Lehman Brothers New York Municipal Money Market
Fund
Prospectus
November 1, 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 or endorsed by, any bank, and such shares are not
federally insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency. Shares
of the Fund involve certain investment risks, including the
possible loss of principal. There can be no assurance that the
Fund will be able to maintain a net asset value of $1.00 per
share.
Lehman Brothers Inc. ("Lehman Brothers" or the "Distributor")
sponsors the Fund and acts as Distributor of the Fund's shares.
Lehman Brothers Global Asset Management Inc. ("LBGAM" or the
"Investment Adviser") serves as the Fund's Investment Adviser. The
Fund's address is 3 World Financial Center, New York, New York
10285. Yield and other information regarding the Fund may be
obtained through a Lehman Brothers Investment Representative or by
calling 1-800-861-4171.
This Prospectus briefly sets forth certain information about the
Fund that investors should know before investing. Investors are
advised to read this Prospectus and retain it for future
reference. Additional information about the Fund, contained in a
Statement of Additional Information dated November 1, 1995, as may
be amended or supplemented from time to time, has been filed with
the Securities and Exchange Commission (the "SEC") and is
available to investors without charge by calling 1-800-861-4171.
The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
_____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_____________
LEHMAN BROTHERS
[Continued from previous page.]
The Fund's investment objective is to provide investors with as
high a level of current income exempt from federal income tax 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 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
P
a
g
e
Benefits to Investors
3
Background and Expense Information
3
Investment Objective and Policies
4
Purchase of Shares
1
1
Redemption of Shares
1
2
Exchange Privilege
1
3
Valuation of Shares
1
3
Management of the Fund
1
4
Dividends
1
6
Taxes
1
6
Yields
1
8
Additional Information
1
8
_____________
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. Each share of the Fund accrues income in the same
manner, but certain expenses differ based upon the class. See
"Additional Information." The following Expense Summary lists the
costs and estimated expenses that a shareholder can expect to
incur as an investor in Global Clearing Shares of the Fund based
upon estimated operating expenses for the current fiscal year.
Expense Summary
SHAREHOLDER TRANSACTION EXPENSES
GLOBAL
CLEARING
SHARES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after waivers)*
0.25%
Rule 12b-1 Fees (after waivers)**
0.18%
Other Expenses - including
Administration Fees
(after waivers)
0.27%
Total Fund Operating Expenses
(after waivers)
0.70%
* Reflects voluntary waivers of advisory fees, which would not
be changed without 60-days prior notice to shareholders. Absent
such voluntary waivers, the ratio of advisory fees to average net
assets would be 0.30%.
** Reflects voluntary waivers of Rule 12b-1 fees, which would
not be changed without 60-days prior notice to shareholders.
Absent such voluntary waivers, the ratio of Rule 12b-1 fees to
average net assets would be 0.50%.
As of the date of this Prospectus, the Fund had not
commenced investment operations. The amount set forth for "Other
Expenses" is, therefore, based on estimates for the current fiscal
period, after giving effect to voluntary waivers of administration
fees, which would not be changed without 60-days prior notice to
shareholders. Absent such voluntary waivers, the ratio of other
expenses to average net assets would be 0.31%.
Absent the voluntary waivers referred to above, the ratio of
total fund operating expenses to average net assets would be
1.11%.
Example
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return and complete redemption at the end of
each time period:
1
Y
E
A
R
3
Y
E
A
R
Global Clearing Shares
$
7
$
2
2
The foregoing should not be considered a representation of actual
expenses and rates of return, which may be greater or less than
those shown. The foregoing table has not been audited by the
Fund's independent auditors.
Long-term holders of mutual fund shares which bear 12b-1 fees,
such as Global Clearing Shares, may pay more than the economic
equivalent of the maximum front-end sales charge permitted by
rules of the National Association of Securities Dealers, Inc.
Investment Objective and Policies
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 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 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% or more of the value of its total assets at the time of such
purchase to be invested in the securities of one or more issuers
conducting their principal business activities in the same
industry, provided that there is no limitation with respect to
investments in U.S. Government securities or 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 made only if the Company's Board of Directors
believes that the aggregate per share expenses of each class of
the Fund and such other investment company will be less than or
approximately equal to the expenses which each class of the Fund
would incur if the Fund were to continue to retain the services of
an investment adviser for the Fund and the assets of the Fund were
to continue to be invested directly in portfolio securities.
OTHER INVESTMENT PRACTICES
Floating and Variable Rate Notes. The Fund may purchase variable
or floating rate notes, which are instruments that provide for
adjustments in the interest rate on certain reset dates or
whenever a specified interest rate index changes, respectively.
Such notes might not be actively traded in a secondary market but,
in some cases, the Fund may be able to resell such notes in the
dealer market. Variable and floating rate notes typically are
rated by credit rating agencies, and their issuers must satisfy
the same quality criteria as set forth above. The Fund invests in
variable or floating rate notes only when the Investment Adviser
deems the investment to involve minimal credit risk.
Certain of the floating or variable rate notes that may be
purchased by the Fund may carry a demand feature that would permit
the holder to tender them back to the issuer of the underlying
instrument, or to a third party, at par value prior to maturity.
Where necessary to ensure that such a note is an Eligible
Security, the Fund will require that the issuer's obligation to
pay the principal of the note be backed by an unconditional
third-party letter or line of credit, guarantee or commitment to
lend. If a floating or variable rate demand note is not actively
traded in a secondary market, it may be difficult for the Fund to
dispose of the note if the issuer were to default on its payment
obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for this or other
reasons, suffer a loss to the extent of the default. While, in
general, the Fund will invest only in securities that mature
within thirteen months of purchase, the Fund may invest in
floating or variable rate demand notes which have nominal
maturities in excess of thirteen months, if such instruments carry
demand features that comply with conditions established by the
SEC.
When-Issued and Delayed Delivery Securities. The Fund may
purchase securities on a "when-issued" or delayed delivery basis.
When-issued and delayed delivery securities are securities
purchased for delivery beyond the normal settlement date at a
stated price and yield. The Fund generally will not pay for such
securities or start earning interest on them until they are
received. Securities purchased on a when-issued or delayed
delivery basis are recorded as an asset and are subject to changes
in value based upon changes in the general level of interest
rates. The Fund expects that commitments to purchase when-issued
and delayed delivery securities will not exceed 25% of the value
of its total assets absent unusual market conditions. The Fund
does not intend to purchase when-issued or delayed delivery
securities for speculative purposes but only in furtherance of its
investment objective. When the Fund purchases securities on a
when-issued or delayed delivery basis, it will set aside
securities or cash with its Custodian equal to the payment that
will be due.
Tender Option Bonds. The Fund may purchase tender option bonds. A
tender option bond is a municipal obligation (generally held
pursuant to a custodial arrangement) having a maturity longer than
13 months and bearing interest at a fixed rate substantially
higher than prevailing short-term tax-exempt rates, that has been
coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing
the option, the financial institution receives periodic fees equal
to the difference between the municipal obligation's fixed coupon
rate and the rate, as determined by remarketing or similar agent
at or near the commencement of such period, that would cause the
securities coupled with the tender option, to trade at or near par
on the date of such determination. Thus, after payment of this
fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-end tax exempt rate.
LBGAM will consider on an ongoing basis the creditworthiness of
the issuer of the underlying municipal obligation, of any
custodian and of the third party provider of the tender option. In
certain instances and for certain tender option bonds, the option
may be terminable in the event of a default in payment of
principal or interest on the underlying municipal obligation and
for other reasons.
Municipal Lease Obligations. The Fund may invest in municipal
obligations that constitute participations in a lease obligation
or installment purchase contract obligation (hereafter
collectively called "municipal lease obligations") of a municipal
authority or entity. Although municipal lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a municipal lease
obligation is ordinarily backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease
obligation. However, certain municipal lease obligations contain
"non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a
yearly basis. Although non-appropriation municipal lease
obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. The
Fund will seek to minimize the special risks associated with such
securities by not investing more than 10% of its assets in
municipal lease obligations that contain non-appropriation
clauses, and by only investing in those non-appropriation leases
where (a) the nature of the leased equipment or property is such
that its ownership or use is essential to a governmental function
of the municipality, (b) appropriate covenants will be obtained
from the municipal obligor prohibiting the substitution or
purchase of similar equipment if lease payments are not
appropriated, (c) the lease obligor has maintained good market
acceptability in the past, (d) the investment is of a size that
will be attractive to institutional investors, and (e) the
underlying leased equipment has elements of portability and/or use
that enhance its marketability in the event foreclosure on the
underlying equipment were ever required. Municipal lease
obligations provide a premium interest rate which along with
regular amortization of the principal may make them attractive for
a portion of the assets of the Fund.
Custodial Receipts and Certificates. The Fund may acquire
custodial receipts or certificates underwritten by securities
dealers or banks that evidence ownership of future interest
payments, principal payments or both, on certain municipal
obligations. The underwriter of these certificates or receipts
typically purchases municipal obligations and deposits the
obligations in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and
the final principal payment on the obligations. Although under the
terms of a custodial receipt, the Fund typically would be
authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails
to pay principal and/or interest when due, the Fund may be subject
to delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct
obligation of the issuer. In addition, in the event that the trust
or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a
corporation instead of a non-taxable entity, the yield on the
underlying security would be reduced in recognition of any taxes
paid.
Participation Interests. The Fund may purchase participation
certificates issued by a bank, insurance company or other
financial institution in obligations owned by such institutions or
affiliated organizations that may otherwise be purchased by the
Fund, and loan participation certificates. A participation
certificate gives the Fund an undivided interest in the underlying
obligations in the proportion that the Fund's interest bears to
the total principal amount of such obligations. Certain of such
participation certificates may carry a demand feature that would
permit the holder to tender them back to the issuer or to a third
party prior to maturity. See "Floating and Variable Rate Notes"
for additional information with respect to demand instruments that
may be purchased by the Fund. The Fund may invest in participation
certificates even if the underlying obligations carry stated
maturities in excess of thirteen months, upon compliance with
certain conditions contained in Rule 2a-7. Loan participation
certificates are considered by the Fund to be "illiquid" for
purposes of its investment policies with respect to illiquid
securities as set forth under "Illiquid Securities" below.
Illiquid Securities. The Fund will not knowingly invest more than
10% of the value of its total assets in illiquid securities,
including time deposits and repurchase agreements having
maturities longer than seven days. Securities that have readily
available market quotations are not deemed illiquid for purposes
of this limitation (irrespective of any legal or contractual
restrictions on resale). The Fund may invest in commercial
obligations issued in reliance on the so-called "private placement
exemption" from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended ("Section 4(2) paper"). The
Fund may also purchase securities that are not registered under
the Securities Act of 1933, as amended, but which can be sold to
qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Section 4(2) paper is
restricted as to disposition under the federal securities laws,
and generally is sold to institutional investors such as the Fund
who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like the Fund
through or with the assistance of the issuer or investment dealers
who make a market in the Section 4(2) paper, thus providing
liquidity. Rule 144A securities generally must be sold to other
qualified institutional buyers. If a particular investment in
Section 4(2) paper or Rule 144A securities is not determined to be
liquid, that investment will be included within the 10% limitation
on investment in illiquid securities. The Fund's Investment
Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. See "Investment
Objective and Policies - Additional Information on Portfolio
Instruments and Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.
Repurchase Agreements. The Fund may purchase instruments from
financial institutions, such as banks and broker-dealers, subject
to the seller's agreement to repurchase them at an agreed upon
time and price ("repurchase agreements"). The seller under a
repurchase agreement will be required to maintain the value of the
securities subject to the agreement at not less than the
repurchase price. Default by the seller would, however, expose
the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying
obligations.
Other Money Market Funds. The Fund may invest up to 10% of the
value of its total assets in shares of other money market funds.
The Fund will invest in other money market funds only if such
funds are subject to the requirements of Rule 2a-7 and are
considered to present minimal credit risks. The Fund's Investment
Adviser will monitor the policies and investments of other money
market funds in which it invests, based on information furnished
to shareholders of those funds, with respect to their compliance
with their investment objectives and Rule 2a-7. By investing in
another money market fund, the Fund bears a ratable share of the
money market fund's expenses, as well as continuing to bear the
Fund's advisory and administrative fees with respect to the amount
of the investment.
Stand-by Commitments. The Fund may enter into put transactions,
including transactions sometimes referred to as stand-by
commitments, with respect to securities held in its portfolio. In
a put transaction, the Fund acquires the right to sell a security
at an agreed upon price within a specified period prior to its
maturity date, and a stand-by commitment entitles the Fund to
same-day settlement and to receive an exercise price equal to the
amortized cost of the underlying security plus accrued interest,
if any, at the time of exercise. In the event that the party
obligated to purchase the underlying security from the Fund
defaults on its obligation to purchase the underlying security,
then the Fund might be unable to recover all or a portion of any
loss sustained from having to sell the security elsewhere.
Acquisition of puts will have the effect of increasing the cost of
securities subject to the put and thereby reducing the yields
otherwise available from such securities.
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 Investment Company Act of 1940, as amended (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 Internal Revenue
Code of 1986, as amended (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"). Introducing
Brokers through whom Global Clearing Shares are purchased may
charge fees for their services. The Fund reserves the right to
reject any purchase order and to suspend the offering of shares
for a period of time.
The minimum initial investment in Global Clearing Shares of the
Fund is $5,000 and the minimum subsequent investment is $1,000.
For participants with an automatic purchase arrangement in
connection with their brokerage accounts, there is no minimum
initial or subsequent investment. The Fund reserves the right at
any time to vary the initial and subsequent investment minimums.
No certificates are issued for Fund shares.
The Fund's shares are sold continuously at their net asset value
next determined after a purchase order is received and becomes
effective. A purchase order for Global Clearing Shares becomes
effective when the Fund's Transfer Agent receives from the
Introducing Broker sufficient federal funds to cover the purchase
price and will be priced at the net asset value next determined
after the Fund's Transfer Agent receives such federal funds. See
"Valuation of Shares." Investors should note that there may be a
delay between the time when an Introducing Broker receives
purchase proceeds and the time when those proceeds are transmitted
to the Fund and that the Introducing Broker may benefit from the
use of temporarily uninvested funds. Shares will begin to accrue
income dividends on the day the purchase order becomes effective.
Redemption of Shares
Holders of Global Clearing Shares may redeem their shares without
charge on any day on which the Fund calculates its net asset
value. Redemption requests received in proper form prior to noon,
Eastern time, on any day the Fund calculates its net asset value
will be priced at the net asset value per share determined at noon
on that day and redemption requests received after such time will
be priced at the net asset value next determined. The Fund will
normally transmit redemption proceeds on Global Clearing Shares
for credit to the shareholder's account at the Introducing Broker
at no charge on the day following the receipt of the redemption
request.
A shareholder who pays for Fund shares by personal check will be
credited with the proceeds of a redemption of those shares only
after the purchase check has been collected, which may take up to
15 days or more. A shareholder who anticipates the need for more
immediate access to his or her investment should purchase shares
with federal funds by bank wire or with a certified or cashier's
check.
Shareholders who purchase securities through an Introducing Broker
may take advantage of special redemption procedures under which
Fund shares will be redeemed automatically to the extent necessary
to satisfy debit balances arising in the shareholder's account
with the Introducing Broker. One example of how an automatic
redemption may occur involves the purchase of securities. If a
shareholder purchases securities but does not pay for them by the
settlement date, the number of Global Clearing Shares necessary to
cover the debit will be redeemed automatically as of the
settlement date, which currently occurs three business days after
the trade date. Shareholders not wishing to participate in these
arrangements should notify their Introducing Brokers.
A Fund account that is reduced by a shareholder to a value of
$1,000 or less may be subject to redemption by the Fund, but only
after the shareholder has been given at least 30 days in which to
increase the account balance to more than $1,000. In addition, the
Fund may redeem shares involuntarily or suspend the right of
redemption as permitted under the 1940 Act, as described in the
Statement of Additional Information under "Additional Purchase and
Redemption Information."
Requests for the redemption of Global Clearing Shares must be made
through an Introducing Broker. Shares held by an Introducing
Broker on behalf of investors may be redeemed by submitting a
written request for redemption to the Fund's Transfer Agent:
Lehman Brothers Funds, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
A written redemption request to the Fund's Transfer Agent must
(a) state the class and number of shares to be redeemed,
(b) indicate the name of the Fund from which such shares are to be
redeemed, (c) identify the shareholder's account number and (d) be
signed by each registered owner exactly as the shares are
registered. Any signature appearing on a redemption request must
be guaranteed by a domestic bank, a savings and loan institution,
a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange. The
Fund's Transfer Agent may require additional supporting documents
for redemptions made by corporations, executors, administrators,
trustees and guardians. A redemption request will not be deemed to
be properly received until the Fund's Transfer Agent receives all
required documents in proper form.
Exchange Privilege
Global Clearing Shares of the Fund may be exchanged without charge
for shares of the same class of certain other funds offered by
Lehman Brothers through an Introducing Broker. In exchanging
shares, a shareholder must meet the minimum initial investment
requirement of the fund into which the exchange is being made and
the shares involved must be legally available for sale in the
state where the shareholder resides.
Orders for exchanges will only be accepted on days on which both
funds involved determine their respective net asset values. To
obtain information regarding the availability of funds into which
shares of the Fund may be exchanged, investors should contact
their Investment Representatives.
Tax Effect. The exchange of shares of one fund for shares of
another fund is treated for federal income tax purposes as a sale
of the shares given in exchange by the shareholder. Therefore, an
exchanging shareholder may realize a taxable gain or loss in
connection with an exchange.
Additional Information Regarding the Exchange Privilege.
