As filed with the Securities and Exchange Commission on July 21,
1995
Securities Act File No.
33-62312
Investment Company Act File No. 811-7706
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/
Pre-Effective Amendment No. ____
Post-Effective Amendment No. 8
/X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 10
/X/
Lehman Brothers Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
3 World Financial Center
New York, N.Y. 10285
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 526-7000
Andrew D. Gordon
Lehman Brothers Funds, Inc.
3 World Financial Center, New York, New York 10285
(Name and Address of Agent for Service)
Copies to:
Patricia L. Bickimer, Esq. Sarah Cogan, Esq.
The Shareholder Services Group, Inc. Simpson Thacher & Bartlett
Exchange Place 425 Lexington Avenue
Boston, Massachusetts 02109 New York, New York 10017
(Name and Address of Agent for Service)
*Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of the
Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
X immediately upon filing pursuant to paragraph (b),
or
on pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(i), or
___ on pursuant to paragraph (a)(i)
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of shares of Common
Stock, $0.001 par value per share, of all series and classes of the
Registrant, then existing or thereafter created, and has filed a Rule
24f-2 Notice, for the fiscal year ended July 31, 1994, on September 22,
1994.
LEHMAN BROTHERS FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
under the Securities Act of 1933
Form N-1A Location
Item in
No. Prospectus
Item 1. Cover Page Cover Page
Item 2. Synopsis Background and Expense
Information
Item 3. Condensed Financial
Information Not Applicable
Item 4. General Description of
Registrant Investment
Objective and Policies;
Additional Information
Item 5. Management of the Fund Management of the Fund;
Additional Information
Item 5A. Management's Discussion
of Fund Performance Not Applicable
Item 6. Capital Stock and Other
Securities Dividends; Taxes; Additional
Information
Item 7. Purchase of Securities Valuation of Shares;
Being Offered Purchase of Shares;
Exchange Privilege
Item 8. Redemption or Repurchase Redemption of Shares
Item 9. Legal Proceedings Not Applicable
Location in
N-1A Statement of Additional
Item Information
No.
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not Applicable
Item 13. Investment Objectives and
Policies Investment Objective and
Policies
Item 14. Management of the Fund Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities Management of the Fund
Item 16. Investment Advisory and
Other Services Management of the Fund;
Auditors
Item 17. Brokerage Allocation Investment Objective and
and Other Practices Policies; Additional Purchase
and Redemption Information
Item 18. Capital Stock and Other
Securities Investment Objective and
Policies
Item 19. Purchase, Redemption and
Pricing of Securities Additional Purchase and
Redemption Information
Item 20. Tax Status Additional Information
Concerning Taxes
Item 21. Underwriters Additional Purchase and
Redemption Information
Item 22. Calculation of Performance Data Performance Data
Item 23. Financial Statements Not Applicable
LEHMAN BROTHERS FUNDS, INC.
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
under the Securities Act of 1933
PART A
Prospectuses for Lehman Brothers Daily Income Fund, Lehman Brothers Municipal
Income Fund and Lehman Selected Growth Stock Portfolio are incorporated by
reference to Post-Effective Amendment No. 5, as filed with the Securities and
Exchange Commission ("SEC") on November 25, 1994; Prospectuses for Lehman
Mexican Growth and Income Portfolio and Lehman Latin America Dollar Income
Portfolio are incorporated by reference to Post-Effective Amendment No. 2, as
filed with the SEC on January 14, 1994; Prospectuses for Lehman Brothers
International Bond Fund, Lehman Brothers Global Emerging Markets Equity Fund,
Lehman Brothers Global Emerging Markets Bond Fund, Lehman Brothers Large
Capitalization U.S. Equity Fund, Lehman Brothers International Equity Fund,
Lehman Brothers Municipal Bond Fund, Lehman Brothers New York Municipal Bond
Fund and Lehman Brothers High-Grade Fixed Income Fund are incorporated by
reference to Post-Effective Amendment No. 3, as filed with the SEC on
September 8, 1994; and the Prospectus for Lehman Brothers New York Municipal
Money Market Fund is filed herein.
PART B
Statements of Additional Information for Lehman Brothers Daily Income Fund,
Lehman Brothers Municipal Income Fund and Lehman Selected Growth Stock
Portfolio are incorporated by reference to Post-Effective Amendment No. 5, as
filed with the SEC on November 25, 1994; Statements of Additional Information
for Lehman Mexican Growth and Income Portfolio and Lehman Latin America Dollar
Income Portfolio are incorporated by reference to Post-Effective Amendment No.
2, as filed with the SEC on January 14, 1994; Statements of Additional
Information for Lehman Brothers International Bond Fund, Lehman Brothers
Global Emerging Markets Equity Fund, Lehman Brothers Global Emerging Markets
Bond Fund, Lehman Brothers Large Capitalization U.S. Equity Fund, Lehman
Brothers International Equity Fund, Lehman Brothers Municipal Bond Fund,
Lehman Brothers New York Municipal Bond Fund and Lehman Brothers High-Grade
Fixed Income Fund are incorporated by reference to Post-Effective Amendment
No. 3, as filed with the SEC on September 8, 1994; and the Statement of
Additional Information for Lehman Brothers New York Municipal Money Market
Fund is filed herein.
The purpose of filing Post-Effective Amendment No. 8 is to update certain
financial information for Lehman Brothers New York Municipal Money Market Fund
and to make other non-material language changes as the Company deems
appropriate.
Lehman Brothers Funds, Inc.
Lehman Brothers New York Municipal Money Market Fund
Global Clearing Shares
Prospectus begins on page one.
Dated July 21, 1995
Lehman Brothers New York Municipal Money Market Fund
Prospectus July 21, 1995
This Prospectus describes Lehman Brothers New York Municipal Money Market Fund
(the "Fund"), a separate, non-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 of
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. Shares
of the Fund will only be offered for sale in the State of New York.
Lehman Brothers Inc. sponsors the Fund and acts as Distributor of the Fund's
shares. Lehman Brothers Global Asset Management Inc. serves as the Fund's
Investment Adviser.
The address of the Fund is 3 World Financial Center, New York, New York 10285.
Yield and other information regarding the Fund may be obtained through a
Lehman Brothers Investment Representative or by calling 800-861-4171.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about
the Fund, contained in a Statement of Additional Information dated July 21,
1995, and as may be amended or supplemented from time to time, has been
filed with the Securities and Exchange Commission and is available to
investors without charge by calling 800-861-4171. The Statement of Additional
Information is incorporated in its entirety by reference into this Prospectus.
_____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_____________
LEHMAN BROTHERS
[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 and from New York State and
New York City personal income taxes as is consistent with stability of
principal. The Fund will seek to invest substantially all of its total assets
in New York Municipal Obligations (as defined herein). 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
11
Redemption of Shares
12
Exchange Privilege
13
Valuation of Shares
13
Management of the Fund
14
Dividends
16
Taxes
16
Yields
18
Additional Information
19
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 and both New York State and New
York City personal income taxes.
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. The Fund also
offers an additional class of shares, Select Shares, by a separate prospectus
and contemplates that it may offer additional classes of shares in the future.
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 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)*
.25%
Rule 12b-1 Fees (after waivers)**
.18%
Other Expenses - including Administration
Fees
(after waivers)
.27%
Total Fund Operating Expenses
(after waivers)
.65%
* Reflects voluntary waivers of advisory fees, which are expected to
continue in effect until at least one year from the date of this Prospectus.
Absent such voluntary waivers, the ratio of advisory fees to average net
assets would be .30%.
** Reflects voluntary waivers of Rule 12b-1 fees, which are expected to
continue in effect until at least one year from the date of this Prospectus.
Absent such voluntary waivers, the ratio of Rule 12b-1 fees to average net
assets would be .50%.
Reflects voluntary waivers of administration fees, which are expected to
continue in effect until at least one year from the date of this Prospectus.
Absent such voluntary waivers, the ratio of other expenses to average net
assets would be .31%.
Absent the voluntary waivers referred to above, the ratio of total fund
operating expenses to average net assets would be .86%.
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:
1
YEAR
3
YEAR
Global Clearing Shares:
$ 7
$22
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 the
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
In General
The Fund's investment objective is to provide investors with as high a level
of current income exempt from federal income tax and New York State and New
York City personal income taxes 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
Securities and Exchange Commission (the "SEC"), will be deemed to have)
remaining maturities of thirteen months or less at the date of purchase by the
Fund. The Fund maintains a dollar-weighted average portfolio maturity of 90
days or less. The 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
non-diversified investment company, will seek to invest substantially all
(i.e. at least 80%) of its total assets in New York Municipal Obligations (as
defined below). To the extent that the unavailability of suitable New York
Municipal Obligations prevents the Fund from investing substantially all of
its assets in such obligations, the Fund may purchase Other Municipal
Obligations (as defined below). Under normal market conditions, however, the
Fund will invest at least 65% of its total assets in New York Municipal
Obligations, and at least 80% of its total assets in Municipal Obligations (as
defined below). 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 exempt-interest
dividends paid by the Fund for purposes of the federal alternative minimum tax
applicable to particular classes of investors.)
As used herein, "Municipal Obligations" are obligations exempt from federal
income tax that are 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 derivative securities exempt from federal income tax such as
tender option bonds, participations, beneficial interests in trusts and
partnership interests, "New York Municipal Obligations" are Municipal
Obligations the interest on which is exempt from regular federal income tax
and from the personal income taxes of New York State and New York City, and
"Other Municipal Obligations" are Municipal Obligations other than New York
Municipal Obligations. New York Municipal Obligations include municipal
securities issued by the State of New York and its political sub-divisions, as
well as certain other governmental issuers such as the Commonwealth of Puerto
Rico. Dividends derived from interest on Other Municipal Obligations will be
exempt from federal income tax but may be subject to New York State and New
York City personal income taxes. Opinions relating to the validity of
Municipal Obligations and to the exemption of interest thereon from federal
income tax (and, with respect to New York Municipal Obligations, to the
exemption of interest thereon from New York State and New York City personal
income taxes as well) 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 derivatives
are rendered by counsel to the respective sponsors of such derivatives. 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 and New York Municipal Obligations, the creation of any tax-exempt
derivatives or the bases for such opinions.
The Fund may hold uninvested cash reserves pending investment and during
temporary defensive periods including when suitable New York or Other
Municipal 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
without limitation 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 and New York State and New York City personal
income tax. If at some future date, in the opinion of the Fund's Investment
Adviser, adverse conditions prevail in the market for New York Municipal
Obligations (including conditions under which such obligations are unavailable
for investment), the Fund may, for temporary defensive purposes, invest more
than 35% of its assets in Other Municipal Obligations.
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 may 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 New York
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 New York Municipal
Obligations that are payable from the revenues of similar projects or are
private activity bonds, the Fund will be subject to the peculiar risks
presented by the laws and economic conditions relating to such 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 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.
* The Fund may not borrow money, except that the Fund may borrow money
from banks or from other funds advised by Lehman Brothers Inc. ("Lehman
Brothers") or its affiliates, and enter into reverse repurchase agreements, in
each case for temporary or emergency purposes only (not for leveraging or
investing) in aggregate amounts not exceeding 33 1/3% of the value of its
total assets at the time of such borrowing. For purposes of the foregoing
investment limitation, the term "total assets" shall be calculated after
giving effect to the net proceeds of any borrowings and reduced by any
liabilities and indebtedness other than such borrowings. Additional
investments will not be made by the Fund when borrowings exceed 5% of its
total assets; provided, however, that the Fund may increase its interest in
another registered investment company having the same investment objective and
policies and substantially the same investment restrictions as those with
respect to the Fund while such borrowings are outstanding.
* The Fund may not purchase any securities which would cause 25% of 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 New York Municipal
Obligations (other than those backed only by the assets and revenues of non-
governmental users), and provided further, that the Fund may invest all or
substantially all of its assets in another registered investment company
having the same investment objective and policies and substantially the same
investment restrictions as those with respect to the Fund.
The Fund may, in the future, seek to achieve its investment objective by
investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially
the same investment restrictions as those applicable to the Fund. In such
event, the Fund's investment advisory agreement would be terminated. Such
investment would be only if the Company's Board of Directors believes that the
aggregate per share expenses of each class of the Fund and such other
investment company will be less than or approximately equal to the expenses
which each class of the Fund would incur if the Fund were to continue to
retain the services of an investment adviser for the Fund and the assets of
the Fund were to continue to be invested directly in portfolio 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 Objective 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.
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.
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.
Borrowing. The Fund may borrow only from banks or, subject to obtaining
exemptive relief from the SEC, from other funds advised by Lehman Brothers or
its affiliates (as described below under "Interfund Lending Program"), 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), and only for temporary or
emergency purposes. 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.
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 judgment of the Fund's investment adviser, the income to be earned from
the loans justifies the attendant risks.
Interfund Lending Program. Subject to obtaining exemptive relief from the
SEC, the Fund may lend money to and, in the circumstances described under
"Borrowing" above, borrow money from, other funds advised by Lehman Brothers
or its affiliates. The Fund will only borrow through the program when costs
are equal to or lower than the costs for bank loans. The Fund anticipates
that an exemptive order permitting interfund loans, if obtained from the SEC,
will impose various conditions on the Fund, including limitations on the
duration of interfund loans and on the percentage of the Fund's assets that
may be loaned or borrowed through the program. Loans may be called on one
day's notice and the Fund may have to borrow from a bank at a higher rate if
an interfund loan is called or not renewed. Any delay in repayment to a
lending fund could result in a lost investment opportunity or additional
borrowing costs.
Risk Factors and Special Considerations
Because the Fund will invest primarily in obligations issued by the State of
New York and its cities, municipalities and other public authorities, it is
more susceptible to factors adversely affecting issuers of such obligations
than a comparable municipal bond fund that is not so concentrated. New York
State, New York City and other debt-issuing entities located in New York State
have, at various times in the past, encountered financial difficulties. A
continuation or recurrence of the financial difficulties previously
experienced by the issuers of New York Municipal Obligations could result in
defaults or declines in the market values of those issuers' existing
obligations and, possibly, in the obligations of other issuers of New York
Municipal Obligations. If either New York State or any of its local
governmental entities is unable to meet its financial obligations, the income
derived by the Fund and its ability to preserve capital and liquidity could be
adversely affected. See "Special Factors Affecting the Fund's Investment in
New York Municipal Obligations" in the Statement of Additional Information for
further information.
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means that there are no limitations on the percentage of the
Fund's assets that may be invested in the securities of a single issuer. As a
non-diversified investment company, the Fund may invest a greater proportion
of its assets in the obligations of a small number of issuers and, as a
result, may be subject to greater risk with respect to portfolio securities.
The Fund intends to comply, however, with the diversification requirements
imposed on regulated investment companies by the Code, which generally means
that with respect to 50% of the Fund's portfolio, no more than 5% of the
Fund's assets will be invested in any one issuer and with respect to the other
50% of the Fund's portfolio, not more than 25% of the Fund's assets will be
invested in any one issuer. See the Statement of Additional Information under
"Additional Information Concerning Taxes."
Purchase of Shares
Purchases of the Global Clearing Shares may only be made through certain
brokers that clear transactions through Lehman Brothers on a fully disclosed
basis (an "Introducing Broker"). The Fund reserves the right to reject any
purchase order and to suspend the offering of shares for a period of time.
The minimum initial investment in the Global Clearing Shares of the Fund is
$5,000 and the minimum subsequent investment is $1,000. In addition, for
participants with an automatic purchase arrangement in connection with their
brokerage accounts, there is no minimum initial or subsequent investment.
There are no minimum investment requirements for employees of Lehman Brothers
and its affiliates. The Fund reserves the right at any time to vary the
initial and subsequent investment minimums. No certificates are issued for
Fund shares.
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 on the day the
Fund receives sufficient federal funds to cover the purchase price and will be
priced at the net asset value next determined after the Fund's Transfer Agent
receives such federal funds. 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 Lehman Brothers or the Introducing Broker at no
charge on the day of receipt of the redemption request.
A shareholder who pays for Fund shares by personal check will be credited with
the proceeds of a redemption of those shares only after the purchase check has
been collected, which may take up to 15 days or more. A shareholder who
anticipates the need for more immediate access to his or her investment should
purchase shares with federal funds by bank wire or with a certified or
cashier's check.
Shareholders who purchase securities through Lehman Brothers or the
Introducing Broker may take advantage of special redemption procedures under
which Fund shares will be redeemed automatically to the extent necessary to
satisfy debit balances arising in the shareholder's account with Lehman
Brothers or the Introducing Broker. One example of how an automatic redemption
may occur involves the purchase of securities. If a shareholder purchases
securities but does not pay for them by the settlement date, the number of
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 Representative.
A Fund account that is reduced by a shareholder to a value of $1,000 or less
may be subject to redemption by the Fund, but only after the shareholder has
been given at least 30 days in which to increase the account balance to more
than $1,000. In addition, the Fund may redeem shares involuntarily or suspend
the right of redemption as permitted under the 1940 Act, as described in the
Statement of Additional Information under "Additional Purchase and Redemption
Information."
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 must be redeemed by submitting a written request for redemption to
the Fund's Transfer Agent:
Lehman Brothers Funds, Inc.
c/o The Shareholder Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
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
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.
Additional Information Regarding the Exchange Privilege. Shareholders
exercising the exchange privilege with any of the other funds in the Lehman
Brothers Group of Funds should review the prospectus of that fund carefully
prior to making an exchange. Lehman Brothers reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at any
time after notice to shareholders. For further information regarding the
exchange privilege or to obtain the current prospectuses for members of the
Lehman Brothers Group of Funds, investors should contact a Lehman Brothers
Investment Representative.
Valuation of Shares
The net asset value per Global Clearing Share is calculated on each day,
Monday through Friday, except on days on which the New York Stock Exchange 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, The Shareholder Services Group, Inc. or one
of their affiliates. The Statement of Additional Information relating to the
Fund contains general background information regarding each Director and
executive officer of the Company.
INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as the
Investment Adviser to the Fund. LBGAM, together with other Lehman Brothers
investment advisory affiliates, had approximately $12 billion in assets
under management as of April 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.
LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
ADMINISTRATOR AND TRANSFER AGENT - THE SHAREHOLDER SERVICES GROUP, INC.
