As filed with the Securities and Exchange Commission on February 22,
1995
Securities Act File No. 33-62312
Investment Company Act File No. 811-7706
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
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. 6
/X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 8
/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. Gary S. Schpero, 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):
____ 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)
X 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
<TABLE>
<CAPTION>
Form N-1A Location
Item in
No. Prospectus
<S> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Location in
N-1A Statement of Additional
Item Information
No.
<S> <C>
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
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
PART A
Lehman Brothers Funds, Inc.
Lehman Brothers New York Municipal Money Market Fund
Select Shares
Prospectus begins on page one.
Dated May ___, 1995
Information contained herein is subject to completion or amendment.
A registration statement
relating to these securities has been filed with the Securities and
Exchange Commission. These
securities may not be sold nor may offers to buy be accepted prior
to the time the registration
statement becomes effective. This Prospectus shall not constitute
an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of
these securities in any State in
which such offer, solicitation or sale would be unlawful prior
to registration or qualification
under the securities laws of any such State.
Subject to Completion, Dated February 22, 1995
Lehman Brothers New York Municipal Money Market Fund
Prospectus May ___, 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.
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 May __,
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
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Fund's Statement
of Additional Information incorporated herein by reference, in connection with
the offering made by this Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Fund or its Distributor. This Prospectus does not constitute an offering by
the Fund or by the Distributor in any jurisdiction in which such offering may
not lawfully be made.
Benefits to Investors
The Fund offers investors several important benefits:
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.
<TABLE>
Expense Summary
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
SELECT
SHARES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after waivers)*
___%
Rule 12b-1 Fees (after waivers)**
___%
Other Expenses - including Administration
Fees
(after waivers)
___%
Total Fund Operating Expenses
(after waivers)
___%
</TABLE>
* 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 ___%.
** 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 ___%.
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 ___%.
Absent the voluntary waivers referred to above, the ratio of total fund
operating expenses to average net assets would be ___%.
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:
<TABLE>
<CAPTION>
<S> <C> <C>
1
YEAR
3
YEAR
Select Shares:
$__
$__
</TABLE>
The foregoing should not be considered a representation of actual expenses and
rates of return, which may be greater or less than those shown. The foregoing
table has not been audited by the Fund's independent auditors.
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 LBGAM will monitor the liquidity
of such restricted securities under the supervision of the Board of Directors.
See "Investment Objective and Policies - Additional Information on Portfolio
Instruments and 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 five business days after the trade
date but which will, effective June 7, 1995, occur three 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 $10 billion in assets under
management as of December 31, 1994. Subject to the supervision and direction
of the Company's Board of Directors, LBGAM manages the Fund's portfolio in
accordance with the Fund's investment objective and policies, makes investment
decisions for the Fund and places orders to purchase and sell securities. As
compensation for the services of LBGAM as Investment Adviser to the Fund,
LBGAM is entitled to receive a monthly fee from the Fund at the annual rate of
0.30% of the value of the Fund's average daily net assets.
LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
ADMINISTRATOR AND TRANSFER AGENT - THE SHAREHOLDER SERVICES GROUP, INC.
The Shareholder Services Group, Inc. ("TSSG"), located at 53 State Street,
Boston, Massachusetts 02109, serves as the Fund's Administrator and transfer
agent. TSSG is a wholly-owned subsidiary of First Data Corporation. As
Administrator, TSSG calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation.
As compensation for TSSG's services as Administrator, TSSG is entitled to
receive a monthly fee from the Fund at the annual rate of 0.20% of the value
of the Fund's average daily net assets. TSSG is also entitled to a monthly fee
from the Fund for its services as transfer agent.
On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers that
Lehman Brothers and its affiliates, consistent with their fiduciary duties and
assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.). Lehman Brothers agreed to recommend
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect
wholly-owned subsidiary of Mellon, as custodian of mutual funds affiliated
with Lehman Brothers until May 21, 2000 to the extent consistent with its
fiduciary duties and other applicable law.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Lehman Brothers, located at 3 World Financial Center, New York, New York
10285, is the Distributor of the Fund's shares. Lehman Brothers, a leading
full service investment firm, meets the diverse financial needs of
individuals, institutions and governments around the world.
The Company has adopted a plan of distribution with respect to each class of
the Fund (the "Plan of Distribution") pursuant to Rule 12b-1 under the 1940
Act. Under the Plan of Distribution, the Fund has agreed with respect to the
Select 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.
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 Funds, Inc.
Lehman Brothers New York Municipal Money Market Fund
Global Clearing Shares
Prospectus begins on page one.
Dated May ___, 1995
Information contained herein is subject to completion or amendment.
A registration statement
relating to these securities has been filed with the Securities and
Exchange Commission. These
securities may not be sold nor may offers to buy be accepted prior
to the time the registration
statement becomes effective. This Prospectus shall not constitute
an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of
these securities in any State in
which such offer, solicitation or sale would be unlawful prior
to registration or qualification
under the securities laws of any such State.
Subject to Completion, Dated February 22, 1995
Lehman Brothers New York Municipal Money Market Fund
Prospectus May ___, 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.
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 May __,
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
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Fund's Statement
of Additional Information incorporated herein by reference, in connection with
the offering made by this Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Fund or its Distributor. This Prospectus does not constitute an offering by
the Fund or by the Distributor in any jurisdiction in which such offering may
not lawfully be made.
Benefits to Investors
The Fund offers investors several important benefits:
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.
<TABLE>
Expense Summary
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
GLOBAL CLEARING
SHARES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after waivers)*
___%
Rule 12b-1 Fees (after waivers)**
___%
Other Expenses - including Administration
Fees
(after waivers)
___%
Total Fund Operating Expenses
(after waivers)
___%
</TABLE>
* 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 ___%.
** 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 ___%.
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 ___%.
Absent the voluntary waivers referred to above, the ratio of total fund
operating expenses to average net assets would be ___%.
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:
<TABLE>
<CAPTION>
1
YEAR
3
YEAR
<S>
<C>
<C>
Global Clearing Shares:
$__
$__
</TABLE>
The foregoing should not be considered a representation of actual expenses and
rates of return, which may be greater or less than those shown. The foregoing
table has not been audited by the Fund's independent auditors.
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 LBGAM will monitor the liquidity
of such restricted securities under the supervision of the Board of Directors.
See "Investment Objective and Policies - Additional Information on Portfolio
Instruments and 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 five business days after the trade
date but which will, effective June 7, 1995, occur three 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 $10 billion in assets under
management as of December 31, 1994. Subject to the supervision and direction
of the Company's Board of Directors, LBGAM manages the Fund's portfolio in
accordance with the Fund's investment objective and policies, makes investment
decisions for the Fund and places orders to purchase and sell securities. As
compensation for the services of LBGAM as Investment Adviser to the Fund,
LBGAM is entitled to receive a monthly fee from the Fund at the annual rate of
0.30% of the value of the Fund's average daily net assets.
LBGAM is located at 3 World Financial Center, New York, New York 10285. LBGAM
is a wholly-owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
ADMINISTRATOR AND TRANSFER AGENT - THE SHAREHOLDER SERVICES GROUP, INC.
The Shareholder Services Group, Inc. ("TSSG"), located at 53 State Street,
Boston, Massachusetts 02109, serves as the Fund's Administrator and transfer
agent. TSSG is a wholly-owned subsidiary of First Data Corporation. As
Administrator, TSSG calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation.