Shareholders exercising this exchange privilege should review the
prospectus of the fund they are exchanging into carefully prior to
making an exchange. The Fund's Distributor reserves the right to
reject any exchange request. The exchange privilege may be
modified or terminated at any time after notice to shareholders.
For further information regarding the exchange privilege or to
obtain current prospectuses, investors should contact the Fund at
1-800-861-4171.
Valuation of Shares
The net asset value of a Global Clearing Share is calculated on
each day, Monday through Friday, except on days on which the New
York Stock Exchange (the "NYSE") or the Federal Reserve Bank of
Boston is closed. Currently one or both of these institutions are
scheduled to be closed on the customary national business holidays
of New Year's Day, Martin Luther King, Jr's. Birthday (observed),
Presidents' Day (observed), Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Columbus Day (observed), Veterans
Day, Thanksgiving and Christmas and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday
or Sunday, respectively. The net asset value per Global Clearing
Share is calculated at noon, Eastern time, on each day on which
the Fund computes its net asset value. The net asset value per
Global Clearing Share is computed by dividing the value of the net
assets of the Fund attributable to the Global Clearing Shares by
the total number of such shares outstanding. The Fund's assets are
valued on the basis of amortized cost, which involves valuing a
portfolio instrument at its cost and, thereafter, assuming a
constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the
market value of the instrument. The Fund seeks to maintain a
constant net asset value of $1.00 per share, although there can be
no assurance that it can do so on a continuing basis. Further
information regarding the Fund's valuation policies is contained
in the Statement of Additional Information.
Management of the Fund
The business and affairs of the Fund are managed under the
direction of the Company's Board of Directors. The Board of
Directors approves all significant agreements between the Company
and the persons or companies that furnish services to the Fund,
including agreements with its Distributor, Investment Adviser,
Administrator, Custodian and Transfer Agent. The day-to-day
operations of the Fund are delegated to its Investment Adviser and
Administrator. One of the Directors and all of the Company's
officers are affiliated with Lehman Brothers, First Data Investor
Services Group, Inc. ("First Data," formerly known as The
Shareholder Services Group, Inc.) or one of their affiliates. The
Statement of Additional Information relating to the Fund contains
general background information regarding each Director and
executive officer of the Company.
INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
LBGAM serves as the Investment Adviser to the Fund. LBGAM,
together with other Lehman Brothers investment advisory
affiliates, had approximately $11.7 billion in assets under
management as of September 30, 1995. Subject to the supervision
and direction of the Company's Board of Directors, LBGAM manages
the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund
and places orders to purchase and sell securities. As compensation
for the services of LBGAM as Investment Adviser to the Fund, LBGAM
is entitled to receive a monthly fee from the Fund at the annual
rate of 0.30% of the value of the Fund's average daily net assets.
LBGAM is located at 3 World Financial Center, New York, New York
10285. LBGAM is a wholly-owned subsidiary of Lehman Brothers
Holdings Inc. ("Holdings").
ADMINISTRATOR AND TRANSFER AGENT -
FIRST DATA INVESTOR SERVICES GROUP, INC.
First Data, located at 53 State Street, Boston, Massachusetts
02109, serves as the Fund's Administrator and Transfer Agent.
First Data is a wholly-owned subsidiary of First Data Corporation.
As Administrator, First Data calculates the net asset value of the
Fund's shares and generally assists in all aspects of the Fund's
administration and operation. As compensation for First Data's
services as Administrator, First Data is entitled to receive a
monthly fee from the Fund at the annual rate of 0.20% of the value
of the Fund's average daily net assets. First Data is also
entitled to a monthly fee from the Fund for its services as
Transfer Agent.
On May 6, 1994, First Data acquired the third party mutual fund
administration business of The Boston Company Advisors, Inc., an
indirect wholly-owned subsidiary of Mellon Bank Corporation
("Mellon"). In connection with this transaction, Mellon assigned
to First Data its agreement with Lehman Brothers (then named
Shearson Lehman Brothers Inc.) that Lehman Brothers and its
affiliates, consistent with their fiduciary duties and assuming
certain service quality standards are met, would recommend First
Data as the provider of administration services to the Fund. This
duty to recommend expires on May 21, 2000.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Lehman Brothers, located at 3 World Financial Center, New York,
New York 10285, is the Distributor of the Fund's shares. Lehman
Brothers, a leading full service investment firm, meets the
diverse financial needs of individuals, institutions and
governments around the world.
The Company has adopted a plan of distribution with respect to
each class of the Fund (the "Plan of Distribution") pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan of Distribution, the
Fund has agreed with respect to the Global Clearing Shares to pay
Lehman Brothers monthly for advertising, marketing and
distributing its shares at an annual rate of up to 0.50% of its
average daily net assets. Under the Plan of Distribution, Lehman
Brothers may retain all or a portion of the payments made to it
pursuant to the Plan and may make payments to its Investment
Representatives or Introducing Brokers that engage in the sale of
such classes of Fund shares. The Plan of Distribution also
provides that Lehman Brothers may make payments to assist in the
distribution of each class of the Fund's shares out of the other
fees received by it or its affiliates from the Fund, its past
profits or any other sources available to it. From time to time,
Lehman Brothers may waive receipt of fees under the Plan of
Distribution while retaining the ability to be paid under such
Plan thereafter. The fees payable to Lehman Brothers under the
Plan of Distribution for advertising, marketing and distributing
such shares of the Fund and payments by Lehman Brothers to its
Investment Representatives or Introducing Brokers are payable
without regard to actual expenses incurred. Investment
Representatives of Lehman Brothers, Introducing Brokers and any
other person entitled to receive compensation for selling or
servicing shares of the Fund may receive different levels of
compensation for selling or servicing one particular class of
shares in the Fund over another.
CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect
wholly-owned subsidiary of Mellon, is located at One Boston Place,
Boston, Massachusetts 02108 and serves as the Fund's Custodian.
Under the terms of the Stock Purchase Agreement dated
September 14, 1992 between Mellon and Lehman Brothers (then named
Shearson Lehman Brothers Inc.), Lehman Brothers agreed to
recommend Boston Safe as custodian of mutual funds affiliated with
Lehman Brothers until May 21, 2000 to the extent consistent with
its fiduciary duties and other applicable law.
EXPENSES
The Fund's expenses include taxes, interest, fees and salaries of
the directors and officers who are not directors, officers or
employees of the Fund's service contractors, SEC fees, state
securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges
of the custodian, transfer agent and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses,
costs of shareholder reports and shareholder meetings and any
extraordinary expenses. The Fund also pays for brokerage fees and
commissions (if any) in connection with the purchase and sale of
portfolio securities. Fund expenses are allocated to a particular
class based on either expenses identifiable to the class or
relative net assets of the class and the other classes of Fund
shares. LBGAM and First Data have agreed to reimburse the Fund to
the extent required by applicable state law for certain expenses
that are described in the Statement of Additional Information
relating to the Fund.
Dividends
The Fund declares dividends from its net investment income (i.e.,
income other than net realized long- and short-term capital gains)
on each day the Fund is open for business and pays dividends
monthly. Distributions of net realized long- and short-term
capital gains, if any, are declared and paid annually after the
close of the Fund's fiscal year in which they have been earned.
Unless a shareholder instructs the Fund to pay dividends or
capital gains distributions in cash and credit them to the
shareholder's brokerage account, dividends and distributions from
the Fund will be reinvested automatically in additional shares of
the same class of the Fund at net asset value. Shares redeemed
during a month will be entitled to dividends up to, but not
including, the date of redemption, and purchased shares will be
entitled to dividends and distributions declared on the day the
purchase order becomes effective. The Fund does not expect to
realize net long-term capital gains.
Taxes
The Fund will be treated as a separate entity for federal income
tax purposes, and thus the provisions of the Code applicable to
regulated investment companies generally will be applied to each
series of the Company separately, rather than to the Company as a
whole. In addition, net realized long-term capital gains, net
investment income and operating expenses will be determined
separately for each series of the Company. The Fund intends to
qualify each year as a "regulated investment company" under
Subchapter M of the Code. A regulated investment company is exempt
from federal income tax on amounts distributed to its
shareholders.
Qualification as a regulated investment company under the Code for
a taxable year requires, among other things, that the Fund
distribute to its shareholders each taxable year (a) at least 90%
of its investment company taxable income for such year and (b) at
least 90% of the excess of its tax-exempt interest income over
certain deductions disallowed with respect to such income. In
general, the Fund's investment company taxable income will be its
taxable income (including dividends and short-term capital gains,
if any) subject to certain adjustments and excluding the excess of
any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. The Fund intends
to distribute substantially all of its investment company taxable
income each year. Such distributions will be taxable as ordinary
income to Fund shareholders who are not currently exempt from
federal income taxes, whether such income is received in cash or
reinvested in additional shares. It is not anticipated that a
significant portion of the Fund's distributions will be eligible
for the dividends received deduction for corporations. The Fund
does not expect to realize long-term capital gains and, therefore,
does not contemplate payment of any "capital gain dividends" as
described in the Code.
The Fund may hold without limit certain private activity bonds
issued after August 7, 1986. Shareholders must include, as an item
of tax preference, the portion of dividends paid by the Fund that
is attributable to interest on such bonds in their federal
alternative minimum taxable income for purposes of determining
liability (if any) for the federal alternative minimum tax.
Noncorporate taxpayers, depending on their individual tax status,
may be subject to alternative minimum tax at a blended rate
between 26% and 28%. Corporate taxpayers may be subject to (1)
alternative minimum tax at a rate of 20% of the excess of their
alternative minimum taxable income over the exemption amount, and
(2) the environmental tax. Corporate investors must also take all
exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum and environmental tax
purposes. The environmental tax applicable to corporations is
imposed at the rate of 0.12% on the excess of the corporation's
modified federal alternative minimum taxable income over
$2,000,000. Shareholders receiving Social Security benefits should
note that all exempt-interest dividends will be taken into account
in determining the taxability of such benefits.
Dividends and distributions by the Fund are generally taxable to
the shareholders at the time the dividend or distribution is made.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such
months will be deemed to have been received by the shareholders
and paid by the Fund on December 31 of such year in the event such
dividends are actually paid during January of the following year.
Dividends paid by the Fund which are derived from exempt-interest
income may be treated by the Fund's shareholders as items of
interest excludable from their gross income under Section
103(a) of the Code, unless under the circumstances applicable to
the particular shareholder the exclusion would be disallowed. (See
the Statement of Additional Information under "Additional
Information Concerning Taxes.")
To the extent, if any, dividends paid to shareholders by the Fund
are derived from taxable income or from long-term or short-term
capital gains, such dividends will not be exempt from federal
income tax, whether such dividends are paid in the form of cash or
additional shares, and may also be subject to state and local
taxes. Under state or local law, the Fund's distributions of net
investment income may be taxable to investors as dividend income
though a substantial portion of such distributions may be derived
from interest on tax-exempt obligations which, if realized
directly, would be exempt from such income taxes.
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 shareholders.
_____________
The foregoing discussion is only a brief summary of some of the
important tax considerations generally affecting the Fund and its
shareholders. No attempt is made to present a detailed explanation
of the federal, state or local income tax treatment of the Fund or
its shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential
investors in the Fund should consult their tax advisers with
specific reference to their own tax situation.
Yields
From time to time, the "yields," "effective yields" and
"tax-equivalent yields" for Global Clearing Shares of the Fund may
be quoted in advertisements or in reports to shareholders. Yield
quotations are computed separately for each class of shares of the
Fund. The "yield" quoted in advertisements for Global Clearing
Shares of the Fund refers to the income generated by an investment
in such shares over a specified period (such as a seven-day
period) identified in the advertisement. This income is then
"annualized"; that is, the amount of income generated by the
investment during that period is assumed to be generated each such
period over a 52-week or one-year period and is shown as a
percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment
in Global Clearing Shares is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because
of the compounding effect of this assumed reinvestment. The
"tax-equivalent yield" demonstrates the level of taxable yield
necessary to produce an after tax yield equivalent to the Fund's
tax-free yield. It is calculated by increasing the yield
(calculated as above) by the amount necessary to reflect the
payment of federal taxes at a stated rate. The "tax-equivalent
yield" will always be higher than the "yield."
The Fund's yields may be compared to those of other mutual funds
with similar objectives, to bond or other relevant indices, or to
rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual
funds, or to the average yields reported by the Bank Rate Monitor
from money market deposit accounts offered by the 50 leading banks
and thrift institutions in the top five standard metropolitan
statistical areas. For example, such data are reported in national
financial publications such as IBC/Donoghue's Money Fund Report,
Ibbotson Associates of Chicago, The Wall Street Journal and The
New York Times, reports prepared by Lipper Analytical
Service, Inc. and publications of a local or regional nature.
The Fund's yield figures represent past performance, will
fluctuate and should not be considered as representative of future
results. The yield of any investment is generally a function of
portfolio quality and maturity, type of investment and operating
expenses. The methods used to compute the yields on each class of
the Fund's shares are described in more detail in the Statement of
Additional Information. Investors may call 1-800-861-4171 to
obtain current yield information.
Additional Information
The Company was incorporated under the laws of the State of
Maryland on May 5, 1993. The authorized capital stock of the
Company consists of 10,000,000,000 shares having a par value of
$.001 per share. The Company's Charter currently authorizes the
issuance of several series of shares, corresponding to shares of
the Fund as well as shares of the other investment portfolios of
the Company and multiple classes of shares in each series. The
Company's Board of Directors may, in the future, authorize the
issuance of additional series of capital stock representing shares
of additional investment portfolios or additional classes of
shares of the Fund or the Company's other investment portfolios.
The Company's Board of Directors has authorized the establishment
of multiple classes of shares in the Fund. This Prospectus relates
only to Global Clearing Shares, one class of shares that the Fund
is authorized to issue, and the Fund offers other classes of
shares. The categories of investors that are eligible to purchase
shares may be different for each class of Fund shares. In
addition, other classes of Fund shares may be subject to
differences in sales charge arrangements, exchange privileges,
ongoing distribution and service fee levels, and levels of certain
other expenses, which may affect the relative performance of the
different classes of Fund shares. Certain Fund expenses, such as
transfer agency expenses, are allocated separately to each class
of the Fund's shares based on expenses identifiable by class.
Investors may call the Company at 1-800-861-4171 to obtain
additional information about other classes of shares of the Fund
that are offered.
The shares of each class of the Fund represent interests in the
Fund in proportion to their relative net asset values. All shares
of the Company have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by
series or class is required by law or where the matter involved
affects only one series or class. Under the corporate law of
Maryland, the Company's state of incorporation, and the Company's
By-Laws (except as required under the 1940 Act), the Company is
not required and does not currently intend to hold annual meetings
of shareholders for the election of directors. Shareholders,
however, do have the right to call for a meeting to consider the
removal of one or more of the Company's directors if such a
request is made, in writing, by the holders of at least 10% of the
Company's outstanding voting securities.
All shares of the Company, when issued, will be fully paid and
nonassessable.
The Fund sends shareholders a semi-annual and audited annual
report, which includes listings of investment securities held by
the Fund at the end of the period covered. Shareholders may direct
inquiries regarding the Fund to their Introducing Broker, or to
the Fund at 1-800-861-4171.
LEHMAN BROTHERS
Member SIPC
3 WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10285
- - 2 -
LEHMAN\RETAIL\PROSPECTUS\NYMUNI\GLOBAL11.DOC
Lehman Brothers New York Municipal Money Market Fund
Prospectus November 1, 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 or endorsed by, any bank, and such shares are not
federally insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other government agency. Shares
of the Fund involve certain investment risks, including the
possible loss of principal. There can be no assurance that the
Fund will be able to maintain a net asset value of $1.00 per
share.
Lehman Brothers Inc. ("Lehman Brothers" or the "Distributor")
sponsors the Fund and acts as Distributor of the Fund's shares.
Lehman Brothers Global Asset Management Inc. ("LBGAM" or the
"Investment Adviser") serves as the Fund's Investment Adviser. The
Fund's address is 3 World Financial Center, New York, New York
10285. Yield and other information regarding the Fund may be
obtained through a Lehman Brothers Investment Representative or by
calling 1-800-861-4171.
This Prospectus briefly sets forth certain information about the
Fund that investors should know before investing. Investors are
advised to read this Prospectus and retain it for future
reference. Additional information about the Fund, contained in a
Statement of Additional Information dated November 1, 1995, as may
be amended or supplemented from time to time, has been filed with
the Securities and Exchange Commission (the "SEC") and is
available to investors without charge by calling 1-800-861-4171.
The Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
_____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[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 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
P
a
g
e
Benefits to Investors
3
Background and Expense Information
3
Investment Objective and Policies
4
Purchase of Shares
1
1
Redemption of Shares
1
2
Exchange Privilege
1
3
Valuation of Shares
1
3
Management of the Fund
1
4
Dividends
1
6
Taxes
1
6
Yields
1
8
Additional Information
1
9
_____________
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.
Each share of the Fund accrues income in the same manner, but
certain expenses differ based upon the class. See "Additional
Information." The following Expense Summary lists the costs and
estimated expenses that a shareholder can expect to incur as an
investor in Select Shares of the Fund based upon estimated
operating expenses for the current fiscal year.
Expense Summary
SHAREHOLDER TRANSACTION EXPENSES
SELECT
SHARES
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Advisory Fees (after waivers)*
0.25%
Rule 12b-1 Fees (after waivers)**
0.18%
Other Expenses - including
Administration Fees
(after waivers)
0.27%
Total Fund Operating Expenses
(after waivers)
0.70%
* Reflects voluntary waivers of advisory fees, which would not
be changed without 60-days prior notice to shareholders. Absent
such voluntary waivers, the ratio of advisory fees to average net
assets would be 0.30%.