The Shareholder Services Group, Inc. ("TSSG"), located at 53 State Street,
Boston, Massachusetts 02109, serves as the Fund's Administrator and transfer
agent. TSSG is a wholly-owned subsidiary of First Data Corporation. As
Administrator, TSSG calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation.
As compensation for TSSG's services as Administrator, TSSG is entitled to
receive a monthly fee from the Fund at the annual rate of 0.20% of the value
of the Fund's average daily net assets. TSSG is also entitled to a monthly fee
from the Fund for its services as transfer agent.
On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers
(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 TSSG 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 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.
Lehman Brothers Investment Representatives and any other person entitled to
receive compensation for selling shares of the Fund may receive different
levels of compensation for selling one particular class of shares over another
in the Fund.
CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe, an indirect wholly-owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108 and serves as the Fund's Custodian.
Under the terms of the Stock Purchase Agreement dated September 14, 1992
between Mellon and Lehman Brothers (then named Shearson Lehman Brothers Inc.),
Lehman Brothers agreed to recommend Boston Safe Deposit and Trust Company
("Boston Safe"), an indirect wholly-owned subsidiary of Mellon, as custodian
of mutual funds affiliated with Lehman Brothers until May 21, 2000 to the
extent consistent with its fiduciary duties and other applicable law.
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 TSSG have agreed to reimburse the Fund to the extent
required by applicable state law for certain expenses that are described in
the Statement of Additional Information relating to the Fund.
Dividends
The Fund declares dividends from its net investment income (i.e., income other
than net realized long- and short-term capital gains) on each day the Fund is
open for business and pays dividends monthly. Distributions of net realized
long- and short-term capital gains, if any, are declared and paid annually
after the close of the Fund's fiscal year in which they have been earned.
Unless a shareholder instructs the Fund to pay dividends or capital gains
distributions in cash and credit them to the shareholder's account at Lehman
Brothers, dividends and distributions from the Fund will be reinvested
automatically in additional shares of the same class of the Fund at net asset
value. Shares redeemed during 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 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.
The Fund may hold without limit certain private activity bonds issued after
August 7, 1986. Shareholders must include, as an item of tax preference, the
portion of dividends paid by the Fund that is attributable to interest on such
bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the 26% or 28% alternative minimum tax
applicable to individuals and the 20% alternative minimum tax and the
environmental tax applicable to corporations. Corporate shareholders must also
take all exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum tax and environmental tax
purposes. The environmental tax applicable to corporations is imposed at the
rate of .12% on the excess of the corporation's modified federal alternative
minimum taxable income over $2,000,000. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.
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.
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 Service ("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.
New York State and Local Tax Matters
Exempt-interest dividends paid to shareholders of the Fund will not be subject
to New York State and New York City personal income taxes to the extent they
represent interest income directly attributable to federally tax exempt
obligations of the State of New York and its political subdivisions and
instrumentalities (as well as certain other federally tax exempt obligations
the interest on which is exempt from New York State and New York City personal
income taxes.) The Fund intends that substantially all of the dividends it
designates as exempt-interest dividends will also be exempt from New York
State and New York City personal income taxes. Exempt-interest dividends paid
by the Fund, however, may be taxable to shareholders who are subject to
taxation outside New York State and New York City.
Corporate shareholders subject to New York City franchise tax or New York City
general corporation tax will be required to include all dividends received
from the Fund (including exempt-interest dividends) as net income subject to
such taxes. Furthermore, for purposes of calculating a corporate
shareholder's liability for such taxes under the alternative tax base measured
by business and investment capital, such shareholder's shares of the Fund will
be included in computing such shareholder's investment capital.
Shareholders will not be subject to the New York City unincorporated business
tax solely by reason of their ownership of shares in the Fund. If a
shareholder is subject to the New York City unincorporated business tax,
income and gains derived from the Fund will be subject to such tax, except for
exempt-interest dividend income that is directly related to interest on New
York municipal obligations. Shares of the Fund will be exempt from local
property taxes in New York State and New York City.
A notice detailing the federal and New York tax status of dividends and
distributions paid by the Fund will be mailed annually to the Fund's
shareholder.
_____________
The foregoing discussion is only a brief summary of some of the important
federal tax considerations generally affecting the Fund and its shareholders.
As noted above, IRAs receive special tax treatment. No attempt is made to
present a detailed explanation of the federal, state or local income tax
treatment of the Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning. Accordingly, potential investors in
the Fund should consult their tax advisers with specific reference to their
own tax situation.
Yields
From time to time, the "yields," effective yields" and "tax-equivalent yields"
for 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 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. The Company's Board of Directors may, in the future, authorize the
issuance of additional series of capital stock representing shares of
additional investment portfolios or additional classes of shares of the Fund
or the Company's other investment portfolios.
The Company has received an order from the SEC permitting it, subject to
certain terms and conditions, to establish multiple classes of shares within
each series. The Board of Directors of the Company has authorized the
establishment of two classes of shares in the Fund: "Select Shares" and
"Global Clearing Shares". This Prospectus relates only to Global Clearing
Shares of the Fund. The shares of each class of the Fund represent interests
in the Fund in proportion to their relative net asset values.
The Select Shares offered by the Fund are subject to a distribution fee
payable under the Plan of Distribution at the annual rate of 0.25% of the
Fund's average daily net assets attributable to that class. Select Shares are
available both through certain Introducing Brokers and Lehman Brothers and are
exchangeable only for Select Shares of certain other funds in the Lehman
Brothers Group of Funds. Certain Fund expenses, such as transfer agency
expenses, are allocated separately to each class of the Fund's shares based on
expenses identifiable by class. An Investment Representative may receive
different levels of compensation for selling different classes of shares.
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. When the Fund's annual report is combined with the Prospectus into a
single document, the Fund will mail the combined document to each shareholder
to comply with legal requirements. Any shareholder who does not want this
consolidation to apply to his or her account should contact his or her Lehman
Brothers Investment Representative or the Fund's transfer agent. Shareholders
may direct inquiries regarding the Fund to their Lehman Brothers Investment
Representatives.
LEHMAN BROTHERS
Member SIPC
3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285
Lehman Brothers Funds, Inc.
Lehman Brothers New York Municipal Money Market Fund
Select Shares
Prospectus begins on page one.
Dated July 21, 1995
Lehman Brothers New York Municipal Money Market Fund
Prospectus July 21, 1995
This Prospectus describes Lehman Brothers New York Municipal Money Market Fund
(the "Fund"), a separate, non-diversified money market portfolio of Lehman
Brothers Funds, Inc. (the "Company"), an open-end management investment
company. This Prospectus relates to Select 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 of
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. Shares
of the Fund will only be offered for sale in the State of New York.
Lehman Brothers Inc. sponsors the Fund and acts as Distributor of the Fund's
shares. Lehman Brothers Global Asset Management Inc. serves as the Fund's
Investment Adviser.
The address of the Fund is 3 World Financial Center, New York, New York 10285.
Yield and other information regarding the Fund may be obtained through a
Lehman Brothers Investment Representative or by calling 800-861-4171.
This Prospectus briefly sets forth certain information about the Fund that
investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about
the Fund, contained in a Statement of Additional Information dated July 21,
1995, and as may be amended or supplemented from time to time, has been
filed with the Securities and Exchange Commission and is available to
investors without charge by calling 800-861-4171. The Statement of Additional
Information is incorporated in its entirety by reference into this Prospectus.
_____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_____________
LEHMAN BROTHERS
[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 and from New York State and
New York City personal income taxes as is consistent with stability of
principal. The Fund will seek to invest substantially all of its total assets
in New York Municipal Obligations (as defined herein). 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
11
Redemption of Shares
12
Exchange Privilege
13
Valuation of Shares
13
Management of the Fund
14
Dividends
16
Taxes
16
Yields
18
Additional Information
19
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 and both New York State and New
York City personal income taxes.
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, Select Shares, is offered by this Prospectus. The Fund also offers an
additional class of shares, Global Clearing Shares, by a separate Prospectus
and contemplates that it may offer additional classes of shares in the future.
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 of the Fund based upon estimated
operating expenses for the current fiscal year.
Expense Summary
SHAREHOLDER TRANSACTION EXPENSES
SELECT
SHARES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after waivers)*
.25%
Rule 12b-1 Fees (after waivers)**
.18%
Other Expenses - including Administration
Fees
(after waivers)
.27%
Total Fund Operating Expenses
(after waivers)
.70%
* Reflects voluntary waivers of advisory fees, which are expected to
continue in effect until at least one year from the date of this Prospectus.
Absent such voluntary waivers, the ratio of advisory fees to average net
assets would be .30%.
** Reflects voluntary waivers of Rule 12b-1 fees, which are expected to
continue in effect until at least one year from the date of this Prospectus.
Absent such voluntary waivers, the ratio of Rule 12b-1 fees to average net
assets would be .25%.
Reflects voluntary waivers of administration fees, which are expected to
continue in effect until at least one year from the date of this Prospectus.
Absent such voluntary waivers, the ratio of other expenses to average net
assets would be .31%.
Absent the voluntary waivers referred to above, the ratio of total fund
operating expenses to average net assets would be .86%.
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:
1
YEAR
3
YEAR
Select Shares:
$ 7
$22
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.
Investment Objective and Policies
In General
The Fund's investment objective is to provide investors with as high a level
of current income exempt from federal income tax and New York State and New
York City personal income taxes 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
Securities and Exchange Commission (the "SEC"), will be deemed to have)
remaining maturities of thirteen months or less at the date of purchase by the
Fund. The Fund maintains a dollar-weighted average portfolio maturity of 90
days or less. The 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
non-diversified investment company, will seek to invest substantially all
(i.e. at least 80%) of its total assets in New York Municipal Obligations (as
defined below). To the extent that the unavailability of suitable New York
Municipal Obligations prevents the Fund from investing substantially all of
its assets in such obligations, the Fund may purchase Other Municipal
Obligations (as defined below). Under normal market conditions, however, the
Fund will invest at least 65% of its total assets in New York Municipal
Obligations, and at least 80% of its total assets in Municipal Obligations (as
defined below). 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 exempt-interest
dividends paid by the Fund for purposes of the federal alternative minimum tax
applicable to particular classes of investors.)
As used herein, "Municipal Obligations" are obligations exempt from federal
income tax that are 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 derivative securities exempt from federal income tax such as
tender option bonds, participations, beneficial interests in trusts and
partnership interests, "New York Municipal Obligations" are Municipal
Obligations the interest on which is exempt from regular federal income tax
and from the personal income taxes of New York State and New York City, and
"Other Municipal Obligations" are Municipal Obligations other than New York
Municipal Obligations. New York Municipal Obligations include municipal
securities issued by the State of New York and its political sub-divisions, as
well as certain other governmental issuers such as the Commonwealth of Puerto
Rico. Dividends derived from interest on Other Municipal Obligations will be
exempt from federal income tax but may be subject to New York State and New
York City personal income taxes. Opinions relating to the validity of
Municipal Obligations and to the exemption of interest thereon from federal
income tax (and, with respect to New York Municipal Obligations, to the
exemption of interest thereon from New York State and New York City personal
income taxes as well) 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 derivatives
are rendered by counsel to the respective sponsors of such derivatives. 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 and New York Municipal Obligations, the creation of any tax-exempt
derivatives or the bases for such opinions.
The Fund may hold uninvested cash reserves pending investment and during
temporary defensive periods including when suitable New York or Other
Municipal 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
without limitation 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 and New York State and New York City personal
income tax. If at some future date, in the opinion of the Fund's Investment
Adviser, adverse conditions prevail in the market for New York Municipal
Obligations (including conditions under which such obligations are unavailable
for investment), the Fund may, for temporary defensive purposes, invest more
than 35% of its assets in Other Municipal Obligations.
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 may 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 New York
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 New York Municipal
Obligations that are payable from the revenues of similar projects or are
private activity bonds, the Fund will be subject to the peculiar risks
presented by the laws and economic conditions relating to such 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 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.
* The Fund may not borrow money, except that the Fund may borrow money
from banks or from other funds advised by Lehman Brothers Inc. ("Lehman
Brothers") or its affiliates, and enter into reverse repurchase agreements, in
each case for temporary or emergency purposes only (not for leveraging or
investing) in aggregate amounts not exceeding 33 1/3% of the value of its
total assets at the time of such borrowing. For purposes of the foregoing
investment limitation, the term "total assets" shall be calculated after
giving effect to the net proceeds of any borrowings and reduced by any
liabilities and indebtedness other than such borrowings. Additional
investments will not be made by the Fund when borrowings exceed 5% of its
total assets; provided, however, that the Fund may increase its interest in
another registered investment company having the same investment objective and
policies and substantially the same investment restrictions as those with
respect to the Fund while such borrowings are outstanding.
* The Fund may not purchase any securities which would cause 25% of 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 New York Municipal
Obligations (other than those backed only by the assets and revenues of non-
governmental users), and provided further, that the Fund may invest all or
substantially all of its assets in another registered investment company
having the same investment objective and policies and substantially the same
investment restrictions as those with respect to the Fund.
The Fund may, in the future, seek to achieve its investment objective by
investing all of its assets in a no-load, open-end management investment
company having the same investment objective and policies and substantially
the same investment restrictions as those applicable to the Fund. In such
event, the Fund's investment advisory agreement would be terminated. Such
investment would be only if the Company's Board of Directors believes that the
aggregate per share expenses of each class of the Fund and such other
investment company will be less than or approximately equal to the expenses
which each class of the Fund would incur if the Fund were to continue to
retain the services of an investment adviser for the Fund and the assets of
the Fund were to continue to be invested directly in portfolio 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 Objective 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.
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.
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.
Borrowing. The Fund may borrow only from banks or, subject to obtaining
exemptive relief from the SEC, from other funds advised by Lehman Brothers or
its affiliates (as described below under "Interfund Lending Program"), 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), and only for temporary or
emergency purposes. 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.
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 judgment of the Fund's investment adviser, the income to be earned from
the loans justifies the attendant risks.
Interfund Lending Program. Subject to obtaining exemptive relief from the
SEC, the Fund may lend money to and, in the circumstances described under
"Borrowing" above, borrow money from, other funds advised by Lehman Brothers
or its affiliates. The Fund will only borrow through the program when costs
are equal to or lower than the costs for bank loans. The Fund anticipates
that an exemptive order permitting interfund loans, if obtained from the SEC,
will impose various conditions on the Fund, including limitations on the
duration of interfund loans and on the percentage of the Fund's assets that
may be loaned or borrowed through the program. Loans may be called on one
day's notice and the Fund may have to borrow from a bank at a higher rate if
an interfund loan is called or not renewed. Any delay in repayment to a
lending fund could result in a lost investment opportunity or additional
borrowing costs.
Risk Factors and Special Considerations
Because the Fund will invest primarily in obligations issued by the State of
New York and its cities, municipalities and other public authorities, it is
more susceptible to factors adversely affecting issuers of such obligations
than a comparable municipal bond fund that is not so concentrated. New York
State, New York City and other debt-issuing entities located in New York State
have, at various times in the past, encountered financial difficulties. A
continuation or recurrence of the financial difficulties previously
experienced by the issuers of New York Municipal Obligations could result in
defaults or declines in the market values of those issuers' existing
obligations and, possibly, in the obligations of other issuers of New York
Municipal Obligations. If either New York State or any of its local
governmental entities is unable to meet its financial obligations, the income
derived by the Fund and its ability to preserve capital and liquidity could be
adversely affected. See "Special Factors Affecting the Fund's Investment in
New York Municipal Obligations" in the Statement of Additional Information for
further information.
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means that there are no limitations on the percentage of the
Fund's assets that may be invested in the securities of a single issuer. As a
non-diversified investment company, the Fund may invest a greater proportion
of its assets in the obligations of a small number of issuers and, as a
result, may be subject to greater risk with respect to portfolio securities.
The Fund intends to comply, however, with the diversification requirements
imposed on regulated investment companies by the Code, which generally means
that with respect to 50% of the Fund's portfolio, no more than 5% of the
Fund's assets will be invested in any one issuer and with respect to the other
50% of the Fund's portfolio, not more than 25% of the Fund's assets will be
invested in any one issuer. See the Statement of Additional Information under
"Additional Information Concerning Taxes."
Purchase of Shares
Purchases of Select Shares may be made through a brokerage account maintained
through Lehman Brothers or certain brokers that clear securities transactions
through Lehman Brothers on a fully disclosed basis (an "Introducing Broker").
The Fund reserves the right to reject any purchase order and to suspend the
offering of shares for a period of time.
The minimum initial investment in each class of the Fund is $5,000 and the
minimum subsequent investment is $1,000. In addition, for participants with an
automatic purchase arrangement in connection with their brokerage accounts,
there is no minimum initial or subsequent investment. There are no minimum
investment requirements for employees of Lehman Brothers and its affiliates.
The Fund reserves the right at any time to vary the initial and subsequent
investment minimums. No certificates are issued for Fund shares.
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 on the day the Fund receives sufficient
federal funds to cover the purchase price and will be priced at the net asset
value next determined after the Fund's Transfer Agent receives such federal
funds. 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.
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. 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 on the day of receipt of the
redemption request.
A shareholder who pays for Fund shares by personal check will be credited with
the proceeds of a redemption of those shares only after the purchase check has
been collected, which may take up to 15 days or more. A shareholder who
anticipates the need for more immediate access to his or her investment should
purchase shares with federal funds by bank wire or with a certified or
cashier's check.
Shareholders who purchase securities through Lehman Brothers or the
Introducing Broker may take advantage of special redemption procedures under
which Fund shares will be redeemed automatically to the extent necessary to
satisfy debit balances arising in the shareholder's account with Lehman
Brothers or the Introducing Broker. One example of how an automatic redemption
may occur involves the purchase of securities. If a shareholder purchases
securities but does not pay for them by the settlement date, the number of
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 Representative.
A Fund account that is reduced by a shareholder to a value of $1,000 or less
may be subject to redemption by the Fund, but only after the shareholder has
been given at least 30 days in which to increase the account balance to more
than $1,000. In addition, the Fund may redeem shares involuntarily or suspend
the right of redemption as permitted under the 1940 Act, as described in the
Statement of Additional Information under "Additional Purchase and Redemption
Information."
