As filed with the Securities and Exchange Commission on June 8, 2007
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-3802
LEHMAN BROTHERS INCOME FUNDS
----------------------------
(Exact Name of the Registrant as Specified in Charter)
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
(Address of Principal Executive Offices - Zip Code)
Registrant's telephone number, including area code: (212) 476-8800
Peter E. Sundman, Chairman of the Board and Chief Executive Officer
Lehman Brothers Income Funds
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur Delibert, Esq.
Kirkpatrick & Lockhart Preston Gates Ellis LLP
1601 K Street, N.W.
Washington, D.C. 20006-1600
(Names and Addresses of agents for service)
Date of fiscal year end: March 31, 2007
Date of reporting period: March 31, 2007
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO SHAREHOLDERS
[LOGO] LEHMAN BROTHERS ASSET MANAGEMENT
Neuberger Berman
Government Money Fund
Annual Report
March 1, 2007
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Contents
THE FUND
Chairman's Letter ...................................................1
PORTFOLIO COMMENTARY/MATURITY DIVERSIFICATION
Neuberger Berman Government Money Fund...............................2
Fund Expense Information.............................................6
FINANCIAL STATEMENTS.................................................8
FINANCIAL HIGHLIGHTS/PER SHARE DATA.................................16
Report of Independent Registered Public Accounting Firm.............18
THE MASTER SERIES
SCHEDULE OF INVESTMENTS.............................................19
FINANCIAL STATEMENTS................................................21
FINANCIAL HIGHLIGHTS................................................26
Report of Independent Registered Public Accounting Firm.............28
Directory...........................................................29
Trustees and Officers...............................................30
Proxy Voting Policies and Procedures................................39
Quarterly Portfolio Schedule........................................39
Board Consideration of the Management and Sub-Advisory Agreements...39
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Neuberger Berman Management Inc." and the individual Fund name in this report
are either service marks or registered service marks of Neuberger Berman
Management Inc. (C)2007 Neuberger Berman Management Inc. All rights reserved.
(C)2007 Lehman Brothers Asset Management LLC. All rights reserved.
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Chairman's Letter
Dear Shareholder,
I am pleased to present to you this annual report for the Neuberger Berman
Government Money Fund for the period from November 1, 2006 through March 31,
2007. The report includes portfolio commentary, a listing of the Fund's
investments, and the audited financial statements for the reporting period.
After two final 25 basis point increases through June 2006, the Federal Reserve
paused in the policy of monetary tightening it had been pursuing since June of
2004. The Fed has kept the Fed Funds rate at 5.25% at each of it's meetings
from June 2006 through March 2007. The central bank continues to articulate
concerns about inflation; it has noted that it will look to future data
releases to assess the impact of past rate increases in containing inflation
and engineering a soft landing for the economy. This will determine whether, in
the view of the Fed, further increases will be necessary or if rates can be
reduced.
The Fund performed admirably and as expected throughout the period. Our
investment strategy combines a distinct process for interest rate risk
management with dedicated credit research to build a portfolio of high-quality
securities that seeks to respond quickly to changes in interest rates without
sacrificing yield.
As always, we intend to proceed with caution to protect our clients' principal
and maintain daily liquidity and diversification.
Sincerely,
/s/ Peter Sundman
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN GOVERNMENT MONEY FUND
1
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Neuberger Berman Government Money Fund
Portfolio Commentary
We are pleased to report that the Neuberger Berman Government Money Fund
Investor Class delivered positive returns and outperformed the iMoneyNet, Inc.
Money Fund Report Government & Agencies Retail Average during the period from
November 1, 2006 through March 31, 2007.
The combination of slower economic growth and a pause in the Fed's two-year
tightening campaign led to a rally in bonds that began in the third quarter of
calendar 2006, with the market delivering its best quarterly total return in
four years and the fifth best in the last 10 years,* as average yields on the
10-year Treasury declined roughly 40 basis points between October and December
2006. The Fed continued its pause into the first quarter of 2007, removing
language reflecting its tightening bias from its March 21 statement. This is a
significant shift and suggests board members may be a bit more sanguine with
respect to moderating economic prospects.
During the reporting period, investors were focused on issues including strains
in the U.S. sub-prime mortgage market, inflationary pressures, and a vibrant
U.S. employment picture. In recent months, there has been considerable anxiety
surrounding the sub-prime mortgage market as delinquencies and foreclosures
continue to climb. However, employment figures remain benign as monthly
non-farm payrolls for the first quarter of 2007 averaged gains of 152,000
and the unemployment rate dropped to 4.4% in March. The Core Personal
Consumption Expenditures (PCE) Price Index, policy makers' preferred measure of
inflation--increased to an annualized rate of 2.4% in February. This is above
Fed officials' well known "comfort" level.
Looking forward, we expect the Fed to leave rates unchanged in the short term
as it assesses the macroeconomic impact of a housing led slowdown on the
broader economy. Inherent problems persist in the sub-prime sector but it is
unclear whether these problems will move into the prime market. And although
inflation remains stubbornly high, we feel that the Fed will be hard-pressed to
raise short-term rates, despite board members' stated willingness to do so.
Ultimately, we anticipate that the next move by the Fed will be to take rates
lower, or to take no action and remain neutral. In the interim, we anticipate
that rates will be limited to a trading range as the market and the Fed digest
incoming data. We will seek to capitalize on pockets of interest rate
volatility in order to provide consistent and secure returns to our
shareholders.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS
TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO
LOSE MONEY BY INVESTING IN THE FUND.
THE COMPOSITION, INDUSTRIES AND HOLDINGS OF THE FUND ARE SUBJECT TO CHANGE.
INVESTMENT RETURN WILL FLUCTUATE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS.
* As measured by Lehman Brothers U.S. Aggregate Index.
2
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Neuberger Berman Government Money Fund
For the five months ending on March 31, 2007, the Neuberger Berman Government
Money Fund returned 2.01% compared to the iMoneyNet Money Fund Report
Government & Agencies Retail Average's 1.90%. The Fund closed the period with a
4.86% seven-day current yield and a 4.98% seven-day effective yield; this more
closely reflects current earnings than the six-month or one-year figures.
Sincerely,
/s/ John C. Donohue
/s/ Scott Riecke
JOHN C. DONOHUE AND SCOTT F. RIECKE
PORTFOLIO CO-MANAGERS
GOVERNMENT MASTER SERIES
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Maturity Diversification (% by Maturity)
1 - 7 Days 36.4%
8 - 30 Days 31.1
31 - 90 Days 14.1
91 - 180 Days 14.7
181+ Days 3.7
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3
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Endnotes
1 Neuberger Berman Management Inc. (NBMI) has contractually agreed to forgo
current payment of fees and/or reimburse certain expenses of the Investor
Class of the Fund through 10/31/2010, so that the total annual operating
expenses of that class are limited to 0.45% of average net assets. The Fund
has contractually undertaken to reimburse Management for the excess
expenses paid by Management, provided the reimbursements do not cause
operating expenses (exclusive of taxes, interest, brokerage commissions,
and extraordinary expenses) to exceed the above-stated expense limitation
and the reimbursements are made within three years after the year that
Management incurred the expense. For the period ended March 31, 2007, there
was no reimbursement of expenses by Management to the Fund.
2 "Current yield" of a money market fund refers to the income generated by an
investment in a Fund over a recent 7-day period. This income is then
"annualized." The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "current
yield" because of the compounding effect of this assumed reinvestment.
Yields of a money market fund will fluctuate and past performance is not a
guarantee of future results.
3 Unaudited performance data current to the most recent month-end are
available at www.nb.com.
4
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Glossary of Indices
The iMoneyNet Money Fund Measures the performance of retail money market
Report Government & mutual funds which invest in obligations of the
Agencies Retail Average: U.S. Treasury (T-Bills), repurchase agreements,
or U.S. Government Agency securities.
Lehman Brothers U.S. An unmanaged index that represents the U.S.
Aggregate Index: domestic investment grade bond market. It is
comprised of the Lehman Brothers
Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and Asset-Backed Securities
Index, including securities that are of
investment-grade quality or better, have at
least one year to maturity, and have an
outstanding par value of at least $100 million.
Please note that indices do not take into account any fees and expenses or any
tax consequences of investing in the individual securities that they track and
that individuals cannot invest directly in any index. Data about the
performance of these indices are prepared or obtained by Neuberger Berman
Management Inc. and include reinvestment of all dividends and capital gain
distributions. The Funds may invest in securities not included in the
above-described indices.
5
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Information About Your Fund's Expenses
This table is designed to provide information regarding costs related to your
investments. All mutual funds incur operating expenses, which include the
fund's proportionate share of expenses of its corresponding portfolio,
administrative service fees and other expenses. The following examples are
based on an investment of $1,000 made at the beginning of the period shown and
held for the entire period. The table illustrates the fund's costs in two ways:
Actual Expenses and The first section of the table provides
Performance: information about actual account values and
actual expenses in dollars, based on the fund's
actual performance during the period. You may
use the information in this line, together with
the amount you invested, to estimate the
expenses you paid over the period. Simply divide
your account value by $1,000 (for example, an
$8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the
first section of the table under the heading
entitled "Expenses Paid During the Period" to
estimate the expenses you paid over the period.
