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PROSPECTUS
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
AN INVESTMENT PORTFOLIO OF LEHMAN BROTHERS FUNDS, INC.
March 21, 1994
This Prospectus describes the LEHMAN SELECTED GROWTH STOCK
PORTFOLIO (the "Fund"), a diversified portfolio of Lehman
Brothers Funds, Inc. (the "Company"), an open-end
management investment company.
The Fund's investment objective is to seek long-term
capital appreciation. The Fund will, under normal market
conditions, invest primarily in equity securities which
the Fund's investment adviser believes to have the
potential for above-average capital appreciation. Such
securities will be primarily those of small- and
medium-sized companies. Because of the nature of the
Fund's investment objective and policies and its ability
to leverage its assets, the Fund may be subject to greater
investment risks than those assumed by certain other
investment companies.
LEHMAN BROTHERS INC. sponsors the Fund and acts as
distributor of the Fund's shares. LEHMAN BROTHERS GLOBAL
ASSET MANAGEMENT INC. serves as the Fund's investment
adviser.
The address of the Fund is 200 Vesey Street, New York, New
York 10285. Performance and other information regarding
the Fund may be obtained through a Lehman Brothers
Investment Representative or by calling 800-861-4171.
Shares of the Fund are being offered during an initial
subscription period scheduled to end on May 5, 1994.
Subsequent to such date, the Fund will engage in a
continuous offering of its shares. See "Purchase of
Shares."
This Prospectus briefly sets forth certain information
about the Fund that investors should know before
investing. Investors are advised to read this Prospectus
and retain it for future reference. Additional information
about the Fund, contained in a Statement of Additional
Information dated March 21, 1994, as amended or
supplemented from time to time, has been filed with the
Securities and Exchange Commission and is available to
investors without charge by calling 800-861-4171. The
Statement of Additional Information is incorporated in its
entirety by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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No person has been authorized to give any information or
to make any representations not contained in this
Prospectus, or in the Statement of Additional Information
incorporated herein by reference, in connection with the
offering made by this Prospectus and, if given or made,
such information or representations must not be relied
upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an
offering by the Fund or by the distributor in any
jurisdiction in which such offering may not lawfully be
made.
TABLE OF CONTENTS
<TABLE>
<S> <C>
3 Prospectus Summary
4 Background and Expense Information
4 Investment Objective and Policies
9 Purchase of Shares
10 Redemption of Shares
11 Exchange Privilege
12 Valuation of Shares
12 Management of the Fund
13 Dividends
14 Taxes
15 The Fund's Performance
15 Additional Information
</TABLE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
Benefits to Investors The Fund offers investors several important benefits:
- a professionally managed portfolio of equity securities having the
potential for above-average capital appreciation.
- investment liquidity through convenient purchase and redemption
procedures.
- a convenient way to invest without the administrative and recordkeeping
burdens normally associated with the direct ownership of securities.
- automatic dividend reinvestment feature, plus exchange privilege with the
shares of certain other funds in the Lehman Brothers Group of Funds.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term capital appreciation. The
Fund will, under normal market conditions, invest primarily in equity securities
which the Fund's investment adviser believes to have the potential for
above-average capital appreciation. Although the Fund invests primarily in
common stocks, it may also invest in other equity securities, such as
convertible securities, preferred stocks and warrants. The equity securities in
which the Fund invests will be primarily those of small- and medium-sized
companies, although the Fund may invest up to 20% of its total assets in equity
securities of larger companies.
INVESTMENT APPROACH
In selecting equity securities with above-average growth potential, the Fund's
investment adviser employs a disciplined investment methodology under which (i)
a fundamental analysis is performed on specific issuers, (ii) quantitative
models are applied to assess the relative attractiveness of issuers with
fundamental characteristics deemed to be favorable, (iii) investments are
selected in a manner intended to achieve diversification across broad industry
sectors, and (iv) investments are monitored on an ongoing basis with respect to
fundamental characteristics and quantitative projections. See "Investment
Objective and Policies."
PURCHASE OF SHARES
The Fund's shares are offered with no sales charge imposed at the time of
purchase but are subject to a contingent deferred sales charge ("CDSC") upon
redemption as described below. During an initial subscription period, shares of
the Fund will be offered at $10.00 per share. Lehman Brothers Inc. ("Lehman
Brothers"), the Fund's distributor, will solicit subscriptions for shares during
a period of time scheduled to end on May 5, 1994, subject to extension as agreed
by the Fund and Lehman Brothers. Following termination of the subscription
period, subscriptions for shares will be payable, shares will be issued and the
Fund will begin a continuous offering of shares.
During the continuous offering, shares of the Fund may be purchased at the next
determined net asset value per share through a brokerage account maintained
through Lehman Brothers or through a broker that clears securities transactions
through Lehman Brothers on a fully disclosed basis (an "Introducing Broker").
See "Purchase of Shares."