Fund shares may be redeemed in one of the following ways:
REDEMPTION THROUGH LEHMAN BROTHERS
Redemption requests may be made through Lehman Brothers or an Introducing
Broker.
REDEMPTION BY MAIL
Shares held by Lehman Brothers on behalf of investors must be redeemed by
submitting a written request to a Lehman Brothers Investment Representative.
All other shares may be redeemed by submitting a written request for
redemption to the Fund's Transfer Agent:
Lehman Brothers Funds, Inc.
c/o The Shareholder Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
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
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.
Additional Information Regarding the Exchange Privilege. Shareholders
exercising the exchange privilege with any of the other funds in the Lehman
Brothers Group of Funds should review the prospectus of that fund carefully
prior to making an exchange. Lehman Brothers reserves the right to reject any
exchange request. The exchange privilege may be modified or terminated at any
time after notice to shareholders. For further information regarding the
exchange privilege or to obtain the current prospectuses for members of the
Lehman Brothers Group of Funds, investors should contact a Lehman Brothers
Investment Representative.
Valuation of Shares
The net asset value per Select Share is calculated on each day, Monday through
Friday, except on days on which the New York Stock Exchange 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 Select Share is
calculated at noon, Eastern time, on each day on which the Fund computes its
net asset value. The net asset value per Select Share is computed by dividing
the value of the net assets of the Fund attributable to the Select Shares by
the total number of shares of that class outstanding. The Fund's assets are
valued on the basis of amortized cost, which involves valuing a portfolio
instrument at its cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. The Fund seeks to
maintain a constant net asset value of $1.00 per share, although there can be
no assurance that it can do so on a continuing basis. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.
Management of the Fund
The business and affairs of the Fund are managed under the direction of the
Company's Board of Directors. The Board of Directors approves all significant
agreements between the Company and the persons or companies that furnish
services to the Fund, including agreements with its Distributor, Investment
Adviser, Administrator, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to its Investment Adviser and
Administrator. One of the Directors and all of the Company's officers are
affiliated with Lehman Brothers, The Shareholder Services Group, Inc. or one
of their affiliates. The Statement of Additional Information relating to the
Fund contains general background information regarding each Director and
executive officer of the Company.
INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as the
Investment Adviser to the Fund. LBGAM, together with other Lehman Brothers
investment advisory affiliates, had approximately $12 billion in assets
under management as of April 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.
LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
ADMINISTRATOR AND TRANSFER AGENT - THE SHAREHOLDER SERVICES GROUP, INC.
The Shareholder Services Group, Inc. ("TSSG"), located at 53 State Street,
Boston, Massachusetts 02109, serves as the Fund's Administrator and transfer
agent. TSSG is a wholly-owned subsidiary of First Data Corporation. As
Administrator, TSSG calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation.
As compensation for TSSG's services as Administrator, TSSG is entitled to
receive a monthly fee from the Fund at the annual rate of 0.20% of the value
of the Fund's average daily net assets. TSSG is also entitled to a monthly fee
from the Fund for its services as transfer agent.
On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers
(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 TSSG 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 to pay Lehman Brothers monthly for advertising, marketing and
distributing its shares at an annual rate of 0.25% of its average daily net
assets. Under the Plan of Distribution, Lehman Brothers may retain all or a
portion of the payments made to it pursuant to the Plan and may make payments
to its Investment Representatives or Introducing Brokers that engage in the
sale of such classes of Fund shares. The Plan of Distribution also provides
that Lehman Brothers may make payments to assist in the distribution of each
class of the Fund's shares out of the other fees received by it or its
affiliates from the Fund, its past profits or any other sources available to
it. From time to time, Lehman Brothers may waive receipt of fees under the
Plan of Distribution while retaining the ability to be paid under such Plan
thereafter. The fees payable to Lehman Brothers under the Plan of Distribution
for advertising, marketing and distributing such shares of the Fund and
payments by Lehman Brothers to its Investment Representatives or Introducing
Brokers are payable without regard to actual expenses incurred. Lehman
Brothers Investment Representatives and any other person entitled to receive
compensation for selling shares of the Fund may receive different levels of
compensation for selling one particular class of shares over another in the
Fund.
CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe, an indirect wholly-owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108 and serves as the Fund's Custodian.
Under the terms of the Stock Purchase Agreement dated September 14, 1992
between Mellon and Lehman Brothers (then named Shearson Lehman Brothers Inc.),
Lehman Brothers agreed to recommend Boston Safe Deposit and Trust Company
("Boston Safe"), an indirect wholly-owned subsidiary of Mellon, as custodian
of mutual funds affiliated with Lehman Brothers until May 21, 2000 to the
extent consistent with its fiduciary duties and other applicable law.
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 TSSG have agreed to reimburse the Fund to the extent
required by applicable state law for certain expenses that are described in
the Statement of Additional Information relating to the Fund.
Dividends
The Fund declares dividends from its net investment income (i.e., income other
than net realized long- and short-term capital gains) on each day the Fund is
open for business and pays dividends monthly. Distributions of net realized
long- and short-term capital gains, if any, are declared and paid annually
after the close of the Fund's fiscal year in which they have been earned.
Unless a shareholder instructs the Fund to pay dividends or capital gains
distributions in cash and credit them to the shareholder's account at Lehman
Brothers, dividends and distributions from the Fund will be reinvested
automatically in additional shares of the same class of the Fund at net asset
value. Shares redeemed during 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 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.
The Fund may hold without limit certain private activity bonds issued after
August 7, 1986. Shareholders must include, as an item of tax preference, the
portion of dividends paid by the Fund that is attributable to interest on such
bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the 26% or 28% alternative minimum tax
applicable to individuals and the 20% alternative minimum tax and the
environmental tax applicable to corporations. Corporate shareholders must also
take all exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum tax and environmental tax
purposes. The environmental tax applicable to corporations is imposed at the
rate of .12% on the excess of the corporation's modified federal alternative
minimum taxable income over $2,000,000. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.
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.
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 Service ("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.
New York State and Local Tax Matters
Exempt-interest dividends paid to shareholders of the Fund will not be subject
to New York State and New York City personal income taxes to the extent they
represent interest income directly attributable to federally tax exempt
obligations of the State of New York and its political subdivisions and
instrumentalities (as well as certain other federally tax exempt obligations
the interest on which is exempt from New York State and New York City personal
income taxes.) The Fund intends that substantially all of the dividends it
designates as exempt-interest dividends will also be exempt from New York
State and New York City personal income taxes. Exempt-interest dividends paid
by the Fund, however, may be taxable to shareholders who are subject to
taxation outside New York State and New York City.
Corporate shareholders subject to New York City franchise tax or New York City
general corporation tax will be required to include all dividends received
from the Fund (including exempt-interest dividends) as net income subject to
such taxes. Furthermore, for purposes of calculating a corporate
shareholder's liability for such taxes under the alternative tax base measured
by business and investment capital, such shareholder's shares of the Fund will
be included in computing such shareholder's investment capital.
Shareholders will not be subject to the New York City unincorporated business
tax solely by reason of their ownership of shares in the Fund. If a
shareholder is subject to the New York City unincorporated business tax,
income and gains derived from the Fund will be subject to such tax, except for
exempt-interest dividend income that is directly related to interest on New
York municipal obligations. Shares of the Fund will be exempt from local
property taxes in New York State and New York City.
A notice detailing the federal and New York tax status of dividends and
distributions paid by the Fund will be mailed annually to the Fund's
shareholder.
_____________
The foregoing discussion is only a brief summary of some of the important
federal tax considerations generally affecting the Fund and its shareholders.
As noted above, IRAs receive special tax treatment. No attempt is made to
present a detailed explanation of the federal, state or local income tax
treatment of the Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning. Accordingly, potential investors in
the Fund should consult their tax advisers with specific reference to their
own tax situation.
Yields
From time to time, the "yields," effective yields" and "tax-equivalent yields"
for 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, Ibbotson Associates of
Chicago, The Wall Street Journal and The New York Times, reports prepared by
Lipper Analytical Service, Inc. and publications of a local or regional
nature.
The Fund's yield figures represent past performance, will fluctuate and should
not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. The methods used to compute the yields on
each class of the Fund's shares are described in more detail in the Statement
of Additional Information. Investors may call 800-861-4171 to obtain current
yield information.
Additional Information
The Company was incorporated under the laws of the State of Maryland on May 5,
1993. The authorized capital stock of the Company consists of 10,000,000,000
shares having a par value of $.001 per share. The Company's 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. The Company's Board of Directors may, in the future, authorize the
issuance of additional series of capital stock representing shares of
additional investment portfolios or additional classes of shares of the Fund
or the Company's other investment portfolios.
The Company has received an order from the SEC permitting it, subject to
certain terms and conditions, to establish multiple classes of shares within
each series. The Board of Directors of the Company has authorized the
establishment of two classes of shares in the Fund: "Select Shares," and
"Global Clearing Shares". This Prospectus relates only to Select Shares of
the Fund. The shares of each class of the Fund represent interests in the
Fund in proportion to their relative net asset values.
The Global Clearing Shares offered by the Fund are subject to a distribution
fee payable under the Plan of Distribution at the annual rate of up to 0.50%
of the Fund's average daily net assets attributable to that class. Global
Clearing Shares are available only through certain Introducing Brokers and are
exchangeable only for Global Clearing Shares of other funds in the Lehman
Brothers Group of Funds. Certain Fund expenses, such as transfer agency
expenses, are allocated separately to each class of the Fund's shares based on
expenses identifiable by class. An Investment Representative may receive
different levels of compensation for selling different classes of shares.
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. When the Fund's annual report is combined with the Prospectus into a
single document, the Fund will mail the combined document to each shareholder
to comply with legal requirements. Any shareholder who does not want this
consolidation to apply to his or her account should contact his or her Lehman
Brothers Investment Representative or the Fund's transfer agent. Shareholders
may direct inquiries regarding the Fund to their Lehman Brothers Investment
Representatives.
LEHMAN BROTHERS
Member SIPC
3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285
Lehman Brothers New York Municipal Money Market Fund
An Investment Portfolio of Lehman Brothers Funds, Inc.
Statement of Additional Information
July 21,
1995
This Statement of Additional Information is meant to be read in
conjunction with the Prospectuses for Lehman Brothers New York Municipal Money
Market Fund (the "Fund"), dated July 21, 1995, as amended or
supplemented from time to time, and is incorporated by reference in its
entirety into the Prospectuses. The Fund is a separate, non-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 Fund
should be made solely upon the information contained herein. Copies of the
Prospectuses may be obtained by calling Lehman Brothers Inc. at 1-800-861-
4171. Capitalized terms used but not defined herein have the same meanings as
in the Prospectuses.
TABLE OF CONTENTS
Page
Investment Objective and Policies 2
Additional Information Concerning Municipal Obligations 8
Special Factors Affecting the Fund's Investments in New York Municipal
Obligations 10
Additional Purchase and Redemption Information 29
Exchange Privilege 30
Management of the Fund 31
Additional Information Concerning Taxes 36
Dividends 38
Additional Yield Information 38
Additional Description Concerning Fund Shares 39
Counsel 40
Auditors 40
Appendix A-1
INVESTMENT OBJECTIVE AND POLICIES
As stated in the Fund's Prospectuses, the investment objective of the
Fund is to provide as high a level of current income exempt from federal
income tax and from New York State and New York City personal income taxes, as
is consistent with stability of principal. The following policies supplement
the description of the Fund's investment objective and policies in the
Prospectuses.
The Fund is 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 Fund's Investment
Adviser, is responsible for, makes decisions with respect to and places orders
for all purchases and sales of portfolio securities. LBGAM generally
purchases portfolio securities for the Fund either directly from the issuer or
from dealers who specialize in money market instruments. Purchases are
usually principal transactions 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 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.
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 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 Company's other portfolios or other investment company portfolios or
accounts advised by LBGAM. Such other investment company portfolios may
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
investment company 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 investment company 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 obtained 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
investment companies 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 them, 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.
The Fund may participate, if and when practicable, in bidding for the
purchase of Municipal Obligations (as defined in the Prospectuses) directly
from an issuer in order to take advantage of the lower purchase price
available to members of such a group. The Fund will engage in this practice,
however, only when LBGAM, in its sole discretion, believes such practice to be
otherwise in the Fund's interest.
The Fund does not intend to seek profits through short-term trading.
The Fund's annual portfolio turnover will be relatively high because of the
short-term nature of the instruments in which it invests, but the Fund's
portfolio turnover is not expected to have a material effect on its net
income. The Fund's portfolio turnover 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 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 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 Fund's investments in the obligations of
foreign branches of U.S. banks and of foreign banks and other foreign issuers
may subject the 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 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 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
Fund 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 Fund 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 may not be actively traded in a secondary market, in some
cases, the Fund 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, LBGAM 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 the 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, subject to notice of no more than 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 not exceeding 13 months (397 days). In determining the 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 measured through demand. In
determining whether an unrated variable or floating rate demand instrument is
of comparable quality at the time of purchase to instruments with minimal
credit risk, LBGAM will follow guidelines adopted by the Company's Board of
Directors.
Tender Option Bonds. The Fund may invest in tender option bonds. The
Fund will not purchase tender option bonds unless (a) the demand feature
applicable thereto is exercisable by the Fund within 13 months of the date of
such purchase upon no more than 30 days' notice and thereafter is exercisable
by the 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 securities 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 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 securities 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 Fund will
exercise the tender feature with respect to tender option bonds, or otherwise
dispose of its 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 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
security underlying a tender option bond, or the termination of the tender
option agreement, the 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 Fund would sell the security as soon
as would be practicable. The 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 security and (b) payment of any tender
fees will not have the effect of creating taxable income for the Fund. Based
on the tender option bond arrangement, the 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 the
Prospectuses, 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 and yield). When the Fund agrees to purchase when-issued or
delayed delivery securities, its 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. Because the 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 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 the securities before the settlement date if it is deemed advisable.
Stand-By Commitments. The Fund may acquire rights to "put" its
securities at an agreed upon price within a specified period prior to their
maturity date. The Fund 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.
The Fund's right to exercise a stand-by commitment will be unconditional and
unqualified.
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the 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 Fund intends to
enter into stand-by commitments solely to facilitate portfolio liquidity and
does not intend to exercise its 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 the 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 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.
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 the
Fund's portfolio.
Illiquid Securities. The Fund may not invest more than 10% of its total
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 restriction 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 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 securities under the
supervision of the Board of Directors. In reaching liquidity decisions with
respect to Rule 144A securities, LBGAM will consider, inter alia, 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 willing 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 marketplace trades
(including, the time needed to dispose of the Rule 144A security, methods of
soliciting offers and mechanics of transfer).
Repurchase Agreements. The repurchase price under the repurchase
agreements described in the Prospectuses 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.
Reverse Repurchase Agreements. Whenever the Fund enters 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 Fund under the 1940 Act.
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.
The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by nationally recognized
statistical rating organizations ("NRSROs") for Municipal Obligations that may
be purchased by the Fund.
Investment Limitations
The Fund's Prospectuses summarize 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 6 may not be changed without such a vote of shareholders; investment
limitations 7 through 12 may be changed by a vote of the Company's Board of
Directors at any time.
The Fund may not:
1. Borrow money, except from banks for temporary purposes and then in
amounts not exceeding 33 1/3% of the value of the Fund's 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 33 1/3% of the value of the Fund's
total assets at the time of such borrowing. Additional investments will not
be made when borrowings exceed 5% of the Fund's assets, provided, however,
that the Fund may increase its interest in another registered investment
company having the same investment objective and policies and substantially
the same investment restrictions as those with respect to the Fund while such
borrowings are outstanding.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of purchase to be invested in the securities
of 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 New York Municipal Obligations (other than those
backed only by the assets and revenues of non-governmental users) and provided
further that the Fund may invest all or substantially all of its assets in
another registered investment company having the same investment objective and
policies and substantially the same investment restrictions as those with
respect to the Fund.
3. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objective and policies and enter
into repurchase agreements with respect to portfolio transactions.
4. Act as an underwriter of securities, except insofar as the Fund
may be deemed an underwriter under applicable securities laws in selling
portfolio securities.
5. Purchase or sell real estate or real estate limited partnerships,
provided that the Fund may purchase securities of issuers which invest in real
estate or interests therein.
6. Purchase or sell commodities or commodity contracts, or invest in
oil, gas or mineral exploration or development programs or in mineral leases.
7. Knowingly invest more than 10% of the value of the Fund's 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, provided, however, that the Fund may invest all or
substantially all of its assets in another registered investment company
having the same investment objective and policies and substantially the same
investment restrictions as those with respect to the Fund.
8. Purchase securities on margin, make short sales of securities or
maintain a short position.
9. Write or sell puts, calls, straddles, spreads or combinations
thereof.
10. 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.
11. Purchase securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization.
12. Invest in warrants.
In addition, without the affirmative vote of the holders of a majority
of the Fund's outstanding shares, the 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 Fund 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 interests, it will revoke the commitment by terminating
sales of its shares in the state involved. Further, with respect to the
above-stated second limitation, the 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 be considered a
separate industry.
ADDITIONAL INFORMATION CONCERNING MUNICIPAL OBLIGATIONS
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 (and, with respect to
New York Municipal Obligations, New York State and New York City personal
income taxes as well) are rendered by counsel to the issuers or bond counsel
to the respective issuing authorities at the time of issuance. Neither the
Fund nor LBGAM will review independently the underlying proceedings relating
to the issuance of Municipal Obligations or the bases for such opinions.
The 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 the 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 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 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 Fund's Prospectuses, the two principal
classifications of Municipal Obligations consist of "general obligation" and
"revenue" issues, and the 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 the 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
statistical rating organizations represent their opinions as to the quality of
Municipal Obligations. It should be recognized, 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 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 Fund. LBGAM will consider
such an event in determining whether the 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
adversely affected by litigation or other conditions.
Among other types of Municipal Obligations, the 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 instruments 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 Fund may
invest in other types of tax-exempt instruments, including general obligation
and private activity 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 Fund will depend upon the ability of the issuers to meet their
obligations. The State of New York, the District of Columbia, each other
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 Fund. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer."