Hypothetical Example The second section of the table provides
for Comparison Purposes: information about hypothetical account values
and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of
return at 5% per year before expenses. This
return is not the fund's actual return. The
hypothetical account values and expenses may not
be used to estimate the actual ending account
balance or expenses you paid for the period. You
may use this information to compare the ongoing
costs of investing in these funds versus other
funds. To do so, compare the expenses shown in
this 5% hypothetical example with the 5%
hypothetical examples that appear in the
shareholder reports of other funds.
6
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Expense Information As of 3/31/07 (Unaudited)
NEUBERGER BERMAN GOVERNMENT MONEY FUND
Expenses Paid During
Beginning Account Ending Account the Period* Expense
Actual Value 11/01/06 Value 3/31/07 11/01/06 - 3/31/07 Ratio
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Investor Class $1,000.00 $1,024.10 $1.97 .47%
Hypothetical (5% annual return before expenses)**
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Investor Class $1,000.00 $1,018.87 $1.97 .47%
* Expenses are equal to the annualized expense ratio for the class, multiplied
by the average account value over the period, multiplied by 152/365 (to
reflect the period shown of November 1, 2006 to March 31, 2007). The fund's
expense ratio includes its proportionate share of the expenses of its
corresponding master series.
**Hypothetical 5% annual return before expenses is calculated by multiplying
the number of days in the most recent period divided by 365.
7
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Statement of Assets and Liabilities
Neuberger Berman Income Funds
(000's omitted except per share amounts)
Government
Money Fund
--------------
March 31, 2007
Assets
Investment in corresponding Master Series, at value (Note A) $265,909
Receivable for Fund shares sold 5
Prepaid expenses and other assets 3
--------------
Total Assets 265,917
--------------
Liabilities
Distributions payable 925
Payable for Fund shares redeemed 11
Payable to administrator (Note B) 65
Accrued expenses and other payables 61
--------------
Total Liabilities 1,062
--------------
Net Assets at value $264,855
--------------
Net Assets consist of:
Paid-in capital $264,889
Undistributed net investment income (loss) --
Accumulated net realized gains (losses) on investments (34)
--------------
Net Assets at value $264,855
--------------
Shares Outstanding ($.001 par value; unlimited shares authorized)
Investor Class 264,889
--------------
Net Asset Value, offering and redemption price per share
Investor Class $1.00
--------------
See Notes to Financial Statements
8
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Statement of Operations
Neuberger Berman Income Funds
(000's omitted)
GOVERNMENT MONEY FUND
-----------------------------------
Period from
November 1, 2006 Year Ended
to March 31, 2007 October 31, 2006
Investment Income
Investment income from corresponding Master Series (Note A) $1,271 $--
Expenses from corresponding Master Series (Notes A & B) (27) --
----------------- ----------------
Net investment income from corresponding Master Series 1,244 --
Interest income-unaffiliated issuers (Note A) 5,165 17,179
----------------- ----------------
Total Income 6,409 17,179
Expenses:
Investment management fees (Note B) 98 364
Administration fees (Note B) 330 984
Shareholder servicing agent fees 25 63
Audit fees 18 37
Custodian fees (Note B) 35 117
Insurance expense 1 18
Legal fees 14 38
Registration and filing fees 16 33
Shareholder reports 12 25
Trustees' fees and expenses 7 29
Miscellaneous 10 26
----------------- ----------------
Total expenses 566 1,734
Investment management fees waived (Notes A & B) (20) (73)
Expenses reduced by custodian fee expense offset arrangement (Note B) (2) (6)
----------------- ----------------
Total net expenses 544 1,655
----------------- ----------------
Net investment income (loss) 5,865 15,524
----------------- ----------------
Realized and Unrealized Gain (Loss) on Investments (Note A)
Net realized gain (loss)
On sales of investment securities of unaffiliated issuers (7) (10)
Net gain (loss) on investments (7) (10)
----------------- ----------------
Net increase (decrease) in net assets resulting from operations $5,858 $15,514
----------------- ----------------
See Notes to Financial Statements
9
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Statement of Changes in Net Assets
Neuberger Berman Income Funds
(000's omitted)
GOVERNMENT MONEY FUND
-----------------------------------------------------
Period from
November 1, 2006 Year Ended Year Ended
to March 31, 2007 October 31, 2006 October 31, 2005
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) $5,865 $15,524 $9,987
Net realized gain (loss) on investments (7) (10) (2)
Net increase (decrease) in net assets resulting
from operations 5,858 15,514 9,985
Distributions to Shareholders From (Note A):
Net investment income (5,865) (15,524) (9,987)
From Fund Share Transactions (Note D):
Proceeds from shares sold 334,335 740,009 726,079
Proceeds from reinvestment of dividends
and distributions 1,131 2,441 1,388
Payments for shares redeemed (366,508) (855,804) (772,915)
Net increase (decrease) from Fund share transactions (31,042) (113,354) (45,448)
Net Increase (Decrease) in Net Assets (31,049) (113,364) (45,450)
Net Assets:
Beginning of period 295,904 409,268 454,718
End of period $264,855 $295,904 $409,268
Undistributed net investment income (loss)
at end of period $-- $-- $--
See Notes to Financial Statements
10
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Notes to Financial Statements Income Funds
Note A--Summary of Significant Accounting Policies:
1 GENERAL: Neuberger Berman Government Money Fund ("Government Money") (the
"Fund") is a separate operating series of Neuberger Berman Income Funds
(the "Trust"), a Delaware statutory trust organized pursuant to a Trust
Instrument dated December 23, 1992. The Trust is registered as a
diversified, open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and its shares are
registered under the Securities Act of 1933, as amended. The Fund offers
Investor Class shares. The Board of Trustees of the Trust (the "Board") may
establish additional series or classes of shares without the approval of
shareholders.
On February 28, 2007, Government Money converted from a single-fund
structure to a "master-feeder" structure. Under the master-feeder
structure, rather than investing directly in securities, the Fund is a
"feeder fund," meaning that it invests in a corresponding "master series."
The master series in turn invests in securities, using the strategies
described in the Fund's prospectus.
The assets of the Fund belong only to the Fund, and the liabilities of the
Fund are borne solely by the Fund and no other series of the Trust.
The Fund seeks to achieve its investment objective by investing all of its
net investable assets in a Master Series of Institutional Liquidity Trust,
Government Master Series (the "Master Series") (commencement of operations
December 18, 2006) that has an investment objective identical to, and a
name similar to, that of the Fund. The value of the Fund's investment in
the Master Series reflects the Fund's proportionate interest in the net
assets of the Master Series (34.54% at March 31, 2007). The performance of
the Fund is directly affected by the performance of the Master Series. The
financial statements of the Master Series, including the Schedule of
Investments, are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
It is the policy of the Fund to maintain a continuous net asset value per
share of $1.00; the Fund has adopted certain investment, valuation, and
distribution policies, which conform to general industry practice, to
enable it to do so. However, there is no assurance the Fund will be able to
maintain a stable net asset value per share. The Fund complies with Rule
2a-7 of the 1940 Act.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires Neuberger Berman Management Inc.
("Management") to make estimates and assumptions at the date of the
financial statements. Actual results could differ from those estimates.
2 FUND VALUATION: The Fund records its investment in the Master Series at
value. Investment securities held by the Master Series are valued as
indicated in the notes following the Master Series' Schedule of
Investments. Prior to February 28, 2007, investments in securities were
valued at amortized cost, which approximated U.S. federal income tax cost.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Prior to February 28, 2007,
the Fund recorded securities transactions on trade date for financial
reporting purposes. Interest income, including accretion of discount
(adjusted for original issue discount, where applicable), and amortization
of premium, where applicable, was recorded on the accrual basis. Realized
gains and losses from securities transactions were recorded on the basis of
identified cost and stated separately in the Statement of Operations.
4 INCOME TAX INFORMATION: The Fund is treated as a separate entity for U.S.
federal income tax purposes. It is the policy of the Fund to continue to
qualify as a regulated investment company by complying with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
earnings to its shareholders. Therefore, no federal income or excise tax
provision is required.
11
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Income distributions and capital gain distributions are determined in
accordance with income tax regulations, which may differ from U.S.
generally accepted accounting principles. These differences are primarily
due to differing treatments of income and gains on various investment
securities held by the Master Series, timing differences and differing
characterization of distributions made by the Fund as a whole.
As determined on March 31, 2007, there were no permanent differences
resulting from different book and tax accounting.
The tax character of distributions paid during the period ended March 31,
2007, and the years ended October 31, 2006 and October 31, 2005 were as as
follows:
Distributions Paid From:
Taxable Income Total
- ---------------------------------------- ----------------------------------------
For the Period For the Year For the Year For the Period For the Year For the Year
Ended Ended Ended Ended Ended Ended
March 31, October 31, October 31, March 31, October 31, October 31,
2007 2006 2005 2007 2006 2005
$5,864,940 $15,523,659 $9,987,018 $5,864,940 $15,523,659 $9,987,018
As of March 31, 2007, the components of distributable earnings (accumulated
losses) on a U.S. federal income tax basis were as follows:
Undistributed Loss
Ordinary Carryforwards
Income and Deferrals Total
$925,111 $(33,787) $891,324
The difference between book and tax basis distributable earnings is
attributable primarily to timing differences of distribution payments and
capital loss carryforwards.