As compensation for TSSG's services as Administrator, TSSG is entitled to
receive a monthly fee from the Fund at the annual rate of 0.20% of the value
of the Fund's average daily net assets. TSSG is also entitled to a monthly fee
from the Fund for its services as transfer agent.
On May 6, 1994, TSSG acquired the third party mutual fund administration
business of The Boston Company Advisors, Inc., an indirect wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). In connection with this
transaction, Mellon assigned to TSSG its agreement with Lehman Brothers that
Lehman Brothers and its affiliates, consistent with their fiduciary duties and
assuming certain service quality standards are met, would recommend TSSG as
the provider of administration services to the Fund. This duty to recommend
expires on May 21, 2000. In addition, under the terms of the Stock Purchase
Agreement dated September 14, 1992 between Mellon and Lehman Brothers (then
named Shearson Lehman Brothers Inc.). Lehman Brothers agreed to recommend
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect
wholly-owned subsidiary of Mellon, as custodian of mutual funds affiliated
with Lehman Brothers until May 21, 2000 to the extent consistent with its
fiduciary duties and other applicable law.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Lehman Brothers, located at 3 World Financial Center, New York, New York
10285, is the Distributor of the Fund's shares. Lehman Brothers, a leading
full service investment firm, meets the diverse financial needs of
individuals, institutions and governments around the world.
The Company has adopted a plan of distribution with respect to each class of
the Fund (the "Plan of Distribution") pursuant to Rule 12b-1 under the 1940
Act. Under the Plan of Distribution, the Fund has agreed with respect to the
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.
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
Part B
STATEMENT OF ADDITIONAL INFORMATION
Information contained herein is subject to completion or amendment.
A registration statement
relating to these securities has been filed with the Securities and
Exchange Commission. These
securities may not be sold nor may offers to buy be accepted prior to
the time the registration
statement becomes effective. This Statement of Additional Information
shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there
be any sale of these
securities in any State in which such offer, solicitation or sale would
be unlawful prior to
registration or qualification under the securities laws of any such State.
Subject to Completion - Dated February 22, 1995
Lehman Brothers New York Municipal Money Market
Fund
An Investment Portfolio of Lehman Brothers Funds, Inc.
Statement of Additional Information
_________, 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 _______, 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
<TABLE>
Page
<S> <C>
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
</TABLE>
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 Sates 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, 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 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.
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. Prospectuseses 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:
<TABLE>
<CAPTION>
Name and Address
Position with the
Company
Principal Occupation
During Past 5 Years and
Other Affiliations
<S>
<C>
<C>
Kirk Hartman (1)
3 World Financial Center
New York, New York 10285
Age: ____
Chairman of the
Board and Director
Managing Director,
Lehman Brothers.
Burt N. Dorsett (2)(3)
201 East 62nd Street
New York, New York 10021
Age: ____
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.
</Table
</TABLE>
<TABLE>
<CAPTION>
Name and Address
Position with the
Company
Principal Occupation
During Past 5 Years and
Other Affiliations
<S>
<C>
<C>
Kathleen C. Holmes(2)(3)
Wharton Financial
Institutions Center
3620 Locust Walk
3301 Steinberg Hall
Dietrich Hall
Philadelphia,
Pennsylvania 19104-6367
Age:
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:
Director
Executive Vice
President and Chief
Financial Officer,
Thermo Electron Corp.
Andrew Gordon
3 World Financial Center
New York, New York 10285
Age:
President
Managing Director,
Lehman Brothers.
John M. Winters
3 World Financial Center
New York, New York 10285
Age:
Vice President
Senior Vice President,
Lehman Brothers.
Michael Kardok
53 State Street
Boston, Massachusetts
02109
Age:
Treasurer and Chief
Financial Officer
Vice President, The
Shareholder Services
Group, Inc.
Patricia L. Bickimer
53 State Street
Boston, Massachusetts
02109
Age:
Secretary
Vice President and
Associate General
Counsel, The
Shareholder Services
Group, Inc.
</TABLE>
___________
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
<TABLE>
<CAPTION>
Name of
Person and
Position
Aggregate
Compensat
ion
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*
<S>
<C>
<C>
<C>
<C>
Kirk Hartman,
Chairman of
the Board
0
0
N/A
$0 (1)
Kathleen
Holmes,
Director
$
0
N/A
$ (2)
John
Hatsopolous,
Director
$
0
N/A
$ (1)
Burt N.
Dorsett,
Director
$
0
N/A
$ (2)
</TABLE>
_____________
* 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.
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 C
Consent and Opinion of Independent Auditors will be filed by
amendment.
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S>
<C>
<C>
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) to 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) to 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) to Post-Effective Amendment
No. 3.
</TABLE>
<TABLE>
<S>
<C>
<C>
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) to 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 filed
herewith.
2
- --
Registrant's By-Laws are incorporated by
reference to Exhibit 2 to 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 to 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 to 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) to 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)
to Post-Effective Amendment No 2.
</TABLE>
<TABLE>
<S>
<C>
<C>
5(d)
- --
Form of Research Service Agreements
between Lehman Brothers Inc. and LBGAM
Ltd. is incorporated by reference to
Exhibit 10 to 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) to 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) to 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 filed herewith.
6
- --
Form of Distribution Agreement between
Registrant and Lehman Brothers Inc. is
incorporated by reference to Exhibit 6 to
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) to 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) to 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 to Pre-Effective Amendment
No. 1.
</TABLE>
<TABLE>
<S>
<C>
<C>
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)
to Post-Effective Amendment No. 3.
10
- --
Opinion and Consent of Piper & Marbury
is to be filed by amendment.
11
- --
Consent of independent auditors is
incorporated by reference to Exhibit 11 to
Post-Effective Amendment No. 5.
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 to 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)
to 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) to 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) to 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 filed herewith.
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 to
Pre-Effective Amendment No. 1.
15(b)
- --
Form of Amended and Restated Services and
Distribution Plan is incorporated by
reference to Exhibit 15(b) to 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) to Post-Effective
Amendment No. 3.
15(d)
- --
Amendment to the Restated Plan dated July
21, 1994 is incorporated by reference to
Exhibit 15(d) to 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) to 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 filed herewith.
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.
</TABLE>
<TABLE>
<CAPTION>
<S>
<C>
<C>
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 to Post-Effective Amendment No.
4.
27
- --
Financial Data Schedules for the Company's
financial statements dated July 31, 1994
are filed herewith.
</TABLE>
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
<TABLE>
Holders as of February 14, 1995
FUND
<S> <C>
Lehman Brothers Daily Income Fund 626,962,107.890
(Class A)
Lehman Brothers Municipal Income Fund 284,342,882.790
(Class B)
Lehman Brothers Selected Growth Stock Portfolio 3,169,531.497
(Class C)
</TABLE>
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, the
Registrant has duly caused this Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized,
in the City of New York and State of New York, on February 22, 1995.
LEHMAN BROTHERS FUNDS, INC.
Registrant
By: /s/ Andrew D. Gordon
Andrew D. Gordon, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Kirk Hartman Chairman of the Board
Kirk Hartman and Director February 22, 1995
/s/ Michael Kardok Treasurer and Chief
Michael Kardok Financial Officer February 22, 1995
(principal financial and accounting officer)
* Director February 22, 1995
Burt N. Dorsett
* Director February 22, 1995
John Hatsopoulos
* Director February 22, 1995
Kathleen C. Holmes
* /s/ Andrew Gordon
Attorney-in-Fact
EXHIBIT No. DESCRIPTION OF EXHIBIT
1(e) Form of Articles Supplementary to the Registrant's Articles of
Incorporation to be filed with respect to Lehman Brothers New York
Municipal Money Market Fund.