INVESTMENT MINIMUMS
Investors are subject to a minimum initial investment requirement of $5,000 and
a minimum subsequent investment requirement of $1,000. However, for Individual
Retirement Accounts ("IRAs") and Self-Employed Retirement Plans, the minimum
initial investment requirement is $2,000 and the minimum subsequent investment
requirement is $1,000 and for certain qualified retirement plans, the minimum
initial and subsequent investment requirement is $500. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN
The Fund also offers shareholders a Systematic Investment Plan under which they
may authorize the automatic placement of a purchase order each month or quarter
for Fund shares in an amount not less than $100. See "Purchase of Shares."
REDEMPTION OF SHARES
The Fund redeems shares at its next determined net asset value, subject to a
maximum CDSC of 2% of redemption proceeds during the first year after the date
of purchase, 1% of redemption proceeds during the second year, and no CDSC
thereafter. See "Redemption of Shares."
MANAGEMENT OF THE FUND
Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as investment
adviser to the Fund. LBGAM, together with other Lehman Brothers investment
advisory affiliates, had in excess of $15 billion in assets under management as
of March 10, 1994. See "Management of the Fund."
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of certain other funds in the
Lehman Brothers Group of Funds. See "Exchange Privilege."
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DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute its investment income and net realized
capital gains, if any, once a year, normally at the end of the year in which
earned or at the beginning of the next year. Dividends and distributions will be
reinvested in additional shares of the Fund unless a shareholder requests
otherwise. See "Dividends."
RISK FACTORS AND SPECIAL CONSIDERATIONS
There is no assurance that the Fund will achieve its investment objectives.
Securities of the kinds of companies in which the Fund invests may be subject to
significant price fluctuation and above-average risk. In addition, the Fund may
from time to time leverage its investments by purchasing securities with
borrowed money, in amounts not to exceed 33-1/3% of its total assets (including
the amount borrowed) less its liabilities (excluding the amount borrowed).
Borrowed money creates an opportunity for greater capital gain but at the same
time increases exposure to capital risk. In addition, the Fund may invest up to
15% of its total assets in illiquid securities, and engage in hedging and other
strategic transactions and certain other investment practices, which may entail
certain risks. For a more complete discussion of these risks, see "Investment
Objective and Policies - Other Investment Practices" and
"-Risk Factors and Special Considerations."
BACKGROUND AND EXPENSE INFORMATION
The following Expense Summary lists the costs and expenses that a shareholder
can expect to incur as an investor in the Fund, based upon the maximum CDSC and
estimated expenses and average net assets for the current fiscal year.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum CDSC
(as a percentage of redemption proceeds).......... 2.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Advisory Fees..................................... 0.75%
Rule 12b-1 Fees*.................................. 1.00%
Other Expenses - including Administration Fees
(estimated, after expense reimbursements)**....... 0.35%
Total Fund Operating Expenses
(estimated, after expense reimbursements)***...... 2.10%
<FN>
* Lehman Brothers receives an annual 12b-1 fee of 1.00% of the value of the
Fund's average daily net assets, consisting of a .75% distribution fee and
a .25% service fee. See "Management of the Fund - Distributor."
** The amount set forth for "Other Expenses" is based on estimates for the
current fiscal year, after giving effect to the voluntary expense
reimbursements as described below. Absent these voluntary expense
reimbursements, the ratio of "Other Expenses" to average net assets is
estimated to be 0.46%.
*** The amount set forth for "Total Fund Operating Expenses" reflects the
agreement by LBGAM and the Fund's administrator to reimburse the Fund for
"Total Fund Operating Expenses" in excess of 2.10% average net assets for a
period of at least one year from the date of this Prospectus. Absent these
voluntary expense reimbursements, the ratio of "Total Fund Operating
Expenses" to average net assets is estimated to be 2.21%.
</TABLE>
The CDSC set forth in the above table is the maximum charge imposed on
redemptions of Fund shares, and investors may pay an actual CDSC of less than 2%
as described under "Redemption of Shares."
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:
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<CAPTION>
1 YEAR 3 YEARS
<S> <C> <C>
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Expenses, assuming complete redemption
at the end of each time period:*.................. $41 $66
Expenses, assuming no redemption:................. $21 $66
<FN>
* Assumes deduction at the time of redemption of the maximum CDSC applicable
for that time period.
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES AND
RATE OF RETURN, WHICH MAY BE GREATER OR LESSER THAN THOSE SHOWN. The foregoing
table has not been audited by the Fund's independent auditors.
Long-term shareholders in mutual funds with Rule 12b-1 fees, such as the Fund,
may pay more than the economic equivalent of the maximum front-end sales charge
permitted by rules of the National Association of Securities Dealers, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek long-term capital appreciation.
Although the Fund may receive current income from dividends, interest and other
sources, income is only an incidental consideration of the Fund. The Fund will,
under normal market conditions, invest primarily in equity securities which
LBGAM believes to have the potential for above-average capital appreciation.
Although LBGAM anticipates that the assets of the Fund will, under normal market
conditions, be invested primarily in common stocks, the Fund may also invest in
other equity securities, such as convertible securities,
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preferred stocks and warrants. See "Investment Objective and Policies - Other
Investment Practice.'' The equity securities in which the Fund invests will be
primarily those of small and medium-sized companies, although the Fund may
invest up to 20% of its total assets in equity securities of larger companies.