To the extent the Fund's net realized capital gains, if any, can be offset
by capital loss carryforwards, it is the policy of the Fund not to
distribute such gains. As determined on March 31, 2007, the Fund had unused
capital loss carryforwards available for federal income tax purposes to
offset net realized capital gains, if any, as follows:
Expiring in:
-----------------------------
2012 2013 2014 2015
$14,846 $2,086 $10,498 $6,357
5 DISTRIBUTIONS TO SHAREHOLDERS: The Fund earns income, net of expenses,
daily on its investment in the Master Series. It is the policy of the Fund
to declare distributions from net investment income on each business day;
such distributions are paid or reinvested monthly. Distributions from net
realized capital gains, if any, will be made annually. Income distributions
and capital gain distributions to shareholders are recorded on the ex-date.
6 EXPENSE ALLOCATION: Certain expenses are applicable to multiple funds.
Expenses directly attributable to the Fund are charged to the Fund.
Expenses of the Trust that are not directly attributed to the Fund are
allocated among the series of the Trust, on the basis of relative net
assets, except where a more appropriate allocation of expenses to each of
the series can otherwise be made fairly. Expenses borne by the complex of
related investment companies, which includes open-end and closed-end
investment companies for which Management serves as investment manager,
that are not directly attributed to the Fund or the Trust, are allocated
among the Fund and the other investment companies in the complex or series
thereof, on the basis of relative net assets, except where a more
appropriate allocation of expenses to each investment company in the
complex or series thereof can otherwise be made fairly.
12
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7 OTHER: All net investment income and realized and unrealized capital gains
and losses of the Master Series are allocated pro rata among its respective
funds and any other investors in the Master Series, if any.
8 INDEMNIFICATIONS: Like many other companies, the Trust's organizational
documents provide that its officers and trustees are indemnified against
certain liabilities arising out of the performance of their duties to the
Trust. In addition, both in some of its principal service contracts and in
the normal course of its business, the Trust enters into contracts that
provide indemnifications to other parties for certain types of losses or
liabilities. The Trust's maximum exposure under these arrangements is
unknown as this could involve future claims against the Trust.
Note B--Management Fees, Administration Fees, Distribution Arrangements, and
Other Transactions with Affiliates:
The Fund retains Management as its administrator under an Administration
Agreement. The Investor Class of the Fund pays Management an administration
fee at the annual rate of 0.27% of its average daily net assets under this
agreement. Additionally, Management retains State Street Bank and Trust
Company ("State Street") as its sub-administrator under a
Sub-Administration Agreement. Management pays State Street a fee for all
services received under the agreement.
Prior to February 28, 2007, the Fund directly retained Management as its
investment manager under a Management Agreement. The Fund paid Management a
fee for investment management services at the annual rate of 0.10% of the
Fund's average daily net assets. Management voluntarily waived 0.02% of the
average daily net assets, which amounted to $19,651 for the period ended
February 28, 2007. Effective March 1, 2007, the Fund indirectly pays for
investment management services through its investment in the Master Series
at the annual rate of 0.08% of the average daily net assets (see Note B of
Notes to Financial Statements of the Master Series).
Effective March 1, 2007, Management has contractually undertaken to
reimburse the Fund for its operating expenses plus its pro rata portion of
its corresponding Master Series' operating expenses (including the fees
payable to Management but excluding interest, taxes, brokerage commissions
and extraordinary expenses) ("Operating Expenses") which exceed the expense
limitation as detailed in the following table:
Contractual
Reimbursement
Contractual from Management
Expense for the Period Ended
Limitation/(1)/ Expiration March 31, 2007
0.45% 10/31/10 $--
/(1)/ Expense limitation per annum of the Fund's average daily net assets.
The Fund has agreed to repay Management for its excess Operating Expenses
previously reimbursed by Management, pursuant to a contractual expense
limitation, so long as its annual Operating Expenses during that period do
not exceed its expense limitation and the repayments are made within three
years after the year in which Management issued the reimbursement.
During the period ended March 31, 2007, there was no reimbursement to
Management under this agreement. At March 31, 2007, there were no
contingent liabilities to Management under the agreement.
Management and Lehman Brothers Asset Management LLC ("LBAM"), sub-adviser
to the Master Series, are wholly-owned subsidiaries of Lehman Brothers
Holdings Inc., a publicly-owned holding company. Several individuals who
are officers and/or trustees of the Trust are also employees of LBAM and/or
Management.
13
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The Fund also has a distribution agreement with Management. Management
receives no compensation under it and no commissions for sales or
redemptions of shares of beneficial interest of the Fund.
The Fund (for the period November 1, 2006 to February 28, 2007) and
effective March 1, 2007, the Master Series has an expense offset
arrangement in connection with its custodian contract. For the period ended
March 31, 2007, the impact of this arrangement was a reduction of expenses
of $2,264 for the Fund.
Note C--Investment Transactions:
During the period ended March 31, 2007, contributions and withdrawals in
the Fund's investment in its corresponding Master Series were as follows:
(000's omitted) Contributions Withdrawals
$338,231 $73,566
Note D--Fund Share Transactions:
Share activity at $1.00 per share for the period ended March 31, 2007 and
the years ended October 31, 2006 and October 31, 2005 was as follows:
For the Period Ended For the Year Ended
March 31, 2007 October 31, 2006
--------------------------------------- ----------------------------------------
Shares Shares
Issued on Issued on
Reinvestment Reinvestment
of Dividends of Dividends
Shares and Shares Shares and Shares
(000's omitted) Sold Distributions Redeemed Total Sold Distributions Redeemed Total
Investor Class 334,335 1,131 (366,508) (31,042) 740,009 2,441 (855,804) (113,354)
For the Year Ended
October 31, 2005
---------------------------------------
Shares
Issued on
Reinvestment
of Dividends
Shares and Shares
(000's omitted) Sold Distributions Redeemed Total
Investor Class 726,079 1,388 (772,915) (45,448)
Note E--Recent Accounting Pronouncements:
On July 13, 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48 "Accounting for Uncertainty in Income
Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions
should be recognized, measured, presented and disclosed in the financial
statements. FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN 48 requires
that a "more-likely-than-not" threshold be met before the benefit of a tax
position may be recognized in the financial statements and prescribes how
such benefit should be measured. Adoption of FIN 48 is required for fiscal
years beginning after December 15, 2006 and is to be applied to all open
tax years as of the effective date. The Securities and Exchange Commission
will permit investment companies to delay implementation of FIN 48 until
September 30, 2007. At this time, Management is evaluating the implications
of FIN 48 and its impact in the financial statements has not yet been
determined.
14
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In September 2006, FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years.
Management believes the adoption of SFAS 157 will not have a material
impact on the Fund's financial position or results of operations.
Note F--Change in Year End:
The Board of Trustees adopted a change in the Fund's fiscal year end date
to March 31. This change is effective beginning with the current fiscal
period, which ran from November 1, 2006 to March 31, 2007. Prior to
March 31, 2007, the Fund's fiscal year end was October 31.
15
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Financial Highlights
Government Money Fund
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements. It should be read in conjunction with its corresponding Master
Series' Financial Statements and notes thereto.
Investor Class/+/
Period from
November 1, 2006^^
to March 31, Year Ended October 31,
2007 2006 2005 2004 2003 2002
Net Asset Value, Beginning of Period $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
Income From Investment Operations:
Net Investment Income (Loss) .0200 .0429 .0230 .0060 .0078 .0149
Net Gains or Losses on Securities (.0000) (.0000) (.0000) .0000 .0000 .0000
Total From Investment Operations .0200 .0429 .0230 .0060 .0078 .0149
Less Distributions From:
Net Investment Income (.0200) (.0429) (.0230) (.0060) (.0078) (.0149)
Net Capital Gains -- -- -- (.0000) (.0000) (.0000)
Total Distributions (.0200) (.0429) (.0230) (.0060) (.0078) (.0149)
Net Asset Value, End of Period $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
Total Return/+//+/ +2.01%** +4.38% +2.33% +.61% +.78% +1.50%
Ratios/Supplemental Data
Net Assets, End of Period (in millions) $264.9 $295.9 $409.3 $454.7 $1,078.3 $1,345.2
Ratio of Gross Expenses to Average Net
Assets/#/ 0.47%* .46% .48% .49% .45% .47%
Ratio of Net Expenses to Average Net
Assets/++/ 0.47%* .45% .47% .49% .45% .47%
Ratio of Net Investment Income (Loss) to
Average Net Assets 4.78%* 4.26% 2.25% .57% .78% 1.45%
See Notes to Financial Highlights
16
- --------------------------------------------------------------------------------
Notes to Financial Highlights Income Funds
/+/ The per share amounts and ratios which are shown reflect income and
expenses, including the Fund's proportionate share of its corresponding
Master Series' income and expenses (except for the period from November
1, 2001 to February 28, 2007 when it was organized in a single-fund
structure).
/+//+/ Total return based on per share net asset value reflects the effects of
changes in net asset value on the performance of the Fund during each
fiscal period and assumes dividends and other distributions, if any,
were reinvested. Results represent past performance and do not guarantee
future results. Current returns may be lower or higher than the
performance data quoted. Investment returns and principal may fluctuate
and shares when redeemed may be worth more or less than original cost.