5(g) Form of Investment Advisory Agreement with Lehman Brothers
Global Asset Management with respect to Lehman Brothers New York
Municipal Money Market Fund.
10 Opinion of Piper & Marbury to be filed by amendment.
13(e) Form of Share Purchase Agreement with respect to Lehman
Brothers New York Municipal Money Market Fund and additional shares of
Lehman Brothers Daily Income Fund and Lehman Brothers Municipal Income
Fund.
15(f) Form of Amended and Restated Distribution Plan, as amended,
with respect to Lehman Brothers New York Municipal Money Market
Fund.
15(g)Form of Amended and Restated Services and Distribution Plan, as
amended, with respect to and additional classes of shares of Lehman
Brothers Daily Income Fund and Lehman Brothers Municipal Income
Fund.
27 Financial Data Schedules
Exhibit 1(e)
LEHMAN BROTHERS FUNDS, INC.
FORM OF
ARTICLES SUPPLEMENTARY
Lehman Brothers Funds, Inc., a Maryland corporation having
its principal office in Baltimore City, Maryland (the
"Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority of the Board of
Directors to classify and reclassify unissued shares of capital
stock of the Corporation, the Board of Directors has:
(a) duly divided and reclassified 555 million shares of
the authorized and unissued shares of Class A Common Stock of
the Corporation, par value $.001 per shares, into Class E Common
Stock and has provided for the issuance of such class;
(b) duly divided and reclassified 605 million shares of
the authorized and unissued shares of Class A Common Stock of
the Corporation, par value $.001 per share, into Class F Common
Stock and has provided for the issuance of such class;
(c) duly divided and reclassified 605 million shares of
the authorized and unissued shares of Class A Common Stock of
the Corporation, par value $.001 per share, into Class G Common
Stock and has provided for the issuance of such class;
(d) duly divided and reclassified 605 million shares of
the authorized and unissued shares of Class A Common Stock of
the Corporation, par value $.001 per share, into Class H Common
Stock, and has provided for the issuance of such class;
(e) duly divided and reclassified 605 million shares of
the authorized and unissued shares of Class A Common stock of
the Corporation, par value $.001 per share, into Class I Common
Stock and has provided for the issuance of such class;
(f) duly divided and reclassified 148.5 million shares of
the authorized and unissued shares of Class A Common Stock of
the Corporation, par value $.001 per share, and 452.5 million
shares of the authorized and unissued shares of Class B Common
Stock of the Corporation, par value $.001 per share, into Class
J Common Stock and has provided for the issuance of such class;
(g) duly divided and reclassified 605 million shares of
the authorized and unissued shares of Class B Common Stock of
the Corporation, par value $.001 per share, into Class K Common
Stock, and has provided for the issuance of such class;
(h) duly divided and reclassified 605 million shares of
the authorized and unissued shares of Class B Common Stock of
the Corporation, par value $.001 per share, into Class L Common
Stock, par value $.001 per share, and has provided for the
issuance of such class;
(i) duly divided and reclassified 605 million shares of
the authorized and unissued shares of Class B Common Stock of
the Corporation, par value $.001 per share, into Class M Common
Stock, and has provided for the issuance of such class; and
(j) duly divided and reclassified 702 million shares of
the authorized and unissued shares of Class B Common Stock of
the Corporation, par value $.001 per share, 49 million shares of
the authorized and unissued shares of Class C Common Stock of
the Corporation, par value $.001 per share, and 49 million
shares of the authorized and unissued shares of Class D Common
Stock of the Corporation, par value $.001 per share, into Class
N Common Stock, and has provided for the issuance of such class.
Any class of Common Stock shall be referred to herein
individually as a "Class" and collectively, together with any
further classes from time to time established, as "Classes."
SECOND: The shares of Class F Common Stock, Class G
Common Stock, Class H Common Stock, Class I Common Stock, Class
J Common Stock, Class K Common Stock, Class L Common Stock,
Class M Common Stock and Class N Common Stock, as so divided and
reclassified by the Corporation's Board of Directors, shall have
the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption set forth in the
Corporation's Charter and shall be subject to all provisions of
the Corporation's Charter relating to shares of Class A Common
Stock, Class B Common Stock, Class C Common Stock, Class D
Common Stock and Class E Common Stock, respectively, and to
stock of the Corporation generally, except as otherwise set
forth in these Articles Supplementary.
THIRD: (a) The Class A Common Stock shall have eight
sub-classes of shares, the first of which, the sub-class known
as the "Select" sub-class which shall be redesignated as the
"Investment" sub-class, consisting, until further changed, of
1.8765 billion shares, the "Select" sub-class, consisting, until
further changed, of 5 million shares, the "Premier" sub-class,
consisting, until further changed, of 5 million shares, the
"Class A" sub-class, consisting, until further changed, of 300
million shares, the "Class B" sub-class, consisting, until
further changed, of 150 million shares, the "Class C" sub-class,
consisting, until further changed, of 25 mllion shares, the
"Class W" sub-class, consisting, until further changed, of 10
million shares and the "Global Clearing" sub-class, consisting,
until further changed, of 300 million shares.
(b) The Class B Common Stock shall have eight
sub-classes of shares, the first of which, the sub-class known
as the "Select" sub-class which shall be redesignated as the
"Investment" sub-class, consisting, until further changed, of
1.8765 billion shares, the "Select" sub-class, consisting, until
further changed, of 5 million shares, the "Premier" sub-class,
consisting, until further changed of 5 million shares, the
"Class A" sub-class, consisting, until further changed, of 300
million shares, the "Class B" sub-class, consisting, until
further changed, of 150 million shares, the "Class C" sub-class,
consisting, until further changed, of 25 mllion shares, the
"Class W" sub-class, consisting, until further changed, of 10
million shares and the "Global Clearing" sub-class, consisting,
until further changed, of 300 million shares.
(c) The Class E Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(d) The Class F Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(e) The Class G Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(f) The Class H Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(g) The Class I Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(h) The Class J Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(i) The Class K Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(j) The Class L Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(k) The Class M Common Stock shall have six
sub-classes of shares, which shall be designated the "Select"
sub-class, consisting, until further changed, of 10 million
shares, the "Premier" sub-class, consisting, until further
changed, of 10 million shares, the "Class A" sub-class,
consisting, until further changed, of 350 million shares, the
"Class B" sub-class, consisting, until further changed, of 200
million shares, the "Class C" sub-class, consisting, until
further changed, of 25 million shares, and the "Class W" sub-
class, consisting, until further changed, of 10 million shares.
(l) The Class N Common Stock shall have two
sub-classes of shares, which shall be designated the
"Investment" sub-class, consisting, until further changed, of
500 million shares and the "Global Clearing" sub-class,
consisting, until further changed, of 300 million shares.
(m) Any sub-class of any Class of Common Stock
shall be referred to herein individually as a "Sub-Class" and
collectively, together with any further sub-classes from time to
time established, as "Sub-Classes."