Although the Fund may receive current income from dividends, interest and other
sources, income is only an incidental consideration of the Fund. There can be
no assurance that the Fund will achieve its investment objective. For a
discussion of certain risks and considerations associated with an investment
in the Fund, see "Investment Objective and Policies - Risk Factors and Special
Considerations."
INVESTMENT APPROACH
In selecting equity securities with above-average growth potential, LBGAM
employs a disciplined investment methodology under which (i) a fundamental
analysis is performed on specific issuers, (ii) quantitative models are applied
to assess the relative attractiveness of issuers with fundamental
characteristics deemed to be favorable, (iii) investments are selected in a
manner intended to achieve diversification across broad industry sectors, and
(iv) investments are monitored on an ongoing basis with respect to fundamental
characteristics and quantitative projections.
FUNDAMENTAL ANALYSIS. In selecting equity securities for the Fund's portfolio,
LBGAM initially applies a fundamental analysis on specific issuers. LBGAM
focuses on companies which have relatively unleveraged capital structures
(generally where debt represents less than one-third of total capitalization),
small-and medium-sized companies which have total annual revenues of less than
$1 billion and a market capitalization of less than $2.5 billion, companies
which satisfy certain benchmarks with respect to their internal rates of return,
and companies with high cash flows relative to market capitalization. LBGAM also
seeks to identify companies with certain business characteristics which it deems
favorable, such as strong brand name recognition, a franchise or service that
can be easily replicated but is expensive to duplicate in a defined market
niche, and service companies which compete based primarily on quality of service
rather than price. LBGAM also seeks companies where a significant proportion of
revenues is derived from reorder activity as opposed to companies which are
dependent on product life cycles. Companies may not satisfy all of the foregoing
fundamental criteria, however, if the overall mix of characteristics is deemed
favorable by LBGAM. The Fund may invest up to 20% of its total assets in larger
companies (I.E., those with total annual revenues in excess of $1 billion or a
market capitalization in excess of $2.5 billion).
QUANTITATIVE MODELS. After selecting equity securities with fundamental
characteristics deemed by LBGAM to be favorable, LBGAM applies three distinct
quantitative models to assess the relative attractiveness of the securities
identified as having favorable fundamental characteristics. In applying the
quantitative models, LBGAM seeks to select securities with projected earnings
growth rates of 15% or higher over the following three years. In addition, LBGAM
seeks to use the models to identify securities with favorable risk/reward
characteristics. Among the models employed by LBGAM are a valuation model which
places a value on growth relative to the long-term interest rate environment, an
earnings momentum model, which seeks to identify companies most likely to
experience an upward revision in earnings targets, and an earnings stability
model, which emphasizes the consistency of growth. There can of course be no
assurance that the models will predict accurately the performance of particular
securities.
INDUSTRY DIVERSIFICATION. Once equity securities are identified by LBGAM as
having favorable fundamental and quantitative characteristics, LBGAM selects
stocks for the Fund in a manner intended to achieve diversification across broad
industry sectors. LBGAM divides companies into four broad industry
classifications: Business/Industrial Service, Consumer Service, Health Care and
Technology. LBGAM expects that a substantial proportion of the Fund's
investments will be comprised of companies in each of these sectors. However,
LBGAM does not seek an equal balance among sectors but instead allocates
investments in each of these sectors based upon its expectations as to the
relative future performance of each sector. Although the Fund is subject to an
investment limitation which generally prohibits it from investing 25% or more of
its total assets in a single industry, the four industry classifications
employed by LBGAM are substantially broader than the term "industry" as used in
the foregoing investment limitation and as interpreted by the staff of the
Securities and Exchange Commission (the "SEC"). See "Investment Objective and
Policies - Investment Limitations."
ONGOING MONITORING. LBGAM will monitor the Fund's investments on an ongoing
basis with respect to, among other things, the continuing presence of favorable
fundamental characteristics, the performance of investments compared with
projections of the quantitative models, and changing prospects for the industry
sectors. LBGAM will also review other investment opportunities on an ongoing
basis and will alter the Fund's investment portfolio as it deems appropriate.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may vary from its investment
objective and may invest, without limit (except for
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the limitations described under "Investment Objective and Policies - Investment
Limitations"), in certain high quality short-term debt instruments described
below. The Fund may also at any time invest funds in such instruments for cash
management purposes, pending investment in accordance with the Fund's investment
objective and policies and to meet operating expenses.
The short-term instruments in which the Fund may invest include obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities ("U.S. Government Securities"); obligations issued or
guaranteed by other governments or one of their agencies or instrumentalities;
obligations issued or guaranteed by international organizations designed or
supported by multiple foreign government entities to promote economic
reconstruction or development; bank obligations, such as certificates of
deposit, time deposits and bankers' acceptances; corporate debt obligations,
including commercial paper; and repurchase agreements. To be eligible for
investment under the circumstances described above, such instruments (other than
U.S. Government Securities) must be issued by an issuer having a short-term debt
rating of A-1 or better by Standard & Poor's Corporation, a rating of Prime-1 by
Moody's Investors Service, Inc., a comparable rating from another nationally
recognized rating service or, if unrated, deemed to be of equivalent quality by
the Fund's investment adviser.