SPECIAL FACTORS AFFECTING THE FUND'S INVESTMENTS IN NEW YORK MUNICIPAL
OBLIGATIONS
Some of the significant financial considerations relating to the
investments of The New York Tax Free Money Market Fund in New York Municipal
Obligations are summarized below. The following information constitutes only
a brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New York municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in such offering statements has not been independently
verified.
New York State
New York State Financing Activities. There are a number of methods by
which New York (the "State") may incur debt. Under the State Constitution,
the State may not, with limited exceptions for emergencies, undertake long-
term borrowing (i.e., borrowing for more than one year) unless the borrowing
is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount
of long-term debt that may be so authorized and subsequently incurred by the
State. The total amount of long-term State general obligation debt authorized
but not issued as of December 31, 1993 was approximately $2.273 billion.
The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes. Tax and revenue anticipation notes must mature within one
year from their dates of issuance and may not be refunded or refinanced beyond
such period. The amount of tax and revenue anticipation notes issued may not
exceed either the amount of appropriations in force (which amount normally
exceeds the amount of disbursements provided in the financial plan for each
year) or the amount of taxes and revenues reasonably expected, at the time the
notes are issued, to be available to pay such notes.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain State public benefit corporation ("Authority")
obligations. Payments of debt service on State general obligation and State-
guaranteed bonds and notes are legally enforceable obligations of the State.
The State also employs two other types of long-term financing mechanisms
which are State-supported but are not general obligations of the State: moral
obligation and lease-purchase or contractual-obligation financing. Moral
obligation financing generally involves the issuance of debt by an Authority
to finance a revenue-producing project or other activity, and the debt is
secured by project revenues and statutory provisions of the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. Under lease-purchase or
contractual-obligation financing arrangements, Authorities and certain
municipalities have issued obligations to finance the construction and
rehabilitation of facilities or the acquisition and rehabilitation of
equipment, and expect to cover the debt service and amortizations of the
obligations through the receipt of rental or other contractual payments made
by the State. The State has also entered into a payment agreement with LGAC
(as defined below). State lease-purchase or contractual-obligation financing
arrangements involve a contractual undertaking by the State to make payments
to an Authority, municipality or other entity, but the State's obligation to
make such payments is generally expressly made subject o appropriation by the
Legislature and the actual availability of money to the State for making the
payments. The State also participates in the issuance of certificates of
participation in a pool of leases entered into by the State's Office of
General Services on behalf of several State departments and agencies. The
State also participates in the issuance of certificates of participation in a
pool of leases entered into by the State's Office of General Services on
behalf of several State departments and agencies. The State has also
participated in the issuance of certificates of participation for the
acquisition of real property which represents proportionate interests in lease
payments to be paid by the State.
Payments for principal and interest due on general obligations bonds,
interest due on bond anticipation notes and on tax and revenue anticipation
notes and contractual-obligation and lease-purchase commitments were $1.783
billion and $2.045 billion in the aggregate for the State's 1991-92 and 1992-
93 fiscal years, respectively, and are estimated to be $2.167 billion for the
State's 1993-94 fiscal year and are budgeted at $2.549 billion in the
Recommended 1994-95 State Financial Plan. These figures do not include
interest payable on either State General Obligation Refunding Bonds issued in
July 1992, to the extent that such interest is to be paid from an escrow fund
established with the proceeds of such Refunding Bonds, or the State's
installment payments relating to the issuance of certificates of
participation.
The State has never defaulted or any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been valued upon to make any direct
payments pursuant to its guarantees. There has never been a default on any
moral obligation debt of any Authority.
In addition to the arrangements described above, State law provides for
State municipal assistance corporation, which are Authorities authorized to
aid financially troubled localities. The Municipal Assistance Corporation for
The City of New York ("MAC"), created to provide financing assistance to New
York City (the "City"), is the only municipal assistance corporation created
to date. To enable MAC to pay debt service on its obligations, MAC receives,
subject to annual appropriation by the Legislature, receipts from the 4% New
York State Sales Tax for the Benefit of New York City, the State-imposed Stock
Transfer Tax and, subject to certain prior liens, certain local assistance
payments otherwise payable to the City. The legislation creating MAC also
includes a moral obligation provision. Under its enabling legislation, MAC's
authority to issue bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984. Legislation has been enacted which would, under
certain conditions, permit MAC to issue up to $.1465 billion of additional
bonds, which are not subject to a moral obligation provision.
State Financial Operations. The State has historically been one of the
wealthiest states in the nation. For decades, however, the State economy has
grown more slowly than that of the nation as a whole, gradually eroding the
State's relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to
the suburbs and an influx of generally less affluent residents. Regionally,
the older Northeast cities have suffered because of the relative success that
the South and the West have had in attracting people and business. The City
has also had to face greater competition as other major cities have developed
financial and business capabilities which make them less dependent on the
specialized services traditionally available almost exclusively in the City.
The State has for many years had a very high state and local tax burden
relative to other states. The burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, may
have contributed to the decisions of some businesses and individuals to
relocate outside, or not locate within, the State.
A national recession commenced in mid-1990. The downturn continued
throughout the State's 1990-91 fiscal year and was followed by a period of
weak economic growth during the 1991 and 1992 calendar years. For calendar
year 1993, the national economy grew faster than in 1992, but still at a very
moderate rate, as compared to other recoveries. Economic recovery started
considerably later in the State than in the nation as a whole due in part to
the significant retrenchment in the banking and financial industries,
downsizing by several major corporations, cutbacks in defense spending and an
oversupply of office buildings. The forecast made by the Division of the
Budget for the overall rate of growth of the national economy during calendar
1994 is similar to the "consensus" of a widely followed survey of national
economic forecasters.
The New York economy, as measured by employment, shifted from recession
to recovery near the start of calendar year 1993. During the course of
calendar year 1993, employment began to increase, albeit sporadically, and the
unemployment rate declined. The recovery is expected by the State to continue
in calendar year 1994, with employment growing more rapidly, on average, than
in the previous calendar year. Many uncertainties exist in forecasts of both
the national and State economies, including employment levels and consumer
attitudes toward spending, Federal fiscal and monetary policies and the
condition of the world economy, which could have an adverse effect on the
State. There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1993-94 and 1994-95 fiscal years, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
The following discussion summarizes the 1993-94 State Financial Plan and
the Recommended 1994-95 State Financial Plan with particular emphasis on the
State's General Fund. Pursuant to statute, the State updates the financial
plan at least on a quarterly basis. Due to changing economic conditions and
information, public statements or reports may be released by the Governor,
members of the State Legislature, and their respective staffs, as well as
others involved in the budget process from time to time. Those statements or
reports may contain predictions, projections or other items of information
relating to the State's financial condition, as reflected in the 1993-94 State
Financial Plan, that may vary materially and adversely from the information
provided herein.
General Fund receipts, excluding transfers from other funds, totaled
$28.818 billion in the State's 1991-92 fiscal year (before repayment of $1.081
billion of deficit notes issued in 1990-91 fiscal year end before issuance of
$531 million in deficit notes to close the State's 1992-92 fiscal year General
Fund cash-basis operating deficit), and $29.950 billion in the State's 1992-92
fiscal year (before repayment of $531 million in deficit notes issued to close
the State's 1991-92 fiscal year General Fund cash-basis operating deficit).
General Fund receipts in the State's 1994-95 fiscal year, including the margin
available from the State's 1993-94 fiscal year, are budgeted at $31.948
billion in the Recommended 1994-95 State Financial Plan.
General Fund disbursements, exclusive of transfers to other funds,
totaled $28.058 billion in the State's 1992-92 fiscal year and $29.068 billion
in the State's 1992-93 fiscal year, and are estimated to total $30.421 billion
in the State's 1993-94 fiscal year and are budgeted at $31.453 billion in the
Recommended 1994-95 State Financial Plan. Major General Fund disbursements
categories and the approximate percentage of estimated fiscal year 1993-94 and
budgeted fiscal year 1994-95 General Fund disbursements for which they account
include grants to local governments (including aid to education, social
services and State revenue sharing), 73% and 73%, respectively, State
operations spending, 20% and 20%, respectively and other general State charges
(including contributions to pension systems and employee fringe benefits), 7%
and 7%, respectively.
Economic forecasts have frequently failed to predict accurately the
timing and magnitude of changes in the national and the State economy because
a number of uncertainties exist in forecasts of both the national and State
economies, including consumer attitudes toward spending, Federal financial and
monetary policies, the availability of credit and the condition of the world
economy, which could have an adverse effect on the State. There can be no
assurance that the State economy will not experience slower-than-predicted
results in the 1993-94 fiscal year, with corresponding material and adverse
effects on the State's projections of receipts and disbursements.
The State issued $850 million in tax and revenue anticipation notes on
May 4, 1993 to fund its day-to-day operations and certain local assistance
payments to its municipalities and school districts. These tax and revenue
anticipation notes were fully retired on December 31, 1993. The State
anticipates that its borrowings for capital purposes in fiscal year 1993-94
will consist of approximately $456 million in general obligation bonds. The
State also expects to issue approximately $140 million in general obligation
bonds for the purpose of redeeming outstanding bond anticipation notes. The
Legislature has also authorized the issuance of up to $85 million in
certificates of participation during the State's 1993-94 fiscal year for
equipment purchases and real property purposes. The projection of the State
regarding its borrowings for the 1993-94 and 1994-95 fiscal years may change
if other circumstances require.
The Governor released the recommended Executive Budget for the 1993-94
fiscal year on January 19, 1993 and amended it on February 18, 1993. The
1993-94 State Financial Plan as recommended projected a balanced General Fund.
General Fund receipts and transfers from other funds were projected at $31.556
billion, including $184 million carried over from the 1992-93 fiscal year.
Disbursements and transfers from other funds were projected at $31.489
billion, not including a $67 million repayment to the State's Tax
Stabilization Reserve Fund.
The 1993-94 State Financial Plan issued on April 16, 1993 projected
General Fund receipts and transfers from other funds at $32.367 billion and
disbursements and transfers to other funds at $32.300 billion. Excess
receipts of $67 million were to be used for a required repayment to the
State's Tax Stabilization Reserve Fund. In comparison to the recommended
1993-94 Executive Budget, the 1993-94 State budget, as enacted, reflected
increases in both receipts and disbursements in the General Fund of $811
million.
Revisions to the 1993-94 Financial Plan at the mid-year point resulted
in a projected surplus of $38 million. Revenues improved $251 million,
reflecting an improving economy. Disbursements increased by $218 million to
reflect projected deficiencies for school and income assistance.
The 1993-94 State Financial Plan was revised on January 18, 1994 and
amended on February 17, 1994. The Financial Plan now projects a surplus of
$339 million, more than one percent of the General Fund. Positive
developments affecting both receipts and disbursements contributed to this
improved outlook for the current year. In addition, the State will pay a 53rd
weekly Medicaid payment, estimated at $120 million, deposit another $82
million in a reserve fund for contingencies and deposit $110 million in a
Medicaid takeover reserve fund.
As a result of the United States Supreme Court decision in the case of
State of Delaware v. State of New York, on January 21, 1994 the State entered
into a settlement agreement with Delaware. The case involved a claim by
Delaware that certain unclaimed dividends, interest and other distributions
made by issuers of securities and held by New York-based brokers incorporated
in Delaware, for beneficial owners who could not be identified or located, had
been, and were being, wrongfully taken by the State pursuant to the State's
abandoned property laws. The United States Supreme Court determined that the
abandoned property should be remitted first to the state of the beneficial
owner's last known address, if ascertainable, and if not, then to the State of
incorporation of the intermediary bank, broker or depository. Pursuant to the
settlement agreement, the State made an immediate $35 million payment to
Delaware and agreed to make annual payments of $33 million in each of the next
five fiscal years. In return, Delaware has agreed to withdraw its claims and
its request for summary judgment. Litigation continues with respect to other
parties and the State may be required to make additional payments, which may
be significant, during the State's 1993-94 fiscal year or thereafter.
On November 16, 1993, the Court of Appeals, the State's highest court,
affirmed the decision of the Appellate Division of the State's Supreme Court
in three actions declaring unconstitutional certain legislation enacted in
1990. That legislation mandated a change in the actuarial funding method for
determining contributions by the State and its local governments to the State
and local retirement systems from the aggregate cost method, previously used
by the Comptroller, to the projected unit credit method, and it required the
application of the surplus reported under the projected unit credit method as
a credit to employer contributions. As a result of the legislation,
contributions to the retirement systems have been significantly reduced since
the State's 1990-91 fiscal year. The Court of Appeals held, among other
things, that the State Constitution, which prohibits the benefits of
membership in the retirement systems from being impaired or diminished, was
violated because the legislation impaired "the means designed to assure
benefits to public employees by depriving the Comptroller of his personal
responsibility to maintain the 'security and sources of benefits' of the
pension fund." As a result of this decision, the Comptroller has developed a
plan to return to the aggregate cost method and to restore prior funding
levels of the retirement systems. The Comptroller expects to achieve this
objective in a manner that, consistent with his fiduciary responsibilities,
will neither require the State to make additional contributions in its 1993-94
fiscal year nor materially and adversely affect the financial condition of the
State thereafter. The Comptroller's plan calls for a return to the aggregate
cost method, using a four-year phase-in in the New York State and Local
Employees' Retirement System (ERS), with State aggregate cost contributions to
ERS capped at a percentage of payroll that increases each year during the
phase-in. Although State contributions under the plan are expected to be
lower during the phase-in period than they would have been if the aggregate
cost method were reinstated immediately, they are expected to exceed projected
unit credit levels by $30 million in fiscal 1994-95, $63 million in fiscal
1995-96, $116 million in fiscal 1996-97, and $193 million in fiscal 1997-98.
The excess over projected unit credit levels is expected to peak at $241
million in fiscal 1998-99, when State contributions under the Comptroller's
plan are first projected to exceed levels that would have been required by an
immediate return to the aggregate cost method. The excess over projected unit
credit levels is projected to decline after fiscal 1998-99, and beginning in
fiscal 2001-02, State contributions required under the Comptroller's plan are
projected to be less than projected unit credit requirements would have been.
The Governor presented the recommended Executive Budget for the State's
1994-95 fiscal year on January 18, 1994 and amended it on February 17, 1994.
The Recommended 1994-95 State Financial Plan projects a balanced General Fund,
with receipts and transfers from other funds projected at $33.422 billion,
including $339 million carried over from the surplus anticipated for the
State's 1993-94 fiscal year. Disbursements and transfers to other funds are
projected at $33.399 billion and, in addition, the Financial Plan includes a
$23 million repayment to the State' Tax Stabilization Reserve Fund. The
Division of the Budget projects that at the close of the State's 1994-95
fiscal year, the balance in the Tax Stabilization Reserve Fund will be $157
million. The balance available in the contingency Reserve Fund on April 1,
1994 is projected by the Division of the budget at $311 million.
The 1994-95 Executive Budget follows a General Fund cash-basis surplus
in the State's 1993-94 fiscal year. The Recommended 1994-95 Financial Plan is
predicted on modest growth in the State economy. According to the division of
the Budget it includes limited use of nonrecurring moneys, and is balanced
without the use of significant cost-cutting measures such as layoffs or
service reductions. In addition, the Recommended 1994-95 Financial Plan does
not require an intra-year note issuance for cash flow purposes (a "spring
borrowing").
Major revenue actions recommended in the 1994-95 Executive Budget
include tax and free reductions ($210 million); preservation of revenues
currently received ($1.244 billion), primarily through deferral of a scheduled
personal income tax rate reduction; additional revenue measures ($58 million),
resulting primarily from the collection of unredeemed deposits on bottles and
cans; increased lottery revenues due to changes proposed in lottery games
($130 million); and enhanced revenue collection and enforcement measures ($49
million).
Major programmatic recommendations include a $198 million increase in
school aid (on a school year basis), $185 million in statutory Medicaid cost-
containment initiatives, additional State takeover of local government
Medicaid costs amounting to $110 million, funding for new programs to fight
crime and spur economic development, increased funding for community-based
mental hygiene programs consistent with legislation passed in the 1993
Legislative session, and productivity initiatives which constrain the cost of
operating State government.
There can be no assurance that the Legislature will enact the Executive
Budget as proposed, nor can there be any assurance that the Legislature will
enact a budget for the State's 1994-95 fiscal year prior to the beginning of
such fiscal year. In recent years, the Legislature has failed to enact a
budget prior to the beginning of the State's fiscal year. A protracted delay
in legislative enactment of the State's 1994-95 fiscal year budget may reduce
the effectiveness of several of the actions proposed. The 1994-95 State
Financial Plan, when formulated after enactment of the budget, would have to
take into account any reduced savings arising from any late budget enactment.
For its 1992-93 fiscal year the State had a balanced budget on a cash
basis with a positive margin of $671 million in the General Fund that was
deposited in the refunded reserve account. During its 1991-92 and 1990-91
fiscal years, the State incurred cash-basis operating deficits, prior to the
issuance of tax and revenue anticipation notes, owing to lower-than-projected
receipts, which it believes to have been principally the result of a
significant slowdown in the New York and regional economy.
The State's 1992-93 fiscal year was characterized by national and
regional economies that performed better than projected in April 1992.
National gross domestic product, State personal income, and employment and
unemployment in the State performed better than originally projected in April
1992.
After reflecting a 1992-93 year-end deposit to the refund reserve
account of $671 million, reported 1992-93 General Fund receipts were $45
million higher than originally projected in April 1992. If not for that year-
end transaction, which had the effect of reducing 1992-93 receipts by $671
million and making those receipts available in 1993-94, General Fund receipts
would have been $716 million higher than originally projected.
The favorable performance was primarily attributable to personal income
tax collections that were more than $700 million higher than originally
projected (before reflecting the refund reserve transaction). The withholding
and estimated payment components of the personal income tax exceed original
estimates by more than $800 million combined, reflecting both stronger
economic activity, particularly at year's end, and the tax-induced one-time
acceleration of income in 1992. Modest short-falls were experienced in other
components of the income tax.
There were large, but largely offsetting, variances in other categories.