(n) All Sub-Classes of a particular Class of
Common Stock of the Corporation shall represent the same
interest in the Corporation and have identical voting, dividend,
liquidation, and other rights, terms and conditions with any
other shares of Common Stock of that Class; provided, however,
that notwithstanding anything in the Corporation's Charter to
the contrary, shares of Class F Common Stock, Class G Common
Stock, Class H Common Stock, Class I Common Stock, Class J
Common Stock, Class K Common Stock, Class L Common Stock, Class
M Common Stock and Class N Common Stock shall have such
additional rights, terms and conditions as are provided in
section FOURTH below; and provided further, however, that
notwithstanding anything in the Corporation's Charter to the
contrary:
(1) Expenses related solely to a particular Sub-Class of
a Class (including, without limitation, distribution expenses
under a Rule 12b-1 plan and administrative expenses under an
administration or service agreement, plan or other arrangement,
however designated) shall be borne by that Sub-Class and shall
be appropriately reflected (in the manner determined by the
Board of Directors) in the net asset value, dividends,
distribution and liquidation rights of the shares of that Sub-
Class.
(2) As to any matter with respect to which a separate
vote of any Sub-Class of a Class is required by the Investment
Company Act of 1940 (the "Investment Company Act") or by the
Maryland General Corporation Law (including, without limitation,
approval of any plan, agreement or other arrangement referred to
in subsection (1) above), such requirement as to a separate vote
by that Sub-Class shall apply in lieu of Single Class Voting (as
defined in the Corporation's Charter), and if permitted by the
Investment Company Act or the Maryland General Corporation Law,
the Sub-Classes of more than one Class shall vote together as a
single class on any such matter which shall have the same effect
on each such Sub-Class. As to any matter which does not affect
the interest of a particular Sub-Class of a Class, only the
holders of shares of the affected Sub-Class of that Class shall
be entitled to vote.
FOURTH: The Shares of the Class F Common Stock, the
Class G Common Stock, the Class H Common Stock, the Class I
Common Stock, the Class J Common Stock, the Class K Common
Stock, the Class L Common Stock, the Class M Common Stock and
the Class N Common Stock shall have the following additional
rights, terms and conditions:
(1) Each such Class or Sub-Class thereof shall be subject
to such contingent deferred sales charges and/or other sales
charges as may be established by resolution of the Board of
Directors from time to time in accordance with the Investment
Company Act and applicable rules and regulations of the National
Association of Securities Dealers, Inc.
(2) Each such Class or Sub-Class shall have an exchange
privilege, at such times and upon such terms and conditions as
may be established by resolution of the Board of Directors from
time to time, permitting exchange of shares of one of such
Classes or Sub-Classes for shares of other Classes or Sub-
Classes.
FIFTH: The shares aforesaid have been duly classified
or reclassified by the Board of Directors pursuant to the
authority and power contained in the Corporation's Charter.
SIXTH: These Articles Supplementary do not increase the
authorized stock of the Corporation.
IN WITNESS WHEREOF, LEHMAN BROTHERS FUNDS, INC. has caused
these presents to be signed in its name and on its behalf by its
President and witnessed by its Secretary on
, 1995.
WITNESS: LEHMAN BROTHERS FUNDS,
INC.
Patricia L. Bickimer, Secretary Andrew Gordon,
President
THE UNDERSIGNED, Andrew Gordon, President of LEHMAN
BROTHERS FUNDS, INC., who executed on behalf of the Corporation
the foregoing Articles Supplementary of which this certificate
is made a part, hereby acknowledges in the name and on behalf of
said Corporation the foregoing Articles Supplementary to be the
corporate act of said Corporation and hereby certifies that to
the best of his knowledge, information and belief the matters
and facts set forth therein with respect to the authorization
and approval thereof are true in all material respects under the
penalties of perjury.
Exhibit 5(g)
LEHMAN BROTHERS FUNDS, INC.
FORM OF
INVESTMENT ADVISORY AGREEMENT
___________, 1995
Lehman Brothers Global Asset Management Inc.
3 World Financial Center
New York, NY 10285
Ladies and Gentlemen:
Lehman Brothers Funds, Inc. (the "Company"), a
corporation organized under the laws of the State of
Maryland, confirms its agreement with Lehman Brothers Global
Asset Management Inc. (the "Advisor") regarding investment
advisory services to be provided by the Advisor to New York
Municipal Money Market Fund (the "Fund"), a portfolio of the
Company. The Advisor agrees to provide services upon the
following terms and conditions:
1. Investment Description; Appointment.
The Company anticipates that the Fund will employ
its capital by investing and reinvesting in investments of
the kind and in accordance with the limitations specified in
the Company's Articles of Incorporation dated May 5, 1993,
as amended from time to time (the "Articles of
Incorporation"), in the prospectus (the "Prospectus") and
the statement of additional information (the "Statement")
describing the Fund filed with the Securities and Exchange
Commission as part of the Company's Registration Statement
on Form N-1A, as amended from time to time, and in the
manner and to the extent as may from time to time be
approved by the Board of Directors of the Company. Copies
of the Prospectus, the Statement and the Articles of
Incorporation have been or will be submitted to the Advisor.
The Company desires to employ and appoints the Advisor to
act as the Fund's investment adviser. The Advisor accepts
the appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Investment Advisor.
Subject to the supervision and direction of the
Board of Directors of the Company, the Advisor has general
responsibility for the investment advisory services provided
to the Fund and will exercise this responsibility in
accordance with the Articles of Incorporation, the
Investment Company Act of 1940 and the Investment Advisers
Act of 1940, as the same may from time to time be amended,
and with the Fund's investment objective and policies as
stated in tthe Prospectus and Statement relating to the Fund
as from time to time in effect. In connection therewith,
the Advisor will, among other things, (a) manage the Fund's
portfolio in accordance with the Fund's investment objective
and policies as stated in the Prospectus and the Statement;
(b) make investment decisions for the Fund; (c) place orders
to purchase and sell securities on behalf of the Fund; (d)
employ professional portfolio managers and securities
analysts who provide research services to the Fund; (e)
participate in the formulation of the Fund's investment
policies; (f) analyze economic trends affecting the Fund;
and (g) monitor the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities
Act of 1934) that are provided to the Fund and may be
considered in selecting brokers or dealers to execute
particular transactions. In providing those services, the
Advisor will conduct a continual program of investment,
evaluation and, if appropriate, sale and reinvestment of the
Fund's assets. In addition, the Advisor will furnish the
Fund with whatever statistical information the Fund may
reasonably request with respect to the instruments that the
Fund may hold or contemplate purchasing.
3. Information Provided to the Company.
The Advisor will keep the Company informed of
developments materially affecting the Fund, and will, on its
own initiative, furnish the Company from time to time with
whatever information the Advisor believes is appropriate for
this purpose.
4. Standard of Care.
The Advisor will exercise its best judgment in
rendering the services described in paragraph 2 of this
Agreement. The Advisor will not be liable for any error of
judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which this Agreement
relates, except that nothing in this Agreement may be deemed
to protect or purport to protect the Advisor against any
liability to the Company or to shareholders of the Fund to
which the Advisor would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or by reason of the
Advisor's reckless disregard of its obligations and duties
under this Agreement.
5. Compensation.
In consideration of the services rendered pursuant
to this Agreement, the Company will pay the Advisor on the
first business day of each month a fee for the previous
month at the annual rate of .30% of the value of the average
daily net assets of the Fund. The fee for the period from
the date the Fund commences its investment operations to the
end of the month during which the Fund commences its
investment operations will be prorated according to the
proportion that the period bears to the full monthly period.
Upon any termination of this Agreement before the end of a
month, the fee for such part of that month will be prorated
according to the proportion that the period bears to the
full monthly period and will be payable upon the date of
termination of this Agreement. For the purpose of
determining fees payable to the Advisor, the value of the
Fund's net assets will be computed at the times and in the
manner specified in the Prospectus and/or the Statement.
6. Expenses.
The Advisor will bear all expenses in connection
with the performance of its services under this Agreement.