Total return would have been lower if Management had not reimbursed
and/or waived certain expenses (see Note B of Notes to Financial
Statements of the Fund).
/++/ After reimbursement and/or waiver of a portion of the investment
management fee by Management (see Note B of Notes to Financial
Statements of the Fund). Had Management not undertaken such actions, the
annualized ratios of net expenses to average daily net assets would have
been:
Year Ended October 31,
Period from
November 1, 2006
to March 31, 2007 2006 2005 2004 2003 2002
Government Money Investor Class .48% .47% .49% .58% .57% .55%
* Annualized.
** Not annualized.
/#/ The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
^^ See Note F of the Fund's Financial Statements.
17
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Neuberger Berman Income Funds
and Shareholders of Neuberger Berman Government Money Fund:
We have audited the accompanying statement of assets and liabilities of
Neuberger Berman Government Money Fund (one of the series constituting
Neuberger Berman Income Funds) (the "Fund"), as of March 31, 2007, and the
related statements of operations for the period from November 1, 2006 to
March 31, 2007 and for the year ended October 31, 2006, for the statements of
changes in net assets for the period from November 1, 2006 to March 31, 2007
and for the year ended October 31, 2006 and 2005, and the financial highlights
for each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our procedures included
confirmation of securities owned as of March 31, 2007, by correspondence with
the custodian and brokers. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Neuberger Berman Government Money Fund, a series of the Neuberger Berman Income
Funds, at March 31, 2007, the results of its operations for the period from
November 1, 2006 to March 31, 2007 and the year ended October 31, 2006, and
changes in net assets for the period from November 1, 2006 to March 31, 2007
and for the year ended October 31, 2006 and 2005, the financial highlights for
each of the periods indicated therein, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
May 16, 2007
18
- --------------------------------------------------------------------------------
Schedule of Investments Government Master Series
PRINCIPAL AMOUNT RATING(S) VALUE++
(000's omitted) Moody's S&P
U.S. Government Agency Securities (61.7%)
$71,046 Fannie Mae, Disc. Notes, 5.03% - 5.20%, due 4/4/07 - 11/30/07 AGY AGY $70,539
2,705 Fannie Mae, Notes, 4.25% - 6.63%, due 9/15/07 - 10/30/07 AGY AGY 2,699
100 Federal Farm Credit Bank, Bonds, 7.25%, due 6/12/07 AGY AGY 100
2,506 Federal Farm Credit Bank, Disc. Notes, 5.05% - 5.11%, due 7/10/07 - 2/1/08 AGY AGY 2,458
86,400 Federal Farm Credit Bank, Floating Rate Bonds,
5.17% - 5.22%, due 4/18/07 - 5/28/07 AGY AGY 86,392(mu)
21,055 Federal Home Loan Bank, Bonds, 3.00% - 7.63%, due 4/23/07 - 4/9/08 AGY AGY 21,047
2,185 Federal Home Loan Bank, Disc. Notes, 5.12% - 5.16%, due 5/14/07 - 7/25/07 AGY AGY 2,159
70,500 Federal Home Loan Bank, Floating Rate Notes,
5.18% - 5.28%, due 4/4/07 - 6/22/07 AGY AGY 70,480(mu)
100 Federal Home Loan Bank, Notes, 3.38%, due 9/14/07 AGY AGY 99
138,850 Freddie Mac, Disc. Notes, 5.02% - 5.22%, due 4/9/07 - 12/28/07 AGY AGY 137,026
56,400 Freddie Mac, Floating Rate Notes, 5.17% - 5.23%, due 4/10/07 - 6/30/07 AGY AGY 56,376(mu)
25,300 Freddie Mac, Notes, 3.75% - 5.38%, due 4/5/07 - 3/27/08 AGY AGY 25,281
Total U.S. Government Agency Securities 474,656
Mortgage-Backed Securities (2.9%)
22,800 Fannie Mae, Pass-Through Certificates, 5.19%, due 5/1/07 AGY AGY 22,705(mu)
Repurchase Agreements (35.2%)
20,000 Bank of America Repurchase Agreement, 5.26%, due 4/10/07, dated 2/9/07,
Maturity Value $20,175,333, Collateralized by $49,469,887, Freddie Mac,
5.50%, due 1/1/33 (Collateral Value $20,400,000) 20,000
25,000 Bank of America Repurchase Agreement, 5.26%, due 4/9/07, dated 1/9/07,
Maturity Value $25,328,750, Collateralized by $26,465,144, Fannie Mae,
5.00%, due 2/1/37 (Collateral Value $25,500,001) 25,000
101,000 Goldman Sachs Repurchase Agreement, 5.37%, due 4/2/07, dated 3/30/07,
Maturity Value $101,045,197, Collateralized by $94,955,416, Fannie Mae,
0.00% - 7.35%, due 6/25/23 - 3/25/36 and $21,804,000, Freddie Mac,
5.00% & 7.00%, due 12/15/22 & 8/15/29 (Collateral Value $103,020,000) 101,000
125,000 Merrill Lynch Repurchase Agreement, 5.39%, due 4/2/07, dated 3/30/07,
Maturity Value $125,056,146, Collateralized by $193,063,247, Freddie Mac,
4.00% - 7.50%, due 2/1/10 - 3/1/37 (Collateral Value $127,501,085) 125,000
Total Repurchase Agreements 271,000
Total Investments (99.8%) 768,361
Cash, receivables and other assets, less liabilities (0.2%) 1,398
Total Net Assets (100.0%) $769,759
See Notes to Schedule of Investments
19
- --------------------------------------------------------------------------------
Notes to Schedule of Investments Institutional Liquidity Trust
++ Investment securities are valued at amortized cost, which approximates U.S.
federal income tax cost.
(mu)Floating rate securities are securities whose yields vary with a designated
market index or market rate. These securities are shown at their current
rates as of March 31, 2007.
(S) Credit Ratings are unaudited.
See Notes to Financial Statements
20
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
Institutional Liquidity Trust
(000's omitted)
Government
Master Series
--------------
March 31, 2007
Assets
Investments in securities, at value* (Note A)-see Schedule of Investments:
Unaffiliated issuers $497,361
Repurchase agreements 271,000
--------------
768,361
Cash --
Interest receivable 1,528
Prepaid expenses 12
--------------
Total Assets 769,901
--------------
Liabilities
Due to custodian 29
Payable to investment manager-net (Note B) 54
Accrued expenses and other payables 59
--------------
Total Liabilities 142
--------------
Net Assets Applicable to Investors' Beneficial Interests $769,759
--------------
Net Assets consist of:
Paid-in capital $769,759
--------------
*Cost of investments:
Unaffiliated issuers $768,361
--------------
See Notes to Financial Statements
21
- --------------------------------------------------------------------------------
Statement of Operations
Institutional Liquidity Trust
(000's omitted)
GOVERNMENT
MASTER SERIES
-----------------
Period from
December 18, 2006
(Commencement of
Operations) to
March 31, 2007
Investment Income
Income:
Interest income-unaffiliated issuers (Note A) $7,958
Expenses:
Investment management fees (Note B) 120
Audit fees 31
Custodian fees (Note B) 25
Insurance expense 1
Legal fees 3
Rating agency fees 2
Shareholder reports 4
Trustees' fees and expenses 7
Miscellaneous 6
-----------------
Total expenses 199
Expenses reduced by custodian fee expense offset arrangement (Note B) (1)
-----------------
Total net expenses 198
-----------------
Net investment income $7,760
-----------------
See Notes to Financial Statements
22
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
Institutional Liquidity Trust
(000's omitted)
GOVERNMENT
MASTER SERIES
-----------------
Period from
December 18, 2006
(Commencement
of Operations) to
March 31, 2007
Increase (Decrease) in Net Assets:
From Operations:
Net investment income (loss) $7,760
Net increase (decrease) in net assets resulting from operations 7,760
Transactions in Investors' Beneficial Interest:
Contribution from initial capitalization 101
Contributions 1,008,073
Withdrawals (246,175)
Net increase (decrease) from transactions in investors' beneficial interest 761,999
Net Increase (Decrease) in Net Assets 769,759
Net Assets:
Beginning of period --
End of period $769,759
See Notes to Financial Statements
23
- --------------------------------------------------------------------------------
Notes to Financial Statements Institutional Liquidity Trust
Note A--Summary of Significant Accounting Policies:
1 GENERAL: The Government Master Series (the "Master Series") is a separate
operating series of Institutional Liquidity Trust (the "Trust"), a Delaware
statutory trust organized pursuant to a Trust Instrument dated October 1,
2004. The Trust is registered as a diversified, open-end management
investment company under the Investment Company Act of 1940, as amended.
The Master Series had no operations until December 18, 2006 other than the
contribution of beneficial interest from the Institutional Class of
Government Portfolio and Neuberger Berman Management Inc., the Master
Series' investment manager ("Management") of $100,000 and $1,000,
respectively, on December 4, 2006.
Other investment companies sponsored by Management and Lehman Brothers
Asset Management LLC ("LBAM"), the sub-adviser to the Master Series, whose
financial statements are not presented herein, also invest in the Master
Series.
The assets of the Master Series belong only to that Master Series, and the
liabilities of the Master Series are borne solely by that Master Series and
no other series of the Trust.
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires Management to make estimates and
assumptions at the date of the financial statements. Actual results could
differ from those estimates.