Significantly higher-than-projected business tax collections and the receipt
of unbudgeted payments from the Medical Malpractice Insurance Association and
the New York Racing Association approximately offset the loss of an
anticipated $200-million Federal reimbursement, the loss of certain budgeted
hospital different revenue as a result of unfavorable court decisions, and
shortfalls in certain miscellaneous revenue sources.
Disbursements and transfers to other funds totaled $30.829 billion, an
increase of $45 million above projections in April 1992. After adjusting for
the impact of a $150 million payment from the Medical Malpractice Insurance
Association to health insurers pursuant to legislation passed in January 1993,
actual disbursements were $105 million lower than projected. This reduction
primarily reflected lower costs in virtually all other categories of spending,
including Medicaid, local health programs, agency operations, fringe benefits,
capital projects and debt service as partially offset by higher-than-
anticipated costs for education programs.
The State Financial Plan for the 1991-92 fiscal year was initially
formulated on June 10, 1991 and included increased taxes and other revenues,
deferral of scheduled personal income tax reductions, significant reductions
from previously projected levels in aid to localities and State operations and
other budgetary actions that were expected to maintain many items of General
Fund disbursements at or below the 1990-91 fiscal year levels. The 1991-92
State Financial Plan was formulated after disagreement between the Governor
and the legislative leaders over spending levels, revenue-raising measures and
estimates of the impact of legislative actions and after the Governor vetoed
$937 million in spending measures which the Legislature added to his proposed
Executive Budget without providing the necessary revenues.
On July 4, 1991, the Legislature, after consultation with the Governor,
passed appropriation bills adding a net of $676 million in spending in the
State's 1991-2 fiscal year. The additional spending was expected to be
financed through several actions including amendments to the tax law to raise
the tax rate on certain regulated businesses ($200 million) and to increase
revenue from the personal income tax for taxpayers with adjusted gross income
of $100,000 or more ($100 million), offset, in part, by reductions in a
portion of the petroleum and energy-based taxes enacted in June 1991 ($145
million); restoration of additional tax receipts ($139 million) resulting from
added State support for the Department of Taxation and Finance; $98 million in
additional nonrecurring actions including $57 million in anticipated receipts
from the Federal government in settlement of foster care claims and $41
million in payment restructuring; use of $80 million in Thruway Authority
funds; other miscellaneous actions; and further administrative actions to
reduce spending.
The national and regional economic recession has caused a substantial
reduction in State tax receipts. Uncertainties in taxpayer behavior as a
result of actual and proposed changes in Federal tax laws can also have an
adverse impact on State tax receipts. As a result of the foregoing
uncertainties and other factors, actual results could differ materially and
adversely from time to time. There can be no assurance that the State will
not fact substantial potential budget gaps in future years resulting from a
significant disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs at current
levels. To address any potential budgetary imbalance, the State may need to
take significant actions to align recurring receipts and disbursements in
future fiscal years.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating the New York Local Government Assistance Corporation
("LGAC"), a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation empowered LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of those long-term obligations, which will be
amortized over no more than 30 years, is expected to result in eliminating the
need for continuing short-term seasonal borrowing for those purposes. The
legislation also imposed a cap on the annual seasonal borrowing of the State
at $4.7 billion, less net proceeds of bonds issued by LGAC and bonds issued to
provide for capitalized interest, except in cases where the Governor and the
legislative leaders have certified both the need for additional borrowing and
provided a schedule for reducing it to the cap. If borrowing above the cap is
thus permitted in any fiscal year, it is required by law to be reduced to the
cap by the fourth fiscal year after the limit was first exceeded. As of
February 28, 1994 LGAC has issued its bonds to provide net proceeds of $3.716
billion and has been authorized to issue its bonds to provide the proceeds of
up to an additional $140 million during the State's 1993-94 fiscal year. The
Governor has recommended up to $315 million in additional LGAC bond issuances
in the 1994-95 fiscal year.
In April 1993, legislation was also enacted provided for significant
changes in the long-term financing practice of the State and the Authorities.
The Legislature passed a proposed constitutional amendment that would
permit the State, without a voter referendum but within a formula-based cap,
to issue revenue bonds, which would be debt of the State secured solely by a
pledge of certain State tax receipts (including those allocated to State funds
dedicated for transportation purposes), and not by the full faith and credit
of the State. In addition, the proposed amendment would require that State
debt be incurred only for capital projects included in a multi-year capital
financing plan and would prohibit lease-purchase and contractual-obligation
financing mechanisms for State facilities. Public hearings have been held on
the proposed constitutional amendment. The Governor has announced that he
intends to submit changes to the proposed constitutional amendments. Before
becoming effective, the proposed constitutional amendment must first be passed
again by the next separately-elected Legislature and then approved by the
voters at a general election, so that it could not become effective until
after the general election in November 1995. If the proposed constitutional
amendment were to be amended and passed at the 1994 legislative session, the
schedule outlined in the previous sentences would still be applicable.
On March 10, 1993, Moody's confirmed its A rating of State general
obligation bonds, stating that the State's "credit standing reflects its
diverse and substantial economic base, a strength offset by structural
imbalance of state finances and increase debt levels. Chronic financial
problems weight most heavily on New York State's credit evaluation. The State
anticipates ending the current fiscal year with a small operating surplus,
compared with deficits recorded in each of the prior five years. While the
State's stringent cash condition has eased, fiscal reforms depends on efforts
to restrain spending, use of realistic revenue estimates in light of uncertain
economic growth, reduced reliance on non-recurring actions, and timely budget
enactment." On December 30, 1993, Moody's reconfirmed the A rating. On March
5, 1993, Standard & Poor's Rating Group ("S&P") affirmed its A- rating on
State general obligation bonds, stating that this rate "reflects a contracting
economic base, manageable yet rising debt levels and historically weak
financial performance and position." S&P further stated that "the outlook
remains negative; however, the outlook could be revised to stable if the state
closes fiscal 1993 as anticipated and the 1994 budget is passed on time and is
once again based on realistic economic projections." On April 27, 1993, S&P
revised its rating outlook to stable, citing the state's operating surplus and
timely budget passage. On December 20, 1993, S&P confirmed its A- rating and
continued to express a stable outlook. On February 14, 1994, S&P raised its
outlook to positive. On July 10, 1995, S&P downgraded its rating on New
York City's $23 billion of outstanding general obligation bonds to "BBB+" from
"A-", citing to the City's chronic structural budget problems and weak
economic outlook. S&P's stated that New York City's reliance on one-time
revenue measures to close annual budget gaps, a dependence on unrealized labor
savings, overly optimistic estimates of revenues and state and federal aid and
the City's continued high debt levels also contributed to its decision to
lower the rating.
On January 13, 1992, S&P lowered its rating on State general obligation
bonds to A- from A. S&P noted that the "continued economic deterioration,
chronic operating deficits, mounting GAAP fund balance deficits, and the
legislative stalemate in seeking permanent and structurally sound fiscal
operations" had contributed to the downgrade. On January 6, 1992, Moody's
lowered from A to Baa1 the ratings on a substantial portion of appropriation-
backed debt of the State, citing increasing budget deficits, the inability of
the legislature and the administration to agree in a timely fashion on a
deficit reduction plan for the current fiscal year, as well as continued
weakness in the economy.
On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from A1 to A, the rating having been A1
since May 27, 1986. On November 12, 1990, Moody's confirmed the A rating. On
March 26, 1990, S&P lowered its rating of all of the State's outstanding
general obligation bonds from AA- to A. Previous S&P ratings were AA- from
August, 1987 to March, 199o and A+ from November, 1982 to August, 1987.
Authorities. The fiscal stability of the State is related to the fiscal
stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to he constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds
and notes within the amounts of, and as otherwise restricted by, their
legislative authorization. As of September 30, 1993, the latest data
available, there were 18 Authorities that had outstanding debt of $100 million
or more. The aggregate outstanding debt, including refunding bonds, of these
18 Authorities was $63.5 billion as of September 30, 1993, of which
approximately $7.7 billion was moral obligation debt and approximately $19.3
billion was financed under lease-purchase or contractual-obligation financing
arrangements.
Authorities are generally supported by revenues generated by the project
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, the State
has provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for operating and other
expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those
Authorities having financial difficulties to meet their obligations could
result in a default by one or more of the Authorities. Such default, if it
were to occur, would be likely to have significant adverse affect on investor
confidence in, and therefore the market price of, obligations of the
defaulting Authorities.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State Housing Finance Agency, the New York State Urban Development Corporation
and certain other authorities have in the past required and continue to
require substantial amounts of assistance from the State to meet debt service
costs or to pay operating expenses. Further assistance, possibly in
increasing amounts, may be required for these, or other, Authorities in the
future. In addition, certain statutory arrangements provide for State local
assistance payments otherwise payable to localities to be made under certain
circumstances to certain Authorities. The State has no obligation to provide
additional assistance to localities whose local assistance payments have been
paid to Authorities under these arrangements. However, in the event that such
local assistance payments are so diverted, the affected localities could seek
additional State funds
Metropolitan Transportation Authority (the "MTA"). The MTA oversees the
operation of the City's subway and bus lines by its affiliates, the New York
City Transit Authority and the Manhattan and Bronx Surface Transit Operating
Authority (collectively, the "TA"). The MTA operates certain commuter rail
and bus lines in the New York Metropolitan area through MTA's subsidiaries,
the Long Island Rail Road Company, the Metro-North Commuter Railroad Company
and the Metropolitan Suburban Bus Authority. In addition, the Staten Island
Rapid Transit Operating Authority, and MTA subsidiary, operates a rapid
transit line on Staten Island. Through its affiliated agency, the Triborough
Bridge and Tunnel Authority (the "TBTA"), the MTA operates certain intrastate
toll bridges and tunnels. Because fare revenues are not sufficient to finance
the mass transit portion of these operations, the MTA has depended and will
continue to depend for operating support upon a system of State, local
government and TBTA support, and, to the extent available, Federal operating
assistance, including loans, grants and operating subsidies.
The TA and the commuter railroads, which are on a December 31 fiscal
year, ended 1993 with their budgets balanced on a cash basis. The TA had a
closing cash balance of approximately $39 million.
Over the past several years the State has enacted several taxes --
including a surcharge on the profits of banks, insurance corporations and
general business corporation doing business in the 120 county Metropolitan
Transportation Region served by the MTA and a special one-quarter of 1 percent
regional sales and use tax -- that provide revenues for mass transit purposes,
including assistance to the MTA. The surcharge, which expires in November
1995, yielded approximately $533 million in calendar year 1993, of which the
MTA was entitled to receive approximately 90 percent, or approximately $480
million. These amounts include some receipts resulting from a change in State
law to require taxpayers to make estimated payments on their surcharge
liabilities. In addition, in March 1987, legislation was enacted that creates
an additional source of recurring revenues for the MTA. This legislation
requires that the proceeds of a one-quarter of 1 percent mortgage recording
tax paid on certain mortgages in the Metropolitan Transportation Region that
heretofore had been paid to the State of New York Mortgage Agency be deposited
in a special MTA fund. These tax proceeds may be used by the MTA for either
operating or debt service expenses. The March 1987 legislation also requires
the MTA to pay $25 million annually from its existing recurring mortgage
recording tax revenues, of which $20 million is to be paid to the State for
highway purposes in the Metropolitan Transportation Region, except in New York
City, to the extent revenues are available therefor, and the remaining $5
million of which is to be paid to certain counties in the Metropolitan
Transportation Region.
In accordance with enacted State legislation for the State's 1992-93
fiscal year, the MTA submitted a one-year capital program for 1992 which
contained $1.635 billion of projects for the TA and commuter systems combined,
$1.293 billion of which is allocated to the TA's capital program. The State
Capital Program Review Board (the "CPRB") approved such program in May 1992.
The enacted State legislation further required the MTA to submit to the CPRB
by October 1, 1992 a proposed plan covering the period 1992 through 1996.
This proposed plan was disapproved by the CPRB on December 30, 1992 "without
prejudice." On April 15, 1993, State legislation was enacted that authorized
the funding of a portion of a five-year $9.56 billion capital plan for the MTA
for 1992 through 1996. The MTA submitted a 1992-1996 Capital Program based on
this legislation for the approval of the CPRB, as State law requires. Such
plan was approved by the CPRB on December 17, 1993.
There can be no assurances that all the necessary government actions for
1992-96 Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the Program, or parts
thereof, will not be delayed or reduced. Furthermore, the MTA has been named
as a respondent in a lawsuit challenging the constitutionality of certain
State borrowing practices. If the Program is delayed or reduced, ridership
and fare revenues may decline, which could, among other things, impair the
MTA's ability to meet is operating expenses without additional State
assistance.
Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1993-94 and 1994-95 fiscal years and thereafter. The potential
impact on the State of such actions by localities is not included in the
projections of the State receipts and disbursements in the State's 1993-94 and
1994-5 fiscal years.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken
by the Governor or the State Legislature to assist Yonkers could result in
allocation of State resources in amounts that cannot yet be determined.
Municipal Indebtedness. Municipalities and school districts have
engaged in substantial short-term and long-term borrowings. In 1992, the
total indebtedness of all localities in the State was approximately $35.2
billion, of which $19.5 billion was debt of the City (excluding $5.9 billion
in MAC debt); a small portion (approximately $71.6 million) of the $35.2
billion of indebtedness represented borrowing to finance budgetary deficits
and was issued pursuant to enabling State legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of those
local government units other than the City authorized by the State law to
issue debt to finance deficits during the period that such deficit financing
is outstanding. Seventeen localities had outstanding indebtedness for deficit
financing at the close of their 1992 fiscal year.
In 1992, an unusually large number of local government units required
authorization for deficit financing. According to the Comptroller, nine local
government units were authorized to issue deficit financing in the aggregate
amount of $131.1 million, including Nassau County for $65 million in six-year
deficit bonds and Suffolk County for $36 million in six-year deficit bonds.
Although the Comptroller has indicated that this level of deficit-financing
requests in 1992 was unprecedented, in 1993 five localities were authorized to
issue only $5.5 million in deficit financing indebtedness. Such developments
are not expected to have a material adverse effect on the financial condition
of the State.
Certain proposed Federal expenditure reductions would reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, the City or any of the Authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. The longer-range potential
problems of declining urban population, increasing expenditures and other
economic trends could adversely affect certain localities and require
increasing State assistance in the future.
Litigation. Certain litigation pending against the State or its
officers or employees could have a substantial or long-term adverse effect on
State finances. Among the more significant of these cases are those that
involve: (i) the validity of agreements and treaties by which various Indian
tribes transferred title to the State of certain land in central and upstate
New York; (ii) contamination in the Love Canal area of Niagara Falls; (iii) an
action against State and City officials alleging that the present level of
shelter allowance for public assistance recipients is inadequate under
statutory standards to maintain proper housing; (iv) challenges to the
practice of reimbursing certain Office of Mental Health patient care expenses
from the client's Social Security benefits; (v) a challenge to the methods by
which the State reimburses localities for the administrative costs of food
stamp programs; (vi) a challenge to the State's possession of certain funds
taken pursuant to the State's Abandoned Property Law; (vii) alleged
responsibility of State officials to assist remedying racial segregation in
the City of Yonkers; (viii) an action, in which the State is a third party
defendant, for injunctive or other appropriate relief, concerning liability
for the maintenance of stone groins constructed along certain areas of Long
Island's shoreline; (ix) a challenge to the constitutionality of financing
programs of the Thruway Authority authorized by Chapters 166 and 410 of the
Laws of 1991; (x) a challenge to the constitutionality of financing programs
of the Metropolitan Transportation Authority and the Thruway Authority
authorized by Chapter 56 of the Laws of 1993; (xi) challenges by commercial
insurers, employee welfare benefit plans, and health maintenance organizations
to provisions of Section 2807-c of the Public Health Law which impose 13%, 11%
and 9% surcharges on inpatient hospital bills and a bad debt and charity care
allowance on all hospital bills paid by such entities; (xii) challenges to the
promulgation of the State's proposed procedure to determine the eligibility
for an nature of home care services for Medical recipients; (xiii) a challenge
to State implementation of a program which reduces Medicaid benefits to
certain home-relief recipients; and (xiv) a challenge to the rationality and
retroactive application of State regulations recalibrating nursing home
Medicaid rates.
In Schulz, et al. v State of New York et al., commenced May 24, 1993,
Supreme Court, Albany County, petitioners challenge, among other things, the
constitutionality of, and seek to enjoin certain highway, bridge and mass
transportation bonding programs of the New York State Thruway Authority and
the MTA authorized by Chapter 56 of the Laws of 1993. Petitioners contend
that the application of State tax receipts held in dedicated transportation
funds to pay debt service on bonds of the Thruway Authority and of the MTA
violates Section 8 and 11 of Article VII and Section 5 of Article X of the
State Constitution and due process provisions of the State and Federal
Constitutions. By order dated July 27, 1993, the Supreme Court granted
defendants' motions for summary judgment, dismissed the complaint, and vacated
the temporary restraining order previously issued. By decision dated October
21, 1993, the Appellate Division, Third Department, affirmed the judgment of
the Supreme Court. Plaintiffs' appeal of the decision of the Appellate
Division is pending the Court of Appeals.
In an action commenced on August 6, 1991 (Schultz, et al. v. State of
New York, et al.), Supreme Court, Albany County), discussed in item (ix)
above, plaintiffs challenge the constitutionality of two bonding programs of
the Thruway Authority authorized by Chapters 166 and 410 of the Laws of 1991.
Plaintiffs argue that cooperative highway contractual agreements and service
contracts to be entered into by the State and the Thruway Authority in
connection with the bonding programs constitute State debt and a gift or loan
of State credit in violation of Section 8 and 11 of Article VII and Section 5
of Article X of the State Constitution. In addition, plaintiffs challenge the
fiscal year 1991-92 Judiciary budget as having been enacted in violation of
Section 1 and 2 of Article VII of the State Constitution. The defendants'
motion to dismiss the action on procedural grounds was denied by order of the
Supreme Court dated January 2, 1992. By order dated November 5, 1992, the
Appellate Division, Third Department, reversed the order of the Supreme Court
and granted defendants' motion to dismiss on grounds of standing and mootness.