OTHER INVESTMENT PRACTICES
LEVERAGE. The Fund may from time to time leverage its investments by purchasing
securities with borrowed money. The Fund may borrow only from banks or by
entering into reverse repurchase agreements, in aggregate amounts not to exceed
33-1/3% of its total assets (including the amount borrowed) less its liabilities
(excluding the amount borrowed). Bank borrowings may be from U.S. or foreign
banks and may be secured or unsecured. The Fund may also borrow by entering into
reverse repurchase agreements, pursuant to which it would sell portfolio
securities to financial institutions, such as banks and broker-dealers, and
agree to repurchase them at an agreed upon date and price. The Fund would also
consider entering into reverse repurchase agreements to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. Reverse
repurchase agreements involve the risk that the market value of the portfolio
securities sold by the Fund may decline below the price of the securities the
Fund is obligated to repurchase. In addition to the foregoing, the Fund may
borrow up to 5% of its total assets (including the amount borrowed) for
temporary or emergency purposes. Borrowed money creates an opportunity for
greater capital gain but at the same time increases exposure to capital risk, as
any gain in the value of securities purchased with borrowed money that exceeds
the interest paid on the amount borrowed would cause the Fund's net asset value
to increase more rapidly than otherwise, while any decline in the value of
securities purchased would cause the Fund's net asset value to decrease more
rapidly than otherwise.
OTHER INVESTMENT FUNDS. The Fund may invest in the securities of other
investment funds that seek capital appreciation by investing primarily in equity
securities, to the extent permitted by the 1940 Act. Under the 1940 Act, the
Fund may invest up to 10% of its total assets in shares of other investment
funds and up to 5% of its total assets in any one investment fund, provided that
the investment does not represent more than 3% of the voting stock of the
acquired investment company. By investing in another investment fund, the Fund
bears a ratable share of the investment fund's expenses, as well as continuing
to bear the Fund's advisory and administrative fees with respect to the amount
of the investment.
REPURCHASE AGREEMENTS. The Fund may purchase instruments from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase them at an agreed upon time and price ("repurchase
agreement"). The Fund would enter into repurchase agreements to generate
additional income. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price. Default by the seller would, however, expose the Fund to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend its portfolio securities
consistent with its investment policies, in order to generate additional income.
The Fund may lend portfolio securities against collateral, consisting of cash or
securities which are consistent with its permitted investments, which is equal
at all times to at least 100% of the value of the securities loaned. There is no
limitation on the amount of securities that may be loaned. Such loans would
involve risks of delay in receiving additional collateral or in recovering the
securities loaned or even loss of rights in the collateral should the borrower
of the securities fail financially. However, loans will be made only to
borrowers deemed by LBGAM to be of good standing and only when, in the judgment
of LBGAM, the income to be earned from the loans justifies the attendant risks.
WHEN-ISSUED SECURITIES. The Fund may purchase securities on a "when-issued"
basis. When-issued securities are securities purchased for delivery beyond the
normal settlement date at a stated price. The Fund will generally not pay for
such securities
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or start earning income on them until they are received. Securities purchased on
a when-issued basis are recorded as an asset and are subject to changes in value
based upon changes in the general level of interest rates. The Fund expects that
commitments to purchase when-issued securities will not exceed 25% of the value
of its total assets absent unusual market conditions. The Fund does not intend
to purchase when-issued securities for speculative purposes but only in
furtherance of its investment objective.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of the value of its
total assets in illiquid securities. Illiquid securities are securities which
may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued the investments,
and include securities with legal or contractual restrictions on resale, time
deposits, repurchase agreements having maturities longer than seven days and
securities that do not have readily available market quotations. In addition,
the Fund may invest in securities that are sold in private placement
transactions between their issuers and their purchasers and that are neither
listed on exchange nor traded over-the counter. These factors may have an
adverse effect on the Fund's ability to dispose of particular securities and may
limit the Fund's ability to obtain accurate market quotations for purposes of
valuing securities and calculating net asset value and to sell securities at
fair value. If any privately placed securities held by the Fund are required to
be registered under the securities laws of one or more jurisdictions before
being resold, the Fund may be required to bear the expenses of registration. The
Fund may also purchase securities that are not registered under the Securities
Act of 1933, as amended, but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act ("Rule 144A securities"). Rule 144A
securities generally must be sold to other qualified institutional buyers. If a
particular investment in Rule 144A securities or private placement securities is
not determined to be liquid, that investment will be included within the 15%
limitation on investment in illiquid securities. The ability to sell Rule 144A
securities to qualified institutional buyers is a recent development and it is
not possible to predict how this market will mature. LBGAM will monitor the
liquidity of such restricted securities under the supervision of the Board of
Directors. See "Investment Objective and Policies - Additional Information on
Portfolio Instruments and Certain Investment Practices - Illiquid and Restricted
Securities" in the Statement of Additional Information.
