Age: 61
Director
Executive Vice
President and Chief
Financial Officer,
Thermo Electron Corp.
Name and
Address
Position with the
Company
Principal Occupation
During Past 5
Years and Other
Affiliations
Andrew D. Gordon
3 World Financial Center
New York, New York 10285
Age: 41
President
Managing Director,
Lehman Brothers.
John M. Winters
3 World Financial Center
New York, New York 10285
Age: 46
Vice President &
Investment Officer
Senior Vice President and
Senior Money Market
Portfolio Manager,
Lehman Brothers
Global Asset Management,
Inc.; formerly Product
Manager with Lehman Brothers
Capital Markets Group.
Nicholas Rabiecki, III
3 World Financial Center
New York, New York 10285
Age: 37
Vice President &
Investment Officer
Vice President and
Senior Portfolio Manager,
Lehman Brothers
Global Asset Management, Inc.;
formerly Senior Fixed Income
Portfolio Manager with Chase Private
Banking.
Michael C. Kardok
53 State Street
Boston, Massachusetts 02109
Age: 35
Treasurer
Vice President,
First Data Investor
Services Group, Inc.;
formerly Vice President, The
Boston Company.
Patricia L. Bickimer
53 State Street
Boston, Massachusetts 02109
Age: 42
Secretary
Vice President and
Associate General Counsel, First
Data Investor Services Group, Inc.;
formerly Vice President and
Associate General Counsel, The
Boston Company Advisors, 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. Carbone 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 First Data
Investor Services Group, Inc. ("First Data," formerly known
as The Shareholder Services Group, Inc.) 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 First Data 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. As of
November 6, 1995, directors and officers of the Company as a
group beneficially owned less than 1% of the outstanding
shares of the Fund.
By virtue of the responsibilities assumed by Lehman
Brothers, LBGAM, First Data and their affiliates under their
respective agreements with the Company, the Company itself
requires no employees in addition to its officers.
The following table sets forth certain information
regarding the compensation of the Company's directors during
the fiscal year ended July 31, 1995. No executive officer
or person affiliated with the Company received compensation
from the Company during the fiscal year ended July 31, 1995
in excess of $60,000. For purposes of this table, "Fund
Complex" means regulated investment companies, including the
Company, which have common or affiliated investment
advisers.
COMPENSATION TABLE
Name of Person
and Position
Aggregate Compensation from
the Company
Pension or Retirement Benefits
Accrued as Part of Company Expenses
Estimated Annual Benefits
Upon Retirement
Total Compensation From the
Company and Fund Complex
Paid to Directors*
James A. Carbone,
Chairman of the Board
$0
$0
N/A
$0 (2)
Burt N. Dorsett,
Director
$22,000.00
$0
N/A
$47,000.00 (2)
Kathleen C. Holmes,
Director
$23,116.75**
$0
N/A
$34,208.25** (2)
John N. Hatsopoulos,
Director
$22,000.00
$0
N/A
$22,000.00 (1)
_____________
* Represents the total compensation paid to such persons by
all investment companies (including the Company) from which
such person received compensation during the fiscal year
ended July 31, 1995 that are considered part of the same
"fund complex" as the Company. The parenthetical number
represents the number of such investment companies,
including the Company.
** Includes $1,208.25 for reimbursement of out-of-pocket
expenses.
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 May 11, 1995. 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 August 6,
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.
As compensation for investment advisory services
rendered, LBGAM is entitled to receive from the Fund a fee
computed daily and paid monthly at the annual rate of 0.75%
of the value of the Fund's average daily net assets. For the
fiscal period ended July 31, 1994 and the fiscal year ended
July 31, 1995, LBGAM was entitled to receive advisory fees
of $25,460 and $248,738, respectively. Waivers by the
Investment Adviser of advisory fees and reimbursement by the
Investment Adviser of expenses to maintain the Fund's
operating expense ratios at certain levels totalled $25,460
and $11,440, respectively, for the fiscal period ended July
31, 1994, and totalled $94,900 and $0, respectively, for the
fiscal year ended July 31, 1995. In order to maintain
competitive expense ratios, the Investment Adviser has
agreed to voluntary fee waivers and expense reimbursements
for the Fund if total operating expenses exceed certain
levels, which policy would not be changed without 60-days
prior notice to shareholders. See "Background and Expense
Information" in the Fund's Prospectus.
Administrator
First Data serves as the Fund's administrator pursuant
to a written agreement dated August 2, 1993 (the
"Administration Agreement") between the Company and The
Boston Company Advisors, Inc. ("Boston Advisors"), which was
assigned by Boston Advisors to First Data on May 6, 1994. As
the Fund's Administrator, First Data 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.
As compensation for administrative services rendered,
First Data is entitled to receive from the Fund a fee
computed daily and paid monthly at the annual rate of 0.20%
of the value of the Fund's average daily net assets. For the
fiscal period ended July 31, 1994 and the fiscal year ended
July 31, 1995, First Data was entitled to receive
administrative fees in the amount of $6,790 and $66,330,
respectively. Waivers by the Administrator of administration
fees and reimbursement by the Administrator of expenses to
maintain the Fund's operating expense ratios at certain
levels totalled $6,790 and $3,051, respectively, for the
fiscal period ended July 31, 1994, and totalled $25,307 and
$0, respectively, for the fiscal year ended July 31, 1995.