** Reflects voluntary waivers of Rule 12b-1 fees, which would
not be changed without 60-days prior notice to shareholders.
Absent such voluntary waivers, the ratio of Rule 12b-1 fees to
average net assets would be 0.25%.
As of the date of this Prospectus, the Fund had not
commenced investment operations. The amount set forth for "Other
Expenses" is, therefore, based on estimates for the current fiscal
period, after giving effect to voluntary waivers of administration
fees, which would not be changed without 60-days prior notice to
shareholders. Absent such voluntary waivers, the ratio of other
expenses to average net assets would be 0.31%.
Absent the voluntary waivers referred to above, the ratio of
total fund operating expenses to average net assets would be
0.86%.
Example
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return and complete redemption at the end of
each time period:
1
Y
E
A
R
3
Y
E
A
R
Select Shares:
$
7
$
2
2
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 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 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% or more of the value of its total assets at the time of such
purchase to be invested in the securities of one or more issuers
conducting their principal business activities in the same
industry, provided that there is no limitation with respect to
investments in U.S. Government securities or 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 made only if the Company's Board of Directors
believes that the aggregate per share expenses of each class of
the Fund and such other investment company will be less than or
approximately equal to the expenses which each class of the Fund
would incur if the Fund were to continue to retain the services of
an investment adviser for the Fund and the assets of the Fund were
to continue to be invested directly in portfolio securities.
OTHER INVESTMENT PRACTICES
Floating and Variable Rate Notes. The Fund may purchase variable
or floating rate notes, which are instruments that provide for
adjustments in the interest rate on certain reset dates or
whenever a specified interest rate index changes, respectively.
Such notes might not be actively traded in a secondary market but,
in some cases, the Fund may be able to resell such notes in the
dealer market. Variable and floating rate notes typically are
rated by credit rating agencies, and their issuers must satisfy
the same quality criteria as set forth above. The Fund invests in
variable or floating rate notes only when the Investment Adviser
deems the investment to involve minimal credit risk.
Certain of the floating or variable rate notes that may be
purchased by the Fund may carry a demand feature that would permit
the holder to tender them back to the issuer of the underlying
instrument, or to a third party, at par value prior to maturity.
Where necessary to ensure that such a note is an Eligible
Security, the Fund will require that the issuer's obligation to
pay the principal of the note be backed by an unconditional
third-party letter or line of credit, guarantee or commitment to
lend. If a floating or variable rate demand note is not actively
traded in a secondary market, it may be difficult for the Fund to
dispose of the note if the issuer were to default on its payment
obligation or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for this or other
reasons, suffer a loss to the extent of the default. While, in
general, the Fund will invest only in securities that mature
within thirteen months of purchase, the Fund may invest in
floating or variable rate demand notes which have nominal
maturities in excess of thirteen months, if such instruments carry
demand features that comply with conditions established by the
SEC.
When-Issued and Delayed Delivery Securities. The Fund may
purchase securities on a "when-issued" or delayed delivery basis.
When-issued and delayed delivery securities are securities
purchased for delivery beyond the normal settlement date at a
stated price and yield. The Fund generally will not pay for such
securities or start earning interest on them until they are
received. Securities purchased on a when-issued or delayed
delivery basis are recorded as an asset and are subject to changes
in value based upon changes in the general level of interest
rates. The Fund expects that commitments to purchase when-issued
and delayed delivery securities will not exceed 25% of the value
of its total assets absent unusual market conditions. The Fund
does not intend to purchase when-issued or delayed delivery
securities for speculative purposes but only in furtherance of its
investment objective. When the Fund purchases securities on a
when-issued or delayed delivery basis, it will set aside
securities or cash with its custodian equal to the payment that
will be due.
Tender Option Bonds. The Fund may purchase tender option bonds. A
tender option bond is a municipal obligation (generally held
pursuant to a custodial arrangement) having a maturity longer than
13 months and bearing interest at a fixed rate substantially
higher than prevailing short-term tax-exempt rates, that has been
coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing
the option, the financial institution receives periodic fees equal
to the difference between the municipal obligation's fixed coupon
rate and the rate, as determined by remarketing or similar agent
at or near the commencement of such period, that would cause the
securities coupled with the tender option, to trade at or near par
on the date of such determination. Thus, after payment of this
fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-end tax exempt rate.
LBGAM will consider on an ongoing basis the creditworthiness of
the issuer of the underlying municipal obligation, of any
custodian and of the third party provider of the tender option. In
certain instances and for certain tender option bonds, the option
may be terminable in the event of a default in payment of
principal or interest on the underlying municipal obligation and
for other reasons.
Municipal Lease Obligations. The Fund may invest in municipal
obligations that constitute participations in a lease obligation
or installment purchase contract obligation (hereafter
collectively called "municipal lease obligations") of a municipal
authority or entity. Although municipal lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a municipal lease
obligation is ordinarily backed by the municipality's covenant to
budget for, appropriate and make the payments due under the lease
obligation. However, certain municipal lease obligations contain
"non-appropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments
in future years unless money is appropriated for such purpose on a
yearly basis. Although non-appropriation municipal lease
obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. The
Fund will seek to minimize the special risks associated with such
securities by not investing more than 10% of its assets in
municipal lease obligations that contain non-appropriation
clauses, and by only investing in those non-appropriation leases
where (a) the nature of the leased equipment or property is such
that its ownership or use is essential to a governmental function
of the municipality, (b) appropriate covenants will be obtained
from the municipal obligor prohibiting the substitution or
purchase of similar equipment if lease payments are not
appropriated, (c) the lease obligor has maintained good market
acceptability in the past, (d) the investment is of a size that
will be attractive to institutional investors, and (e) the
underlying leased equipment has elements of portability and/or use
that enhance its marketability in the event foreclosure on the
underlying equipment were ever required. Municipal lease
obligations provide a premium interest rate which along with
regular amortization of the principal may make them attractive for
a portion of the assets of the Fund.
Custodial Receipts and Certificates. The Fund may acquire
custodial receipts or certificates underwritten by securities
dealers or banks that evidence ownership of future interest
payments, principal payments or both, on certain municipal
obligations. The underwriter of these certificates or receipts
typically purchases municipal obligations and deposits the
obligations in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and
the final principal payment on the obligations. Although under the
terms of a custodial receipt, the Fund typically would be
authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails
to pay principal and/or interest when due, the Fund may be subject
to delays, expenses and risks that are greater than those that
would have been involved if the Fund had purchased a direct
obligation of the issuer. In addition, in the event that the trust
or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a
corporation instead of a non-taxable entity, the yield on the
underlying security would be reduced in recognition of any taxes
paid.
Participation Interests. The Fund may purchase participation
certificates issued by a bank, insurance company or other
financial institution in obligations owned by such institutions or
affiliated organizations that may otherwise be purchased by the
Fund, and loan participation certificates. A participation
certificate gives the Fund an undivided interest in the underlying
obligations in the proportion that the Fund's interest bears to
the total principal amount of such obligations. Certain of such
participation certificates may carry a demand feature that would
permit the holder to tender them back to the issuer or to a third
party prior to maturity. See "Floating and Variable Rate Notes"
for additional information with respect to demand instruments that
may be purchased by the Fund. The Fund may invest in participation
certificates even if the underlying obligations carry stated
maturities in excess of thirteen months, upon compliance with
certain conditions contained in Rule 2a-7. Loan participation
certificates are considered by the Fund to be "illiquid" for
purposes of its investment policies with respect to illiquid
securities as set forth under "Illiquid Securities" below.
Illiquid Securities. The Fund will not knowingly invest more than
10% of the value of its total assets in illiquid securities,
including time deposits and repurchase agreements having
maturities longer than seven days. Securities that have readily
available market quotations are not deemed illiquid for purposes
of this limitation (irrespective of any legal or contractual
restrictions on resale). The Fund may invest in commercial
obligations issued in reliance on the so-called "private placement
exemption" from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended ("Section 4(2) paper"). The
Fund may also purchase securities that are not registered under
the Securities Act of 1933, as amended, but which can be sold to
qualified institutional buyers in accordance with Rule 144A under
that Act ("Rule 144A securities"). Section 4(2) paper is
restricted as to disposition under the federal securities laws,
and generally is sold to institutional investors such as the Fund
who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper
normally is resold to other institutional investors like the Fund
through or with the assistance of the issuer or investment dealers
who make a market in the Section 4(2) paper, thus providing
liquidity. Rule 144A securities generally must be sold to other
qualified institutional buyers. If a particular investment in
Section 4(2) paper or Rule 144A securities is not determined to be
liquid, that investment will be included within the 10% limitation
on investment in illiquid securities. The Fund's Investment
Adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. See "Investment
Objective and Policies - Additional Information on Portfolio
Instruments and Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.
Repurchase Agreements. The Fund may purchase instruments from
financial institutions, such as banks and broker-dealers, subject
to the seller's agreement to repurchase them at an agreed upon
time and price ("repurchase agreements"). The seller under a
repurchase agreement will be required to maintain the value of the
securities subject to the agreement at not less than the
repurchase price. Default by the seller would, however, expose
the Fund to possible loss because of adverse market action or
delay in connection with the disposition of the underlying
obligations.
Other Money Market Funds. The Fund may invest up to 10% of the
value of its total assets in shares of other money market funds.
The Fund will invest in other money market funds only if such
funds are subject to the requirements of Rule 2a-7 and are
considered to present minimal credit risks. The Fund's Investment
Adviser will monitor the policies and investments of other money
market funds in which it invests, based on information furnished
to shareholders of those funds, with respect to their compliance
with their investment objectives and Rule 2a-7. By investing in
another money market fund, the Fund bears a ratable share of the
money market fund's expenses, as well as continuing to bear the
Fund's advisory and administrative fees with respect to the amount
of the investment.
Stand-by Commitments. The Fund may enter into put transactions,
including transactions sometimes referred to as stand-by
commitments, with respect to securities held in its portfolio. In
a put transaction, the Fund acquires the right to sell a security
at an agreed upon price within a specified period prior to its
maturity date, and a stand-by commitment entitles the Fund to
same-day settlement and to receive an exercise price equal to the
amortized cost of the underlying security plus accrued interest,
if any, at the time of exercise. In the event that the party
obligated to purchase the underlying security from the Fund
defaults on its obligation to purchase the underlying security,
then the Fund might be unable to recover all or a portion of any
loss sustained from having to sell the security elsewhere.
Acquisition of puts will have the effect of increasing the cost of
securities subject to the put and thereby reducing the yields
otherwise available from such securities.
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 Investment Company Act of 1940, as amended (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 Internal Revenue
Code of 1986, as amended (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 must 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"). Introducing Brokers
through whom shares are purchased may charge fees for their
services. The Fund reserves the right to reject any purchase order
and to suspend the offering of shares for a period of time.
The minimum initial investment in Select Shares of the Fund is
$5,000 and the minimum subsequent investment is $1,000. For
participants with an automatic purchase arrangement in connection
with their brokerage accounts, there is no minimum initial or
subsequent investment. There are no minimum investment
requirements for employees of Lehman Brothers and its affiliates.
The Fund reserves the right at any time to vary the initial and
subsequent investment minimums. No certificates are issued for
Fund shares.
The Fund's shares are sold continuously at their net asset value
next determined after a purchase order is received and becomes
effective. A purchase order becomes effective when the Fund's
Transfer Agent receives from Lehman Brothers or an Introducing
Broker sufficient federal funds to cover the purchase price and
will be priced at the net asset value next determined after the
Fund's Transfer Agent receives such federal funds. See "Valuation
of Shares." Investors should note that there may be a delay
between the time when Lehman Brothers or an Introducing Broker
receives purchase proceeds and the time when those proceeds are
transmitted to the Fund and that Lehman Brothers or the
Introducing Broker, as applicable, may benefit from the use of
temporarily uninvested funds. Shares will begin to accrue income
dividends on the day the purchase order becomes effective.
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 following the receipt of the redemption
request.
A shareholder who pays for Fund shares by personal check will be
credited with the proceeds of a redemption of those shares only
after the purchase check has been collected, which may take up to
15 days or more. A shareholder who anticipates the need for more
immediate access to his or her investment should purchase shares
with federal funds by bank wire or with a certified or cashier's
check.
Shareholders who purchase securities through Lehman Brothers or an
Introducing Broker may take advantage of special redemption
procedures under which Fund shares will be redeemed automatically
to the extent necessary to satisfy debit balances arising in the
shareholder's account with Lehman Brothers or the Introducing
Broker. One example of how an automatic redemption may occur
involves the purchase of securities. If a shareholder purchases
securities but does not pay for them by the settlement date, the
number of shares necessary to cover the debit will be redeemed
automatically as of the settlement date, which currently occurs
three business days after the trade date. Shareholders not
wishing to participate in these arrangements should notify their
Lehman Brothers Investment Representatives.
A Fund account that is reduced by a shareholder to a value of
$1,000 or less may be subject to redemption by the Fund, but only
after the shareholder has been given at least 30 days in which to
increase the account balance to more than $1,000. In addition, the
Fund may redeem shares involuntarily or suspend the right of
redemption as permitted under the 1940 Act, as described in the
Statement of Additional Information under "Additional Purchase and
Redemption Information."
Fund shares may be redeemed in one of the following ways:
REDEMPTION THROUGH BROKERS
Redemption requests may be made through Lehman Brothers or an
Introducing Broker.
REDEMPTION BY MAIL
Shares held by Lehman Brothers on behalf of investors must be
redeemed by submitting a written request to a Lehman Brothers
Investment Representative. All other shares may be redeemed by
submitting a written request for redemption to the Fund's Transfer
Agent:
Lehman Brothers Funds, Inc.
c/o First Data Investor Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
A written redemption request to the Fund's Transfer Agent must
(a) state the class and number of shares to be redeemed,
(b) indicate the name of the Fund from which such shares are to be
redeemed, (c) identify the shareholder's account number and (d) be
signed by each registered owner exactly as the shares are
registered. Any signature appearing on a redemption request must
be guaranteed by a domestic bank, a savings and loan institution,
a domestic credit union, a member bank of the Federal Reserve
System or a member firm of a national securities exchange. The
Fund's Transfer Agent may require additional supporting documents
for redemptions made by corporations, executors, administrators,
trustees and guardians. A redemption request will not be deemed to
be properly received until the Fund's Transfer Agent receives all
required documents in proper form.
Exchange Privilege
Select Shares of the Fund may be exchanged without charge for
shares of the same class of certain other funds in the Lehman
Brothers Group of Funds. In exchanging shares, a shareholder must
meet the minimum initial investment requirement of the fund into
which the exchange is being made and the shares involved must be
legally available for sale in the state where the shareholder
resides.
Orders for exchanges will only be accepted on days on which both
funds involved determine their respective net asset values. To
obtain information regarding the availability of funds into which
shares of the Fund may be exchanged, investors should contact a
Lehman Brothers Investment Representative.
Tax Effect. The exchange of shares of one fund for shares of
another fund is treated for federal income tax purposes as a sale
of the shares given in exchange by the shareholder. Therefore, an
exchanging shareholder may realize a taxable gain or loss in
connection with an exchange.
Additional Information Regarding the Exchange Privilege.
Shareholders exercising this exchange privilege should review the
prospectus of the fund they are exchanging into carefully prior to
making an exchange. The Fund's Distributor reserves the right to
reject any exchange request. The exchange privilege may be
modified or terminated at any time after notice to shareholders.
For further information regarding the exchange privilege or to
obtain current prospectuses, investors should contact the Fund at
1-800-861-4171.
Valuation of Shares
The net asset value of a Select Share is calculated on each day,
Monday through Friday, except on days on which the New York Stock
Exchange (the "NYSE") or the Federal Reserve Bank of Boston is
closed. Currently one or both of these institutions are scheduled
to be closed on the customary national business holidays of New
Year's Day, Martin Luther King, Jr's. Birthday (observed),
Presidents' Day (observed), Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Columbus Day (observed), Veterans
Day, Thanksgiving and Christmas and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday
or Sunday, respectively. The net asset value per 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, First Data Investor
Services Group, Inc. ("First Data," formerly known as The
Shareholder Services Group, Inc.) or one of their affiliates. The
Statement of Additional Information relating to the Fund contains
general background information regarding each Director and
executive officer of the Company.
INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
LBGAM serves as the Investment Adviser to the Fund. LBGAM,
together with other Lehman Brothers investment advisory
affiliates, had approximately $11.7 billion in assets under
management as of September 30, 1995. Subject to the supervision
and direction of the Company's Board of Directors, LBGAM manages
the Fund's portfolio in accordance with the Fund's investment
objective and policies, makes investment decisions for the Fund
and places orders to purchase and sell securities. As compensation
for the services of LBGAM as Investment Adviser to the Fund, LBGAM
is entitled to receive a monthly fee from the Fund at the annual
rate of 0.30% of the value of the Fund's average daily net assets.
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.
First Data, located at 53 State Street, Boston, Massachusetts
02109, serves as the Fund's Administrator and Transfer Agent.
First Data is a wholly-owned subsidiary of First Data Corporation.
As Administrator, First Data calculates the net asset value of the
Fund's shares and generally assists in all aspects of the Fund's
administration and operation. As compensation for First Data's
services as Administrator, First Data is entitled to receive a
monthly fee from the Fund at the annual rate of 0.20% of the value
of the Fund's average daily net assets. First Data is also
entitled to a monthly fee from the Fund for its services as
Transfer Agent.