WARRANTS. The Fund may invest up to 5% of the value of its net assets (valued
at the lower of cost or market) in warrants for equity securities, which are
securities permitting, but not obligating, their holder to subscribe for other
equity securities. Warrants do not carry with them the right to dividends or
voting rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As a
result, an investment in warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to its expiration date. The
Fund will not invest more than 2% of the value of its net assets (valued as
described above) in warrants which are not listed on the New York or American
Stock Exchanges.
CONVERTIBLE SECURITIES. Convertible securities are fixed-income securities that
may be converted at either a stated price or stated rate into underlying shares
of common stock. Convertible securities have general characteristics similar to
both fixed-income and equity securities. Although to a lesser extent than with
fixed-income securities generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stocks and therefore also will react to
variations in the general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying common
stock declines, convertible securities tend to trade increasingly on a yield
basis, and so may not experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection
of the value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
HEDGING AND OTHER STRATEGIC TRANSACTIONS. The Fund is authorized to use the
investment strategies described below to hedge broad or specific market
movements, or to seek to increase the Fund's income or gain. The Fund may
purchase and sell (or write) exchange-listed and over-the-counter put and call
options on securities, financial futures contracts, equity indices and other
financial instruments and enter into financial futures contracts (collectively,
these transactions are referred to in this Prospectus as "Hedging and Other
Strategic Transactions").
Hedging and Other Strategic Transactions may be used to attempt to protect
against possible changes in the market value of securities held or to be
purchased by the Fund resulting from securities market to protect the Fund's
unrealized gains in the
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value of its securities, to facilitate the sale of those securities for
investment purposes, to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities or to seek
to enhance the Fund's income or gain. The Fund may use any or all types of
Hedging and Other Strategic Transactions at any time; no particular strategy
will dictate the use of one type of transaction rather than another, as use of
any Hedging and Other Strategic Transaction will be a function of numerous
variables, including market conditions. The ability of the Fund to utilize
Hedging and Other Strategic Transactions successfully will depend on, in
addition to the factors described above, LBGAM's ability to predict pertinent
market movements, which cannot be assured. These skills are different from those
needed to select the Fund's securities. The Fund is not a "commodity pool"
(I.E., a pooled investment vehicle which trades in commodity futures contracts
and options thereon and the operator of which is registered with the Commodity
Futures Trading Commission (the "CFTC")) and Hedging and Other Strategic
Transactions involving futures contracts and options on futures contracts will
be purchased, sold or entered into only for BONA FIDE hedging purposes, provided
that the Fund may enter into such transactions for purposes other than BONA FIDE
hedging if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio, provided, further, that, in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of certain Hedging and Other Strategic
Transactions will require that the Fund segregate cash, liquid high grade debt
obligations or other assets to the extent the Fund's obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. Risks associated with Hedging and Other Strategic
Transactions are described in "Investment Objective and Policies - Additional
Information Regarding Hedging and Other Strategic Transactions - Risk Factors"
in the Statement of Additional Information. A detailed discussion of various
Hedging and Other Strategic Transactions, including applicable regulations of
the CFTC and the requirement to segregate assets with respect to these
transactions, also appears in the Statement of Additional Information.
SHORT SALES. The Fund may make short sales of securities "against the box." A
short sale is a transaction in which the Fund sells a security it does not own
in anticipation that the market price of that security will decline. In a short
sale "against the box," at the time of sale, the Fund owns or has the immediate
and unconditional right to acquire at no additional cost the identical security.
Short sales against the box are a form of hedging to offset potential declines
in long positions in similar securities.
INVESTMENT LIMITATIONS
The investment limitations enumerated below are fundamental and may not be
changed by the Company's Board of Directors without the affirmative vote of the
holders of a majority of the Fund's outstanding shares. The Fund's investment
objectives and the other investment policies described herein may be changed by
the Board of Directors at any time. If there is a change in the investment
objectives of the Fund, shareholders of the Fund should consider whether the
Fund remains an appropriate investment in light of their then current financial
position and needs. (A complete list of Fund's investment limitations that
cannot be changed without a vote of shareholders is contained in the Statement
of Additional Information under "Investment Objective and Policies.") The
percentage limitations set forth below, as well as those contained elsewhere in
this Prospectus and the Statement of Additional Information, apply at the time a
transaction is effected, and a subsequent change in a percentage resulting from
market fluctuations or any other cause other than an action by the Fund will not
require the Fund to dispose of portfolio securities or to take other action to
satisfy the percentage limitation.
1. The Fund may not purchase the securities of any one issuer if as a result
more than 5% of the value of its total assets would be invested in the
securities of such issuer, except that up to 25% of the value of its total
assets may be invested without regard to this 5% limitation and provided
that there is no limitation with respect to investments in U.S. government
securities.