2 PORTFOLIO VALUATION: Investment securities are valued as indicated in the
notes following the Master Series' Schedule of Investments.
3 SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on trade date for financial reporting purposes. Interest income,
including accretion of discount (adjusted for original issue discount,
where applicable), and amortization of premium, where applicable, is
recorded on the accrual basis. Realized gains and losses from securities
transactions are recorded on the basis of identified cost and stated
separately in the Statement of Operations.
4 INCOME TAX INFORMATION: The Master Series intends to comply with the
requirements of the Internal Revenue Code. The Master Series also intends
to conduct its operations so that its investors will be able to continue to
or qualify as a regulated investment company. The Master Series will be
treated as a partnership for U.S. federal income tax purposes and is
therefore not subject to U.S. federal income tax.
5 EXPENSE ALLOCATION: Certain expenses are applicable to multiple funds.
Expenses directly attributable to a Master Series are charged to that
Master Series. Expenses of the Trust that are not directly attributed to a
Master Series are allocated among the series of the Trust, on the basis of
relative net assets, except where a more appropriate allocation of expenses
to each of the series can otherwise be made fairly. Expenses borne by the
complex of related investment companies, which includes open-end and
closed-end investment companies for which Management serves as investment
manager, that are not directly attributed to the Master Series or the
Trust, are allocated among the Master Series and the other investment
companies in the complex or series thereof, on the basis of relative net
assets, except where a more appropriate allocation of expenses to each
investment company in the complex or series thereof can otherwise be made
fairly.
6 REPURCHASE AGREEMENTS: The Master Series may enter into repurchase
agreements with institutions that Management has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Master
Series requires that the securities purchased in a repurchase agreement be
transferred to the custodian in a manner sufficient to enable the Master
Series to assert a perfected security interest in those securities in the
event of a default under the repurchase agreement. The Master Series
monitors, on a daily basis, the value of the securities transferred to
ensure that their value, including accrued interest, is greater than
amounts owed to the Master Series under each such repurchase agreement.
24
- --------------------------------------------------------------------------------
7 INDEMNIFICATIONS: Like many other companies, the Trust's organizational
documents provide that its officers and trustees are indemnified against
certain liabilities arising out of the performance of their duties to the
Trust. In addition, both in some of its principal service contracts and in
the normal course of its business, the Trust enters into contracts that
provide indemnifications to other parties for certain types of losses or
liabilities. The Trust's maximum exposure under these arrangements is
unknown as this could involve future claims against the Trust.
Note B--Management Fees and Other Transactions with Affiliates:
The Master Series retains Management as its investment manager under a
Management Agreement. For such investment management services, the Master
Series pays Management a fee at the annual rate of 0.08% of its average
daily net assets
Management and LBAM, the sub-adviser to the Master Series, are wholly-owned
subsidiaries of Lehman Brothers Holdings Inc., a publicly-owned holding
company. LBAM is retained by Management to provide day-to-day investment
management services. LBAM, as sub-adviser to the Master Series, receives a
monthly fee paid by Management, based on an annual rate of each Master
Series' average daily net assets. The Master Series does not pay a fee
directly to LBAM for such services. As investment adviser, Management is
responsible for overseeing the investment activities of LBAM. Several
individuals who are officers and/or trustees of the Trust are also
employees of LBAM and/or Management.
The Master Series has an expense offset arrangement in connection with its
custodian contract. For the period ended March 31, 2007, the impact of this
arrangement was a reduction of expenses of $725 for the Master Series.
Note C--Securities Transactions:
All securities transactions for the Master Series were short-term.
Note D--Recent Accounting Pronouncement:
In September 2006, FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years.
Management believes the adoption of SFAS 157 will not have a material
impact on the Master Series' financial position or results of operations.
25
- --------------------------------------------------------------------------------
Financial Highlights
Government Master Series
Period from
December 18, 2006^
to March 31,
2007
Ratios to Average Net Assets:
Gross Expenses/#/ .13%*
Net Expenses .13%*
Net Investment Income (Loss) 5.17%*
Total Return/+/ +1.49%**
Net Assets, End of Period (in millions) $769.8
See Notes to Financial Highlights
26
- --------------------------------------------------------------------------------
Notes to Financial Highlights Institutional Liquidity Trust
/#/ The Master Series is required to calculate an expense ratio without taking
into consideration any expense reductions related to expense offset
arrangements.
/+/ Total return for the Master Series has been calculated based on the total
return for the feeder funds that invest all of their net investable assets
in the Master Series. Total return assumes all distributions were
reinvested and adjusted for the difference in expenses as set forth in the
Notes to the Financial Statements of Institutional Liquidity Trust. Results
represent past performance and do not guarantee future results. Current
returns may be lower or higher than the performance data quoted. Total
return would have been lower had Management not waived a portion of the
investment management fee.
^ The date investment operations commenced.
* Annualized.
** Not annualized.
27
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Institutional Liquidity Trust
and Owners of Beneficial Interest of Government Master Series:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Government Master Series (one of the series
constituting Institutional Liquidity Trust) (the "Master Series"), as of
March 31, 2007, and the related statements of operations, changes in net assets
and the financial highlights for the period from December 18, 2006
(commencement of operations) to March 31, 2007. These financial statements and
financial highlights are the responsibility of the Master Series' management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Master Series'
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Master Series' internal
control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial highlights, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of March 31, 2007, by
correspondence with the custodian and brokers. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Government Master Series, a series of the Institutional Liquidity Trust, at
March 31, 2007, the results of its operations, changes in its net assets and
the financial highlights for the period from December 18, 2006 (commencement of
operations) to March 31, 2007, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
May 16, 2007
28
- --------------------------------------------------------------------------------
Directory
Investment Manager, Administrator and Distributor
Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, NY 10158-0180
888.556.9030
Sub-Adviser
Lehman Brothers Asset Management LLC
399 Park Avenue
New York, NY 10022
Custodian and Shareholder Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Kirkpatrick & Lockhart Priston Gates Ellis LLP
1601 K Street, NW
Washington, DC 20006
Independent Registered Public Accounting Firm
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
29
- --------------------------------------------------------------------------------
Trustee and Officer Information
The following tables set forth information concerning the trustees and officers
of the Trust. All persons named as trustees and officers also serve in similar
capacities for other funds administered or managed by Management. The Statement
of Additional Information includes additional information about fund trustees
and is available upon request, without charge, by calling (800) 877-9700.
Information about the Board of Trustees
Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/ Number of Other Directorships Held
Length of Funds in Outside Fund Complex by
Time Served/(2)/ Fund Complex Fund Trustee
Overseen by
Fund Trustee/(4)/
Independent Fund Trustees
John Cannon (77) Trustee since Consultant; formerly, 61 Independent Trustee or
1994 Chairman, CDC Investment Director of three series of
Advisers (registered Oppenheimer Funds: Limited
investment adviser), 1993 to Term New York Municipal
January 1999; formerly, Fund, Rochester Fund
President and Chief Executive Municipals, and
Officer, AMA Investment Oppenheimer Convertible
Advisors, an affiliate of the Securities Fund since 1992.
American Medical
Association.
Faith Colish (71) Trustee since Counsel, Carter Ledyard & 61 Formerly, Director (1997 to
2000 Milburn LLP (law firm) since 2003) and Advisory Director
October 2002; formerly, (2003 to 2006), ABA
Attorney-at-Law and Retirement Funds (formerly,
President, Faith Colish, A American Bar Retirement
Professional Corporation, Association) (not-for-profit
1980 to 2002. membership corporation).
C. Anne Harvey (69) Trustee since President, C.A. Harvey 61 Formerly, President, Board of
2000 Associates since October Associates to The National
2001; formerly, Director, Rehabilitation Hospital's
AARP, 1978 to December Board of Directors, 2001 to
2001. 2002; formerly, Member,
Individual Investors Advisory
Committee to the New York
Stock Exchange Board of
Directors, 1998 to June
2002.
30
- --------------------------------------------------------------------------------
Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/ Number of Other Directorships Held
Length of Funds in Outside Fund Complex by
Time Served/(2)/ Fund Complex Fund Trustee
Overseen by
Fund Trustee/(4)/
Robert A. Kavesh (79) Trustee since Marcus Nadler Professor 61 Formerly, Director, The
1993 Emeritus of Finance and Caring Community (not-for-
Economics, New York profit), 1997 to 2006;
University Stern School of formerly, Director, DEL
Business; formerly, Executive Laboratories, Inc. (cosmetics
Secretary-Treasurer, and pharmaceuticals), 1978
American Finance to 2004; formerly, Director,
Association, 1961 to 1979. Apple Bank for Savings, 1979
to 1990; formerly, Director,
Western Pacific Industries,
Inc., 1972 to 1986 (public
company).
Michael M. Knetter (47) Trustee since Dean, School of Business, 61 Trustee, Northwestern
2007 University of Wisconsin - Mutual Series Fund, Inc. since
Madison; formerly, Professor February 2007; Director,
of International Economics Wausau Paper since 2005;
and Associate Dean, Amos Director, Great Wolf Resorts
Tuck School of Business - since 2004.
Dartmouth College, 1998 to
2002.