On May 6, 1994, First Data acquired the third party mutual fund
administration business of The Boston Company Advisors, Inc., an
indirect wholly-owned subsidiary of Mellon Bank Corporation
("Mellon"). In connection with this transaction, Mellon assigned
to First Data its agreement with Lehman Brothers (then named
Shearson Lehman Brothers Inc.) that Lehman Brothers and its
affiliates, consistent with their fiduciary duties and assuming
certain service quality standards are met, would recommend First
Data as the provider of administration services to the Fund. This
duty to recommend expires on May 21, 2000.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Lehman Brothers, located at 3 World Financial Center, New York,
New York 10285, is the Distributor of the Fund's shares. Lehman
Brothers, a leading full service investment firm, meets the
diverse financial needs of individuals, institutions and
governments around the world.
The Company has adopted a plan of distribution with respect to
each class of the Fund (the "Plan of Distribution") pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan of Distribution, the
Fund has agreed with respect to the Select Shares to pay Lehman
Brothers monthly for advertising, marketing and distributing its
shares at an annual rate of 0.25% of its average daily net assets.
Under the Plan of Distribution, Lehman Brothers may retain all or
a portion of the payments made to it pursuant to the Plan and may
make payments to its Investment Representatives or Introducing
Brokers that engage in the sale of such classes of Fund shares.
The Plan of Distribution also provides that Lehman Brothers may
make payments to assist in the distribution of each class of the
Fund's shares out of the other fees received by it or its
affiliates from the Fund, its past profits or any other sources
available to it. From time to time, Lehman Brothers may waive
receipt of fees under the Plan of Distribution while retaining the
ability to be paid under such Plan thereafter. The fees payable to
Lehman Brothers under the Plan of Distribution for advertising,
marketing and distributing such shares of the Fund and payments by
Lehman Brothers to its Investment Representatives or Introducing
Brokers are payable without regard to actual expenses incurred.
Lehman Brothers Investment Representatives and any other person
entitled to receive compensation for selling or servicing shares
of the Fund may receive different levels of compensation for
selling or servicing one particular class of shares in the Fund
over another.
CUSTODIAN - BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect
wholly-owned subsidiary of Mellon, is located at One Boston Place,
Boston, Massachusetts 02108 and serves as the Fund's Custodian.
Under the terms of the Stock Purchase Agreement dated
September 14, 1992 between Mellon and Lehman Brothers (then named
Shearson Lehman Brothers Inc.), Lehman Brothers agreed to
recommend Boston Safe as custodian of mutual funds affiliated with
Lehman Brothers until May 21, 2000 to the extent consistent with
its fiduciary duties and other applicable law.
EXPENSES
The Fund's expenses include taxes, interest, fees and salaries of
the directors and officers who are not directors, officers or
employees of the Fund's service contractors, SEC fees, state
securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges
of the custodian, transfer agent and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses,
costs of shareholder reports and shareholder meetings and any
extraordinary expenses. The Fund also pays for brokerage fees and
commissions (if any) in connection with the purchase and sale of
portfolio securities. Fund expenses are allocated to a particular
class based on either expenses identifiable to the class or
relative net assets of the class and the other classes of Fund
shares. LBGAM and First Data have agreed to reimburse the Fund to
the extent required by applicable state law for certain expenses
that are described in the Statement of Additional Information
relating to the Fund.
Dividends
The Fund declares dividends from its net investment income (i.e.,
income other than net realized long- and short-term capital gains)
on each day the Fund is open for business and pays dividends
monthly. Distributions of net realized long- and short-term
capital gains, if any, are declared and paid annually after the
close of the Fund's fiscal year in which they have been earned.
Unless a shareholder instructs the Fund to pay dividends or
capital gains distributions in cash and credit them to the
shareholder's account at Lehman Brothers, dividends and
distributions from the Fund will be reinvested automatically in
additional shares of the same class of the Fund at net asset
value. Shares redeemed during a month will be entitled to
dividends up to, but not including, the date of redemption, and
purchased shares will be entitled to dividends and distributions
declared on the day the purchase order becomes effective. The
Fund does not expect to realize net long-term capital gains.
Taxes
The Fund will be treated as a separate entity for federal income
tax purposes, and thus the provisions of the Code applicable to
regulated investment companies generally will be applied to each
series of the Company separately, rather than to the Company as a
whole. In addition, net realized long-term capital gains, net
investment income and operating expenses will be determined
separately for each series of the Company. The Fund intends to
qualify each year as a "regulated investment company" under
Subchapter M of the Code. A regulated investment company is exempt
from federal income tax on amounts distributed to its
shareholders.
Qualification as a regulated investment company under the Code for
a taxable year requires, among other things, that the Fund
distribute to its shareholders each taxable year (a) at least 90%
of its investment company taxable income for such year and (b) at
least 90% of the excess of its tax-exempt interest income over
certain deductions disallowed with respect to such income. In
general, the Fund's investment company taxable income will be its
taxable income (including dividends and short-term capital gains,
if any) subject to certain adjustments and excluding the excess of
any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. The Fund intends
to distribute substantially all of its investment company taxable
income each year. Such distributions will be taxable as ordinary
income to Fund shareholders who are not currently exempt from
federal income taxes, whether such income is received in cash or
reinvested in additional shares. It is not anticipated that a
significant portion of the Fund's distributions will be eligible
for the dividends received deduction for corporations. The Fund
does not expect to realize long-term capital gains and, therefore,
does not contemplate payment of any "capital gain dividends" as
described in the Code.
The Fund may hold without limit certain private activity bonds
issued after August 7, 1986. Shareholders must include, as an item
of tax preference, the portion of dividends paid by the Fund that
is attributable to interest on such bonds in their federal
alternative minimum taxable income for purposes of determining
liability (if any) for the federal alternative minimum tax.
Noncorporate taxpayers, depending on their individual tax status,
may be subject to alternative minimum tax at a blended rate
between 26% and 28%. Corporate taxpayers may be subject to (1)
alternative minimum tax at a rate of 20% of the excess of their
alternative minimum taxable income over the exemption amount, and
(2) the environmental tax. Corporate investors must also take all
exempt-interest dividends into account in determining certain
adjustments for federal alternative minimum and environmental tax
purposes. The environmental tax applicable to corporations is
imposed at the rate of 0.12% on the excess of the corporation's
modified federal alternative minimum taxable income over
$2,000,000. Shareholders receiving Social Security benefits should
note that all exempt-interest dividends will be taken into account
in determining the taxability of such benefits.
Dividends and distributions by the Fund are generally taxable to
the shareholders at the time the dividend or distribution is made.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such
months will be deemed to have been received by the shareholders
and paid by the Fund on December 31 of such year in the event such
dividends are actually paid during January of the following year.
Dividends paid by the Fund which are derived from exempt-interest
income may be treated by the Fund's shareholders as items of
interest excludable from their gross income under Section
103(a) of the Code, unless under the circumstances applicable to
the particular shareholder the exclusion would be disallowed. (See
the Statement of Additional Information under "Additional
Information Concerning Taxes.")
To the extent, if any, dividends paid to shareholders by the Fund
are derived from taxable income or from long-term or short-term
capital gains, such dividends will not be exempt from federal
income tax, whether such dividends are paid in the form of cash or
additional shares, and may also be subject to state and local
taxes. Under state or local law, the Fund's distributions of net
investment income may be taxable to investors as dividend income
though a substantial portion of such distributions may be derived
from interest on tax-exempt obligations which, if realized
directly, would be exempt from such income taxes.
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 tax considerations generally affecting the Fund and its
shareholders. No attempt is made to present a detailed explanation
of the federal, state or local income tax treatment of the Fund or
its shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential
investors in the Fund should consult their tax advisers with
specific reference to their own tax situation.
Yields
From time to time, the "yields," "effective yields" and
"tax-equivalent yields" for shares of each class of shares of the
Fund may be quoted in advertisements or in reports to
shareholders. Yield quotations are computed separately for each
class of shares of the Fund. The "yield" quoted in advertisements
for each class of the Fund's shares refers to the income generated
by an investment in that class over a specified period (such as a
seven-day period) identified in the advertisement. This income is
then "annualized"; that is, the amount of income generated by the
investment during that period is assumed to be generated each such
period over a 52-week or one-year period and is shown as a
percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment
in a given Class of shares is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because
of the compounding effect of this assumed reinvestment. The
"tax-equivalent yield" demonstrates the level of taxable yield
necessary to produce an after tax yield equivalent to the Fund's
tax-free yield. It is calculated by increasing the yield
(calculated as above) by the amount necessary to reflect the
payment of federal taxes at a stated rate. The "tax-equivalent
yield" will always be higher than the "yield."
The Fund's yields may be compared to those of other mutual funds
with similar objectives, to bond or other relevant indices, or to
rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual
funds, or to the average yields reported by the Bank Rate Monitor
from money market deposit accounts offered by the 50 leading banks
and thrift institutions in the top five standard metropolitan
statistical areas. For example, such data are reported in national
financial publications such as IBC/Donoghue's Money Fund Report,
Ibbotson Associates of Chicago, The Wall Street Journal and The
New York Times, reports prepared by Lipper Analytical
Service, Inc. and publications of a local or regional nature.
The Fund's yield figures represent past performance, will
fluctuate and should not be considered as representative of future
results. The yield of any investment is generally a function of
portfolio quality and maturity, type of investment and operating
expenses. The methods used to compute the yields on each class of
the Fund's shares are described in more detail in the Statement of
Additional Information. Investors may call 1-800-861-4171 to
obtain current yield information.
Additional Information
The Company was incorporated under the laws of the State of
Maryland on May 5, 1993. The authorized capital stock of the
Company consists of 10,000,000,000 shares having a par value of
$.001 per share. The Company's Charter currently authorizes the
issuance of several series of shares, corresponding to shares of
the Fund as well as shares of the other investment portfolios of
the Company and multiple classes of shares in each series. The
Company's Board of Directors may, in the future, authorize the
issuance of additional series of capital stock representing shares
of additional investment portfolios or additional classes of
shares of the Fund or the Company's other investment portfolios.
The Company's Board of Directors has authorized the establishment
of multiple classes of shares in the Fund. This Prospectus
relates only to Select Shares, one class of shares that the Fund
is authorized to issue, and the Fund offers other classes of
shares. The categories of investors that are eligible to purchase
shares may be different for each class of Fund shares. In
addition, other classes of Fund shares may be subject to
differences in sales charge arrangements, exchange privileges,
ongoing distribution and service fee levels, and levels of certain
other expenses, which may affect the relative performance of the
different classes of Fund shares. Certain Fund expenses, such as
transfer agency expenses, are allocated separately to each class
of the Fund's shares based on expenses identifiable by class.
Investors may call the Company at 1-800-861-4171 to obtain
additional information about other classes of shares of the Fund
that are offered.
The shares of each class of the Fund represent interests in the
Fund in proportion to their relative net asset values. All shares
of the Company have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by
series or class is required by law or where the matter involved
affects only one series or class. Under the corporate law of
Maryland, the Company's state of incorporation, and the Company's
By-Laws (except as required under the 1940 Act), the Company is
not required and does not currently intend to hold annual meetings
of shareholders for the election of directors. Shareholders,
however, do have the right to call for a meeting to consider the
removal of one or more of the Company's directors if such a
request is made, in writing, by the holders of at least 10% of the
Company's outstanding voting securities.
All shares of the Company, when issued, will be fully paid and
nonassessable.
The Fund sends shareholders a semi-annual and audited annual
report, which includes listings of investment securities held by
the Fund at the end of the period covered. 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
- - 5 -
LEHMAN\PROSPECTUS\NYMUNI\SELECT2.DOC
Lehman Brothers New York Municipal Money
Market Fund
An Investment Portfolio of Lehman Brothers Funds, Inc.
Statement of Additional Information
November 1, 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 November 1, 1995, as amended or
supplemented from time to time, and is incorporated by
reference in its entirety into the Prospectuses. The Fund
is a separate, non-diversified money market portfolio of
Lehman Brothers Funds, Inc. (the "Company"), an open-end,
management investment company. Because this Statement of
Additional Information is not itself a prospectus, no
investment in shares of the Fund should be made solely
upon the information contained herein. Copies of the
Prospectuses may be obtained by calling Lehman Brothers
Inc. at 1-800-861-4171. Capitalized terms used but not
defined herein have the same meanings as in the
Prospectuses.
TABLE OF CONTENTS
Page
Investment Objective and Policies 2
Additional Information Concerning Municipal Obligations
8
Special Factors Affecting the Fund's Investments in New
York Municipal Obligations 10
Additional Purchase and Redemption Information 31
Exchange Privilege 33
Management of the Fund 34
Additional Information Concerning Taxes 39
Dividends 41
Additional Yield Information 41
Additional Information Concerning Fund Shares 42
Counsel 43
Auditors 43
Appendix A-1
INVESTMENT OBJECTIVE AND POLICIES
As stated in the Fund's Prospectuses, the investment
objective of the Fund is to provide as high a level of
current income exempt from federal income tax and from New
York State and New York City personal income taxes, as is
consistent with stability of principal. The following
supplements 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 INVESTMENT IN NEW
YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations
relating to the investments of the Fund in New York
municipal securities 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 State (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 New
York State Legislature (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.
In April 1993, legislation was also enacted providing
for significant constitutional changes to the long-term
financing practices of the State and the Authorities.
The Legislature passed a proposed constitutional
amendment that would permit the State, 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 permit multiple purpose general
obligation bond proposals to be proposed on the same
ballot, require that State debt be incurred only for
capital projects included in a multi-year capital
financing plan and prohibit, after its effective date,
lease-purchase and contractual-obligation financing
mechanisms for State facilities.
Public hearings were held on the proposed
constitutional amendment during 1993. Following these
hearings, in February 1994, Governor Cuomo and the State
Comptroller recommended a revised constitutional amendment
which would further tighten the ban on lease-purchase and
contractual-obligation financing, incorporate existing
lease-purchase and contractual-obligation debt under the
proposed revenue bond cap while simultaneously reducing
the size of the cap. After considering these
recommendations, the Legislature passed a revised
constitutional amendment which tightens the ban, and
provides for a phase-in to a lower cap (4.4 percent of
personal income).
Before the approved constitutional amendment can be
presented to the voters for their consideration, it must
be passed again by a separately elected Legislature. The
amendment must therefore be passed by the newly elected
Legislature in 1995 prior to presentation to the voters in
November 1995. The amendment was passed by the State
Senate in June 1995, and the State expects the Assembly to
pass the amendment. If approved by the voters, the
amendment would become effective January 1, 1996.
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 ("TRANs"), and (ii) in anticipation of the receipt
of proceeds from the sale of duly authorized but unissued
bonds, by issuing bond anticipation notes ("BANs"). TRANs
must mature within one year from their dates of issuance
and may not be refunded or refinanced beyond such period.
BANS may only be issued for the purposes and within the
amounts for which bonds may be issued pursuant to voter
authorizations. Such BANs must be paid from the proceeds
of the sale of bonds in anticipation of which they were
issued or from other sources within two years of the date
of issuance or, in the case of BANs for housing purposes,
within five years of the date of issuance.
The State may also, pursuant to specific
constitutional authorization, directly guarantee certain
public authority obligations. The State Constitution
provides for the State guarantee of the repayment of
certain borrowings for designated projects of the New York
State Thruway Authority, the Job Development Authority and
the Port Authority of New York and New Jersey. The State
has never been called upon to make any direct payments
pursuant to such guarantees. The constitutional
provisions allowing a State-guarantee of certain Port
Authority of New York and New Jersey debt stipulates that
no such guaranteed debt may be outstanding after
December 31, 1996.
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 that 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 debt service and amortization 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 the New York
Local Government Assistance Corporation ("LGAC"). 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 to
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 ("COPs") 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 represent proportionate interests in lease
payments to be paid by the State.
The State has never defaulted on any of its general
obligation indebtedness or its obligations under lease-
purchase or contractual-obligation financing arrangements
and has never been called upon to make any direct payments
pursuant to its guarantees.
The State anticipates that its capital programs will
be financed, in part, through borrowings by the State and
public authorities in the 1995-96 fiscal year. The State
expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming
outstanding BANs) and $186 million in general obligation
commercial paper. The Legislature has also authorized the
issuance of up to $33 million in COPs during the State's
1995-96 fiscal year for equipment purchases and
$14 million for capital purposes. The projection of the
State regarding its borrowings for the 1995-96 fiscal year
may change if circumstances require.
LGAC is authorized to provide net proceeds of up to
$529 million during the State's 1995-96 fiscal year, to
redeem notes sold in June 1995.
Borrowings by other public authorities pursuant to
lease-purchase and contractual-obligation financings for
capital programs of the State are projected to total
$2.7 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other
adjustments for 1994-95 capital projects. Included
therein are borrowings by (i) the Dormitory Authority of
the State of New York ("DA") for State University of New
York ("SUNY"), The City University of New York ("CUNY"),
and health facilities, (ii) the New York State Medical
Care Facilities Finance Agency ("MCFFA") for mental health
facilities; (iii) Thruway Authority for the Dedicated
Highway and Bridge Trust Fund and Consolidated Highway
Improvement Program; (iv) UDC for prison and youth
facilities and economic development programs; (v) the
Housing Finance Agency ("HFA") for housing programs; and
(vi) other borrowings by the Environmental Facilities
Corporation ("EFC") and the Energy Research and
Development Authority ("ERDA").
In addition to the arrangements described above,
State law provides for State municipal assistance
corporations, 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.
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.
Although the State ranks 22nd in the nation for its
State tax burden, the State has the second highest
combined state and local tax burden in the United States.
In 1991, total State and local taxes in New York were
$3,349 per capita, compared with $1,475 per capita in
1980. Between 1980 and 1991, State and local taxes per
capita increased at approximately the same rate in the
State as in the nation as a whole with per capita taxes in
the State increasing by 127% while such taxes increased
111% in the nation. The State and its localities have
used these taxes to develop and maintain their respective
transportation networks, public schools and colleges,
public health systems, other social services, and
recreational facilities. Despite these benefits, 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.