2. The Fund may not borrow money, except (a) from banks or by entering into
reverse repurchase agreements, in aggregate amounts not exceeding 33-1/3% of
the value of its total assets at the time of such borrowing and (b) in
amounts not exceeding 5% of the value of its total assets at the time of
such borrowing for temporary or emergency purposes (including for clearance
of securities transactions or payment of redemptions or dividends). For
purposes of the foregoing investment limitation, the term "total assets"
shall be calculated after giving effect to the net proceeds of any
borrowings and reduced by any liabilities and indebtedness other than such
borrowings.
3. The Fund may not purchase any securities which would cause 25% or more of
the value of its total assets at the time of such purchase to be invested in
the securities of one or more issuers conducting their principal business
8
<PAGE>
activities in the same industry; provided that there is no limitation with
respect to investments in U.S. Government Securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Securities of the kinds of companies in which the Fund invests may be subject to
significant price fluctuation and above-average risk. Stocks of small- and
medium-sized companies are more volatile than stocks of larger companies. The
Fund may invest in relatively new or unseasoned companies which are in their
early states of development, or small companies positioned in new and emerging
industries. Securities of small and unseasoned companies present greater risks
than securities of larger, more established companies. The companies in which
the Fund may invest may have relatively small revenues and limited product
lines, and may have a small share of the market for their products or services.
Smaller companies may lack depth of management. They may be unable internally to
generate funds necessary for growth or potential development or to generate such
funds through external financing on favorable terms. They may be developing or
marketing new products or services for which markets are not yet established and
may never become established. Due to these and other factors, smaller companies
may incur significant losses.
In addition, the fund may invest in illiquid securities and engage in hedging
and other strategic transactions and certain other investment practices, which
may entail certain risks. See "Investment Objective and Policies - Other
Investment Practices."
PURCHASE OF SHARES
Purchases of Fund shares must be made through a brokerage account maintained
through Lehman Brothers or a broker or dealer (each, an "Introducing Broker")
that (i) clears securities transactions through Lehman Brothers on a fully
disclosed basis or (ii) has entered into an agreement with Lehman Brothers with
respect to the sale of Fund shares. The Fund's shares are offered with no sales
charge imposed at the time of purchase but are subject to a CDSC upon
redemption. See "Redemption of Shares." The Fund reserves the right to reject
any purchase order and to suspend the offering of shares for a period of time.
INITIAL OFFERING
Shares of the Fund are being offered through Lehman Brothers, the Fund's
distributor, during a period scheduled to end on May 5, 1994, subject to
extension by agreement between the Fund and Lehman Brothers (the "Subscription
Period"). The price for shares of the Fund during the Subscription Period will
be $10.00 per share. Following termination of the Subscription Period (the
"Closing Date"), subscriptions for shares will be payable, shares will be issued
and the Fund will begin a continuous offering of shares. Investors will not be
required to pay for shares offered during the Subscription Period until the
Closing Date, and they may revoke subscriptions until the termination of the
Subscription Period. Investors who make payment prior to the Closing Date may
permit the payment to be held in their brokerage accounts or may designate a
temporary investment (such as a money market fund in the Lehman Brothers Group
of Funds) for such payment until the Closing Date. The Fund and Lehman Brothers
reserve the right to withdraw, cancel or modify the initial offering of shares
without notice.
CONTINUOUS OFFERING
Following termination of the Subscription Period, the Fund will begin a
continuous offering of its shares. During the continuous offering, Fund shares
may be purchased through Lehman Brothers or an Introducing Broker at the net
asset value next determined after the purchase order is received by Lehman
Brothers or an Introducing Broker. See "Valuation of Shares."
Purchase orders received by Lehman Brothers or an Introducing Broker prior to
the close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"),
currently 4:00 p.m., New York time, on any day the Fund's net asset value is
calculated are priced according to the net asset value determined on that day.
Purchase orders received after the close of regular trading on the NYSE are
priced as of the time the net asset value per share is next determined. See
"Valuation of Shares." Payment is generally due to Lehman Brothers or an
Introducing Broker on the fifth business day (the "Settlement Date") after the
trade date. Investors who make payment prior to a Settlement Date may permit the
payment to be held in their brokerage accounts or may designate a temporary
investment (such as a money market fund in the Lehman Brothers Group of Funds)
for such payment until the Settlement Date. The Fund reserves the right to
reject any purchase order and to suspend the offering of shares for a period of
time.
SYSTEMATIC INVESTMENT PLAN
The Fund offers shareholders a Systematic Investment Plan under which
shareholders may authorize Lehman Brothers or an Introducing Broker to place a
purchase order each month or quarter for shares of the Fund in an amount not
less than $100. The purchase price is paid automatically from cash held in the
shareholder's Lehman Brothers brokerage account or through the automatic
redemption of the shareholder's shares of a Lehman Brothers money market fund.
For further information regarding the Systematic Investment Plan, shareholders
should contact their Lehman Brothers Investment Representative.