Howard A. Mileaf (70) Trustee since Retired; formerly, Vice 61 Director, Webfinancial
2000 President and General Corporation (holding
Counsel, WHX Corporation company) since December
(holding company), 1993 to 2002; formerly, Director
2001. WHX Corporation (holding
company), January 2002 to
June 2005; formerly,
Director, State Theatre of
New Jersey (not-for-profit
theater), 2000 to 2005.
George W. Morriss (59) Trustee since Formerly, Executive Vice 61 Member, Board of Managers,
2007 President and Chief Financial Old Mutual Funds of Hedge
Officer, People's Bank (a Funds (registered hedge
financial services company), fund) since October 2006.
1991 to 2001.
31
- --------------------------------------------------------------------------------
Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/ Number of Other Directorships Held
Length of Funds in Outside Fund Complex by
Time Served/(2)/ Fund Complex Fund Trustee
Overseen by
Fund Trustee/(4)/
Edward I. O'Brien (78) Trustee since Formerly, Member, 61 Director, Legg Mason, Inc.
2000 Investment Policy Committee, (financial services holding
Edward Jones, 1993 to 2001; company) since 1993;
President, Securities Industry formerly, Director, Boston
Association ("SIA") (securities Financial Group (real estate
industry's representative in and tax shelters), 1993 to
government relations and 1999.
regulatory matters at the
federal and state levels),
1974 to 1992; Adviser to SIA,
November 1992 to
November 1993.
William E. Rulon (74) Trustee since Retired; formerly, Senior Vice 61 Formerly, Director, Pro-Kids
1993 President, Foodmaker, Inc. Golf and Learning Academy
(operator and franchiser of (teach golf and computer
restaurants) until January usage to "at risk" children),
1997. 1998 to 2006; formerly,
Director, Prandium, Inc.
(restaurants), March 2001 to
July 2002.
Cornelius T. Ryan (75) Trustee since Founding General Partner, 61 None.
2000 Oxford Partners and Oxford
Bioscience Partners (venture
capital investing) and
President, Oxford Venture
Corporation since 1981.
32
- --------------------------------------------------------------------------------
Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/ Number of Other Directorships Held
Length of Funds in Outside Fund Complex by
Time Served/(2)/ Fund Complex Fund Trustee
Overseen by
Fund Trustee/(4)/
Tom D. Seip (57) Trustee since General Partner, Seip 61 Director, H&R Block, Inc.
2000; Lead Investments LP (a private (financial services company)
Independent investment partnership); since May 2001; Chairman,
Trustee formerly, President and CEO, Compensation Committee,
beginning Westaff, Inc. (temporary H&R Block, Inc. since 2006;
2006 staffing), May 2001 to Director, America One
January 2002; formerly, Foundation since 1998;
Senior Executive at the formerly, Chairman,
Charles Schwab Corporation, Governance and Nominating
1983 to 1998, including Committee, H&R Block, Inc.,
Chief Executive Officer, 2004 to 2006; Director,
Charles Schwab Investment Forward Management, Inc.
Management, Inc. and (asset management
Trustee, Schwab Family of company), 1999 to 2006;
Funds and Schwab formerly Director, E-Bay
Investments, 1997 to 1998, Zoological Society, 1999 to
and Executive Vice President- 2003; formerly, Director,
Retail Brokerage, Charles General Magic (voice
Schwab & Co., Inc., 1994 to recognition software), 2001
1997. to 2002; formerly, Director,
E-Finance Corporation (credit
decisioning services), 1999 to
2003; formerly, Director,
Save-Daily.com (micro
investing services), 1999 to
2003.
Candace L. Straight (59) Trustee since Private investor and 61 Director, Montpelier Re
1993 consultant specializing in the (reinsurance company) since
insurance industry; formerly, 2006; Director, National
Advisory Director, Securitas Atlantic Holdings
Capital LLC (a global private Corporation (property and
equity investment firm casualty insurance company)
dedicated to making since 2004; Director, The
investments in the insurance Proformance Insurance
sector), 1998 to December Company (property and
2003. casualty insurance company)
since March 2004; formerly,
Director, Providence
Washington Insurance
Company (property and
casualty insurance company),
December 1998 to March
2006; formerly, Director,
Summit Global Partners
(insurance brokerage firm),
2000 to 2005.
33
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Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/ Number of Other Directorships Held
Length of Funds in Outside Fund Complex by
Time Served/(2)/ Fund Complex Fund Trustee
Overseen by
Fund Trustee/(4)/
Peter P. Trapp (62) Trustee since Regional Manager for Mid- 61 None.
2000 Southern Region, Ford Motor
Credit Company since
September 1997; formerly,
President, Ford Life Insurance
Company, April 1995 to
August 1997.
Fund Trustees who are "Interested Persons"
Jack L. Rivkin (66)* President and Executive Vice President and 61 Director, Dale Carnegie and
Trustee since Chief Investment Officer, Associates, Inc. (private
2002 Neuberger Berman Inc. company) since 1998;
(holding company) since Director, Solbright, Inc.
2002 and 2003, respectively; (private company) since
Managing Director and Chief 1998.
Investment Officer,
Neuberger Berman, LLC since
December 2005 and 2003,
respectively; formerly,
Executive Vice President,
Neuberger Berman, LLC,
December 2002 to 2005;
Director and Chairman,
Management since
December 2002; formerly,
Executive Vice President,
Citigroup Investments, Inc.,
September 1995 to February
2002; formerly, Executive
Vice President, Citigroup Inc.,
September 1995 to February
2002.
34
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Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/ Number of Other Directorships Held
Length of Funds in Outside Fund Complex by
Time Served/(2)/ Fund Complex Fund Trustee
Overseen by
Fund Trustee/(4)/
Peter E. Sundman (48)* Chairman of Executive Vice President, 61 Director and Vice President,
the Board and Neuberger Berman Inc. Neuberger & Berman
Trustee since (holding company) since Agency, Inc. since 2000;
2000; Chief 1999; Head of Neuberger formerly, Director, Neuberger
Executive Berman Inc.'s Mutual Funds Berman Inc. (holding
Officer since Business (since 1999) and company), October 1999 to
1999; Institutional Business (1999 March 2003; Trustee, Frost
President from to October 2005); Valley YMCA; Trustee,
1999 to 2000 responsible for Managed College of Wooster.
Accounts Business and
intermediary distribution
since October 1999;
President and Director,
Management since 1999;
Managing Director,
Neuberger Berman, LLC since
2005; formerly, Executive
Vice President, Neuberger
Berman, LLC, 1999 to
December 2005; formerly,
Principal, Neuberger Berman,
LLC, 1997 to 1999; formerly,
Senior Vice President,
Management, 1996 to 1999.
/(1)/ The business address of each listed person is 605 Third Avenue, New
York, New York 10158.
/(2)/ Pursuant to the Trust's Trust Instrument, each Fund Trustee shall hold
office for life or until his or her successor is elected or the Trust
terminates; except that (a) any Fund Trustee may resign by delivering a
written resignation; (b) any Fund Trustee may be removed with or without
cause at any time by a written instrument signed by at least two-thirds of
the other Fund Trustees; (c) any Fund Trustee who requests to be retired,
or who has become unable to serve, may be retired by a written instrument
signed by a majority of the other Fund Trustees; and (d) any Fund Trustee
may be removed at any shareholder meeting by a vote of at least two-thirds
of the outstanding shares.
/(3)/ Except as otherwise indicated, each individual has held the positions
shown for at least the last five years.
/(4)/ For funds organized in a master-feeder structure, we count the master fund
and its associated feeder funds as a single portfolio.
* Indicates a Fund Trustee who is an "interested person" within the meaning
of the 1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the
Trust by virtue of the fact that they are officers and/or directors of
Management and/or LBAM.
35
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Information about the Officers of the Trust
Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/
Length of Time
Served/(2)/
Andrew B. Allard (45) Anti-Money Senior Vice President, Neuberger Berman, LLC since 2006; Deputy General
Laundering Counsel, Neuberger Berman, LLC since 2004; formerly, Vice President,
Compliance Neuberger Berman, LLC, 2000 to 2006; formerly, Associate General Counsel,
Officer since Neuberger Berman, LLC, 1999 to 2004; Anti-Money Laundering Compliance
2002 Officer, sixteen registered investment companies for which Management
acts as investment manager and administrator (seven since 2002, three since
2003, four since 2004, one since 2005 and one since 2006) and one
registered investment company for which Management acts as investment
adviser (since 2006).
Michael J. Bradler (37) Assistant Vice President, Neuberger Berman, LLC since 2006; Employee, Management
Treasurer since since 1997; Assistant Treasurer, sixteen registered investment companies for
2005 which Management acts as investment manager and administrator (fifteen
since 2005 and one since 2006) and one registered investment company for
which Management acts as investment adviser (since 2006).
Claudia A. Brandon (50) Secretary since Senior Vice President, Neuberger Berman, LLC since 2007; Vice President-
1985 Mutual Fund Board Relations, Management since 2000 and Assistant
Secretary since 2004; formerly, Vice President, Neuberger Berman, LLC, 2002
to 2006 and Employee since 1999; Secretary, sixteen registered investment
companies for which Management acts as investment manager and
administrator (three since 1985, four since 2002, three since 2003, four
since 2004, one since 2005 and one since 2006) and one registered
investment company for which Management acts as investment adviser
(since 2006).