The Company will be responsible for all of the Fund's other
expenses and liabilities, including but not limited to:
costs incurred in connection with the Company's
organization; investment advisory, sub-investment advisory
and administration fees; fees for necessary professional and
brokerage services; fees for any pricing service; the costs
of regulatory compliance; the costs associated with
maintaining the Company's legal existence; and the costs of
corresponding with shareholders of the Fund.
7. Reduction of Fee.
If in any fiscal year of the Fund, the aggregate
expenses of the Fund (including fees pursuant to this
Agreement, but excluding interest, taxes, brokerage fees
and, if permitted by the relevant state securities
commissions, extraordinary expenses or other expenses)
exceed the expense limitation of any state having
jurisdiction over the Fund, the Advisor will reduce its fee
to the Fund for that excess expense, to the extent required
by state law. A fee reduction pursuant to this paragraph 7,
if any, will be estimated, reconciled and paid on a monthly
basis.
8. Services to Other Companies or Accounts.
(a) The Company understands that the Advisor now
acts, will continue to act and may act in the future as
investment adviser to fiduciary and other managed accounts,
and may act in the future as investment adviser to other
investment companies, and the Company has no objection to
the Advisor so acting, provided that whenever the Fund and
one or more fiduciary and other managed accounts or other
investment companies advised by the Advisor have available
funds for investment, investments suitable and appropriate
for each will be allocated in accordance with a formula
believed by the Advisor to be equitable to each. The
Company recognizes that in some cases this procedure may
adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the
Fund.
(b) The Company understands that the persons
employed by the Advisor to assist in the performance of the
Advisor's duties under this Agreement will not devote their
full time to such service and nothing contained in this
Agreement will be deemed to limit or restrict the right of
the Advisor or any affiliate of the Advisor to engage in and
devote time and attention to other businesses or to render
services of whatever kind or nature.
9. Term of Agreement.
(a) This Agreement will become effective as of
the date the Fund commences its investment operations and
will continue for an initial two-year term and will continue
thereafter so long as the continuance is specifically
approved at least annually by (i) the Board of Directors of
the Company or (ii) a vote of a "majority" (as defined in
the Investment Company Act of 1940, as amended (the "1940
Act")) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a
majority of the Directors who are not "interested persons"
(as defined in the 1940 Act) of any party to this Agreement,
by vote cast in person at a meeting called for the purpose
of voting on the approval.
(b) This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of
Directors of the Company or by vote of holders of a majority
of the Fund's outstanding voting securities, or upon 60
days' written notice, by the Advisor.
(c) This Agreement will terminate automatically
in the event of its "assignment" (as defined in the 1940
Act).
10. Representation by the Company.
The Company represents that a copy of the Articles
of Incorporation are on file with the Secretary of the State
of Maryland.
11. Limitation of Liability.
The execution and delivery of this Agreement have
been authorized by the Board of Directors of the Company.
No series of the Company, including the Fund, will be liable
for any claims against any other series.
12. Governing Law.
This agreement shall be governed by, and construed
and interpreted in accordance with, the laws of the State of
New York.
13. Other.
Upon expiration or earlier termination of this
Agreement, the Company shall, if reference to "Lehman" is
made in the corporate name of the Company or in the name of
the Fund and if the Advisor requests in writing, as promptly
as practicable change its corporate name and the name of the
Fund so as to eliminate all reference to "Lehman", and
thereafter the Company and the Fund shall cease transacting
business in any corporate name using the word "Lehman" or
containing any other reference to the Advisor or "Lehman."
The foregoing rights of the Advisor and the obligations of
the Company shall not deprive the Advisor, or any affiliate
thereof which has "Lehman" in its name, of, but shall be in
addition to, any other rights or remedies to which the
Advisor and any such affiliate may be entitled in law or
equity by reason of any breach of this Agreement by the
Company, and the failure and omission of the Advisor to
request a change of the Company's or the Fund's name or a
cessation of the use of the name of "Lehman" as described in
this paragraph 13 shall not under any circumstances be
deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any
subsequent breach.
If the foregoing is in accordance with your
understanding, kindly indicate your acceptance of this
Agreement by signing and returning the enclosed copy of this
Agreement.
Very truly yours,
LEHMAN BROTHERS FUNDS, INC.
By:__________________________________
Name:
Title:
Accepted:
LEHMAN BROTHERS GLOBAL
ASSET MANAGEMENT INC.
By:____________________________
Name:
Title:
Exhibit 13(e)
LEHMAN BROTHERS FUNDS, INC.
FORM OF
PURCHASE AGREEMENT
Lehman Brothers Funds, Inc. (the "Company"), a Maryland
corporation, and Lehman Brothers Inc. (the "Distributor"),
hereby agree as follows:
The Company hereby offers the Distributor and the
Distributor hereby purchases 1 share of each of Class A
Shares, Class B Shares, Class C Shares, Class W Shares,
Select Shares and Premier Shares of each of the Company's
Lehman Selected Growth Stock Portfolio, with a par value of
$.001 per share, for a total of six (6) shares at the price
of $10.00 per share. The Company also hereby offers the
Distributor and the Distributor hereby purchases 1 Select
Share and 1 Global Clearing Share of Lehman Brothers New
York Municipal Money Market Fund and 1 share of each of
Class A Shares, Class B Shares, Class C Shares, Class W
Shares, Select Shares and Premier Shares of Lehman Brothers
Daily Income Fund and Lehman Brothers Municipal Income Fund,
each with a par value of $.001 per share, for a total of
fourteen (14) shares at the price of $1.00 per share, the
shares referred to above (the "Shares") are the "initial
shares" of the Classes. The Distributor hereby acknowledges
receipt of a purchase confirmation reflecting the purchase
of twenty (20) shares, and the Company hereby acknowledges
receipt from the Distributor of funds in the amount of
$74.00 in full payment for the Shares.
The Distributor represents and warrants to the Company
that the Shares are being acquired for investment purposes
and not for the purpose of distribution.
The Distributor agrees that if it or any direct or
indirect transferee of the Shares redeems the Shares prior
to the fifth anniversary of the date that the Company begins
its investment activities, the Distributor will pay to the
Company an amount equal to the number resulting from
multiplying the Company's total unamortized organizational
expenses by a fraction, the numerator of which is equal to
the number of Shares redeemed by the Distributor or such
transferee and the denominator of which is equal to the
number of Shares outstanding as of the date of such
redemption, as long as the administrative position of the
staff of the Securities and Exchange Commission requires
such reimbursement.
The Company represents that a copy of its Amended
Articles of Incorporation, as supplemented, is on file in
the Office of the Secretary of the State of Maryland.
This Agreement has been executed on behalf of the
Company by the undersigned officer of the Company in his
capacity as an officer of the Company. The obligations of
this Agreement shall be binding only upon the assets and
property of each individual Fund and not upon the assets and
property of any other portfolio of the Company and shall not
be binding upon any Director, officer or shareholder of a
Fund or the Company individually.
This agreement shall be governed by, and construed and
interpreted in accordance with, the law of the State of New
York.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the ____ day of , 1995.
LEHMAN BROTHERS FUNDS, INC.
Attest:
____________________________ By:
_____________________________
Name:
Title:
Attest: LEHMAN BROTHERS INC.
____________________________ By:
_____________________________
Name:
Title:
Exhibt 15(f)
LEHMAN BROTHERS FUNDS, INC.