The national economy began to expand in 1991,
although the growth rate for the first two years of the
expansion was modest by historical standards. The State
economy remained in recession until 1993, when employment
growth resumed. Employment growth has been hindered
during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, and
defense industries. Personal income increased
substantially in 1992 and 1993, aided significantly by
large bonus payments in banking and financial industries.
To stimulate economic growth, the State has developed
programs, including the provision of direct financial
assistance, designed to assist businesses to expand
existing operations located within the State and to
attract new businesses to the State. In addition, the
State has provided various tax incentives to encourage
business relocation and expansion. These programs include
direct tax abatements from local property taxes for new
facilities (subject to locality approval) and investment
tax credits that are applied against the State corporation
franchise tax. There can be no assurance that these
programs will be successful.
The State's budget for the 1995-96 fiscal year was
enacted by the Legislature on June 7, 1995, more than two
months after the start of the fiscal year. Prior to
adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be
necessary for State operations and other purposes,
including all necessary appropriations for debt service.
The State Financial Plan for the 1995-96 fiscal year (the
"1995-96 State Financial Plan") was formulated on June 20,
1995 and is based on the State's budget as enacted by the
Legislature and signed into law by the Governor. The
State Financial Plan is updated quarterly pursuant to law
in July, October and January.
The 1995-96 budget is the first to be enacted in the
administration of Governor George Pataki, who assumed
office on January 1, 1995. It is the first budget in over
half a century which proposed and, as enacted, projects an
absolute year-over-year decline in General Fund
disbursements. Spending for State operations is projected
to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (i.e., excluding
Federal aid) is proposed to increase by only 2.5 percent
from the prior fiscal year, in contrast to the prior
decade when such spending growth averaged more than 6.0
percent annually.
In his Executive Budget, the Governor indicated that
in the 1995-96 fiscal year, the 1995-96 State Financial
Plan, based on then-current law governing spending and
revenues, would be out of balance by almost $4.7 billion,
as a result of the projected structural deficit resulting
from the ongoing disparity between sluggish growth in
receipts, the effect of prior-year tax changes, and the
rapid acceleration of spending growth; the impact of
unfunded 1994-95 initiatives, primarily for local aid
programs; and the use of one-time solutions, primarily
surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed
additional tax cuts to spur economic growth and provide
relief for low and middle-income tax payers, which were
larger than those ultimately adopted, and which added
$240 million to the then projected imbalance or budget
gap, bringing the total to approximately $5 billion.
The 1995-96 State Financial Plan contemplates closing
this gap based on the enacted budget, through a series of
actions, mainly spending reductions and cost containment
measures and certain reestimates that are expected to be
recurring, but also through the use of one-time solutions.
The 1995-96 State Financial Plan projects (i) nearly
$1.6 billion in savings from cost containment,
disbursement reestimates, and other savings in social
welfare programs, including Medicaid, income maintenance
and various child and family care programs;
(ii) $2.2 billion in savings from State agency actions to
reduce spending on the State workforce, SUNY and CUNY,
mental hygiene programs, capital projects, the prison
system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting
school aid and revenue sharing while proposing program
legislation to provide relief from certain mandates that
increase local spending; (iv) over $400 million in revenue
measures, primarily through a new Quick Draw Lottery game,
changes to tax payment schedules, and the sale of assets;
and (v) $300 million from reestimates in receipts.
The following discussion summarizes the State
Financial Plan for the 1995-96 fiscal year and recent
fiscal years 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 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, including
potential operating results for the current fiscal year
and projected baseline gaps for future fiscal years, that
may vary materially and adversely from the information
provided herein.
The State issued the first of the three required
quarterly updates (the "Financial Plan Update") to the
1995-96 State Financial Plan on July 28, 1995. The
Financial Plan Update reflects an analysis of actual
receipts and disbursements in the first quarter of the
fiscal year, and contains revised estimates of receipts
and disbursements for the current fiscal year.
The Financial Plan Update projects continued balance
in the 1995-96 State Financial Plan. The Financial Plan
Update incorporates few revisions to the 1995-96 State
Financial Plan. A number of small, offsetting changes
were made to the annual receipts estimates. The economic
forecast is unchanged following several weeks of mixed
news about the pace of the economic expansion. Negligible
offsetting changes were made to the underlying
disbursement estimates.
Actual cash receipts and disbursements during the
first quarter of the fiscal year were impacted by the late
adoption of the budget, and fell somewhat short of
original monthly cashflow estimates. Receipt variances
are mainly related to timing issues rather than changes in
the forecast. Disbursement variances are also ascribed to
timing factors. These variances do not affect the
balanced position of the 1995-96 State Financial Plan.
The Financial Plan Update states that recent economic
news remains consistent with the 1995-96 State Financial
Plan forecast of a "soft landing" for the national economy
in which growth declines to a sustainable level. However,
this forecast does contain some risks. A sharper-than-
expected reduction of excess inventory stocks could weaken
economic growth and consumer and investor confidence,
leading to a longer period of slow growth.
The General Fund is the general operating fund of the
State and is used to account for all financial
transactions, except those required to be accounted for in
another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated
to particular purposes. In the State's 1995-96 fiscal
year, the General Fund is expected by the State to account
for approximately 49 percent of total governmental-fund
receipts and 71 percent of total governmental-fund
disbursements. General Fund moneys are also transferred
to other funds, primarily to support certain capital
projects and debt service payments in other fund types.
The General Fund is projected to be balanced on a
cash basis for the 1995-96 fiscal year. Total receipts
were initially projected to be $33.110 billion, an
increase of $48 million over total receipts in the prior
fiscal year. Total General Fund disbursements were
initially projected to be $33.055 billion, an increase of
$344 million over the total amount disbursed and
transferred in the prior fiscal year. According to the
Financial Plan Update, accounting restatements of three
transactions have caused modest changes in anticipated tax
revenues, and General Fund receipts are projected to total
$32.859 billion and General Fund disbursements are
projected to total $32.804 billion.
In addition to the General Fund, the State Financial
Plan includes Special Revenue Funds, Capital Projects
Funds and Debt Service Funds which are discussed below.
Special Revenue Funds are used to account for the
proceeds of specific revenue sources such as Federal
grants that are legally restricted, either by the
Legislature or outside parties, to expenditures for
specified purposes. Although activity in this fund type
is expected to comprise more than 40 percent of total
government funds receipts and disbursements in the 1995-96
fiscal year, about three-quarters of that activity relates
to Federally-funded programs.
Projected receipts in this fund type total $25.547
billion, an increase of $1.316 billion over the prior
year. Projected disbursements in this fund type total
$26.002 billion, an increase of $1.641 billion over 1994-
95 levels. Disbursements from Federal funds, primarily
the Federal share of Medicaid and other social services
programs, are projected to total $19.209 billion in the
1995-96 fiscal year. Remaining projected spending of
$6.793 billion primarily reflects aid to SUNY supported by
tuition and dormitory fees, education aid funded from
lottery receipts, operating aid payments to the
Metropolitan Transportation Authority (the "MTA") funded
from the proceeds of dedicated transportation taxes, and
costs of a variety of self-supporting programs which
deliver services financed by user fees.
Capital Projects Funds are used to account for the
financial resources used for the acquisition,
construction, or rehabilitation of major State capital
facilities and for capital assistance grants to certain
local governments or public authorities. This fund type
consists of the Capital Projects Fund, which is supported
by tax dollars transferred from the General Fund, and 37
other capital funds established to distinguish specific
capital construction purposes supported by other revenues.
In the 1995-96 fiscal year, activity in these funds is
expected to comprise 7 percent of total governmental
receipts and disbursements.
Disbursements from this fund type are projected to
increase by $541 million over prior-year levels, primarily
reflecting higher spending for transportation and mental
hygiene projects. The Dedicated Highway and Bridge Trust
Fund is projected to comprise 23 percent of the activity
in this fund type-$936 million in 1995-96-and is the
single largest dedicated fund. Projected disbursements
from this dedicated fund reflect an increase of $80
million over 1994-95 levels. Spending for capital
projects will be financed through a combination of
sources: Federal grants (25 percent), public authority
bond proceeds (38 percent), general obligation bond
proceeds (9 percent), and current revenues (28 percent).
Total receipts in this fund type are projected at $4.170
billion, not including $364 million expected to be
available from the proceeds of general obligation bonds.
Debt Service Funds are used to account for the
payment of principal of, and interest on, long-term debt
of the State and to meet commitments under lease-purchase
and other contractual-obligation financing arrangements.
This fund is expected to comprise 4 percent of total
governmental fund receipts and disbursements in the 1995-
96 fiscal year. Receipts in these funds in excess of debt
service requirements are transferred to the General Fund
and Special Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General
Debt Service Fund, which is supported primarily by tax
dollars transferred from the General Fund, and seven other
funds. In the 1995-96 fiscal year, total disbursements in
this fund type are projected at $2.506 billion, an
increase of $303 million or 13.8 percent. The transfer
from the General Fund of $1.583 billion is expected to
finance 63 percent of these payments.
The State contemplates financing the remaining
payments by pledged revenues, including $1.794 billion in
taxes, $228 million in dedicated fees, and $2.2 billion in
patient revenues, including transfers of Federal
reimbursements. After impoundment for debt service, as
required, $3.481 billion is expected to be transferred to
the General Fund and other funds in support of State
operations. The largest transfer-$1.761 billion-is made
to the Special Revenue Fund type, in support of operations
of the mental hygiene agencies. Another $1.341 billion in
excess sales taxes is expected to be transferred to the
General Fund, following payment of projected debt service
on bonds of LGAC.
The State Financial Plan is based upon forecasts of
national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing
and magnitude of changes in the national and the State
economies. Many 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 results in the 1995-96 fiscal
year that are worse than predicted, with corresponding
material and adverse effects on the State's projections of
receipts and disbursements.
On July 12, 1995, the State Comptroller released an
analysis of the enacted budget that included the impact on
the 1996-97 fiscal year. The report identified several
risks to the 1995-96 State Financial Plan and also
estimated a potential imbalance in receipts and
disbursements for the 1996-97 fiscal year of at least $2.7
billion. The Governor is required to submit a balanced
budget to the State Legislature and has indicated he will
close any potential imbalance primarily through General
Fund expenditure reductions.
New York State's financial operations have improved
during recent fiscal years. During the period 1989-90
through 1991-92, the State incurred General Fund operating
deficits that were closed with receipts from the issuance
of TRANs. First, the national recession, and then the
lingering economic slowdown in the New York and regional
economy, resulted in repeated shortfalls in receipts and
three budget deficits. For its 1992-93, 1993-94 and 1994-
95 fiscal years, the State recorded balanced budgets on a
cash basis, with substantial fund balances in 1992-93 and
1993-94, and a smaller fund balance in 1994-95 as
described below.
New York State ended its 1994-95 fiscal year with the
General Fund in balance. The closing fund balance of $158
million reflects $157 million in the Tax Stabilization
Reserve Fund and $1 million in the Contingency Reserve
Fund ("CRF"). The CRF was established in State fiscal
year 1993-94, funded partly with surplus moneys, to assist
the State in financing the 1994-95 fiscal year costs of
extraordinary litigation known or anticipated at that
time; the opening fund balance in State fiscal year 1994-
95 was $265 million. The $241 million change in the fund
balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to
the Tax Stabilization Reserve Fund. In addition, $278
million was on deposit in the tax refund reserve account,
$250 million of which was deposited at the end of the
State's 1994-95 fiscal year to continue the process of
restructuring the State's cash flow as part of the LGAC
program.
Compared to the State Financial Plan for 1994-95 as
formulated on June 16, 1994, reported receipts fell short
of original projections by $1.163 billion, primarily in
the categories of personal income and business taxes. Of
this amount, the personal income tax accounts for $800
million, reflecting weak estimated tax collections and
lower withholding due to reduced wage and salary growth,
more severe reductions in brokerage industry bonuses than
projected earlier, and deferral of capital gains
realizations in anticipation of potential Federal tax
changes. Business taxes fell short by $373 million,
primarily reflecting lower payments from banks as
substantial overpayments of 1993 liability depressed net
collections in the 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes,
particularly the user taxes and fees, which exceeded
projections by $210 million. Of this amount, $227 million
was attributable to certain restatements for accounting
treatment purposes pertaining to the CRF and LGAC; these
restatements had no impact on balance in the General Fund.
Disbursements were also reduced from original
projections by $848 million. After adjusting for the net
impact of restatements relating to the CRF and LGAC which
raised disbursements by $38 million, the variance is $886
million. Well over two-thirds of this variance is in the
category of grants to local governments, primarily
reflecting the conservative nature of the original
estimates of projected costs for social services and other
programs. Lower education costs are attributable to the
availability of $110 million in additional lottery
proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in
actions initiated in January 1995 by the Governor to
reduce spending to avert a potential gap in the 1994-95
State Financial Plan. These actions included savings from
a hiring freeze, halting the development of certain
services, and the suspension of non-essential capital
projects. These actions, together with $71 million in
other measures comprised the Governor's $259 million gap-
closing plan, submitted to the Legislature in connection
with the 1995-96 Executive Budget.
On July 28, 1995, the Office of the State Comptroller
issued the General Purpose Financial Statements of the
State of New York for the 1994-95 fiscal year. The
State's Combined Balance Sheet as of March 31, 1995 showed
an accumulated deficit in its combined governmental funds
of $1.666 billion, reflecting liabilities of $14.778
billion and assets of $13.112 billion. This accumulated
governmental funds deficit includes a $3.308 billion
accumulated deficit in the General Fund, as well as
accumulated surpluses in the Special Revenue and Debt
Service fund types of $877 million and $1.753 billion,
respectively, and a $988 million accumulated deficit in
the Capital Projects fund type.
The State completed its 1994-95 fiscal year with a
combined Governmental Funds operating deficit of $1.791
billion, which included operating deficits in the General
Fund of $1.426 billion, in the Capital Projects fund types
of $366 million, and in the Debt Service fund types of $38
million. There is an operating surplus in the Special
Revenue fund types of $39 million.
The State reported a General Fund operating deficit
of $1.426 billion for the 1994-95 fiscal year, as compared
to an operating surplus of $914 million for the prior
fiscal year. The 1994-95 fiscal year deficit was caused
by several factors, including the use of $1.026 billion of
the 1993-94 cash-based surplus to fund operating expenses
in 1994-95 and the adoption of changes in accounting
methodologies by the State Comptroller. These factors
were offset by net proceeds of $315 million in bonds
issued by LGAC.
Total revenues for 1994-95 were $31.455 billion.
Revenues decreased by $173 million over the prior fiscal
year, a decrease of less than one percent. Personal
income tax revenues grew by $103 million, an increase of
0.6 percent. Similarly, consumption and use taxes
increased by $376 million or 6.0 percent. The increase in
personal income and sales taxes was due to modest growth
in the State's economy. Business taxes declined by $751
million or 12.8 percent from the previous year. The
decline in business taxes was caused primarily by a
decline in taxable earnings in the insurance, bank and
petroleum industries. Other revenues and miscellaneous
receipts showed modest increases.
1994-95 expenditures totalled $33.079 billion, an
increase of $2.083 billion, or 6.7 percent, over the prior
fiscal year. In grants to local governments, social
service and education expenditures grew by $927 million
(10.3 percent) and $727 million (7.6 percent),
respectively. Social services spending increased in
Medicaid and Income Maintenance, while education spending
grew as a result of increases enacted with the 1994-95
budget. General purpose local assistance declined by $205
million (22.9 percent) as a result of prior year spending
reductions. Other local assistance spending showed modest
increases. In State Operations, personal service costs
grew by $322 million (5.4 percent) while non-personal
service declined by $70 million (3.4 percent). Pension
contributions more than doubled, increasing by $95
million, while other fringe benefit costs increased by
$151 million (10.9 percent). State Operations growth was
primarily from labor contracts that resulted in salary
increases and retroactive payments.
Net other financial sources and uses declined from
$282 million (as restated) to $198 million, an $84 million
(29.8 percent) decline from the previous year, primarily
because of a reduction in bonds issued by LGAC.
The State ended its 1993-94 fiscal year with a
balance of $1.14 billion in its tax refund reserve
account, $265 million in its CRF and $134 million in its
Tax Stabilization Reserve Fund. These fund balances were
primarily the result of an improving national economy,
State employment growth, tax collections that exceeded
earlier projections and disbursements that were below
expectations. Deposits to the personal income tax refund
reserve have the effect of reducing reported personal
income tax receipts in the fiscal year when made and
withdrawals from such reserve increase receipts in the
fiscal year when made. The balance in the tax refund
reserve account will be used to pay taxpayer refunds,
rather than drawing from 1994-95 receipts.
Of the $1.14 billion deposited in the tax refund
reserve account, $1.026 billion was available for
budgetary planning purposes in the 1994-95 fiscal year.
The remaining $114 million was redeposited in the tax
refund reserve account at the end of the State's 1994-95
fiscal year to continue the process of restructuring the
State's cash flow as part of the LGAC program. The
balance in the CRF will be used to meet the cost of
litigation facing the State. The Tax Stabilization
Reserve Fund may be used only in the event of an
unanticipated General Fund cash-basis deficit during the
1994-95 fiscal year.
Before the deposit of $1.14 billion in the tax refund
reserve account, General Fund receipts in the 1993-94
fiscal year exceeded those originally projected when the
State Financial Plan for that year was formulated on April
16, 1993 by $1.002 billion. Greater-than-expected
receipts in the personal income tax, the bank tax, the
corporation franchise tax and the estate tax accounted for
most of this variance, and more than offset weaker-than-
projected collections from the sales and use tax and
miscellaneous receipts. Collections from individual taxes
were affected by various factors including changes in
Federal business laws, sustained profitability of banks,
strong performance of securities firms, and
higher-than-expected consumption of tobacco products
following price cuts.