By order dated September 16, 1993, on motion to reconsider, the Appellate
Division, Third Department, ruled that plaintiffs have standing to challenge
the bonding program authorized by Chapter 166 of the Laws of 1991. The action
is pending in Supreme Court, Albany County.
Adverse developments in those proceedings or the initiation of new
proceedings could affect the ability of the State to maintain balanced 1993-94
and 1994-95 State Financial Plans. An adverse decision in any of the above
cited proceedings could exceed the amount of the 1993-94 State Financial Plan
reserves for the payment of judgments and, therefore, could affect the ability
of the State to maintain a balanced 1993-94 and 1994-95 State Financial Plan.
New York City
The fiscal health of the State is closely related to the fiscal health
of its localities, particularly the City, which has required and continues to
require significant financial assistance from the State. The City's
independently audited operating results for each of its 1981 through 1993
fiscal years, which end on June 30, shows a General Fund surplus reported in
accordance with GAAP. In addition, the City's financial statements for the
1993 fiscal year received an unqualified opinion from the City's independent
auditors, the eleventh consecutive year the City has received such an opinion.
In response to the City's fiscal crisis in 1975, the State took a number
of steps to assist the City in returning to fiscal stability. Among these
actions, the State created MAC to provide financing assistance to the City.
The State also enacted the New York State Financial Emergency Act for The City
of New York (the "Financial Emergency Act") which, among other things,
established the New York State Financial Control Board (the "Control Board")
to oversee the City's financial affairs. The State also established the
Office of the State Deputy Comptroller for the City of New York ("OSDC") to
assist the Control Board in exercising its powers of approval over the City's
financial plan were suspended pursuant to the Financial Emergency Act.
However, the Control Board, MAC and OSDC continue to exercise various
monitoring functions relating to the City's financial position. The City
operates under a four-year financial plan which is prepared annually and is
periodically updated. The City submits its financial plans as well as the
periodic updates to the Control Board for its review.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and subject to various uncertainties. If expected Federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided
for in the City's financial plan or if other uncertainties materialize that
reduce expected revenues or increase projected expenditures, then, to avoid
operating deficit, the City may be required to implement additional actions,
including increases in taxes and reductions in essential City services. The
City might also seek additional assistance from the State.
The City achieved balanced operating results as reported in accordance
with GAAP for the 1993 fiscal year.
In February 1994, the City released the Financial Plan for the 1994
through 1997 fiscal years, which is a modification to a financial plan
submitted to the Control Board on August 30, 1993 and which relates to the
City, the Board of Education and the City University of New York. The gap-
closing actions for the 1994 fiscal year included substantial productivity
savings and savings from restructuring the delivery of City services, service
reductions, and the sale of delinquent real property tax receivables for $215
million. The proposed sale of real property tax receivables requires
authorization by the City Council. Subsequent to the submission of the
Financial Plan to the Control Board, the City proposed additional "other than
personal service" expenditure reductions to offset additional projected
expenditures resulting from the unusually harsh winter.
The Financial Plan also sets forth projections for the 1995 through 1997
fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $2.3 billion, $3.2 billion for the 1995 through 1997 fiscal
years, respectively. The projections include the continuation of the personal
income tax surcharge, resulting in revenues of $415, $443 and $470 million in
the 1995, 1996 and 1997 fiscal years, respectively, and reflect a recent
decline in property tax forecast for each of the 1995 through 1997 fiscal
years. The proposed gap-closing actions include City actions aggregating $1.9
billion, $1.8 billion and $1.6 billion in the 1995 through 1997 fiscal years,
respectively; $275 million and $705 million in proposed State actions in the
1995 through 1997 fiscal years, respectively; and other unspecified Federal,
State or City actions of $629 million and $740 million in the 1996 and 1997
fiscal years, respectively.
The proposed City actions include increased revenues and reduced
expenditures from agency actions and efficiently initiatives aggregating $1.1
billion, $1.4 billion and $1.5 billion in the 1995 through 1997 fiscal years,
respectively, including productivity savings, tax and free enforcement
initiatives, service reductions, savings from the restructuring of City
services, and other initiatives, including a proposed lottery. Proposed
productivity initiatives and initiatives regarding the restructuring of City
services could include work rule changes for City employees; combining City
agencies which perform overlapping functions; the competitive bidding out of
service performed by the City; and the decentralization of Certain City
services. Certain of these initiatives, including work rule changes, will be
subject to negotiation with the City's municipal unions, and other
initiatives, including the proposed video lottery, tort reform and the
combining of certain City agencies, will require approval of the State
legislature.
City gap-closing actions also include a reduction in City personnel as
the result of a severance program, which the City proposes to be funded by MAC
in the 1994 fiscal year, and a partial hiring freeze, or alternatively,
through attrition and layoffs, which would result in net savings of $144
million, $311 million and $415 million in each of the 1995, 1996 and 1997
fiscal years. Implementation of the voluntary severance program will depend
upon the cooperation of the City's municipal unions to permit transfers of
certain remaining employees among City agencies, and the availability in the
1994 fiscal year of $200 million from MAC for the estimated cost of severance
payments. On March 23, 1994, the Mayor ordered commissioners of the City's
agencies to select 10,000 City workers who could be laid off quickly. The
Mayor has publicly stated that in the event that the City is unable to reach
severance agreements with municipal labor unions, or if permission from MAV to
use the $200 million surplus to pay for the severance packages is not
received, the City will resort to layoffs immediately. Additional proposed
City gap-closing actions include annual savings of $200 million for health
insurance costs, resulting from City employees sharing in the payment of
premiums or from alternative proposals, and savings of $200 million and $100
million in the 1995 and 1996 fiscal years, respectively, from reduced pension
costs. The savings from reduced pension costs assume that the City Actuary
will accelerate recognition of recent pension investment returns which were in
excess of the assumed investment returns and will continue the current
assumptions with respect to wages for City employees and earnings on pension
fund assets affecting the City's required pension fund contributions. The
proposed savings for health insurance costs will be subject to collective
bargaining negotiations with the City's unions. The City gap-closing actions
described above are partially offset by reduced revenues of $35 million, $186
million and $534 million in the 1995, 1996 and 1997 fiscal years,
respectively, from a proposed tax reduction program.
The proposes State actions include the proposed reallocation of State
education aid among various localities totaling $80 million, $160 million and
$240 million in the 1995 through 1997 fiscal years, respectively, and $130
million, $300 million and $400 million of savings in the 1995, 1996 and 1997
fiscal years, respectively, from the proposed State assumption of certain
Medicaid costs.
Although the City has maintained balanced budgets in each of its last
thirteen fiscal years, and is projected to achieve balanced operating results
for the 1994 fiscal year, there can be no assurance that the gap-closing
actions can be successfully implemented or that the city will maintain a
balanced budget in future years without additional State aid, revenue
increases or expenditure reductions. Additional tax increases and reductions
in essential City services could adversely affect the City's economic base.
Various actions proposed in the Financial Plan, including a continuation
of the resident personal income tax surcharge beyond December 31, 1995 and the
proposed increase in State aid, are subject to approval by the Governor and
the State Legislature, and the proposed increase in Federal aid is subject to
approve proposals for State assumption of certain Medicaid costs, mandate
relief and reallocation of State education aid, thereby increasing the
uncertainty as to the receipt of the State assistance included in the
Financial Plan. The Governor has submitted to the current Legislature a
proposal for the State assumption of certain Medicaid costs. In addition, on
February 17, 1994, the Governor proposed the deposit of $110 million in a
Medicaid Takeover Reserve Fund to be available in the State's 1995 fiscal year
to local governments for certain Medicaid costs. If these two proposals for
local Medical relief are enacted as proposed, the Governor has stated that the
City would receive approximately $130 million during the City's 1995 fiscal
year. If these actions cannot be implemented, the City will be required to
take other actions to decrease expenditures or increase revenues to maintain a
balanced financial plan. The Financial Plan has been the subject of extensive
public comment and criticism particularly regarding the sale of delinquent
property tax receivables, the amount of State and Federal aid included in the
Financial Plan and the amount of savings contingent on collective bargaining
agreements yet to be reached with the City's work force.
The $2.3 billion budget gap for the 1995 fiscal year is the largest
budget gap which has been projected for the next succeeding fiscal year at
this stage of the budget planning process for the last four years. It can be
expected that the proposal contained in the Financial Plan to close the
projected budget gap for the 1995 fiscal year will engender substantial public
debate, and that public debate relating to the 1995 fiscal year budget will
continue through the time the budget is scheduled to be adopted in June 1994.
From time to time, the Control Board staff, MAC, OSDC, the City
Comptroller, various Federal agencies and other issue reports and make public
statements regarding the City's financial condition, commencing on, among
other maters, the City's financial plans, projected revenues and expenditures
and actions by the City to eliminate projected operating deficits. Some of
these reports and statements have warned that the City may have underestimated
certain expenditures and overestimated certain revenues and have suggested
that the City may not have adequately provided for future contingencies.
Certain of these reports have analyzed the City's future economic and social
conditions and have questioned whether the City has the capacity to general
sufficient revues in the future to meet the costs of its expenditure increases
and to provide necessary services. It is reasonable to expect that such
reports and statements will continue to be issued and to engender public
comment.
On March 1, 1994, the City Comptroller issued a report on the state of
the City's economy. The report concluded that, while the City's long
recession is over, moderate growth is the best the City can expect, with the
local economy being held back by continuing weakness in important
international economies. The report projects that total tax revenues for the
1994 and 1995 fiscal years will be $45 million and $107 million higher than
projected in the Financial Plan, due primarily to higher estimates of the
personal income tax and the banking corporation tax. In addition, the report
projects that, while tax revenues for the 1997 fiscal year will be below the
Financial Plan projections by $76 million, due primarily to a projected
shortfall in property tax revenues. The report identified revenue risks for
the 1994 through 1997 fiscal years totaling $9 million, $134 million, $184
million and $184 million, respectively, relating to the proposed video lottery
and certain audit initiatives and other revenues. In the report that City
Comptroller also offered certain alternative tax initiative to the tax
reductions proposed by the Mayor, which are designed to further stimulate the
creation of jobs.
On March 21, 1994, the City Comptroller identified as risks for the 1995
fiscal year the proposals in the Financial Plan that are uncertain because
they depend on actions by organizations other than City government, including
the State Legislature and municipal unions. The City Comptroller stated that
if none of the uncertain proposals are implemented, the total risk could be as
much as $1.15 billion to $1.53 billion. These risks include a possible $39
million increase in overtime costs; the possible need for a $30 million
increase in the reserve to fund disallowances of State and Federal claims;
approval by the State Legislature of a tort reform program to limit damage
claims against the City, which would result in savings of $45 million; the
receipt of $125 million of funding for the State payment of certain costs for
administering the Medicaid program and an additional $145 million in State
aid; agreement of municipal unions to employee co-sharing of the payment of
premiums with respect to employee health insurance, which would reduce City
expenditures for health insurance costs by $200 million; approval by the City
Actuary of the acceleration of earnings which were in excess of assumed
investment returns, which would result in reduced contributions by the City of
$200 million to the municipal pension systems; uncertainties relating to the
proposed reduction in the City's workforce, which is subject to further
discussion with the City's municipal unions, BOE and MAC; assumed improvement
in the collection of taxes, fines and fees totaling $120 million;
uncertainties involving State Legislative approval of an extension of late
payment penalties on overdue parking violations and the proposed State video
lottery; and renegotiation of the terms
of certain Port Authority leases totaling $75 million.
The City Comptroller noted that there are a number of additional issues,
the impact of which cannot currently be quantified, including the proposed
$291 million participation of BOE in the gap-closing program, the amount of
proposed asset sales assumed in the Financial Plan and the impact of a recent
court decision on recycling which could cost the City $100 million in the 1995
fiscal year. Finally, the City Comptroller has recommended that the City
abandon its plan to sell real property tax receivables to generate $215
million in the 1994 fiscal year.
The City Comptroller issued a report on February 17, 1994 projecting
that the exceptionally harsh winter would cost the City an additional $37 to
$50 million. The report also stated that the City Comptroller would issue a
report in April quantifying other additional costs of this exceptional winter,
which may be substantial, including possible decreased tax revenues due to
lost business and increased expenditures due to higher use of health
facilities by Medicaid participants and overtime costs for City employees not
directly involve in snow removal.
On March 22, 1994, OSDC issued a report reviewing the Financial Plan.
The report concluded that a balanced budget is achievable for the 1994 fiscal
year. The report noted that expenditures for the 1994 fiscal year may be
higher than projected by $176 million, due primarily to possible overspending
at BOE, revenue shortfalls at New York City Health and Hospitals Corporation
("HHC") and overtime costs in the uniformed agencies; however, the City has
initiated a program that is intended to reduce nonpersonnel costs by up to
$150 million. In addition, the report noted that the Financial Plan includes
a general revenue of $198 million and assumes savings of $117 million from the
implementation of the proposed severance program for the 1994 fiscal year.
While the City intends to transfer $234 million of these resources to help
balance the 1995 fiscal year budget, the report concluded that most of these
resources will be needed to maintain budget balance in the 1994 fiscal year.
With respect to each of the 1995 through 1997 fiscal years, the report
noted the potential for a budget gap of approximately $300 million greater
than shown in the Financial Plan, primarily due to possible shortfalls in
projected HHC revenues, greater than anticipated spending at BOE and overtime
costs in the uniformed agencies. Additional risks for such years include the
potential for increased recycling costs due to a recent court decision, lower
than anticipated revenues from the renegotiation of certain Port Authority
leases, and greater personnel costs, since the Financial Plan makes no
provisions for wage increases after the expiration of current contracts. For
the 1996 and 1997 fiscal years, the report identified the extension of the
resident personal income tax surcharge as an additional risk.
With respect to the City's $2.3 billion gap-closing program for the 1995
fiscal year, the report noted that approximately $1.4 billion of the gap-
closing initiatives must be considered as high risk because the initiatives
are outside the Mayor's direct control to implement. The report noted that
the City will needs to obtain the approval and cooperation of the municipal
labor unions, the City Actuary, certain State governmental agencies, public
authorities or public benefit corporations which receive or may receive moneys
from the City directly, indirectly or contingently, the City Council and the
State and Federal governments, and that if the necessary approvals are not
obtained, the City will have only a few months to develop alternative
solutions.
On March 23, 1994, the staff of the Control Board issued its report on
the Financial Plan. The report states that, while the Financial Plan moves
the City in the discretion of structural balance, the Financial Plan has more
risks and fewer details than are desirable and does not set forth contingency
plans or other protections to assist the City if unknown but inevitable
impediments emerge. With respect to the 1994 fiscal year, the report
concludes that the budget is reliably balanced. However, for the 1995 fiscal
year, the report notes that decisions will have to be made in the next
modification to the Financial Plan in April 1994 whether to continue to
include in the Financial Plan for the 1995 fiscal year revenues from proposed
additional Federal and State aid, new Port Authority lease agreements and a
proposed video lottery, funds from MAC for the severance program, and savings
from employee health and pension cost reductions and tort reform. The report
notes that all of these actions, which total $1.2 billion, are outside the
Mayor's direct control and require the support of third parties. Risks
identified in the report for the 1994 through 1997 fiscal years aggregate $94
million, $952 million, $1.7 billion and $1.9 billion, respectively, excluding
any risk associated with the State takeover of certain Medicaid costs, the
workforce reduction program and the reduction in health insurance and pension
costs proposed in the Financial Plan.
The City requires certain amounts of financing for seasonal and capital
spending purposes. The city since 1981 has fully satisfied its seasonal
financing needs in the public credit markets, repaying all short-term
obligations within their fiscal year of issuance. As of March 24, 1994, the
City had issued $1.75 billion of short-term obligations in fiscal year 1994 to
finance the City's estimate of its seasonal cash flow needs for the 1994
fiscal year. Season financial requirements for the 1993 fiscal year decreased
to $1.4 billion from $2.25 billion in the 1992 fiscal year.
The 1994 through 1997 Financial Plan is based on numerous assumptions,
including the continuing improvement of the City's and the region's economy
and a modest employment recovery during the calendar year 1994 and the
concomitant receipt of economically sensitive tax revenues in the amounts
projected. The 1994-97 Financial Plan is subject to various uncertainties and
contingencies relating to, among other factors, the extent, if any, to which
wage increases for City employees exceed the annual increases assumed for the
1994 through 1997 fiscal years; continuation of the 9% interest earnings
assumptions for pension fund assets and current assumptions with respect to
wages for City employees affecting the City's required pension fund
contributions and the compensation of the City Actuary in accelerating
recognition of recent pension investment returns which were in excess of the
assumed investment returns; the willingness and ability of the State, in the
context of the State's current financial condition, to provide the aid
contemplated by the Financial Plan and to take various other actions to assist
the City, including the proposed State takeover of certain Medicaid costs and
State mandate relief; the ability of HHC, BOE and other such agencies to
maintain balanced budgets; the willingness of the Federal government to
provide Federal aid; approval of the proposed continuation of the personal
income tax surcharge and the State budgets; adoption of the City's budgets by
the City Council in substantially the forms submitted by the Mayor; the
receipt of revenues from the proposed video lottery in the amount projected in
the Financial Plan; the ability of the City to implement proposed reductions
in City in City personnel and other cost reduction initiatives which may
require in certain cases the cooperation of the City's municipal unions and
MAC and the success with which the City controls expenditures; savings for
insurance costs in the amounts projected in the Financial Plan; additional
expenditures that may be incurred due to the requirements of certain
legislation requiring minimum levels of funding for education; the impact on
the New York City region of the tax increases contained in President Clinton's
economic plan; the impact on real estate tax revenues for the current downturn
in the real estate market; the City's ability to market its securities
successfully in the public credit markets; the level of funding required to
comply with the Americans with Disabilities Act of 1990; and additional
expenditures that may be incurred as a result of deterioration in the
condition of the City's infrastructure. Certain of these assumptions have
been questioned by the City Comptroller and other public officials.
The projections and assumptions contained in the 1994-97 Financial Plan
are subject to revision which may involve substantial change, and no assurance
can be given that these estimates and projections, which include actions which
the City expects will be taken but which are not within the City's control,
will be realized.