FORM OF
AMENDED AND RESTATED DISTRIBUTION PLAN
This Distribution Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the " Rule") under the
Investment Company Act of 1940, as amended (the "1940 Act"),
by Lehman Brothers Funds, Inc., a corporation organized
under the laws of the State of Maryland (the "Company"),
with respect to those classes (each a Class) of its
investment portfolios (each, a "Fund") listed in Appendix A,
as amended from time to time, subject to the following terms
and conditions:
Section 1. Annual Fee.
(a) Distribution Fee. Each Fund will pay to the
distributor of its shares, Lehman Brothers Incorporated, a
corporation organized under the laws of the State of
Delaware (the "Distributor"), on behalf of each Class of
such Fund listed on Appendix A, a distribution fee in
connection with the distribution of shares of each such
Class under the Plan at the annual rate of 0.25% of the
average daily net assets of such Fund attributable to each
such Class (the "Distribution Fee").
(b) Payment of Fees. The Distribution Fee will be
calculated daily and paid monthly by each Fund with respect
to each Class at the annual rates indicated above.
Section 2. Expenses Covered by the Plan.
The annual Distribution Fee paid by a Fund to the
Distributor under Section 1 of the Plan may be used by the
Distributor to cover advertising, marketing and distribution
expenses intended to result in the sale of the Fund's
shares, including without limitation, payments to
Distributor's financial consultants or introducing brokers.
Section 3. Approval of Shareholders.
The Plan will not take effect with respect to a
particular Class of a Fund, and no fee will be payable in
accordance with Section 1 of the Plan, until the Plan has
been approved by a vote of at least a majority of the
outstanding voting securities of such Class.
Section 4. Approval of Directors.
Neither the Plan nor any related agreements will take
effect with respect to a Class of a Fund until approved by a
majority vote of both (a) the full Board of Directors of the
Company and (b) those Directors who are not interested
persons of the Company and who have no direct or indirect
financial interest in the operation of the Plan or in any
agreements related to it (the "Independent Directors"), cast
in person at a meeting called for the purpose of voting on
the Plan and the related agreements.
Section 5. Continuance of the Plan.
The Plan will continue in effect from year to year with
respect to each Class of a Fund, so long as its continuance
is specifically approved annually by vote of the Company's
Board of Directors in the manner described in Section 4
above.
Section 6. Termination
The Plan may be terminated with respect to a Class of a
Fund at any time, without the payment of any penalty, by the
vote of majority of the outstanding voting securities (as so
defined) of such Class of such Fund or by a vote of a
majority of the Independent Directors, in any such event on
sixty days' written notice to the Distributor. The Plan
will remain in effect with respect to a particular Class of
a Fund even if the Plan has been terminated in accordance
with this Section 6 with respect to any other Class of the
Fund or of any other Fund.
Section 7. Amendments
The Plan may not be amended with respect to a Class of
a Fund to increase materially the amounts of the fees
described in Section 1 above, unless the amendment is
approved by a vote of the holders of at least a majority of
the outstanding voting securities of such Class of such
Fund. No material amendment to the Plan may be made unless
approved by the Company's Board of Directors in the manner
described in Section 4 above.
Section 8. Selection of Certain Directors.
While the Plan is in effect, the selection and
nomination of the Company's Directors who are not interested
persons of the Company will be committed to the discretion
of the Directors then in office who are not interested
persons of the Company.
Section 9. Written Reports
In each year during which the Plan remains in effect,
any person authorized to direct the disposition of monies
paid or payable by a Fund with respect to a Class pursuant
to the Plan or any related agreement will prepare and
furnish to the Company's Board of Directors and the Board
will review, at least quarterly, written reports, complying
with the requirements of the Rule, which set out the amounts
expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials.
The Company will preserve copies of the Plan, any
agreement relating to the Plan and any report made pursuant
to Section 9 above, for a period of not less than six years
(the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and
"majority of the outstanding voting securities" will be
deemed to have the same meaning that those terms have under
the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the
Company under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Filing of Articles of Incorporation.
The Company represents that a copy of its Amended
Articles of Incorporation, as amended from time to time (the
"Articles of Incorporation"), is on file with the Secretary
of the State of Maryland.
Section 13. Limitation of Liability.
The obligations of the Company under this Plan will not
be binding upon any of the Directors of the Company,
shareholders of the Funds, nominees, officers, employees or
agents, whether past, present or future, of the Company,
individually, but are binding only upon the assets and
property of the Funds, as provided in the Articles of
Incorporation. The execution and delivery of this Plan have
been authorized by the Directors of the Company, and signed
by an authorized officer of the Company, acting as such, and
neither the authorization by the Directors nor the execution
and delivery by the officer will be deemed to have been made
by any of them individually or to impose any liability on
any of them personally, but will bind only the property of
the Funds as provided in the Articles of Incorporation. No
Fund or Class will be liable for any claims against any
other Fund or Class.
Section 14. Dates.
The Plan has been executed by the Company with respect
to each Fund as of January 27, 1994 and will become
effective with respect to each Class of a Fund upon the date
such Fund first commences its investment operations.
Section 15. Governing Law.
This Plan shall be governed by, and construed and
interpreted in accordance with, the law of the State of New
York.
LEHMAN BROTHERS FUNDS, INC.
By:
Name:
Title:
Dated: January 27, 1994
AMENDED APPENDIX A
TO AMENDED AND RESTATED DISTRIBUTION PLAN
</TABLE>
<TABLE>
<CAPTION>
Name of Fund Name of Class
<S> <C>
Lehman Brothers Daily Select Shares
Income Fund
Lehman Brothers Daily CDSC Shares
Income Fund
Lehman Brothers Daily Global Clearing
Income Fund Shares
Lehman Brothers Municipal Select Shares
Income Fund
Lehman Brothers Municipal CDSC Shares
Income Fund
Lehman Brothers Municipal Global Clearing
Income Fund Shares
Lehman Brothers New York Select Shares
Municipal Money Market Fund
Lehman Brothers New York Global Clearing
Municipal Money Market Fund Shares
</TABLE>
Exhibit 15(g)
LEHMAN BROTHERS FUNDS, INC.
FORM OF AMENDED AND RESTATED
SERVICES AND DISTRIBUTION PLAN
This Services and Distribution Plan (the "Plan") is
adopted in accordance with Rule 12b-1 (the "Rule") under the
Investment Company Act of 1940, as amended (the "1940 Act"),
by Lehman Brothers Funds, Inc., a corporation organized
under the laws of the State of Maryland (the "Company"),
with respect to those classes (each, a "Class") of its
investment portfolios (each, a "Fund") listed in Appendix A,
as amended from time to time, subject to the following terms
and conditions:
Section 1. Annual Fees.
(a) Service Fee. Each Fund will pay to the distributor
of its shares, Lehman Brothers Incorporated, a corporation
organized under the laws of the State of Delaware (the
"Distributor"), on behalf of each Class of such Fund (other
than Premier and Class W Shares), a service fee under the
Plan at the annual rate of 0.25% of the average daily net
assets of such Fund attributable to each such Class (the
"Service Fee").
(b) Distribution Fee. In addition to the Service Fee,
each Fund will pay to the Distributor, on behalf of each
Class of such Fund, a distribution fee under the Plan at the
annual rate set forth opposite the name of such Class on
Appendix A hereto of the average daily net assets of such
Fund attributable to each such Class (the "Distribution
Fee").
(c) Payment of Fees. The Service Fee and Distribution
Fee will be calculated daily and paid monthly by each Fund
with respect to each Class at the annual rates indicated
above. The Distributor may make payments to assist in the
distribution of all classes of shares of the Funds out of
any portion of any fee paid to the Distributor or any of its
affiliates by a Fund, its past profits or any other sources
available to it.