The higher receipts resulted, in part, because the
State economy performed better than forecasted. Employment
growth started in the first quarter of the State's 1993-94
fiscal year, and, although this lagged behind the national
economic recovery, the growth in New York began earlier
than forecasted. The State economy exhibited signs of
strength in the service sector, in construction, and in
trade. Long Island and the Mid-Hudson Valley continued to
lag behind the rest of the State in economic growth. The
State Division of the Budget (the "DOB") believes that
approximately 100,000 jobs were added during the 1993-94
fiscal year.
Disbursements and transfers from the General Fund
were $303 million below the level that was projected in
April 1993, an amount that would have been $423 million
had the State not accelerated the payment of Medicaid
billings, which in the April 1993 State Financial Plan
were planned to be deferred into the 1994-95 fiscal year.
Compared to the estimates included in the State Financial
Plan formulated in April 1993, lower disbursements
resulted from lower spending for Medicaid, capital
projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part
of the LGAC program. Disbursements were higher-than-
expected for general support for public schools, the State
share of income maintenance, overtime for prison guards,
and highway snow and ice removal. The State also made the
first of six required payments to the State of Delaware
related to the settlement of Delaware's litigation against
the State regarding the disposition of abandoned property
receipts.
During the 1993-94 fiscal year, the State also
established and funded the CRF as a way to assist the
State in financing the cost of litigation affecting the
State. The CRF was initially funded with a transfer of
$100 million attributable to the positive margin recorded
in the 1992-93 fiscal year. In addition, the State
augmented this initial deposit with $132 million in debt
service savings attributable to the refinancing of State
and public authority bonds during 1993-94. A year-end
transfer of $36 million was also made to the CRF, which,
after a disbursement for authorized fund purposes, brought
the CRF balance at the end of 1993-94 to $265 million.
This amount was $165 million higher than the amount
originally targeted for this reserve fund.
The State ended its 1992-93 fiscal year with a
balance of $671 million in the tax refund reserve account
and $67 million in the Tax Stabilization Reserve Fund.
The State's 1992-93 fiscal year was characterized by
performance that was better than projected for the
national and regional economies. National gross domestic
product, State personal income, and State employment and
unemployment performed better than originally projected in
April 1992. This favorable economic performance,
particularly at year end, combined with a tax-induced
acceleration of income into 1992, was the primary cause of
the General Fund surplus. Personal income tax collections
were more than $700 million higher than originally
projected (before reflecting the tax refund reserve
account transaction), primarily in the withholding and
estimated payment components of the tax.
There were large, but mainly offsetting, variances in
other categories of receipts. Significantly higher-than-
projected business tax collections and the receipt of
unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association
approximately offset the loss of an anticipated
$200-million Federal reimbursement, the loss of certain
budgeted hospital differential revenue as a result of
unfavorable court decisions, and shortfalls in certain
miscellaneous revenues.
Disbursements and transfers to other funds were $45
million above projections made in April 1992, although
this includes a $150 million payment to health insurers
(financed with a receipt from the MMIA made pursuant to
legislation passed in January 1993). All other
disbursements were $105 million lower than projected. This
reduction primarily reflected lower costs in virtually all
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 financial condition of the State is affected by
several factors, including the strength of the State and
regional economy and actions of the Federal government, as
well as State actions affecting the level of receipts and
disbursements. Owing to these and other factors, the
State may, in future years, face substantial potential
budget gaps resulting from a significant disparity between
tax revenues projected from a lower recurring receipts
base and the future costs of maintaining State programs at
current levels. Any such recurring imbalance would be
exacerbated if the State were to use a significant amount
of nonrecurring resources to balance the budget in a
particular fiscal year. To address a potential imbalance
for a given fiscal year, the State would be required to
take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and
under the State Constitution the Governor is required to
propose a balanced budget each year. To correct recurring
budgetary imbalances, the State would need to take
significant actions to align recurring receipts and
disbursements in future fiscal years. There can be no
assurance, however, that the State's actions will be
sufficient to preserve budgetary balance in a given fiscal
year or to align recurring receipts and disbursements in
future fiscal years.
In 1990, as part of a State fiscal reform program,
legislation was enacted creating 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 authorized 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 these long-term
obligations, which are to be amortized over no more than
30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also
dedicated revenues equal to one-quarter of the four cent
State sales and use tax to pay debt service on these
bonds. 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
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. This provision capping the
seasonal borrowing was included as a covenant with LGAC's
bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to
provide net proceeds of $4.7 billion completing the
program. The impact of LGAC's borrowing is that the State
is able to meet its cash flow needs in the first quarter
of the fiscal year without relying on short-term seasonal
borrowings. The 1995-96 State Financial Plan includes no
spring borrowing nor did the 1994-95 State Financial Plan,
which was the first time in 35 years there was no short-
term seasonal borrowing.
On January 13, 1992, Standard & Poor's, a division of
The McGraw-Hill Companies ("S&P"), lowered its rating on
the State's general obligation bonds from A to A- and, in
addition, reduced its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual
obligation debt. S&P also continued its negative rating
outlook assessment on State general obligation debt. On
April 26, 1993 S&P revised the rating outlook assessment
to stable. On February 14, 1994, S&P revised its outlook
to positive and, on March 1, 1995 and July 13, 1995,
confirmed its A- rating. On January 6, 1992, Moody's
Investors Service, Inc. ("Moody's") reduced its ratings on
outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On March 1, 1995,
Moody's reconfirmed its A rating on the State's general
obligation long-term indebtedness.
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, 1990 and A+ from November, 1982 to August, 1987.
Authorities. The fiscal stability of the State is
related, in part, 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
the 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. The State's access
to the public credit markets could be impaired, and the
market price of its outstanding debt may be materially
adversely affected, if any of its public authorities were
to default on their respective obligations. As of
September 30, 1994, the date of the latest data available,
there were 18 Authorities that had outstanding debt of
$100 million or more, and the aggregate outstanding debt,
including refunding bonds, of these 18 Authorities was
$70.3 billion. As of March 31, 1995, aggregate Authority
debt outstanding as State-supported debt was $27.9 billion
and as State-related debt was $36.1 billion.
There are numerous public authorities, with various
responsibilities, including those which finance, construct
and/or operate revenue producing public facilities.
Public authority operating expenses and debt service costs
are generally paid by revenues generated by the projects
financed or operated, such as tolls charged for the use of
highways, bridges or tunnels, rentals charged for housing
units, and charges for occupancy at medical care
facilities.
In addition, State legislation authorizes several
financing techniques for public authorities. Also, there
are statutory arrangements providing for State local
assistance payments otherwise payable to localities to be
made under certain circumstances to public authorities.
Although the State has no obligation to provide additional
assistance to localities whose local assistance payments
have been paid to public authorities under these
arrangements if local assistance payments are so diverted,
the affected localities could seek additional State
assistance.
Some authorities also receive monies from State
appropriations to pay for the operating costs of certain
of their programs. As described below, the MTA receives
the bulk of this money in order to carry out mass transit
and commuter services.
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 other 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
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, an 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. If current revenue projections are
not realized and/or operating expenses exceed current
projections, the TA or commuter railroads may be required
to seek additional State assistance, raise fares or take
other actions.
Over the past several years the State has enacted
several taxes -- including a surcharge on the profits of
banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan
Transportation Region served by the MTA and a special one-
quarter of 1% regional sales and use tax -- that provide
revenues for mass transit purposes, including assistance
to the MTA. In addition, since 1987, State law has
required that the proceeds of a one-quarter of 1% mortgage
recording tax paid on certain mortgages in the
Metropolitan Transportation Region be deposited in a
special MTA fund for operating or capital expenses.
Further, in 1993 the State dedicated a portion of the
State petroleum business tax to fund operating or capital
assistance to the MTA. For the 1995-96 fiscal year, total
State assistance to the MTA is estimated by the State to
be approximately $1.1 billion.
In 1993, State legislation authorized the funding of
a five-year $9.56 billion MTA capital plan for the five-
year period, 1992 through 1996 (the "1992-96 Capital
Program"). The MTA has received approval of the 1992-96
Capital Program based on this legislation from the 1992-96
Capital Program Review Board, as State law requires. This
is the third five-year plan since the Legislature
authorized procedures for the adoption, approval and
amendment of a five-year plan in 1981 for a capital
program designed to upgrade the performance of the MTA's
transportation systems and to supplement, replace and
rehabilitate facilities and equipment. The MTA, the TBTA
and the TA are collectively authorized to issue an
aggregate of $3.1 billion of bonds (net certain statutory
exclusions) to finance a portion of the 1992-96 Capital
Program. The 1992-96 Capital Program may be financed in
significant part through dedication of State petroleum
business taxes referred to above. However, in December
1994 the proposed bond resolution based on such tax
receipts was not approved by the MTA Capital Program
Review Board. Further consideration of the resolution was
deferred until 1995.
There can be no assurance that all the necessary
governmental actions for the 1992-96 Capital Program will
be taken, that funding sources currently identified will
not be decreased or eliminated, or that the 1992-96
Capital Program, or parts thereof, will not be delayed or
reduced. If the 1992-96 Capital Program is delayed or
reduced, ridership and fare revenues may decline, which
could, among other things, impair the MTA's ability to
meet its 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 1995-96 fiscal year
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 for the 1995-96
fiscal year.
Fiscal difficulties experienced by the City of
Yonkers ("Yonkers") resulted in the re-establishment 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
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 1993, the total indebtedness of all
localities in the State was approximately $17.7 billion. A
small portion (approximately $105 million) of that
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
State law to issue debt to finance deficits during the
period that such deficit financing is outstanding.
Fifteen localities had outstanding indebtedness for
deficit financing at the close of their fiscal year ending
in 1993.
From time to time, proposed Federal expenditure
reductions could 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. Long-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) a
challenge to State regulations which reduce base prices
for the direct and indirect component of Medicaid
reimbursement for rate years commencing 1989; (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) alleged responsibility of State officials to assist in
remedying racial segregation in the City of Yonkers; (vi)
alleged responsibility of the State Department of
Environmental Conservation for a plaintiff's inability to
complete construction of a cogeneration facility in a
timely fashion and the damages suffered thereby; (vii) a
challenge to the constitutionality of petroleum business
tax assessments authorized by Tax Law 301; (viii)
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; (ix)
challenges to the promulgation of the State's proposed
procedure to determine the eligibility for and nature of
home care services for Medicaid recipients; (x) a
challenge to State implementation of a program which
reduces Medicaid benefits to certain home-relief
recipients, and (xi) challenges to certain provisions of
the State retirement system which provide that money in a
Supplemental Reserve Fund shall be used as a credit in the
State's 1995-96 fiscal year against prior State and local
pension contributions.
Adverse developments in the proceedings described
above or the initiation of new proceedings could affect
the ability of the State to maintain a balanced 1995-96
State Financial Plan. In its Notes to its General Purpose
Financial Statements for the fiscal year ended March 31,
1994, the State reports its estimated liability for awards
and anticipated unfavorable judgments at $675 million.
There can be no assurance that an adverse decision in any
of the above cited proceedings would not exceed the amount
of the 1995-96 State Financial Plan reserves for the
payment of judgments and, therefore, could affect the
ability of the State to maintain a balanced 1995-96 State
Financial Plan.
New York City
The fiscal health of the State may also be impacted
by 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 fiscal years from 1981 through 1993, which end on June
30, show a General Fund surplus reported in accordance
with generally accepted accounting principles ("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 action to assist the City in returning to
fiscal stability. Among these actions, the State
established 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 and
responsibilities; and a "Control Period" from 1975 to 1986
during which the City was subject to certain statutorily-
prescribed fiscal-monitoring arrangements. Although the
Control Board terminated the Control Period in 1986 when
certain statutory conditions were met, thus suspending
certain Control Board powers, the Control Board, MAC and
OSDC continue to exercise various fiscal-monitoring
functions over the City, and upon the occurrence or
"substantial likelihood and imminence" of the occurrence
of certain events, including, but not limited to a City
operating budget deficit of more than $100 million, the
Control Board is required by law to reimpose a Control
Period. Currently, the City and its Covered Organizations
(i.e., those which receive or may receive money from the
City directly, indirectly or contingently) operate under a
four-year financial plan which the City prepares annually
and periodically updates.
The City submitted to the Control Board on July 21,
1995 a fourth quarter modification to the City's financial
plan for the 1995 fiscal year (the "1995 Modification"),
which projects a balanced budget in accordance with GAAP
for the 1995 fiscal year, after taking into account a
discretionary transfer of $75 million. On July 11, 1995,
the City submitted to the Control Board the financial plan
for the 1996 through 1999 fiscal years (the "1996-99
Financial Plan"), which relates to the City, the Board of
Education (the "BOE") and the CUNY. The 1996-99 Financial
Plan is based on the City's expense and capital budgets
for the City's 1996 fiscal year, which were adopted on
June 14, 1995, and sets forth proposed actions by the City
for the 1996 fiscal year to close substantial projected
budget gaps resulting from lower than projected tax
receipts and other revenues and greater than projected
expenditures. In addition to substantial proposed agency
expenditure reductions and productivity, efficiency and
labor initiatives negotiated with the City's labor unions,
the 1996-99 Financial Plan reflects a strategy to
substantially reduce spending for entitlements for the
1996 and subsequent fiscal years.
Although the City has balanced its budget since 1981,
estimates of the City's revenues and expenditures, which
are based on numerous assumptions, are subject to various
uncertainties. If, for example, 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 deficits, 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 1996-99 Financial Plan projects revenues and
expenditures for the 1996 fiscal year balanced in
accordance with GAAP. The projections for the 1996 fiscal
year reflect proposed actions to close a previously
projected gap of approximately $3.1 billion for the 1996
fiscal year. The proposed actions in the 1996-99
Financial Plan for the 1996 fiscal year include (i) a
reduction in spending of $400 million, primarily affecting
public assistance and Medicaid payments by the City; (ii)
expenditure reductions in agencies, totaling $1.2 billion;
(iii) traditional labor savings, totaling $600 million;
and (iv) the phase-in of the increased annual pension
funding cost due to revisions resulting from an actuarial
audit of the city pension systems, which would reduce such
costs in the 1996 fiscal year. Other proposed actions
include (i) welfare savings of $100 million from increased
fraud detection; (ii) $170 million of additional
expenditure reductions in agencies and the New York City
Health and Hospitals Corporation ("HHC"); (iii) a delay in
the proposed reduction in the commercial rent tax, which
would increase projected revenues by $62 million in the
1996 fiscal year; (iv) an increase of $75 million in
projected tax collections for the 1996 fiscal year; (v)
$50 million of proposed additional State aid not included
in the adopted State budget and $75 million of proposed
additional federal aid; (vi) certain revenue initiatives,
including the proposed sale of delinquent tax liens and
the U.N. Plaza for $104 million; and (vii) savings from
the proposed refunding of outstanding debt, totaling $50
million.
The proposed agency spending reductions include the
reduction of City personnel through attrition, government
efficiency initiatives, procurement initiatives and labor
productivity initiatives. The substantial agency
expenditure reductions proposed in the 1996-99 Financial
Plan may be difficult to implement, and the Financial Plan
is subject to the ability of the City to implement
proposed reductions in City personnel and other cost
reduction initiatives. In addition, certain initiatives
are subject to negotiation with the City's municipal
unions, and various actions, including proposed
anticipated State aid totalling $50 million are subject to
approval by the Governor and the Legislature.
The City annually prepares a modification to its
financial plan in October or November which amends the
financial plan to accommodate any revisions to forecast
revenues and expenditures and to specify any additional
gap-closing initiatives to the extent required to offset
decreases in projected revenues or increases in projected
expenditures (the "First Quarter Modification"). The
City's current expectation is that additional projected
expenditures for the 1996 fiscal year, to be reflected in
a First Quarter Modification, are not likely to exceed
$100 million, including $45 million in increased spending
to pay for a portion of the cost of student transit
passes. It is anticipated that such additional spending
will be offset by increased revenues. In addition, the
City expects to commence a budget review to specifically
identify $40 million in operating budget savings from an
early retirement program included in the 1996-99 Financial
Plan for the 1996 fiscal year and to address the $450 to
$500 million in gap-closing agency actions assumed in the
gap-closing program for fiscal year 1997. This budget
review process is not expected to be concluded before the
January revision to the 1996-99 Financial Plan.
The 1996-99 Financial Plan also sets forth
projections for the 1997 through 1999 fiscal years and
outlines a proposed gap-closing program to eliminate
projected gaps of $888 million, $1.5 billion and $1.4
billion for the 1997, 1998 and 1999 fiscal years,
respectively, assuming successful implementation of the
$3.1 billion gap-closing program for the 1996 fiscal year.
The projections for the 1996 through 1999 fiscal
years assume (i) agreement with the City's unions with
respect to approximately $100 million of savings to be
derived from efficiencies in management of employee health
insurance programs and other health benefit related
savings for each of the 1996 through 1999 fiscal years to
be negotiated with the City's unions; (ii) $200 million of
additional anticipated State aid and $75 million of
additional anticipated Federal aid in each of the 1997
through 1999 fiscal years; (iii) that HHC and BOE will
each be able to identify actions to offset substantial
revenue shortfalls reflected in the Financial Plan,
including approximately $254 million annual reduction in
revenues for HHC, which results from the reduction in
Medicaid payments proposed by the State and the City,
without any increase in City subsidy payments to HHC; (iv)
the continuation of the current assumption of no wage
increases after fiscal year 1995 for City employees unless
offset by productivity increases; (v) $130 million of
additional revenue as a result of increased rent payments
for the City's airports proposed by the City, which is
subject to further discussion with the Port Authority; and
(vi) savings of $45 million in each of the 1997 through
1999 fiscal years which would result from the
Legislature's enactment of proposed tort reform
legislation. In addition, the 1996-99 Financial Plan
anticipates the receipt of substantial amounts of Federal
aid. Certain Federal legislative proposals contemplate
significant reductions in Federal spending, including
proposed Federal welfare reform, which could result in
caps on, or block grants of, Federal programs.