Changes in major assumptions could significantly affect the City's
ability to balance its budget as required by State law and to meet its annual
cash flow and financial requirements. The City's projections are subject to
the City's ability to implement the necessary service and personnel reduction
programs successfully. The Financial Plan contains substantially proposed
expenditure cuts for the 1994 through 1997 fiscal years. The proposed
expenditure reductions will be difficult to implement because of their size
and substantial expenditure reductions already imposed on the City operations
in recent years.
On November 6, 1990, the voters of Staten Island voted to establish a
charter commission for the purpose of proposing a charter under which Staten
Island would secede from the City to become a separate city of Staten Island.
A referendum approving the charter proposed by such commission was approved by
the voters of the borough of Staten Island on November 2, 1993. On March 1,
1994, the charter commission submitted to the State Legislature proposed
legislation enabling Staten Island to separate from the City. The charter
would take effect upon approval of such enabling legislation. Based upon the
advice of the State Assembly's "home rule" counsel, The Speaker of The
Assembly has determined that the City must issued a "home rule message", which
requires a formal request of action by the Assembly by either (i) the Mayor
and a majority of the City Council or (ii) two-thirds of the City Council,
before the proposed legislation may be voted upon the Assembly. In addition,
any such legislation may be subject to legal challenge and would require
approval by the United States Department of Justice under the Federal Voting
Rights Act. It cannot be determined as of the date of this Statement of
Additional Information what the content of such proposed legislation will be,
whether it will be enacted into law by the State Legislature, and if so, what
legal challenges might be commenced contesting the validly of such
legislation.
On November 2, 1993, the voters of the City approved a referendum
amending the City Charter to provide that no person shall be eligible to be
elected to or serve in the office of Mayor, Public Advocate, Comptroller,
Borough President or Council member if that person had previously held such
office for two or more full consecutive terms, unless one full term or more
has elapsed since that person last held such office. This Charter amendment
will apply only to terms of office commencing after January 1, 1994, and is
subject to approval by the United Stated Department of Justice under the
Federal Voting Rights Act.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if
any, on the proceedings and claims are not currently predictable, adverse
determination in certain of them might have a material adverse effect upon the
City's ability to carry out the 1994-97 Financial Plan. In the fiscal year
ended on June 30, 1993, the City expended $231 million for judgments and
claims. The 1994-97 Financial Plan includes provisions for judgments and
claims of $242 million, $243 million, $253 million, and $262 million for the
1994 through 1997 fiscal years, respectively. The City has estimated that its
potential future liability on account of outstanding claims against it as of
June 30, 1993 amounted to approximately $2.2 billion.
Moody's has rated the City's general obligation bonds Baa1. S&P has
rated the City's general obligation bonds A-. Such ratings reflect only the
views of Moody's and S&P, from which an explanation of the significance of
such ratios may be obtained. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised
downward or withdrawn entirely. Any such downward revision or withdrawal
could have an adverse effect on the market prices of the City's general
obligation bonds.
In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City Bonds upward to BBB+ and on November 19, 1987, to A-. On
February 11, 1991, Moody's lowered its rating on the City's general
obligations bonds from A to Baa1. Moody's ratings of City bonds were revised
in November 1981 from B (in effect since 1977) to Ba1, in November 1983 to
Baa, in December 1985 to Baa1, in May 1988 to A and again in February 1991 to
Baa1.
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
Prospectus, 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
In General
Information on how to purchase and redeem Fund shares, and how such
shares are priced, is included in the Prospectuses. The issuance of shares is
recorded on the books of the Fund, but share certificates are not issued.
The Fund offers its shares to the public on a continuous basis. The
Fund only offers its shares for sale in the State of New York. Purchases
of Select Shares of the Fund must be made either 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 Fund may be
made only through an Introducing Broker.
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 ("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.
(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.
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 Fund normally transmits 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 describes special redemption procedures for certain
shareholders who engage in purchases of securities through Lehman Brothers or
an Introducing Broker, under which Fund shares are redeemed automatically to
satisfy debit balances arising in the shareholder's account on the settlement
date of other securities transactions. A shareholder may choose not to redeem
Fund shares automatically by notifying Lehman Brothers or the Introducing
Broker, and by making payment for securities purchased by the settlement date,
which is usually five business days after the trade date.
Net Asset Value
The Prospectuses discuss the time at which the net asset value of shares of
each class of the 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.
The valuation of the 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, the 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 class of the Fund as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
the 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 the
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 the Fund's Shares may exchange all or part of
their Shares for shares of the same class of shares of certain other funds in
the Lehman Brothers Group of Funds, as indicated in the Prospectuses, to the
extent such shares are offered for sale in the shareholder's state of
residence. There currently is no charge for this service, and exchanges are
made on the basis of relative net asset value per share at the time of
exchange.
The exchange privilege enables holders of the 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, the Fund's Shares submitted for exchange are redeemed at the
then-current net asset value and the proceeds immediately invested in shares
of the appropriate class of the fund being acquired. 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 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
Kirk Hartman (1)
3 World Financial Center
New York, New York 10285
Age: 40
Chairman of the Board
and Director
Managing Director, Lehman
Brothers.
Name and Address
Position with the
Company
Principal Occupation
During Past 5 Years and
Other Affiliations
Burt N. Dorsett (2)(3)
201 East 62nd Street
New York, New York 10021
Age: 64
Director
Managing Partner, Dorsett
McCabe Capital Management,
Inc.; Director, Research
Corporation Technologies;
formerly President,
Westinghouse Pension
Investments Corporation;
formerly Executive Vice
President and Trustee,
College Retirement
Equities Fund, Inc.;
formerly Investment
Officer, University of
Rochester.
Kathleen C. Holmes(2)(3)
Wharton Financial
Institutions Center
3620 Locust Walk
3301 Steinberg Hall
Dietrich Hall
Philadelphia, Pennsylvania
19104-6367
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 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
Senior Vice President,
Lehman Brothers.
Michael Kardok
53 State Street
Boston, Massachusetts 02109
Age: 35
Treasurer and Chief
Financial Officer
Vice President, The
Shareholder Services
Group, Inc.
Patricia L. Bickimer
53 State Street
Boston, Massachusetts 02109
Age: 42
Secretary
Vice President and
Associate General Counsel,
The Shareholder Services
Group, Inc.
___________
1. Director considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
2. Audit Committee Member.
3. Nominating Committee Member.
Three directors of the Company, Messrs. Hartman and Dorsett and Ms.
Holmes, serve as directors or trustees of other investment companies for which
Lehman Brothers, LBGAM or one of their affiliates serves as distributor or
investment adviser.
No employee of Lehman Brothers, LBGAM or The Shareholders Services
Group, Inc. ("TSSG") receives any compensation from the Company for acting as
an officer or director of the Company. The Company pays each director who is
not a director, officer or employee of Lehman Brothers, LBGAM or TSSG or any
of their affiliates, a fee of $20,000 per annum plus $500 per meeting attended
and reimburses them for travel and out-of-pocket expenses.
By virtue of the responsibilities assumed by Lehman Brothers, LBGAM,
TSSG and their affiliates under their respective agreements with the Company,
the Company itself requires no employees in addition to its officers.
The following table sets forth certain information regarding the
compensation of the Company's directors during the fiscal period ended July
31, 1994. No executive officer or person affiliated with the Company received
compensation from the Company during the fiscal period ended July 31, 1994 in
excess of $60,000.
COMPENSATION TABLE
Name of
Person and
Position
Aggregate
Compensatio
n
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*
Kirk Hartman,
Chairman of
the Board
0
0
N/A
$0 (1)
Kathleen
Holmes,
Director
$22,870.23*
*
0
N/A
$22,870.23**(2
)
John
Hatsopoulos,
Director
$16,500.00
0
N/A
$16,500.00 (1)
Burt N.
Dorsett,
Director
$22,000.00
0
N/A
$38,750.00 (2)
_____________
* Represents the total compensation paid to such persons by all investment
companies (including the Company) from which such person received compensation
during the fiscal period ended July 31, 1994 that are considered part of the
same "fund complex" as the Company because they have common or affiliated
investment advisers. The parenthetical number represents the number of such
investment companies, including the Company.
** Includes $870.23 for reimbursement of out-of-pocket expenses.
Investment Adviser
LBGAM serves as investment adviser to the Fund pursuant to a written
investment 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 February 1, 1995. The
services provided by LBGAM under the advisory agreement 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, the advisory agreement will continue in effect until
January 31, 1997 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 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 will be terminable by the Company or LBGAM on 60 days'
written notice, and will terminate immediately in the event of its assignment.
Administrator
As the Fund's administrator, TSSG has agreed to provide the following
services: (i) assist generally in supervising the Fund's operations, providing
and supervising the operation of an automated data processing system to
process purchase and redemption orders, providing information concerning the
Fund to its shareholders of record, handling shareholder problems, supervising
the services of employees whose principal responsibility and function is to
preserve and strengthen shareholder relations; (ii) prepare reports to the
Fund's shareholders and prepare tax returns and reports to and filings with
the SEC; (iii) compute the net asset value per share of the Fund; (iv) provide
the services of certain persons who may be elected as directors or appointed
as officers of the Company by the Board of Directors; and (v) maintain the
registration or qualification of the Fund's shares for sale under state
securities laws.
Distributor and Plan of Distribution
Lehman Brothers acts as distributor of the Fund's shares. The Fund's shares
are sold on a continuous basis by Lehman Brothers as agent, although Lehman
Brothers is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of the Fund (excluding preparation and printing
expenses necessary for the continued registration of the Fund's shares) and of
preparing, printing and distributing all sales literature.
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
the Fund (the "Plan of Distribution"). The Board of Directors believes that
there is a reasonable likelihood that the Plan of Distribution will benefit
the Fund and its shareholders.
A quarterly report of the amounts expended with respect to each class of
the 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 the Fund to increase materially the costs
which may be borne for distribution pursuant to the Plan of Distribution
without the approval of shareholders of that class, and that other material
amendments of the Plan of Distribution must be approved by the Board of
Directors, and by the Directors who are neither "interested person" (as
defined in the 1940 Act) of the Company nor have any direct or indirect
financial interest in the operation of the Plan of Distribution or any related
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Plan of Distribution and any related
agreements are subject to annual approval by such vote cast in person at a
meeting called for the purpose of voting on the Plan. The Plan of Distribution
may be terminated with respect to a class of 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 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 the Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end market
value of securities held in custody and also receives securities transaction
charges, including out-of-pocket expenses. The assets of the Company are held
under bank custodianship in compliance with the 1940 Act.
TSSG, a subsidiary of First Data Corporation, is located at 53 State
Street, Boston, Massachusetts 02019, and serves as the Company's transfer
agent. Under the transfer agency agreement, TSSG maintains the shareholder
account records for the Company, handles certain communications between
shareholders and the Company and distributes dividends and distributions
payable by the Company and produces statements with respect to account
activity for the Company and its shareholders. For these services, TSSG
receives a monthly fee computed separately for each class of the Fund's shares
on the basis of the number of shareholder accounts that it maintains for the
Company during the month and is reimbursed separately by each class for
out-of-pocket expenses.
Expenses
The Fund's expenses include taxes, interest, fees and salaries of the
Company's 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 investors, advisory, sub-advisory and administration fees,
charges of the custodian, transfer and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of independent
pricing service, costs of investor 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 of Fund shares based on the
expenses identifiable to the class or the relative net assets of the class and
other classes of Fund shares. LBGAM and TSSG have agreed, that if, in any
fiscal year, the expenses borne by 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 any excess to the extent required by such regulations.
Unless otherwise required by law, such reimbursement would be accrued and paid
on the same basis that the advisory 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 2-1/2% of the first $30 million of the Fund's average annual
net assets, 2% of the next $70 million of the average annual net assets and
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 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
The 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 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) 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 older 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 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 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). 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 exercise
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 an 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 Services 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 intends to qualify to pay "exempt-interest dividends," as that
term is defined in the Code, by holding at the end of each quarter of its
taxable year at least 50% of the value of its total assets in the form of
obligations described in section 103(a) of the Code. The Fund's policy is to
pay in each taxable year exempt-interest dividends equal at least 90% of the
Fund's interest from tax-exempt obligations net of certain deductions. Except
as discussed below, exempt-interest dividends will be exempt from regular
federal income tax.
Although exempt-interest dividends may be excluded from a shareholder's
gross income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholder's liability (if any) under the federal individual and corporate
alternative minimum tax provisions of the Code. Exempt-interest dividends
will constitute a specific preference item for purposes of the federal
alternative minimum tax to the extent that such dividends are derived from
certain types of private activity bonds issued after August 7, 1986. In
addition, all exempt-interest dividends will be a component of the "adjusted
current earnings" adjustment item for purposes of the federal corporate
alternative minimum tax. Moreover, the receipt of dividends from the Fund may
increase a corporate shareholder's liability for environmental taxes under
Section 59A of the Code and a foreign corporate shareholder's liability under
the branch profits tax, and may also affect the federal tax liability of
certain Subchapter S corporations and insurance companies. Furthermore, the
receipt of exempt-interest dividends may be a factor in determining the extent
to which a shareholder's Social Security benefits are taxable.
The exemption of interest income for regular federal income tax purposes
may not result in similar exemptions under the tax law of state and local
taxing authorities. In general, a state exempts from state income tax only
interest earned on obligations issued by that state or its political
subdivisions and instrumentalities.
Interest on indebtedness incurred by a shareholder to purchase or carry
the Fund's shares is not deductible for federal income tax purposes if the
Fund distributes exempt-interest dividends during the shareholder's taxable
year.
While the Fund does not expect to realize significant long-term capital
gains, any net realized 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.
Similarly, while the Fund does not expect to earn significant investment
company taxable income, 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.
DIVIDENDS
Net income for dividend purposes consists of (i) interest accrued and
original discount earned on the Fund's assets for the applicable dividend
period, plus (ii) the amortization of market discount and minus amortization
of market premium on such assets, and less (iii) accrued expenses directly
attributable to the Fund, and the general expenses (e.g., legal, accounting
and Directors' fees) of the Company prorated to the Fund on the basis of its
relative net assets. The amortization of market discount on the 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 the Fund at $1.00 As a result of a significant expense or realized
or unrealized loss incurred by the Fund, it is possible that the Fund's net
asset value per share may fall below $1.00.
ADDITIONAL YIELD INFORMATION
The "yields", "effective yields" and "tax-equivalent yields" are
calculated separately for each class of shares of the Fund. The seven day
yield for each class of shares in the Fund is calculated by determining the
net change in the value of a hypothetical preexisting account in the 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 the 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 a class of the Fund's shares is
computed by (a) dividing the portion of the yield for such class (calculated
as above) that is exempt from federal income tax and New York State and New
York City personal income taxes by one minus a stated combined federal, New
York State and New York City income tax rate; (b) dividing that portion of the
Fund's yield (calculated as above) that is exempt from federal income tax only
by one minus a stated federal income tax rate; and (c) adding the figures
resulting from (a) and (b) above 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.
From time to time, in advertisements or in reports to shareholders, the
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 the 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 the Fund. Since
yields fluctuate, yield data cannot necessarily be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance and yield are generally functions of the kind and quality of the
investments held in a portfolio, portfolio maturity, operating expenses and
market conditions.
ADDITIONAL INFORMATION CONCERNING FUND SHARES
As used in this Statement of Additional Information and the
Prospectuses, a "majority of the outstanding shares", when referring to the
approvals to be obtained from shareholders in connection with matters
affecting any particular portfolio of the Company (such as the Fund) (e.g.,
approval of investment advisory contracts) or any particular class (e.g.,
approval of plans of distribution) means the lesser of (1) 67% of the shares
of that particular or class, as appropriate, represented at a meeting at which
the holders of more than 50% of the outstanding shares of such portfolio or
class, as appropriate, are present in person or by proxy, or (2) more than 50%
of the outstanding shares of such portfolio or class, as appropriate.
The By-Laws of the Company provide that the Company shall not be
required to hold an annual meeting of shareholders in any year in which the
election of directors to the Company's Board of Directors is not required to
be acted upon under the 1940 Act. The law under certain circumstances provides
shareholders with the right to call for a meeting of shareholders to consider
the removal of one or more directors. To the extent required by law, the
Company will assist in shareholder communication in such matters.
Shares of a class of a particular portfolio of the Company (such as the
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 the
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
Ernst & Young LLP acts as the Fund's independent auditors and has
offices at 200 Clarendon Street, Boston, Massachusetts 02116-5072.
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.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
None
Included in Part B:
Financial Statements for the six-months ended January 31, 1995, for Lehman
Brothers Daily Income Fund, Lehman Brothers Municipal Income Fund and Lehman
Selected Growth Stock Portfolio are incorporated herein by reference to the
Semi-Annual filed with the Commission on March 28, 1995.
Included in Part C:
None
(b) Exhibits:
Exhibit
Number Description
1(a)
- --
Registrant's Amended Articles of
Incorporation and Certificate of Correction
of Amended Articles of Incorporation are
incorporated by reference to Exhibit 1(a)
of Post-Effective Amendment No. 2, filed
January 14, 1994 ("Post-Effective Amendment
No. 2") to the Registrant's Registration
Statement on Form N-1A, filed May 6, 1993,
Registration Nos. 33-62312 and 811-7706
(the "Registration Statement").
1(b)
- --
Articles Supplementary to Registrant's
Articles of Incorporation dated March 15,
1994 is incorporated by reference to
Exhibit 1(b) of Post-Effective Amendment
No. 3, filed September 8, 1994 ("Post-
Effective Amendment No. 3").
1(c)
- --
Articles Supplementary to Registrant's
Articles of Incorporation, dated July 27,
1994, is incorporated by reference to
Exhibit 1(c) of Post-Effective Amendment
No. 3.
1(d)
- --
Form of Articles Supplementary to
Registrant's Articles of Incorporation with
respect to Lehman Brothers International
Bond Fund, Lehman Brothers Global Emerging
Markets Equity Fund, Lehman Brothers Global
Emerging Markets Bond Fund, Lehman Brothers
Large Capitalization U.S. Equity Fund,
Lehman Brothers International Equity Fund,
Lehman Brothers Municipal Bond Fund, Lehman
Brothers New York Municipal Bond Fund and
Lehman Brothers High-Grade Fixed Income
Fund is incorporated by reference to
Exhibit 1(d) of Post-Effective Amendment
No. 3.