Section 2. Expenses Covered by the Plan.
(a) The Service Fee payable with respect to Select
Shares is in return for certain administrative and
shareholder services provided by the Distributor to the
institutional investors that purchase Select Shares. Such
administrative and shareholder services may include
processing purchase, exchange and redemption requests from
customers and placing orders with the Fund's transfer agent;
processing dividend and distribution payments from the Fund
on behalf of customers; providing information periodically
to customers showing their positions in shares; responding
to inquiries from customers concerning their investment in
shares; arranging for bank wires; and providing such other
similar services as may be reasonably requested.
The Distributor may retain all or a portion of the
payments made to it pursuant to the Plan for the provision
of services to holders of each Fund's Select Shares pursuant
to Shareholder Servicing Agreements entered into by the
Distributor in its sole discretion and may make payments to
third parties to assist in providing the services provided
to the Select Shares of each Fund. The Distributor may
waive receipt of fees under the Plan for a period of time.
All expenses incurred by the Company in connection with the
Shareholder Servicing Agreements and the implementation of
this Plan with respect to the Select Shares of a Fund shall
be borne entirely by the holders of that Class of shares of
the Fund.
(b) The Distribution Fee with respect to a Fund may be
used by the Distributor to cover advertising, marketing and
distribution expenses intended to result in the sale of the
Fund's shares, including, without limitation, compensation
for the Distributor's initial expense of paying its
investment representatives or introducing brokers a
commission upon the sale of the Fund's shares and accruals
for interest on the amount of the foregoing expenses that
exceed the Distribution Fee and if applicable, the
contingent deferred sales charge received by the
Distributor. In addition, the Service Fee with respect to a
Fund may be used by the Distributor primarily to pay its
financial consultants or introducing brokers for servicing
shareholder accounts, including a continuing fee to each
such financial consultant or introducing broker, which fee
shall begin to accrue immediately after the sale of such
shares.
(b) The amount of the Distribution Fee and Service Fee
payable by any Fund under Section 1 hereof is not related
directly to expenses incurred by the Distributor and this
Section 2 does not obligate a Fund to reimburse the
Distributor for such expenses. The Distribution Fee and
Service Fee set forth in Section 1 will be paid by a Fund to
the Distributor unless and until the Plan is terminated or
not renewed with respect to a Fund or Class thereof, and any
distribution or service expenses incurred by the Distributor
on behalf of a Fund in excess of payments of the
Distribution and Service Fees specified in Section 1 hereof
which the Distributor has accrued through the termination
date are the sole responsibility and liability of the
Distributor and not an obligation of a Fund.
Section 3. Approval of Shareholders.
The Plan will not take effect with the respect to a
particular Class of a Fund, and no fee will be payable in
accordance with Section 1 of the Plan, until the Plan has
been approved by a vote of at least a majority of the
outstanding voting securities of such Class.
Section 4. Approval of Directors.
Neither the Plan nor any related agreements will take
effect with respect to a Class of a Fund until approved by a
majority of both (a) the full Board of Directors of the
Company and (b) those Directors who are not interested
persons of the Company and who have no direct or indirect
financial interest in the operation of the Plan or in any
agreements related to it (the "Independent Directors"), cast
in person at a meeting called for the purpose of voting on
the Plan and the related agreements.
Section 5. Continuance of the Plan.
The Plan will continue in effect from year to year with
respect to each Class of a Fund, so long as its continuance
is specifically approved at least annually by the vote of
the Company's Board of Directors in the manner described in
Section 4 above.
Section 6. Termination.
The Plan may be terminated with respect to a Class of a
Fund at any time, without the payment of any penalty, by the
vote of a majority of the outstanding voting securities (as
so defined) of such Class of such Fund or by a vote of the
Independent Directors, in any such event on sixty days'
notice to the Distributor. The Plan may remain in effect
with respect to a particular Class of a Fund even if the
Plan has been terminated in accordance with this Section 6
with respect to any other Class of the Fund or of any other
Fund.
Section 7. Amendments.
The Plan may not be amended with respect to a Class of
a Fund so as to increase materially the amounts of the fees
described in Section 1 above, unless the amendment is
approved by a vote of the holders of at least a majority of
the outstanding voting securities of such Class of such
Fund. No material amendment to the Plan may be made unless
approved by the Company's Board of Directors in the manner
described in Section 4 above.
Section 8. Selection of Certain Directors.
While the Plan is in effect, the selection and
nomination of the Company's Directors who are not interested
persons of the Company will be committed to the discretion
of the Directors then in office who are not interested
persons of the Company.
Section 9. Written Reports.
In each year during which the Plan remains in effect, a
person authorized to direct the disposition of monies paid
or payable by a Fund with respect to a Class pursuant to the
Plan or any related agreement will prepare and furnish to
the Company's Board of Directors, and the Board will review,
at least quarterly, written reports complying with the
requirements of the Rule which set out the amounts expended
under the Plan and the purposes for which those expenditures
were made.
Section 10. Preservation of Materials.
The Company will preserve copies of the Plan, any
agreement relating to the Plan and any report made pursuant
to Section 9 above, for a period of not less than six years
(the first two years in an easily accessible place) from the
date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and
"majority of the outstanding voting securities" will be
deemed to have the same meaning that those terms have under
the 1940 Act and the rules and regulations under the 1940
Act, subject to any exemption that may be granted to the
Company under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Filing of Articles of Incorporation.
The Company represents that a copy of its Amended
Articles of Incorporation, as amended from time to time (the
"Articles of Incorporation"), is on file with the Secretary
of the State of Maryland.
Section 13. Limitation of Liability.
The obligations of the Company under this Plan will not
be binding upon any of the Directors of the Company,
shareholders of the Funds, nominees, officers, employees or
agents, whether past, present or future, of the Company,
individually, but are binding only upon the assets and
property of the Funds, as provided in the Articles of
Incorporation. The execution and delivery of this Plan have
been authorized by the Directors of the Company, and signed
by an authorized officer of the Company, acting as such, and
neither the authorization by the Directors nor the execution
and delivery by the officer will be deemed to have been made
by any of them individually or to impose any liability on
any of them personally, but will bind only the property of
the Funds as provided in the Articles of Incorporation. No
Fund or Class will be liable for any claims against any
other Fund or Class.
Section 14. Effective Dates.
The Plan will become effective with respect to each
Class of a Fund upon the date such Fund first commences its
investment operations.
Section 15. Governing Law.
This Plan shall be governed by, and construed and
interpreted in accordance with, the law of the State of New
York.
LEHMAN BROTHERS FUNDS, INC.