The proposed gap-closing actions, a substantial
number of which are not specified in detail, include
additional agency expenditure reductions, primarily
resulting from a partial hiring freeze, totalling between
$388 million and $684 million in each of the 1997 through
1999 fiscal years; reductions in expenditures resulting
from proposed procurement initiatives totalling between
$50 million and $100 in each of the 1997 through 1999
fiscal years; revenue initiatives totalling between $100
million and $200 million in each of the 1997 through 1999
fiscal years; the availability in each of the 1997, 1998
and 1999 fiscal years of $100 million of the general
reserve appropriated in the prior year; and additional
reduced expenditures resulting from further revision in
entitlement programs to reduce City expenditures by $250
million, $400 million and $400 million in the 1997, 1998
and 1999 fiscal years, respectively, which may be subject
to State or Federal approval.
From time to time, the Control Board staff, MAC,
OSDC, the City Comptroller and others issue reports and
make public statements regarding the City's financial
condition, commenting on, among other matters, 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
generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide
necessary services. It is reasonable to expect that
reports and statements will continue to be issued and to
engender public comment.
In July 1995, the City Comptroller issued a report on
the 1996-99 Financial Plan. The report concluded that the
1996-99 Financial Plan includes total risks of $749
million to $1.034 billion for the 1996 fiscal year. These
risks include (i) possible tax revenue shortfalls of $53
million; (ii) a possible $20 million to $60 million
shortfall in savings resulting from unspecified
improvements in the City's health benefits system; (iii) a
potential shortfall of up to $40 million in projected
savings from an early retirement program; (iv) the receipt
of $125 million of unspecified additional Federal and
State assistance; (v) up to $203 million of projected
savings from the public assistance eligibility review and
electronic signature program for public assistance
recipients; (vi) $93 million of greater than projected
expenditures for overtime; (vii) $284 million of greater
than projected expenditures and lower than projected
revenues at BOE; and (viii) the receipt of $130 million of
lease payments from the Port Authority. Other potential
uncertainties identified in the report include the
projected $253.6 million deficit for HHC, $160 million of
the $600 million in labor savings for the 1996 fiscal year
which are yet to be identified, and the impact on the City
of a possible reduction in Federal entitlement programs.
Subsequently, the City Comptroller stated that an
additional $129 million of anticipated State and Federal
assistance for BOE might not be received by BOE.
With respect to the 1997 through 1999 fiscal years,
the report noted that the gap-closing program in the 1996-
99 Financial Plan does not include information about how
the City will implement the various gap-closing programs,
and that the entitlement cost containment and revenue
initiatives will require approval of the State
legislature. Taking into account the same categories of
risks for the 1997 through 1999 fiscal years as the report
identified for the 1996 fiscal year and the uncertainty
concerning the gap-closing program, the report estimated
that the 1996-99 Financial Plan includes total risk of
$2.0 billion to $2.5 billion in the 1997 fiscal year, $2.8
billion to $3.3 billion in the 1998 fiscal year and $2.9
billion to $3.4 billion in the 1999 fiscal year. The
report further noted that the City Comptroller continues
to oppose the proposed sale of the water system, primarily
because of the unwillingness of the City to guarantee that
$1 billion from the $2.3 billion in proceeds of the sale
will be used only to fund capital and not operating
expenses, and concerns about the jurisdiction and
composition of the Water Board once title to the Water
Board has been transferred.
In September 1995, the City Comptroller issued a
report which identified additional risks for the 1996
fiscal year. With respect to BOE, the report noted that
the financial plan for BOE, which projects a deficit of
$151 million for the 1996 fiscal year, relies on $129.9
million of State funding and State and Federal medicaid
reimbursement which is uncertain. The report noted that
BOE has not provided any documentation to substantiate the
receipt of this revenue or to demonstrate that claims have
been submitted to the State, and that the State has not
appropriated funding for these purposes. The report noted
an additional potential shortfall of $250 million under
BOE's projected savings targets and that, while BOE has
allocated $250 million in proposed expenditure reductions
to central administration and school district budgets, it
is uncertain whether these savings will be fully realized.
The report also noted that welfare caseloads and
expenditures had moderately increased in August, for the
first time in five months, over caseloads and expenditures
in July, and that the City has not issued any details on
plans to sell the U.N. Plaza Hotel for $32 million in the
1996 fiscal year.
In early December 1994, the City Comptroller issued a
report which noted that the City is seeking to develop and
implement plans which will satisfy the Federal
Environmental Protection Agency that the water supplied by
the City watershed areas does not need to be filtered.
The City Comptroller noted that, if the City is ordered to
build filtration plants, they could cost as much as $4.57
billion to construct, with annual debt service and
operating costs of more than $500 million, leading to a
water rate increase of 45%.
On December 16, 1994, the City Comptroller issued a
report noting that the capacity of the City to issue
general obligation debt could be greatly reduced in future
years due to the decline in value of taxable real
property. The report noted that, under the State
constitution, the City is permitted to issue debt in an
amount not greater than 10% of the average full value of
taxable real estate for the current year and preceding
four years, that the latest estimates produced by the
State Board of Equalization and Assessment relating to the
full value of real property, using data from a 1992
survey, indicate a 19% decline in the market value of
taxable real property from the previous survey in 1990,
and that the State Board has decided to use a projected
annual growth rate of 8.84%, as compared to its previous
projection of 14% for estimating full value after 1992.
The report concludes that the City will be within the
projected legal debt incurring limit in the 1996 fiscal
year. However, the report concluded that, based on the
most likely forecast of full value of real property, the
debt incurring power of the City would be curtailed in the
1997 and 1998 fiscal years substantially. The City
Comptroller recommended, among other things,
prioritization of capital projects to determine which can
be delayed or cancelled, and better maintenance of the
City's physical plant and infrastructure, which would
result in less capital spending for repair and replacement
of capital structures.
On July 21, 1995, the staff on the Control Board
issued a report on the 1996-99 Financial Plan which
identified risks of $873 million, $2.1 billion, $2.8
billion and $2.8 billion for the 1996 through 1999 fiscal
years, respectively. With respect to the 1996 fiscal
year, the principal risks included (i) possible shortfalls
in projected tax revenues totaling $50 million, (ii) the
possibility that revenue actions and expenditure reduction
initiatives for BOE totaling $266 million might not be
successfully implemented, (iii) possible shortfalls
totaling $172 million in proposed welfare savings from
increased fraud detection, and (iv) uncertainty concerning
the $50 million of proposed additional State aid and $75
million of proposed additional Federal aid, the proposed
receipt of $130 million of increased rent payments for the
City's airports and the $100 million of savings to be
derived from health benefit-related savings, which are
subject to negotiations with or approvals by other
parties. Additional risks identified for the 1997 through
1999 fiscal years include the possibility of additional
tax revenue shortfalls, uncertainty concerning the ability
of the City to implement the gap-closing actions for such
years and uncertainty concerning the projected receipt of
additional anticipated State aid. Other areas of concern
identified in the report included the projected deficit at
HHC of approximately $400 million, reflecting the impact
on HHC of the entitlement reductions contained in the
State budget and the City's reduction in the subsidy
provided to HHC, and the assumption in the Financial Plan
that the City will realize the full $400 million of
projected savings in public assistance and Medicaid
payments enacted at the State level. The report noted
that substantially more information is needed concerning
the proposed gap-closing actions for the 1997-1999 fiscal
years.
On June 14, 1995, the staff of the OSDC issued a
report with respect to the 1995 fiscal year. The report
noted that, during the 1995 fiscal year, the City faced
adverse financial developments totaling over $2 billion
resulting from the inability to initiate approximately 35%
of the City's gap-closing program, as well as newly-
identified spending needs and revenue shortfalls resulting
from the adverse impact on the City's personal income,
general corporation and other tax revenues of the policy
of the Federal Reserve of increasing short-term interest
rates and the related downturn in the bond market and
profits and bonus income on Wall Street. The report noted
that the City relied heavily on one-time actions of offset
these adverse developments, using $2 billion in one-time
resources in the 1995 fiscal year, or nearly double the
1994 amount.
On July 24, 1995, the staff of the OSDC issued a
report on the 1996-99 Financial Plan. The report
concluded that there remains a budget gap for the 1996
fiscal year of $392 million, largely because the City and
its unions have yet to reach an agreement on how to
achieve $160 million in unspecified labor savings and the
remaining $100 million in recurring health insurance
savings from last year's agreement. The report also
identified a number of issues that present a net potential
risk of $409 million to the City's revenue and expenditure
forecasts for the 1996 fiscal year, including risks of (i)
$160 million associated with anticipated increases in
Federal and State assistance, (ii) $130 million relating
to projected Port Authority airport lease payments, and
(iii) $100 million with respect to unfunded BOE mandates.
The report also identified several other concerns
regarding the 1996 fiscal year, including concerns that
(i) detailed programs have not yet been fully developed to
meet the $564 million and $400 million cost-reduction
targets established for BOE and HHC, respectively, (ii)
State and City initiatives to reduce public assistance and
Medicaid costs, which are expected to reduce City costs by
$745 million in the 1996 fiscal year, will require close
monitoring to ensure that financial targets are met; (iii)
the City has not provided sufficient assurances that the
bond proceeds from its proposed sale of the water and
sewer system would be used strictly for capital spending
purposes; and (iv) the 1996-99 Financial Plan makes no
provision for wage increases in the collective bargaining
agreements between the City and its unions, which
generally will expire by October 1995. The report further
noted that growth in City revenues is being constrained by
the weak economy in the City, which is likely to be
compounded by the slowing national economy, and that there
is a likelihood of a national recession during the course
of the 1996-99 Financial Plan. Moreover, the report noted
that State and Federal budgets are undergoing tumultuous
changes, and that the potential for far-reaching
reductions in intergovernmental assistance is clearly on
the horizon, with greater uncertainty about the impact on
City finances and services.
On October 9, 1995, S&P issued a report which
concluded that proposals to replace the graduated Federal
income tax system with a "flat" tax could be detrimental
to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax
deductions currently available, including residential
mortgage interest, property taxes and state and local
income taxes, could have a severe impact on funding
methods under which municipalities operate. With respect
to property taxes, the report noted that the total
valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of
mortgage interest deduction would result in a significant
reduction in affordability and, thus, in the demand for,
and the valuation of, real estate. The report noted that
rapid losses in property valuations would be felt by many
municipalities, hurting their revenue raising abilities.
In addition, the report noted that the loss of the current
deduction for real property and state and local income
taxes from Federal income tax liability would make rate
increases more difficult and increase pressures to lower
existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of
municipal bond interest is worth less to investors.
Finally, the report noted that tax anticipation notes
issued in anticipation of property taxes could be hurt by
the imposition of a flat tax, if uncertainty is introduced
with regard to their repayment revenues, until property
values fully reflect the loss of mortgage and property tax
deductions.
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. The City's current monthly cash flow forecast
for the 1996 fiscal year shows a need of $2.4 billion of
seasonal financing for the 1996 fiscal year, a portion of
which will be met with the proceeds of notes. Seasonal
financing requirements for the 1995 fiscal year increased
to $2.2 billion from $1.75 billion and $1.4 billion in the
1994 and 1993 fiscal years, respectively. The delay in the
adoption of the State's budget for its 1992 fiscal year
required the City to issue $1.25 billion in short-term
notes on May 7, 1991, and the delay in the adoption of the
State's budget for its 1991 fiscal year required the City
to issue $900 million in short-term notes on May 15, 1990.
Seasonal financing requirements were $2.25 billion and
$3.65 billion in the 1992 and 1991 fiscal years,
respectively.
The 1996-99 Financial Plan is based on numerous
assumptions, including the condition of the City's and the
region's economy and a modest employment recovery and the
concomitant receipt of economically sensitive tax revenues
in the amounts projected. The 1996-99 Financial Plan is
subject to various other uncertainties and contingencies
relating to, among other factors, the extent, if any, to
which wage increased for City employees exceeds the annual
wage cost assumed for the 1996 through 1999 fiscal years;
continuation of 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; the willingness and ability of the
State, in the context of the State's current financial
condition, to provide the aid contemplated by the 1996-99
Financial Plan and to take various other actions to assist
the City, including the proposed entitlement spending
reductions; the ability of HHC, BOE and other such
agencies to maintain balanced budgets; the willingness of
the Federal government to provide the amount of Federal
aid contemplated in the 1996-99 Financial Plan; adoption
of the City's budgets by the City Council in substantially
the forms submitted by the Mayor; the ability of the City
to implement proposed reductions in City personnel and
other cost reduction initiatives, which may require in
certain cases the cooperation of the City's municipal
unions, and the success with which the City controls
expenditures; savings for health care costs for City
employees in the amounts projected in the 1996-99
Financial Plan; the impact on conditions in the real
estate market on real estate tax revenues; the City's
ability to market its securities successfully in the
public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the
City's infrastructure.
Contracts with all of the City's municipal unions
either expired during the 1995 fiscal year or will expire
during the 1996 fiscal year. The 1996-99 Financial Plan
provides no additional wage increases for City employees
after their contracts expire in the 1995 and 1996 fiscal
years. Each 1% wage increase for all union contracts
commencing in the 1995 and 1996 fiscal year would cost the
City an estimated additional $141 million for the 1996
fiscal year and $161 million each year thereafter above
the amounts provided for in the Financial Plan. New union
contracts are being negotiated.
The projections and assumptions contained in the
1996-99 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 financing requirements.
The City's projections are subject to the City's ability
to implement the necessary service and personnel reduction
programs successfully.
On March 1, 1994, proposed legislation enabling
Staten Island to separate from the City was submitted to
the Legislature. Separation 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
issue a "home rule message", which requires a formal
request of action by the Legislature 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 by the Assembly. In June
1994, a proceeding was commenced by the members of the
Assembly representing Staten Island against the speaker
and the Assembly "home rule" counsel challenging the
validity of their determination and seeking to have it
rescinded. On January 17, 1995, the Supreme Court for
Albany County dismissed the petition. If any such
enabling legislation were passed, it 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 Legislature, and if so, what legal
challenges might be commenced contesting the validity of
such legislation.
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
determinations in certain of them might have a material
adverse effect upon the City's ability to carry out the
1996-99 Financial Plan. The City is a party to numerous
lawsuits and is the subject of numerous claims and
investigations. The City has estimated that its potential
future liability on account of outstanding claims against
it as of June 30, 1994 amounted to approximately $2.6
billion. This estimate was made by categorizing the
various claims and applying a statistical model, based
primarily on actual settlements by type of claim during
the preceding ten fiscal years, and by supplementing the
estimated liability with information supplied by the
City's Corporation Counsel.
On July 10, 1995, S&P revised downward its rating on
City general obligation bonds from A- to BBB+ and removed
City bonds from CreditWatch. S&P stated that "structural
budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job
growth and a growing dependence on the historically
volatile financial services sector". Other factors
identified by S&P in lowering its rating on City bonds
included a trend of using one-time measures, including
debt refinancings, to close projected budget gaps,
dependence on unratified labor savings to help balance the
Financial Plan, optimistic projections of additional
federal and State aid or mandate relief, a history of cash
flow difficulties caused by State budget delays and
continued high debt levels. Fitch Investors Services,
Inc. ("Fitch") rates City general obligation bonds A-.
Moody's rating for City general obligation bonds is Baa1.
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 July 10, 1995, S&P revised its rating of City bonds
downward to BBB+, as discussed above. 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. Since July 15, 1993, Fitch has rated City bonds
A-. On July 12, 1995, Fitch stated that the City's credit
trend remains "declining."
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 describe special redemption
procedures for certain shareholders who engage in
purchases of securities through Lehman Brothers or an
Introducing Broker, under which Fund shares are redeemed
automatically to satisfy debit balances arising in the
shareholder's account on the settlement date of other
securities transactions. A shareholder may choose not to
redeem Fund shares automatically by notifying Lehman
Brothers or the Introducing Broker, and by making payment
for securities purchased by the settlement date, which is
usually five business days after the trade date.
Net Asset Value
The Prospectuses discuss the time at which the net
asset value of shares of each class of the Fund is
determined for purposes of sales and redemptions. The
following is a description of the procedures used by the
Fund in valuing its assets.
The valuation of the Fund's portfolio securities is
based upon their amortized cost, which does not take into
account unrealized capital gains or losses. Amortized cost
valuation involves initially valuing an instrument at its
cost and, thereafter, assuming a constant amortization to
maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value
of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument.
Pursuant to the 1940 Act, the Fund must maintain a
dollar-weighted average portfolio maturity of 90 days or
less, purchase only instruments having remaining
maturities of thirteen months or less and invest only in
securities determined by LBGAM to be of eligible quality
with minimal credit risks.
Pursuant to Rule 2a-7, the Company's Board of
Directors also has established procedures designed to
stabilize, to the extent reasonably possible, the price
per share of each class of the Fund as computed for the
purpose of sales and redemptions at $1.00. Such procedures
include review of the Fund's portfolio holdings by the
Board of Directors, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset
value calculated by using available market quotations or
market equivalents deviates from $1.00 per share based on
amortized cost.