9
<PAGE>
MINIMUM INVESTMENTS
The minimum initial investment in the Fund is $5,000 and the minimum subsequent
investment is $1,000, except for purchases through (a) Individual Retirement
Accounts ("IRAs") and Self-Employed Retirement Plans, for which the minimum
initial and subsequent investments are $2,000 and $1,000, respectively, (b)
retirement plans qualified under Section 403(b)(7) of the Code ("Qualified
Retirement Plan"), for which the minimum and subsequent investment is $500 and
(c) the Fund's Systematic Investment Plan, for which the minimum and subsequent
investment is $100. For employees of American Express and its subsidiaries, and
Lehman Brothers and its affiliates, the minimum initial investment is $1,000 and
the minimum subsequent investment is $500. The Funds reserve the right at any
time to vary the initial and subsequent investment minimums. Certificates for
Fund shares are issued upon request to the Fund's transfer agent, but it is
considerably more complicated to redeem shares held in certificate form.
REDEMPTION OF SHARES
Shareholders may redeem their shares on any day the Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value as
next determined. The Fund normally transmits redemption proceeds for credit to
the shareholder's account at Lehman Brothers or the Introducing Broker at no
charge (other than any applicable CDSC) within seven days after receipt of a
redemption request. Generally, these funds will not be invested for the
shareholder's benefit without specific instruction, and Lehman Brothers or the
Introducing Broker will benefit from the use of temporarily uninvested funds. A
shareholder who pays for Fund shares by personal check will be credited with the
proceeds of a redemption of those shares only after the purchase check has been
collected, which may take up to 15 days or more. A shareholder who anticipates
the need for more immediate access to his or her investment should purchase
shares with federal funds, by bank wire or with a certified or cashier's check.
A Fund account that is reduced by a shareholder to a value of $1,000 or less
($500 for IRAs and Self-Employed Retirement Plans) may be subject to redemption
by the Fund, but only after the shareholder has been given at least 30 days in
which to increase the account balance to more than $1,000 ($500 for IRAs,
Self-Employed Retirement Plans and Qualified Retirement Plans). In addition, the
Fund may redeem shares involuntarily or suspend the right of redemption as
permitted under the 1940 Act, as described in the Statement of Additional
Information under "Additional Purchase and Redemption Information."
Fund shares may be redeemed in one of the following ways:
REDEMPTION THROUGH LEHMAN BROTHERS OR AN INTRODUCING BROKER
Redemption requests may be made through Lehman Brothers or an Introducing
Broker. A shareholder desiring to redeem shares represented by certificates must
also present such certificates to Lehman Brothers or an Introducing Broker
endorsed for transfer (or accompanied by an endorsed stock power), signed
exactly as the shares are registered. Redemption requests involving shares
represented by certificates will not be deemed received until such certificates
are received by the Fund or the Introducing Broker in proper form.
REDEMPTION BY MAIL
Shares held by Lehman Brothers as custodian must be redeemed by submitting a
written request to a Lehman Brothers Investment Representative. All other shares
may be redeemed by submitting a written request for redemption to the Fund's
transfer agent:
Lehman Selected Growth Stock Portfolio
c/o The Shareholder Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
A written redemption request to the Fund's transfer agent or a Lehman Brothers
Investment Representative must (a) state the number of shares to be redeemed,
(b) identify the shareholder's account number and (c) be signed by each
registered owner exactly as the shares are registered. If the shares to be
redeemed were issued in certificate form, the certificates must be endorsed for
transfer (or be accompanied by an endorsed stock power) and must be submitted to
the Fund's transfer agent together with the redemption request. Any signature
appearing on a redemption request must be guaranteed by a domestic bank, a
savings and loan institution, a domestic credit union, a member bank of the
Federal Reserve System or a member firm of a national securities exchange. The
Fund's transfer agent may require additional supporting documents for
redemptions made by corporations, executors, administrators, trustees and
guardians. A redemption request will not be deemed to be properly received until
the Fund's transfer agent receives all required documents in proper form.
CONTINGENT DEFERRED SALES CHARGE
A CDSC payable to Lehman Brothers is imposed on any redemption of Fund shares,
however effected, that causes the current value of a shareholder's account to
fall below the dollar
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<PAGE>
amount of all payments by the shareholder for the purchase of Fund shares
("purchase payments") during the preceding two years. No charge is imposed to
the extent that the net asset value of the Fund shares redeemed does not exceed
(a) the current net asset value of Fund shares purchased through reinvestment of
dividends or capital gains distributions, plus (b) the current net asset value
of Fund shares purchased more than two years prior to the redemption, plus (c)
increases in the net asset value of the shareholder's Fund shares above the
purchase payments made during the preceding two years.
In circumstances in which the CDSC is imposed, the amount of the charge will
depend on the number of years since the shareholder made the purchase payment
from which the amount is being redeemed. Solely for purposes of determining the
number of years since a purchase payment was made, all purchase payments made
during a month will be aggregated and deemed to have been made on the last
Friday of the preceding Lehman Brothers statement month. The following table
sets forth the rates of the CDSC for redemptions of Fund shares:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
- --------------------------------------------------------------------
First 2.00%
Second 1.00%
Third 0.00%
- --------------------------------------------------------------------
</TABLE>
The purchase payment from which a redemption of Fund shares is made is assumed
to be the earliest purchase payment from which a full redemption has not already
been effected. In the case of redemptions of shares of other funds in the Lehman
Brothers Group of Funds issued in exchange for shares of the Fund, the term
"purchase payments" refers to the purchase payments for the shares given in
exchange. In the event of an exchange of shares of funds with differing CDSC
schedules, the shares will be, in all cases, subject to the higher CDSC
schedule. See "Exchange Privilege."