In order to maintain competitive expense ratios, First Data
has agreed to voluntary fee waivers and expense
reimbursements for the Fund if total operating expenses
exceed 2.10% of the Fund's average net assets, which policy
would not be changed without 60-days prior notice to
shareholders. See "Background and Expense Information" in
the Fund's Prospectus.
Distributor
Lehman Brothers acts as Distributor of the Fund's
shares. Lehman Brothers, located at 3 World Financial
Center, New York, New York 10285, is a wholly-owned
subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). As
of September 30, 1995, FMR Corp. beneficially owned
approximately 12.4% and Nippon Life Insurance Company
beneficially owned approximately 8.7% of the outstanding
voting securities of Holdings. 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. For the fiscal period from May 20,
1994 (commencement of operations) to July 31, 1994 and the
fiscal year ended July 31, 1995, Lehman Brothers received
$908 and $119,088, respectively, in CDSCs on redemptions of
the Fund's shares.
Lehman Brothers forwards investors' funds for the
purchase of shares three 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. 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
the 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 fiscal period from May 20,
1994 to July 31, 1994 and the fiscal year ended July 31,
1995, the Fund incurred distribution fees of $25,460 and
$248,738, respectively. For the same periods, the Fund
incurred service fees of $8,487 and $82,913, respectively.
For the fiscal year ended July 31, 1995, Lehman
Brothers incurred distribution expenses totalling
approximately $2,299,839, consisting of approximately
$260,000 for advertising and printing and mailing of
prospectuses, $877,000 for support services, and $1,162,839
to Lehman Brothers Investment Representatives and
Introducing Brokers.
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.
First Data, 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, First Data 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, First Data 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.
Principal Holders
At November 6, 1995, the principal holder of CDSC
Shares of the Fund was Lehman Brothers, which held of record
49.6% of the outstanding shares. Lehman Brothers has
indicated that it holds shares on behalf of various accounts
and not as a beneficial owner. To the extent that any
investor is the beneficial owner of more than 25% of the
outstanding shares of a Fund, such investor may be deemed to
be a "control person" of that Fund for purposes of the 1940
Act.
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 First
Data 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 1/2%) 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 1/2%) 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)n = 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 10- period at the end of the 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The following average annual total return figures
calculated in accordance with the above formula assume that
the maximum 2% CDSC has been deducted from the hypothetical
$1,000 initial investment:
35.27% for the fiscal year ended July 31, 1995; and
26.58% for the period from the Fund's commencement of
operations on May 20, 1994 through July 31, 1995.
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 the Fund for the specified
period and are computed according to 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) at the end
of the 1-, 5-, or 10-year period (or fractional
portion thereof), assuming
reinvestment of all dividends and distributions.
The Fund's aggregate total return was as follows for the
periods indicated:
37.27% for the fiscal year ended July 31, 1995; and
33.57% for the period from the Fund's commencement of
operations on May 20, 1994 through July 31, 1995.
These aggregate total return figures do not assume
that the maximum 2% CDSC has been deducted from the
investment at the time of purchase. If the maximum CDSC had
been deducted at the time of purchase, the Fund's aggregate
total return for the same periods would have been 35.27% and
32.57%, respectively.
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.
The Fund may also include in advertisements, sales
literature, communications to shareholders and other
materials (collectively, "Materials") a total return figure
that more accurately compares the Fund's performance with
other measures of investment return than the total return
calculated as described above. For example, in comparing the
Fund's total return with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or
Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate its
aggregate total return for the period of time specified in
the Materials by assuming the investment of $10,000 in
shares of the Fund and assuming the reinvestment of all
dividends and distributions. Percentage increases are
determined by subtracting the initial value of the
investment from the ending value and by dividing the
remainder by the beginning value. The Fund will not, for
these purposes, deduct from the initial value invested any
amount representing sales charges. The Fund will, however,
disclose the maximum sales charge and will also disclose
that the performance data does not reflect sales charges and
that inclusion of sale charges would reduce the performance
quoted.
In addition, the Fund may also include in Materials
discussions and/or illustrations of the potential investment
goals of a prospective investor, investment management
strategies, techniques, policies or investment suitability
of the Fund (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable
investments), economic conditions, the relationship between
sectors of the economy and the economy as a whole, various
securities markets, and the effects of inflation and
historical performance of various asset classes, including
but not limited to, stocks, bonds and Treasury securities.
From time to time, Materials may summarize the substance of
information contained in shareholder reports (including the
investment composition of the Fund), as well as the views of
the adviser as to current market, economic, trade and
interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters
believed to be of relevance to the Fund. The Fund may also
include in Materials charts, graphs or drawings which
compare the investment objective, return potential, relative
stability and/or growth possibilities of the Fund and/or
other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, Treasury
securities and shares of the Fund and/or other mutual funds.
Materials may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or
other mutual funds, shareholder profiles and hypothetical
investor scenarios, timely information on financial
management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial
instruments. Such Materials may include symbols, headlines
or other materials which highlight or summarize the
information discussed in more detail therein.
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, 1995 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
given on their authority as experts in accounting and
auditing. Ernst & Young LLP has offices at 200 Clarendon
Street, Boston, Massachusetts 02116-5072.
FINANCIAL STATEMENTS
The Company's annual report for the fiscal year ended
July 31, 1995, which contains audited financial statements
of the Fund for the fiscal year ended July 31, 1995, is
incorporated into this Statement of Additional Information
by reference in its entirety.
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.
- - 27 -
LEHMAN\RETAIL\SLTGRSA5.DOC
F-6