Rule 2a-7 also provides that the extent of any
deviation between the Fund's net asset value based upon
available market quotations or market equivalents and the
$1.00 per share net asset value based on amortized cost
must be examined by the Board of Directors. In the event
the Board of Directors determines that a deviation exists
which may result in material dilution or other unfair
results to investors or existing shareholders, pursuant to
Rule 2a-7 the Board of Directors must cause the Fund to
take such corrective action as the Board of Directors
regards as necessary and appropriate, including: selling
portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity;
withholding dividends or paying distributions from capital
or capital gains; redeeming shares in kind; or
establishing a net asset value per share by using
available market quotations.
EXCHANGE PRIVILEGE
Holders of each class of the Fund's Shares may
exchange all or part of their Shares for shares of the
same class of shares of certain other funds in the Lehman
Brothers Group of Funds, as indicated in the Prospectuses,
to the extent such shares are offered for sale in the
shareholder's state of residence. There currently is no
charge for this service, and exchanges are made on the
basis of relative net asset value per share at the time of
exchange.
The exchange privilege enables holders of the Fund's
Shares to acquire shares in a fund with different
investment objectives when they believe that a shift
between funds is an appropriate investment decision. This
privilege is available to shareholders residing in any
state in which the fund shares being acquired may legally
be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each
fund into which an exchange is to be made. Prospectuses
may be obtained from any Lehman Brothers Investment
Representative.
Exercise of the exchange privilege is treated as a
sale and repurchase for federal income tax purposes and,
depending on the circumstances, a short- or long-term
capital gain or loss may be realized. The price of the
shares of the fund into which shares are exchanged will be
the new cost basis for tax purposes.
Upon receipt of proper instructions and all necessary
supporting documents, the Fund's Shares submitted for
exchange are redeemed at the then-current net asset value
and the proceeds immediately invested in shares of the
appropriate class of the fund being acquired. Lehman
Brothers reserves the right to reject any exchange
request. The exchange privilege may be modified or
terminated at any time after notice to shareholders.
MANAGEMENT OF THE FUND
Directors and Officers
The Company's directors and executive officers, their
addresses, principal occupations during the past five
years and other affiliations are as follows:
Name and Address
Position
with the
Company
Principal
Occupation
During Past
5 Years and
Other
Affiliations
James A. Carbone
Lehman
Brothers Global
Asset
Management,
Inc.
3 World
Financial
Center, 10th
Floor
New York, New
York 10285
Age: 43
Chairman
of the
Board
and
Director
Director,
Lehman
Brothers
Global Asset
Management
K.K.;
Managing
Director,
Lehman
Brothers
Inc.;
formerly
Branch
Manager,
Lehman
Brothers
Japan Inc.;
formerly
Chairman,
Lehman
Brothers
Asia
Holdings
Limited; and
formerly
Manager --
Debt
Syndicate,
Origination
& Corporate
Bonds,
Lehman
Brothers
Inc.
Burt N. Dorsett
(2)(3)
201 East 62nd
Street
New York, New
York 10021
Age: 64
Director
Managing
Partner,
Dorsett
McCabe
Capital
Management,
Inc.;
Director,
Research
Corporation
Technologies
; formerly
President,
Westinghouse
Pension
Investments
Corporation;
formerly
Executive
Vice
President
and Trustee,
College
Retirement
Equities
Fund, Inc.;
and formerly
Investment
Officer,
University
of
Rochester.
Kathleen C.
Holmes(2)(3)
26 Murray Hill
Square
New
Providence, New
Jersey 07974
Age: 47
Director
Managing
Director,
Wharton
School
Financial
Institutions
Center,
University
of
Pennsylvania
; Senior
Partner and
Management
Consultant,
Furash &
Company.
John N.
Hatsopoulos(2)(3
)
Thermo
Electron Corp.
81 Wyman
Street
Waltham,
Massachusetts
02254
Age: 61
Director
Executive
Vice
President
and Chief
Financial
Officer,
Thermo
Electron
Corp.
Name and Address
Position
with the
Company
Principal
Occupation
During Past
5 Years and
Other
Affiliations
Andrew D. Gordon
3 World
Financial Center
New York, New
York 10285
Age: 41
President
Managing
Director,
Lehman
Brothers.
John M. Winters
3 World
Financial Center
New York, New
York 10285
Age: 46
Vice
President
&
Investmen
t Officer
Senior Vice
President
and Senior
Money Market
Portfolio
Manager,
Lehman
Brothers
Global Asset
Management,
Inc.;
formerly
Product
Manager with
Lehman
Brothers
Capital
Markets
Group.
Nicholas
Rabiecki, III
3 World
Financial Center
New York, New
York 10285
Age: 37
Vice
President
&
Investmen
t Officer
Vice
President
and Senior
Portfolio
Manager,
Lehman
Brothers
Global Asset
Management,
Inc.;
formerly
Senior Fixed
Income
Portfolio
Manager with
Chase
Private
Banking.
Michael C.
Kardok
53 State
Street
Boston,
Massachusetts
02109
Age: 35
Treasurer
Vice
President,
First Data
Investor
Services
Group, Inc.;
formerly
Vice
President,
The Boston
Company.
Patricia L.
Bickimer
53 State
Street
Boston,
Massachusetts
02109
Age: 42
Secretary
Vice
President
and
Associate
General
Counsel,
First Data
Investor
Services
Group, Inc.;
formerly
Vice
President
and
Associate
General
Counsel, The
Boston
Company
Advisors,
Inc.
___________
1. Director considered by the Company to be an
"interested person" of the Company as defined in the 1940
Act.
2. Audit Committee Member.
3. Nominating Committee Member.
Three directors of the Company, Messrs. Carbone and
Dorsett and Ms. Holmes, serve as directors or trustees of
other investment companies for which Lehman Brothers,
LBGAM or one of their affiliates serves as distributor or
investment adviser.
No employee of Lehman Brothers, LBGAM or First Data
Investor Services Group, Inc. ("First Data") receives any
compensation from the Company for acting as an officer or
director of the Company. The Company pays each director
who is not a director, officer or employee of Lehman
Brothers, LBGAM or First Data or any of their affiliates,
a fee of $20,000 per annum plus $500 per meeting attended
and reimburses them for travel and out-of-pocket expenses.
By virtue of the responsibilities assumed by Lehman
Brothers, LBGAM, First Data and their affiliates under
their respective agreements with the Company, the Company
itself requires no employees in addition to its officers.
The following table sets forth certain information
regarding the compensation of the Company's directors
during the fiscal year ended July 31, 1995. No executive
officer or person affiliated with the Company received
compensation from the Company during the fiscal year ended
July 31, 1995 in excess of $60,000. For purposes of this
table, "Fund Complex" means regulated invesment companies,
including the Company, which have common or affiliated
investment advisers.
COMPENSATION TABLE
Na
me
of
Pe
rs
on
an
d
Po
si
ti
on
A
g
g
r
e
g
a
t
e
C
o
m
p
e
n
s
a
t
i
o
n
f
r
o
m
t
h
e
C
o
m
p
a
n
y
Pens
ion
or
Reti
reme
nt
Bene
fits
Accr
ued
as
Part
of
Comp
any
Expe
nses
E
s
t
i
m
a
t
e
d
A
n
n
u
a
l
B
e
n
e
f
i
t
s
U
p
o
n
R
e
t
i
r
e
m
e
n
t
To
ta
l
Co
mp
en
sa
ti
on
Fr
om
th
e
Co
mp
an
y
an
d
Fu
nd
Co
mp
le
x
Pa
id
to
Di
re
ct
or
s*
Ja
me
s
A.
Ca
rb
on
e,
Ch
ai
rm
an
of
th
e
Bo
ar
d
0
0
N
/
A
$0
(2
)
Bu
rt
N.
Do
rs
et
t,
Di
re
ct
or
$
2
2
,
0
0
0
.
0
0
0
N
/
A
$4
7,
00
0.
00
(2
)
Ka
th
le
en
Ho
lm
es
,
Di
re
ct
or
$
2
3
,
1
1
6
.
7
5
*
*
0
N
/
A
$3
4,
20
8.
25
**
(2
)
Jo
hn
Ha
ts
op
ou
lo
s,
Di
re
ct
or
$
2
2
,
0
0
0
.
0
0
0
N
/
A
$2
2,
00
0.
00
(1
)
_____________
* Represents the total compensation paid to such persons
by all investment companies (including the Company) from
which such person received compensation during the fiscal
year ended July 31, 1995 that are considered part of the
same "fund complex" as the Company. The parenthetical
number represents the number of such investment companies,
including the Company.
** Includes $1,208.25 for reimbursement of out-of-pocket
expenses.
Investment Adviser
LBGAM serves as investment adviser to the Fund
pursuant to a written 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. As
compensation for investment advisory services rendered to
the Fund, LBGAM is entitled to receive from the Fund a fee
computed daily and paid monthly at the annual rate of
0.30% of the value of the Fund's average daily net assets.
Administrator
As the Fund's administrator, First Data has agreed to
provide the following services: (i) assist generally in
supervising the Fund's operations, providing and
supervising the operation of an automated data processing
system to process purchase and redemption orders,
providing information concerning the Fund to its
shareholders of record, handling shareholder problems,
supervising the services of employees whose principal
responsibility and function is to preserve and strengthen
shareholder relations; (ii) prepare reports to the Fund's
shareholders and prepare tax returns and reports to and
filings with the SEC; (iii) compute the net asset value
per share of the Fund; (iv) provide the services of
certain persons who may be elected as directors or
appointed as officers of the Company by the Board of
Directors; and (v) maintain the registration or
qualification of the Fund's shares for sale under state
securities laws. As compensation for administrative
services rendered to the Fund, First Data is entitled to
receive a fee computed daily and paid monthly at the
annual rate of 0.20% of the value of the Fund's average
daily net assets.
Distributor and Plan of Distribution
Lehman Brothers acts as distributor of the Fund's
shares. Lehman Brothers, located at 3 World Financial
Center, New York, New York 10285, is a wholly-owned
subsidiary of Lehman Brothers Holdings Inc. ("Holdings").
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. Under the Plan of Distribution,
the Fund has agreed to pay Lehman Brothers monthly for
advertising, marketing and distributing its Select Shares
and Global Clearing Shares at the annual rates of 0.25%
and 0.50%, respectively, of the value of its average daily
net assets.
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.
First Data, a subsidiary of First Data Corporation,
is located at 53 State Street, Boston, Massachusetts
02019, and serves as the Company's transfer agent. Under
the transfer agency agreement, First Data maintains the
shareholder account records for the Company, handles
certain communications between shareholders and the
Company and distributes dividends and distributions
payable by the Company and produces statements with
respect to account activity for the Company and its
shareholders. For these services, First Data receives a
monthly fee computed separately for each class of the
Fund's shares on the basis of the number of shareholder
accounts that it maintains for the Company during the
month and is reimbursed separately by each class for
out-of-pocket expenses.
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 services, 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 First Data have agreed, that if, in any fiscal
year, the expenses borne by the Fund exceed the applicable
expense limitations imposed by the securities regulations
of any state in which shares of the Fund are registered or
qualified for sale to the public, they will reimburse the
Fund 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 other securities limited, in respect of any
issuer, to an amount not greater than 5% of the value of
the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of
the value of its assets is invested in the securities
(other than U.S. Government Securities or the securities
of other RICs) of any one issuer.
Investors should consider the tax implications of
buying shares just prior to distribution. Although the
price of shares purchased at that time may reflect the
amount of the forthcoming distribution, those purchasing
just prior to a distribution will receive a distribution
which will nevertheless be taxable to them.
Gain or loss, if any, on the sale or other
disposition of shares of 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
excise tax.
If for any taxable year the Fund does not qualify for
tax treatment as a RIC, all of the Fund's taxable income
will be subject to tax at regular corporate rates without
any deduction for distributions to Fund shareholders. In
such event, dividend distributions to shareholders would
be taxable as ordinary income to the extent of the Fund's
earnings and profits, and would be eligible for the
dividends received deduction in the case of corporate
shareholders.
The Fund will be required in certain cases to
withhold and remit to the U.S. Treasury 31% of taxable
dividends or 31% of gross proceeds realized upon sale paid
to its shareholders who have failed to provide a correct
tax identification number in the manner required, who are
subject to backup withholding by the Internal Revenue
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 to 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 MUNICIPAL OBLIGATION RATINGS
Commercial Paper Ratings
Standard & Poor's, a division of The McGraw-Hill
Companies ("Standard & Poor's) commercial paper rating is
a current assessment of the likelihood of timely payment
of debt considered short-term in the relevant market. The
following summarizes the two highest rating categories
used by Standard & Poor's 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 short-term debt ratings are opinions of the
ability of issuers to repay punctually senior debt
obligations which have an original maturity not exceeding
one year. 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 ability for repayment of
senior short-term debt 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 ability for repayment of
senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample
alternative liquidity is maintained.
The two highest rating categories of Duff & Phelps
for investment grade commercial paper are "D-1" and "D-2."
Duff & Phelps employs three designations, "D-1+," "D-1"
and "D-1-," within the highest rating category. The
following summarizes the two highest rating categories
used by Duff & Phelps for commercial paper:
"D-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.
"D-1" - Debt possesses very high certainty of timely
payment. Liquidity factors are excellent and supported by
good fundamental protection factors. Risk factors are
minor.
"D-1-" - Debt possesses high certainty of timely
payment. Liquidity factors are strong and supported by
good fundamental protection factors. Risk factors are very
small.
"D-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
generally 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 some of the 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 short-term ratings assess the
likelihood of an untimely payment of principal or interest
of debt having a maturity of one year or less. 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. Where issues possess a
particularly strong credit feature a rating of "A1+" is
assigned.
"A2" - Obligations are supported by a good capacity
for timely repayment.
Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard
& Poor's 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 the highest rated issues only in small degree.
"A" - Debt is considered to have a strong capacity to
pay interest and repay principal although such issues are
somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate
capacity to pay interest and repay principal. Whereas
such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in
this category than in higher-rated categories.
"BB," "B," "CCC," "CC," and "C" - Debt that possesses
one of these ratings is regarded as having predominantly
speculative characteristics with respect to capacity to
pay interest and repay principal. "BB" indicates the
least degree of speculation and "CCC" the highest degree
of speculation. While such debt will likely have some
quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures
to adverse conditions.
"CI" - This rating is reserved for income bonds on
which no interest is being paid.
"D" - Debt is in payment default. This rating is
also used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
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 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.
"A" - Bonds possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and
interest are considered adequate but elements may be
present which suggest a susceptibility to impairment
sometime in the future.
"Baa" - Bonds considered medium-grade obligations,
i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess
one of these ratings provide questionable protection of
interest and principal ("Ba" indicates some speculative
elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a
high degree; and "C" represents the lowest rated class of
bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Municipal 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.
Moody's applies numerical modifiers 1, 2 and 3 in
generic classification of "Aa" in its corporate bond
rating system. The modifier 1 indicates that the company
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 company ranks at the lower
end of its generic rating category.
Those municipal bonds in the "Aa" to "B" groups which
Moody's believes posses the strongest investment
attributes are designated by the symbols "Aa1," "A1,"
"Baa1," "Ba1," and "B1."
The following summarizes the 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.
"A" - Debt possesses protection factors which are
average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
"BBB" - Debt possesses below average Protection
factors but such protection factors are still considered
sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that
possesses one of these ratings is considered to be below
investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will
not be met when due. Debt rated "CCC" is well below
investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred
dividends. Debt rated "DD" is a defaulted debt
obligation, and the rating "DP" represents preferred stock
with dividend arrearages.
To provide more detailed indications of credit
quality, the "AA," "A," "BBB," "BB" and "B" ratings may be
modified by the addition of a plus (+) or minus (-) sign
to show relative standing within these major rating
categories.
The following summarizes the 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+."
"A" - Bonds considered to be investment grade and of
high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong,
but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher
ratings.
"BBB" - Bonds considered to be investment grade and
of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse
impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds
with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D"
- -Bonds that possess one of these ratings are considered by
Fitch to be speculative investments. The ratings "BB" to
"C" represent Fitch's assessment of the likelihood of
timely payment of principal and interest in accordance
with the terms of obligation for bond issues not in
default. For defaulted bonds, the rating "DDD" to "D" is
an assessment that bonds should be valued on the basis of
the ultimate recovery value in liquidation or
reorganization of the obligor.
To provide more detailed indications of credit
quality, the Fitch ratings from and including "AA" to "C"
may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major rating
categories.
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.
"A" - This designation indicates the ability to repay
principal and interest is strong. Issues rated "A" could
be more vulnerable to adverse developments (both interal
and external) than obligations with higher ratings.
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.
"A" - Obligations for which there is a low
expectation of investment risk. Capacity for timely
repayment of principal and interest is strong, although
adverse changes in business economic or financial
conditions may lead to increased investment risk.
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 rating reflects the liquidity
factors 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
Corporation for municipal notes:
SP-1" - The issuers of these municipal notes exhibit
strong capacity to pay principal and interest. Those
issues determined to possess a very strong capacity to pay
are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic
changes over the term of the notes.
Moody's ratings for state and municipal notes and
other short-term loans are designated Moody's Investment
Grade ("MIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. A
short-term rating may also be assigned on an issue having
a demand feature. Such ratings will be designated as
"VMIG." The following summarizes the two highest ratings
used by Moody's Investors Service, Inc. for short-term
notes:
"MIG-1"/"VMIG-1" - This designation denotes best
quality. There is strong protection by established cash
flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high
quality. Margins of protection are ample although not so
large as in the preceding group.
Duff & Phelps and Fitch use the short-term ratings
described under Commercial Paper Ratings for municipal
notes.
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