Robert Conti (50) Vice President Managing Director, Neuberger Berman, LLC since 2007; formerly, Senior
since 2000 Vice President, Neuberger Berman, LLC, 2003 to 2006; formerly, Vice
President, Neuberger Berman, LLC, 1999 to 2003; Senior Vice President,
Management since 2000; Vice President, sixteen registered investment
companies for which Management acts as investment manager and
administrator (three since 2000, four since 2002, three since 2003, four
since 2004, one since 2005 and one since 2006) and one registered
investment company for which Management acts as investment adviser
(since 2006).
Brian J. Gaffney (53) Vice President Managing Director, Neuberger Berman, LLC since 1999; Senior Vice
since 2000 President, Management since 2000; Vice President, sixteen registered
investment companies for which Management acts as investment manager
and administrator (three since 2000, four since 2002, three since 2003, four
since 2004, one since 2005 and one since 2006) and one registered
investment company for which Management acts as investment adviser
(since 2006).
36
- --------------------------------------------------------------------------------
Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/
Length of Time
Served/(2)/
Maxine L. Gerson (56) Chief Legal Senior Vice President, Neuberger Berman, LLC since 2002; Deputy General
Officer since Counsel and Assistant Secretary, Neuberger Berman, LLC since 2001;
2005 (only for Secretary and General Counsel, Management since 2004; Chief Legal Officer
purposes of (only for purposes of sections 307 and 406 of the Sarbanes-Oxley Act of
sections 307 2002), sixteen registered investment companies for which Management acts
and 406 of the as investment manager and administrator (fifteen since 2005 and one since
Sarbanes-Oxley 2006) and one registered investment company for which Management acts
Act of 2002) as investment adviser (since 2006).
Sheila R. James (41) Assistant Assistant Vice President, Neuberger Berman, LLC since 2007 and Employee
Secretary since since 1999; Assistant Secretary, sixteen registered investment companies for
2002 which Management acts as investment manager and administrator (seven
since 2002, three since 2003, four since 2004, one since 2005 and one since
2006) and one registered investment company for which Management acts
as investment adviser (since 2006).
Kevin Lyons (51) Assistant Employee, Neuberger Berman, LLC since 1999; Assistant Secretary, sixteen
Secretary since registered investment companies for which Management acts as investment
2003 manager and administrator (ten since 2003, four since 2004, one since 2005
and one since 2006) and one registered investment company for which
Management acts as investment adviser (since 2006).
John M. McGovern (37) Treasurer and Senior Vice President, Neuberger Berman, LLC since 2007; formerly, Vice
Principal President, Neuberger Berman, LLC, 2004 to 2006; Employee, Management
Financial and since 1993; Treasurer and Principal Financial and Accounting Officer, sixteen
Accounting registered investment companies for which Management acts as investment
Officer since manager and administrator (fifteen since 2005 and one since 2006) and one
2005; prior registered investment company for which Management acts as investment
thereto, adviser (since 2006); formerly, Assistant Treasurer, fifteen registered
Assistant investment companies for which Management acts as investment manager
Treasurer since and administrator, 2002 to 2005.
2002
Frank Rosato (36) Assistant Vice President, Neuberger Berman, LLC since 2006; Employee, Management
Treasurer since since 1995; Assistant Treasurer, sixteen registered investment companies for
2005 which Management acts as investment manager and administrator (fifteen
since 2005 and one since 2006) and one registered investment company for
which Management acts as investment adviser (since 2006).
Frederic B. Soule (61) Vice Senior Vice President, Neuberger Berman, LLC since 2003; formerly, Vice
President since President, Neuberger Berman, LLC, 1999 to 2003; Vice President, sixteen
2000 registered investment companies for which Management acts as investment
manager and administrator (three since 2000, four since 2002, three since
2003, four since 2004, one since 2005 and one since 2006) and one
registered investment company for which Management acts as investment
adviser (since 2006).
37
- --------------------------------------------------------------------------------
Name, Age, and Address/(1)/ Position and Principal Occupation(s)/(3)/
Length of Time
Served/(2)/
Chamaine Williams (35) Chief Senior Vice President, Lehman Brothers Inc. since 2007; formerly, Vice
Compliance President, Lehman Brothers Inc., 2003 to 2006; Chief Compliance Officer,
Officer since sixteen registered investment companies for which Management acts as
2005 investment manager and administrator (fifteen since 2005 and one since
2006) and one registered investment company for which Management acts
as investment adviser (since 2005); Chief Compliance Officer, Lehman
Brothers Asset Management Inc. since 2003; Chief Compliance Officer,
Lehman Brothers Alternative Investment Management LLC since 2003;
formerly, Vice President, UBS Global Asset Management (US) Inc. (formerly,
Mitchell Hutchins Asset Management, a wholly-owned subsidiary of
PaineWebber Inc.), 1997 to 2003.
/(1)/ The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
/(2)/ Pursuant to the By-Laws of the Trust, each officer elected by the Fund
Trustees shall hold office until his or her successor shall have been
elected and qualified or until his or her earlier death, inability to
serve, or resignation. Officers serve at the pleasure of the Fund Trustees
and may be removed at any time with or without cause.
/(3)/ Except as otherwise indicated, each individual has held the positions
shown for at least the last five years.
38
- --------------------------------------------------------------------------------
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available, without
charge, by calling 888-556-9030 (toll-free) and on the website of the
Securities and Exchange Commission, at www.sec.gov. Information regarding how
the Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is also available, without charge, by calling
888-556-9030 (toll-free) and on the website of the Securities and Exchange
Commission, at www.sec.gov.
Quarterly Portfolio Schedule
The Trust files a complete schedule of portfolio holdings for the Master Series
with the Securities and Exchange Commission for the first and third quarters of
each fiscal year on Form N-Q. Each Trust's Forms N-Q are available on the
Securities and Exchange Commission's website at www.sec.gov and may be reviewed
and copied at the Securities and Exchange Commission's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may
be obtained by calling 1-800-SEC-0330. The information on Form N-Q is available
upon request, without charge, by calling 888-556-9030 (toll-free).
Board Consideration of the Management and Sub-Advisory Agreements
At a meeting held on September 27, 2006, the Board of Trustees of Institutional
Liquidity Trust ("Board"), including the Trustees who are not "interested
persons" of Neuberger Berman Management Inc. ("Management") (including its
affiliates) or Institutional Liquidity Trust ("Independent Fund Trustees"),
approved the Management and Sub-Advisory Agreements ("Agreements") between
Management and Institutional Liquidity Trust, on behalf of Government Master
Series. Neuberger Berman Government Money Fund invests all of its net
investable assets in Government Master Series. The term "Fund" is used
throughout this section to refer to Government Portfolio or Government Master
Series, as appropriate.
In evaluating the Agreements, the Board, including the Independent Fund
Trustees, reviewed materials furnished by Management and Lehman Brothers Asset
Management Inc. ("Lehman Brothers Asset Management") and met with senior
representatives of Management and Lehman Brothers Asset Management regarding
their personnel and operations. The Independent Fund Trustees were advised by
counsel that is experienced in Investment Company Act of 1940 matters and that
is independent of Management and Lehman Brothers Asset Management.
The Board considered the following factors, among others, in connection with
its approval of the Agreements: (1) the nature, extent, and quality of the
services to be provided by Management and Lehman Brothers Asset Management;
(2) the performance of a similar fund managed by Management; (3) the costs of
the services to be provided; (4) the extent to which economies of scale might
be realized as the Fund grows; and (5) whether fee levels reflect those
potential economies of scale for the benefit of investors in the Fund. In their
deliberations, the Board members did not identify any particular information
that was all-important or controlling, and each Trustee may have attributed
different weights to the various factors.
The Board evaluated the terms of the Agreements, the overall fairness of the
Agreements to the Fund and whether the Agreements were in the best interests of
the Fund and its shareholders.
With respect to the nature, extent and quality of the services provided, the
Board considered the performance of a similar fund managed by Management and
the degree of risk likely to be undertaken by the Fund's portfolio managers.
The Board considered the experience and staffing of portfolio management and
the investment research personnel of Management and Lehman Brothers Asset
Management that would be dedicated to performing services for the Fund. The
Board noted that Management also would provide certain administrative services,
including fund accounting and compliance oversight. In addition, the Board
noted the positive compliance history of Management, as the firm has been free
of significant compliance problems.
39
- --------------------------------------------------------------------------------
With respect to performance, the Board considered the performance of a similar
fund managed by Management relative to a peer group of investment companies
pursuing broadly similar strategies as the Fund.
With respect to the overall fairness of the Agreements, the Board considered
the fee structure of the Agreements as compared to a peer group of comparable
funds and any fall-out benefits likely to accrue to Management or Lehman
Brothers Asset Management or their affiliates.
The Board reviewed a comparison of the Fund's management fee and overall
expense ratio to a peer group of comparable funds. In addition, the Board
considered the contractual limits on Fund expenses undertaken by Management for
the Fund.
The Board considered whether there were other funds that were advised or
sub-advised by Management or its affiliates or separate accounts managed by
Management or its affiliates with similar investment objectives, policies and
strategies as the Fund. The Board noted that there were no comparable
sub-advised funds or separate accounts.
The Board also evaluated any anticipated economies of scale in relation to the
services Management provides to the Fund. The Board considered the relatively
low level of the management fee and the contractual expense limit for each
class of the Fund.