By:
______________________________
Name:
Title:
Dated: _______, 1995
APPENDIX A
<TABLE>
<CAPTION>
Name of Fund
Name of Class
Distribution Fee
(expressed as an
annual rate of the
average daily net
assets of the Fund
attributable to
that Class)
<S>
<C>
<C>
Lehman Mexican Growth
and Income Portfolio
(the only existing
class)
0.75%
Lehman Latin America
Dollar Income
Portfolio
(the only existing
class)
0.50%
Lehman Selected Growth
Stock Portfolio
Class A
0.00%
Lehman Selected Growth
Stock Portfolio
Class B
0.75%
Lehman Selected Growth
Stock Portfolio
Class C
0.75%
Lehman Selected Growth
Stock Portfolio
Class W
0.00%
Lehman Selected Growth
Stock Portfolio
Select Shares
0.00%
Lehman Selected Growth
Stock Portfolio
Premier Shares
0.00%
Lehman Brothers
Municipal
Income Fund
Class A
0.00%
Lehman Brothers
Municipal
Income Fund
Class B
0.50%
Lehman Brothers
Municipal
Income Fund
Class C
0.50%
</TABLE>
<TABLE>
<CAPTION>
<S>
<C>
<C>
Lehman Brothers
Municipal
Income Fund
Class W
0.00%
Lehman Brothers
Municipal
Income Fund
Select Shares
0.00%
Lehman Brothers
Municipal
Income Fund
Premier Shares
0.00%
Lehman Brothers Daily
Income Fund
Class A
0.00%
Lehman Brothers Daily
Income Fund
Class B
0.50%
Lehman Brothers Daily
Income Fund
Class C
0.50%
Lehman Brothers Daily
Income Fund
Class W
0.00%
Lehman Brothers Daily
Income Fund
Select Shares
0.00%
Lehman Brothers Daily
Income Fund
Premier Shares
0.00%
Lehman Brothers Global
Emerging Markets Bond
Fund
Class A
0.00%
Lehman Brothers Global
Emerging Markets Bond
Fund
Class B
0.75%
Lehman Brothers Global
Emerging Markets Bond
Fund
Class C
0.75%
Lehman Brothers Global
Emerging Markets Bond
Fund
Class W
0.00%
</TABLE>
<TABLE>
<CAPTION>
<S>
<C>
<C>
Lehman Brothers Global
Emerging Markets Bond
Fund
Select Shares
0.00%
Lehman Brothers Global
Emerging Markets Bond
Fund
Premier Shares
0.00%
Lehman Brothers
Municipal
Bond Fund
Class A
0.00%
Lehman Brothers
Municipal
Bond Fund
Class B
0.50%
Lehman Brothers
Municipal
Bond Fund
Class C
0.50%
Lehman Brothers
Municipal
Bond Fund
Class W
0.00%
Lehman Brothers
Municipal
Bond Fund
Select Shares
0.00%
Lehman Brothers
Municipal
Bond Fund
Premier Shares
0.00%
Lehman Brothers Large
Capitalization U.S.
Equity Fund
Class A
0.00%
Lehman Brothers Large
Capitalization U.S.
Equity Fund
Class B
0.75%
Lehman Brothers Large
Capitalization U.S.
Equity Fund
Class C
0.75%
</TABLE>
<TABLE>
<CAPTION>
<S>
<C>
<C>
Lehman Brothers Large
Capitalization U.S.
Equity Fund
Class W
0.00%
Lehman Brothers Large
Capitalization U.S.
Equity Fund
Select Shares
0.00%
Lehman Brothers Large
Capitalization U.S.
Equity Fund
Premier Shares
0.00%
Lehman Brothers
International
Equity Fund
Class A
0.00%
Lehman Brothers
International
Equity Fund
Class B
0.75%
Lehman Brothers
International
Equity Fund
Class C
0.75%
Lehman Brothers
International
Equity Fund
Class W
0.00%
Lehman Brothers
International
Equity Fund
Select Shares
0.00%
Lehman Brothers
International
Equity Fund
Premier Shares
0.00%
Lehman Brothers
International
Bond Fund
Class A
0.00%
Lehman Brothers
International
Bond Fund
Class B
0.50%
Lehman Brothers
International
Bond Fund
Class C
0.50%
</TABLE>
<TABLE>
<CAPTION>
<S>
<C>
<C>
Lehman Brothers
International
Bond Fund
Class W
0.00%
Lehman Brothers
International
Bond Fund
Select Shares
0.00%
Lehman Brothers
International
Bond Fund
Premier Shares
0.00%
Lehman Brothers Global
Emerging Markets
Equity Fund
Class A
0.00%
Lehman Brothers Global
Emerging Markets
Equity Fund
Class B
0.75%
Lehman Brothers Global
Emerging Markets
Equity Fund
Class C
0.75%
Lehman Brothers Global
Emerging Markets
Equity Fund
Class W
0.00%
Lehman Brothers Global
Emerging Markets
Equity Fund
Select Shares
0.00%
Lehman Brothers Global
Emerging Markets
Equity Fund
Premier Shares
0.00%
Lehman Brothers New
York
Municipal Bond Fund
Class A
0.00%
Lehman Brothers New
York
Municipal Bond Fund
Class B
0.50%
</TABLE>
<TABLE>
<CAPTION>
<S>
<C>
<C>
Lehman Brothers New
York
Municipal Bond Fund
Class C
0.50%
Lehman Brothers New
York
Municipal Bond Fund
Class W
0.00%
Lehman Brothers New
York
Municipal Bond Fund
Select Shares
0.00%
Lehman Brothers New
York
Municipal Bond Fund
Premier Shares
0.00%
Lehman Brothers High-
Grade
Fixed Income Fund
Class A
0.00%
Lehman Brothers High-
Grade
Fixed Income Fund
Class B
0.50%
Lehman Brothers High-
Grade
Fixed Income Fund
Class C
0.50%
Lehman Brothers High-
Grade
Fixed Income Fund
Class W
0.00%
Lehman Brothers High-
Grade
Fixed Income Fund
Select Shares
0.00%
Lehman Brothers High-
Grade
Fixed Income Fund
Premier Shares
0.00%
</TABLE>
- - 1 -
LEHMAN\PROSPECTUS\NYMUNI\SELECT2.DOC
- - 22 -
- - 3 -
- - 22 -
- - 52 -
A-7
- - 43 -
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> LEH BROS FNDS, INC., DLY INCOME FUND-CDSC SHRS
<S> <C>
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<PERIOD-END> JUL-31-1994
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<INVESTMENTS-AT-VALUE> 809,436,244
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<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 4,837,306
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 1
<NAME> LEH BROS FNDS, INC., DLY INCOME FND-SELECT SHRS
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-END> JUL-31-1994
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<ACCUM-APPREC-OR-DEPREC> 0
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<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 4,837,306
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<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 4,591,256,544
<NUMBER-OF-SHARES-REDEEMED> (3,792,217,038)
<SHARES-REINVESTED> 19,498,755
<NET-CHANGE-IN-ASSETS> 818,554,931
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 6,892,136
<AVERAGE-NET-ASSETS> 730,404,506
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> LEH BROS FNDS, INC., MUNI INC. FUND, CDSC SHRS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 262,996,410
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<RECEIVABLES> 6,118,420
<ASSETS-OTHER> 173,528
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<PAID-IN-CAPITAL-COMMON> 264,424,228
<SHARES-COMMON-STOCK> 264,447,342
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<ACCUMULATED-NII-CURRENT> 23,114
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<ACCUMULATED-NET-GAINS> (12,327)
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<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 264,435,015
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,046,443
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<EXPENSES-NET> 1,438,151
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<REALIZED-GAINS-CURRENT> (12,327)
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<NET-CHANGE-FROM-OPS> 4,595,965
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13)
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<GROSS-EXPENSE> 1,994,070
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> LEH BROS FNDS, INC., MUNI INC. FUND, SELECT SHRS
<S> <C>
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 0
<NAME> LEH BROS FNDS, INC., SELECTED GR STOCK FUND
<S> <C>
<PERIOD-TYPE> 4-6-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> SEP-30-1994
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<ACCUM-APPREC-OR-DEPREC> 1,168,076
<NET-ASSETS> 30,479,989
<DIVIDEND-INCOME> 26,713
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,138,795
<ACCUMULATED-NII-PRIOR> 38,112
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