1(e)
- --
Form of Articles Supplementary to
Registrant's Articles of Incorporation with
respect to Lehman Brothers New York
Municipal Money Market Fund is incorporated
by reference to Exhibit 1(e) of Post-
Effective Amendment No. 6, filed on
February 22, 1995 ("Post-Effective
Amendment No. 6").
2
- --
Registrant's By-Laws are incorporated by
reference to Exhibit 2 of Pre-Effective
Amendment No. 1, filed July 22, 1993 ("Pre-
Effective Amendment No. 1") to the
Registration Statement.
3
- --
Not Applicable.
4
- --
Form of Stock Certificate for shares of
Registrant's Capital Stock is incorporated
by reference to Exhibit 4 of Pre-Effective
Amendment No. 1.
5(a)
- --
Form of Investment Advisory Agreements
between Registrant and Lehman Brothers
Global Asset Management Inc.("LBGAM Inc.")
relating to Lehman Brothers Daily Income
Fund and Lehman Brothers Municipal Income
Fund are incorporated by reference to
Exhibit 5 of Pre-Effective Amendment No. 1.
5(b)
- --
Form of Investment Advisory Agreement
between Registrant and LBGAM Inc. relating
to Lehman Selected Growth Stock Portfolio
is incorporated by reference to Exhibit
5(b) of Post-Effective Amendment No. 2.
5(c)
- --
Form of Investment Advisory Agreements
between Registrant and Lehman Brothers
Global Asset Management Limited ("LBGAM
Ltd.") relating to Lehman Mexican Growth
and Income Portfolio and Lehman Latin
America Dollar Income Portfolio is
incorporated by reference to Exhibit 5(c)
of Post-Effective Amendment No 2.
5(d)
- --
Form of Research Service Agreements between
Lehman Brothers Inc. and LBGAM Ltd. is
incorporated by reference to Exhibit 10 of
Post-Effective Amendment No. 2.
5(e)
- --
Form of Investment Advisory Agreements
between Registrant and LBGAM Ltd. relating
to Lehman Brothers International Bond Fund,
Lehman Brothers Global Emerging Markets
Equity Fund, Lehman Brothers Global
Emerging Markets Bond Fund, Lehman Brothers
Large Capitalization U.S. Equity Fund and
Lehman Brothers International Equity Fund
are incorporated by reference to Exhibit
5(e) of Post-Effective Amendment No. 3.
5(f)
- --
Form of Investment Advisory Agreements
between Registrant and LBGAM Inc. relating
to Lehman Brothers Municipal Bond Fund,
Lehman Brothers New York Municipal Bond
Fund and Lehman Brothers High-Grade Fixed
Income Fund are incorporated by reference
to Exhibit 5(f) of Post-Effective Amendment
No. 3.
5(g)
- --
Form of Investment Advisory Agreement
between Registrant and LBGAM Inc. relating
to Lehman Brothers New York Municipal Money
Market Fund is incorporated by reference to
Exhibit 5(g) of Post-Effective Amendment
No. 6.
6
- --
Form of Distribution Agreement between
Registrant and Lehman Brothers Inc. is
incorporated by reference to Exhibit 6 of
Pre-Effective Amendment No. 1.
7
- --
Not Applicable.
8(a)
- --
Form of Custodian Agreement between
Registrant and Boston Safe Deposit and
Trust Company is incorporated by reference
to Exhibit 8(a) of Pre-Effective Amendment
No. 1.
8(b)
- --
Form of Administration Agreement between
Registrant and The Boston Company Advisors,
Inc. is incorporated by reference to
Exhibit 8(b) of Pre-Effective Amendment No.
1.
9(a)
- --
Form of Transfer Agency Agreement between
Registrant and The Shareholder Services
Group, Inc. is incorporated by reference to
Exhibit 9 of Pre-Effective Amendment No. 1.
9(b)
- --
Form of Amendment to the Transfer Agency
Agreement between Registrant and The
Shareholder Services Group, Inc. is
incorporated by reference to Exhibit 9(b)
of Post-Effective Amendment No. 3.
10
- --
Opinion and Consent of Counsel will be
filed by amendment.
11
- --
Consent of independent auditors will be
filed by amendment.
12
- --
Not Applicable.
13(a)
- --
Form of Share Purchase Agreement between
Registrant and Lehman Brothers Inc.
relating to Lehman Brothers Daily Income
Fund and Lehman Brothers Municipal Income
Fund is incorporated by reference to
Exhibit 13 of Pre-Effective Amendment No.
1.
13(b)
- --
Form of Share Purchase Agreement between
Registrant and Lehman Brothers Inc.
relating to the addition of Selected Growth
Stock Portfolio, Lehman Latin America
Dollar Income Portfolio and Lehman Mexican
Growth and Income Portfolio is incorporated
by reference to Exhibit 13(b) of Post-
Effective Amendment No. 2.
13(c)
- --
Form of Share Purchase Agreement between
Registrant and Lehman Brothers Inc.
relating to Global Clearing Shares, dated
July 21, 1994, is incorporated by reference
to Exhibit 13(c) of Post-Effective
Amendment No. 3.
13(d)
- --
Form of Share Purchase Agreement between
Registrant and Lehman Brothers Inc.
relating to Lehman Brothers International
Bond Fund, Lehman Brothers Global Emerging
Markets Equity Fund, Lehman Brothers Global
Emerging Markets Bond Fund, Lehman Brothers
Large Capitalization U.S. Equity Fund,
Lehman Brothers International Equity Fund,
Lehman Brothers Municipal Bond Fund, Lehman
Brothers New York Municipal Bond Fund and
Lehman Brothers High-Grade Fixed Income
Fund is incorporated by reference to
Exhibit 13(d) of Post-Effective Amendment
No. 3.
13(e)
- --
Form of Share Purchase Agreement between
Registrant and Lehman Brothers Inc.
relating to Lehman Brothers New York
Municipal Money Market Fund and additional
shares of Lehman Brothers Daily Income Fund
and Lehman Brothers Municipal Income Fund
is incorporated by reference to Exhibit
13(e) of Post-Effective Amendment No. 6.
14
- --
Not Applicable.
15(a)
- --
Form of Plan of Distribution relating to
Lehman Brothers Daily Income Fund and
Lehman Brothers Municipal Income Fund is
incorporated by reference to Exhibit 15 of
Pre-Effective Amendment No. 1.
15(b)
- --
Form of Amended and Restated Services and
Distribution Plan is incorporated by
reference to Exhibit 15(b) of Post-
Effective Amendment No. 3.
15(c)
- --
Form of Amended and Restated Distribution
Plan (the "Restated Plan") dated January
27, 1994 relating to Lehman Brothers Daily
Income Fund and Lehman Brothers Municipal
Income Fund is incorporated by reference to
Exhibit 15(c) of Post-Effective Amendment
No. 3.
15(d)
- --
Amendment to the Restated Plan dated July
21, 1994 is incorporated by reference to
Exhibit 15(d) of Post-Effective Amendment
No. 3.
15(e)
- --
Form of Shareholder Servicing Agreement
between Registrant and Service
Organizations relating to the Select Shares
of Lehman Brothers International Bond Fund,
Lehman Brothers Global Emerging Markets
Equity Fund, Lehman Brothers Global
Emerging Markets Bond Fund, Lehman Brothers
Large Capitalization U.S. Equity Fund,
Lehman Brothers International Equity Fund,
Lehman Brothers Municipal Bond Fund, Lehman
Brothers New York Municipal Bond Fund and
Lehman Brothers High-Grade Fixed Income
Fund is incorporated by reference to
Exhibit 15(e) of Post-Effective Amendment
No. 3.
15(f)
- --
Form of Amended and Restated Distribution
Plan, as amended, with respect to Lehman
Brothers New York Municipal Money Market
Fund is incorporated by reference to
Exhibit 15(f) of Post-Effective Amendment
No. 6.
15(g)
- --
Form of Amended and Restated Services and
Distribution Plan, as amended, with respect
to additional shares of Lehman Brothers
Daily Income Fund and Lehman Brothers
Municipal Income Fund is incorporated by
reference to Exhibit 15(g) of Post-
Effective Amendment No. 6.
16
- --
Not Applicable.
17
- --
Not Applicable.
18
- --
Powers of Attorney of Mr. Dorsett, Mr.
Hatsopoulos and Ms. Holmes dated November
2, 1994 are incorporated by reference to
Exhibit 18 of Post-Effective Amendment No.
4.
27
- --
Financial Data Schedules for the
Company's financial statements dated
January 31, 1995 are filed herewith.
Item 25. Persons Controlled by or under Common Control with
Registrant
None.
Item 26 . Number of Holders of Securities
Title of Class
Common Stock, par value
$.001 per share
Number of Holders as of July 12, 1995
FUND
Lehman Brothers Daily Income Fund 42,138
(Select Shares)
Lehman Brothers Daily Income Fund 2
(CDSC Shares)
Lehman Brothers Municipal Income Fund 3,763
(Select Shares)
Lehman Brothers Municipal Income Fund 1
(CDSC Shares)
Lehman Brothers Selected Growth Stock Portfolio 928
(CDSC Shares)
Item 27. Indemnification.
Reference is made to Articles VII and VIII of Registrant's Amended
Articles of Incorporation filed as Exhibit 1(a) to Post-Effective Amendment
No. 2 to the Registration Statement, Article V of Registrant's By-Laws filed
as Exhibit 2 to Pre-Effective Amendment No. 1, and paragraph 4 of the
Distribution Agreement filed as Exhibit 6 to Pre-Effective Amendment No. 1.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities of Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Lehman Brothers Global Asset Management Inc. ("LBGAM Inc."), which
serves as investment adviser to Lehman Brothers Daily Income Fund, Lehman
Brothers Municipal Income Fund and Lehman Selected Growth Stock Portfolio, and
will serve as investment adviser to Lehman Brothers Municipal Bond Fund,
Lehman Brothers New York Municipal Bond Fund, Lehman Brothers New York
Municipal Money Market Fund and Lehman Brothers High-Grade Fixed Income Fund,
is a wholly owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
LBGAM Inc. is an investment adviser registered under the Investment Advisers
Act of 1940 (the "Advisers Act") and serves as investment counsel for
individuals with substantial capital, executors, trustees and institutions.
It also serves as investment adviser or sub-investment adviser to several
investment companies.
The list required by this Item 28 of officers and directors of LBGAM
Inc., together with information as to any other business profession, vocation
or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules
A and D of Form ADV filed by LBGAM Inc. pursuant to the Advisers Act (SEC File
No. 801-42006).
Lehman Brothers Global Asset Management Limited ("LBGAM Ltd."), which
will serve as investment adviser to Lehman Mexican Growth and Income
Portfolio, Lehman Latin America Dollar Income Portfolio, Lehman Brothers
International Bond Fund, Lehman Brothers Global Emerging Markets Equity Fund,
Lehman Brothers Global Emerging Markets Bond Fund, Lehman Brothers Large
Capitalization U.S. Equity Fund, and Lehman Brothers International Equity
Fund, is an affiliate of Lehman Brothers and is an indirect, wholly owned
subsidiary of Holdings. LBGAM Ltd. is an investment adviser registered under
the Advisers Act and serves as investment adviser or sub-investment adviser to
several U.S. registered and offshore investment funds.
The list required by this Item 28 of officers and directors of LBGAM
Ltd., together with information as to any other business profession, vocation
or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules
A and D of Form ADV filed by LBGAM Ltd. pursuant to the Advisers Act (SEC File
No. 801-21068).
Item 29. Principal Underwriters.
(a) In addition to acting as distributor for the shares of the
Registrant's funds, Lehman Brothers Inc.("Lehman Brothers") acts as
distributor for Lehman Brothers Institutional Funds Group Trust, The USA High
Yield Fund N.V., The Latin American Bond Fund N.V., Mexican Short-Term
Investment Portfolio N.V., Garzarelli Sector Analysis Portfolio N.V., The
Mexican Appreciation Fund N.V., The Mexico Premium Income Portfolio N.V., ECU
Fixed-Income Fund N.V., European Equity Investments N.V., Pacific Equity
Investments N.V., Global Bond Investments N.V., U.S. Money Market Investments
N.V., U.S. Appreciation Fund N.V., U.S. Government Securities Investments
N.V., The Asian Dragon Portfolio N.V., Offshore Diversified Strategic Income
Fund N.V., Lehman Brothers Series I Mortgage-Related Securities Portfolio
N.V., TBC Enhanced Tactical Asset Allocation Portfolio N.V., U.S. Tactical
Asset Allocation Portfolio N.V., Short-Term World Income Portfolio (Cayman),
The Global Advisors Portfolio N.V., The Global Advisors Portfolio II N.V.,
Short Duration U.S. Government Fund N.V., The Global Natural Resources Fund
N.V. and various series of unit investment trusts.
(b) Lehman Brothers is a wholly-owned subsidiary of Holdings. The
information required by this Item 29 with respect to each director, officer
and partner of Lehman Brothers is incorporated by reference to Schedule A of
Form BD filed by Lehman Brothers pursuant to the Securities Exchange Act of
1934 (SEC File No. 8-12324).
(c) Not Applicable.
Item 30. Location of Accounts and Records.
(1) Lehman Brothers Funds, Inc.
One Exchange Place
53 State Street
Boston, Massachusetts 02109
(2) Lehman Brothers Global Asset Management Inc.
3 World Financial Center
New York, New York 10285
(3) Lehman Brothers Global Asset Management Limited
Two Broadgate
London EC2M 7HA
England
(4) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(5) The Shareholder Services Group, Inc.
One Exchange Place
53 State Street
Boston, Massachusetts 02109
Item 31. Management Services.
Not Applicable
Item 32. Undertakings.
The undersigned Registrant hereby undertakes to file a post-effective
amendment, using financial statements which need not be certified, within four
to six months from the date the Registrant commences selling shares of each of
Lehman Mexican Growth and Income Portfolio, Lehman Latin America Dollar Income
Portfolio, Lehman Brothers International Bond Fund, Lehman Brothers Global
Emerging Markets Equity Fund, Lehman Brothers Global Emerging Markets Bond
Fund, Lehman Brothers Large Capitalization U.S. Equity Fund, Lehman Brothers
International Equity Fund, Lehman Brothers Municipal Bond Fund, Lehman
Brothers New York Municipal Bond Fund, Lehman Brothers High-Grade Fixed Income
Fund and Lehman Brothers New York Municipal Money Market Fund.
The undersigned Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
The undersigned Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting upon the question of removal of one or
more of Registrant's directors when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares of common stock
and, in connection with such meeting, to assist in communications with other
shareholders in this regard, as provided under Section 16(c) of the 1940 Act.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that
this Post-Effective Amendment No. 8 to the Registration Statement meets the
requirements for effectiveness pursuant to Rule 485(b) of the Securities Act
of 1933, as amended, and the Registrant has duly caused this Post-Effective
Amendment No. 8 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York on the 21st day of July, 1995.
LEHMAN BROTHERS FUNDS, INC.
Registrant
By: /s/ Andrew D. Gordon
Andrew D. Gordon, President
[/R]
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 8 to the Registration Statement of Lehman Brothers
Funds, Inc. has been signed below by the following persons in the capacities
and on the dates indicated.
Signature Title Date
/s/ Kirk Hartman Chairman of the Board and Director July 21, 1995
Kirk Hartman
/s/ Michael Kardok Treasurer and Chief Financial Officer July
21, 1995
Michael Kardok (Principal Financial and Accounting Officer)
* Director July 21, 1995
Burt N. Dorsett
* Director July 21, 1995
John Hatsopoulos
* Director July 21, 1995
Kathleen C. Holmes
*By: /s/ Andrew Gordon
Attorney-in-Fact
Exhibit Index
Exhibit
No. Exhibit
27 Financial Data Schedules
LEHMAN\RETAIL\PEA'S\PEA#8/PEA#8.DOC
- - 1 -
LEHMAN\RETAIL\PROSPECTUS\NYMUNI\GLOBAL1.DOC
- - 1 -
LEHMAN\RETAIL\PEA'S\PEA#8\NYMSEL.DOC
- - 1 -
LEHMAN\RETAIL\PEA'S\PEA#8\NYMMSAI.DOC
lehman/retail/pea's/pea#8/pea#8.doc
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> LEH BROS FUNDS,INC., DLY INCOME FND-CDSC SH
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[NUMBER] 1
<NAME> LEH BROS FUNDS,INC., DLY INCOME FND-SELECT SH
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[NUMBER-OF-SHARES-SOLD] 2,029,642,924
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<NAME> LEH BROS FNDS, INC., SEL GR STK FUND, CDSC SH
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<PERIOD-END> JAN-31-1995
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[INVESTMENTS-AT-VALUE] 32,661,738
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[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 199,803
[TOTAL-LIABILITIES] 2,030,383
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 30,936,260
[SHARES-COMMON-STOCK] 3,129,171
[SHARES-COMMON-PRIOR] 2,706,412
[ACCUMULATED-NII-CURRENT] (140,402)
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 614,925
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 710,062
[NET-ASSETS] 32,120,845
[DIVIDEND-INCOME] 69,598
[INTEREST-INCOME] 117,848
[OTHER-INCOME] 0
[EXPENSES-NET] 327,747
[NET-INVESTMENT-INCOME] (140,301)
[REALIZED-GAINS-CURRENT] 834,879
[APPREC-INCREASE-CURRENT] 839,337
[NET-CHANGE-FROM-OPS] 1,533,915
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (38,213)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 742,448
[NUMBER-OF-SHARES-REDEEMED] (322,392)
[SHARES-REINVESTED] 2,703
[NET-CHANGE-IN-ASSETS] 5,779,651
[ACCUMULATED-NII-PRIOR] 38,112
[ACCUMULATED-GAINS-PRIOR] (219,954)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 114,417
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 379,556
[AVERAGE-NET-ASSETS] 30,262,565
[PER-SHARE-NAV-BEGIN] 9.73
[PER-SHARE-NII] (0.05)
[PER-SHARE-GAIN-APPREC] 0.59
[PER-SHARE-DIVIDEND] (0.01)
[PER-SHARE-DISTRIBUTIONS] 0.00
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</TABLE>