Conclusions
In approving the Agreements, the Board concluded that the terms of each
Agreement are fair and reasonable and that approval of the Agreements is in the
best interest of the Fund and its shareholders. In reaching this determination,
the Board considered that Management and Lehman Brothers Asset Management could
be expected to provide a high level of service to the Fund; that the Fund's fee
structure appeared to the Board to be reasonable given the nature and quality
of services expected to be provided; and that the expected benefits accruing to
Management and its affiliates by virtue of their relationship to the Fund were
reasonable in comparison with the expected costs of providing the investment
advisory services and the expected benefits accruing to the Fund.
40
Investment manager: Neuberger Berman Management Inc.
Sub-adviser: Lehman Brothers Asset Management LLC
Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, NY 10158-0180
800.877.9700
Web site: www.nb.com
STATISTICS AND PROJECTIONS IN THIS REPORT ARE DERIVED FROM SOURCES DEEMED TO BE
RELIABLE BUT CANNOT BE REGARDED AS A REPRESENTATION OF FUTURE RESULTS OF THE
FUND. THIS REPORT IS PREPARED FOR THE GENERAL INFORMATION OF SHAREHOLDERS AND
IS NOT AN OFFER OF SHARES OF THE FUND. SHARES ARE SOLD ONLY THROUGH THE
CURRENTLY EFFECTIVE PROSPECTUS, WHICH MUST PRECEDE OR ACCOMPANY THIS REPORT.
H0298 05/07
ITEM 2. CODE OF ETHICS
The Board of Trustees ("Board") of Lehman Brothers Income Funds (formerly,
Neuberger Berman Income Funds) ("Registrant") adopted a code of ethics that
applies to the Registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions ("Code of Ethics"). For the period covered by this Form N-CSR,
there were no amendments to the Code of Ethics and there were no waivers from
the Code of Ethics granted to the Registrant's principal executive officer,
principal financial officer, principle accounting officer or controller, or
persons performing similar functions.
A copy of the Code of Ethics is incorporated by reference to the Registrant's
Form N-CSR, Investment Company Act file number 811-3802 (filed July 10, 2006).
The Code of Ethics is also available, without charge, by calling 1-800-877-9700
(toll-free).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that the Registrant has one audit committee financial
expert serving on its audit committee. The Registrant's audit committee
financial expert is Howard Mileaf. Mr. Mileaf is an independent director as
defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The financial information provided below is that of the registrant, Lehman
Brothers Income Funds. The Board approved a change to Neuberger Berman
Government Money Fund's (the "Fund") fiscal year end from October 31 to March 31
in 2007. Accordingly, the fees charged by Ernst & Young, LLP ("E&Y") and
reported below are for the fiscal year ended October 31, 2005, the fiscal year
ended October 31, 2006 and the fiscal period of November 1, 2006 to March 31,
2007.
This N-CSR relates only to Neuberger Berman Government Money Fund; however,
the fees disclosed for the fiscal years ended October 31, 2005 and October 31,
2006 are the aggregate fees charged by E&Y to the registrant for those periods.
E&Y serves as independent registered public accounting firm to the Fund.
(a) Audit Fees
----------
The aggregate fees billed for professional services rendered by E&Y for the
audit of the annual financial statements or services that are normally provided
by E&Y in connection with statutory and regulatory filings or engagements
$215,600, $225,000 and $15,000 for the fiscal years ended 2005 and 2006 and the
fiscal period ended 2007, respectively.
(b) Audit-related Fees
------------------
The aggregate fees billed to the Registrant for assurance and related services
by E&Y that are reasonably related to the performance of the audit of the
Registrant's financial statements and are not reported above in AUDIT FEES were
$0, $0 and $0 for the fiscal years ended 2005 and 2006 and the fiscal period
ended 2007, respectively.
The fees billed to other entities in the investment company complex for
assurance and related services by E&Y that are reasonably related to the
performance of the audit that the Audit Committee was required to approve
because the engagement related directly to the operations and financial
reporting of the Registrant were $0, $0 and $0 for the fiscal years ended 2005
and 2006 and the fiscal period ended 2007, respectively.
(c) Tax Fees
--------
The aggregate fees billed to the Registrant for professional services rendered
by E&Y for tax compliance, tax advice, and tax planning were $61,200, $71,000
and $3,000 for the fiscal years ended 2005 and 2006 and the fiscal period ended
2007, respectively. The nature of the services provided were tax compliance, tax
advice, and tax planning. The Audit Committee approved 0% of these services
provided by E&Y for the fiscal period ended 2007, pursuant to the waiver
provisions of Rule 2-01(c)(7)(i)(C) of Regulation S-X.
The fees billed to other entities in the investment company complex for
professional services rendered by E&Y for tax compliance, tax advice, and tax
planning that the Audit Committee was required to approve because the engagement
related directly to the operations and financial reporting of the Registrant
were $0, $0 and $7,000 for the fiscal years ended 2005 and 2006 and the fiscal
period ended 2007, respectively. The Audit Committee approved 0% of these
services provided by E&Y for the fiscal period ended 2007, pursuant to the
waiver provisions of Rule 2-01(c)(7)(i)(C) of Regulation S-X.
(d) All Other Fees
--------------
The aggregate fees billed to the Registrant for products and services provided
by E&Y, other than services reported in AUDIT FEES, AUDIT-RELATED FEES, and TAX
FEES were $0, $0 and $0 for the fiscal years ended 2005 and 2006 and the fiscal
period ended 2007, respectively.
The fees billed to other entities in the investment company complex for products
and services provided by E&Y, other than services reported in AUDIT FEES,
AUDIT-RELATED FEES, and TAX FEES, that the Audit Committee was required to
approve because the engagement related directly to the operations and financial
reporting of the Registrant were $0, $0 and $0 for the fiscal years ended 2005
and 2006 and the fiscal period ended 2007, respectively.
(e) Audit Committee's Pre-Approval Policies and Procedures
------------------------------------------------------
(1) The Audit Committee's pre-approval policies and procedures for the
Registrant to engage an accountant to render audit and non-audit services
delegate to each member of the Committee the power to pre-approve services
between meetings of the Committee.
(2) None of the services described in paragraphs (b) through (d) above were
approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.
(f) Hours Attributed to Other Persons
---------------------------------
Not applicable.
(g) Non-Audit Fees
--------------
Non-audit fees billed by E&Y for services rendered to the Registrant were
$61,200, $71,000 and $3,000 for the fiscal years ended 2005 and 2006 and the
fiscal period ended 2007, respectively.
Non-audit fees billed by E&Y for services rendered to the Registrant's
investment adviser and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the Registrant were
$160,650, $126,000 and $232,000 for the fiscal years ended 2005 and 2006 and the
fiscal period ended 2007, respectively.
(h) The Audit Committee of the Board considered whether the provision of
non-audit services rendered to the Registrant's investment adviser and any
entity controlling, controlled by, or under common control with the adviser that
provides ongoing services to the Registrant that were not pre-approved by the
Audit Committee because the engagement did not relate directly to the operations
and financial reporting of the Registrant is compatible with maintaining E&Y's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
The complete schedule of investments for each series is disclosed in the
Registrant's Annual Report, which is included as Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES
Not applicable to the Registrant.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no changes to the procedures by which shareholders may recommend
nominees to the Board.
ITEM 11. CONTROLS AND PROCEDURES
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "Act")) as of a date within 90 days of the filing date of
this document, the Chief Executive Officer and Treasurer and Principal
Financial and Accounting Officer of the Registrant have concluded that
such disclosure controls and procedures are effectively designed to
ensure that information required to be disclosed by the Registrant on
Form N-CSR and Form N-Q is accumulated and communicated to the
Registrant's management to allow timely decisions regarding required
disclosure.
(b) There were no significant changes in the Registrant's internal controls
over financial reporting (as defined in rule 30a-3(d) under the Act) that
occurred during the Registrant's second fiscal quarter of the period
covered by this report that have materially affected, or are reasonably
likely to materially affect, the Registrant's internal control over
financial reporting.
ITEM 12. EXHIBITS
(a)(1) A copy of the Code of Ethics is incorporated by reference to the
Registrant's Form N-CSR, Investment Company Act file number 811-3802
(filed July 10, 2006).
(a)(2) The certifications required by Rule 30a-2(a) of the Act and Section 302
of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") are attached
hereto.
(a)(3) Not applicable.
(b) The certifications required by Rule 30a-2(b) of the Act and Section 906
of the Sarbanes-Oxley Act are attached hereto.
The certifications provided pursuant to Rule 30a-2(a) of the Act and Section 906
of the Sarbanes-Oxley Act are not deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934 ("Exchange Act"), or otherwise subject to
the liability of that section. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act of 1933 or
the Exchange Act, except to the extent that the Registrant specifically
incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LEHMAN BROTHERS INCOME FUNDS
By: /s/Peter E. Sundman
---------------------------------
Peter E. Sundman
Chief Executive Officer
Date: June 7, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/Peter E. Sundman
---------------------------------
Peter E. Sundman
Chief Executive Officer
Date: June 7, 2007
By: /s/John M. McGovern
---------------------------------
John M. McGovern
Treasurer and Principal Financial
and Accounting Officer
Date: June 7, 2007