WAIVERS OF CDSC. The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares following the death or disability of the
shareholder; (c) redemptions of shares in connection with certain
post-retirement distributions and withdrawals from retirement plans or IRAs; (d)
involuntary redemptions; (e) redemption proceeds from other funds in the Lehman
Brothers Group of Funds that are reinvested within 30 days of the redemption;
(f) redemptions of shares in connection with a combination of any investment
company with the Fund by merger, acquisition of assets or otherwise; and (g)
redemptions of shares owned by employees of American Express and its
subsidiaries, and Lehman Brothers and its affiliates.
EXCHANGE PRIVILEGE
Shares of the Fund may be exchanged for shares of the following funds in the
Lehman Brothers Group of Funds, to the extent shares are offered for sale in the
shareholder's state of residence.
Lehman Brothers Daily Income Fund, a money market fund which seeks as high a
level of current income as is consistent with stability of principal. Shares of
the Fund may be exchanged for CDSC Shares of this fund.
Lehman Brothers Municipal Income Fund, a money market fund which seeks as high a
level of current income exempt from federal income tax as is consistent with
stability of principal. Shares of the Fund may be exchanged for CDSC Shares of
this fund.
ADDITIONAL FUNDS. It is contemplated that additional funds will become
available into which Fund shareholders will exchange their Fund shares. To
obtain information regarding the availability of such additional funds,
investors should contact their Lehman Brothers Investment Representative.
TAX EFFECT. The exchange of shares of one fund for shares of another fund is
treated for federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize a
taxable gain or loss in connection with an exchange.
CDSC. Shareholders may exchange their fund shares without the imposition of an
exchange fee. In the event shareholders of the Fund exchange all or a portion of
their Fund shares for shares in any of the funds listed above imposing a CDSC
higher than that imposed by the Fund, the exchanged shares will be subject to
the higher applicable CDSC. Upon an exchange, the new shares will be deemed to
have been purchased on the same date as the shares of the Fund which have been
exchanged.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Shareholders exercising
the exchange privilege with any of the other funds in the Lehman Brothers Group
of Funds should review the prospectus of that fund carefully prior to making an
exchange. Lehman Brothers reserves the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time after notice to
shareholders. For further information regarding the exchange privilege or to
obtain the current prospectuses for members of the Lehman Brothers Group of
Funds, investors should contact their Lehman Brothers Investment Representative.
11
<PAGE>
VALUATION OF SHARES
The net asset value per share is calculated on each day, Monday through Friday,
except on days on which the NYSE is closed. The NYSE currently is scheduled to
be closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas and on the preceding
Friday or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively.
The net asset value per share of the Fund is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the net
assets of the Fund by the total number of Fund shares outstanding. Generally,
the Fund's investments are valued at market value or, in the absence of a market
value with respect to any securities, at fair value as determined by or under
the direction of the Company's Board of Directors. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Board of
Directors determines that amortized cost reflects fair value of those
investments. Further information regarding the Fund's valuation policies is
contained in the Statement of Additional Information.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Company's Board of Directors. The Board of Directors approves all significant
agreements between the Company and the persons or companies that furnish
services to the Fund, including agreements with its distributors, investment
adviser, administrator, custodian and transfer agent. The day-to-day operations
of the Fund are delegated to the Fund's investment adviser and administrator.
One of the directors and all of the Company's officers are affiliated with
Lehman Brothers, The Boston Company Advisors, Inc. or one of their affiliates.
The Statement of Additional Information relating to the Fund contains general
background information regarding each director and executive officer of the
Company.
INVESTMENT ADVISER - LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT INC.
Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as investment
adviser to the Fund. LBGAM, together with other Lehman Brothers investment
advisory affiliates, had in excess of $15 billion in assets under management as
of March 10, 1994. Subject to the supervision and direction of the Company's
Board of Directors, LBGAM manages the portfolio of the Fund in accordance with
the Fund's investment objective and policies, makes investment decisions for the
Fund and places orders to purchase and sell securities. As compensation for the
services of LBGAM as investment adviser to the Fund, LBGAM is paid a monthly fee
by the Fund at the annual rate of 0.75% of the value of the Fund's average daily
net assets.
Ms. Susan Hirsch, a Portfolio Manager for LBGAM, has primary responsibility for
the management of the Fund's investment portfolio. Prior to joining LBGAM in
1994, Ms. Hirsch was a Senior Vice President at Lehman Brothers, where she had
primary responsibility for the selection of investments for the Lehman Brothers
Selected Growth Stock List (the "List"). Although the investment approach to be
used in managing the Fund's portfolio is generally similar to that which had
been used by Ms. Hirsch in selecting investments for the List, the approach in
managing the Fund will differ because, among other things, (i) the Fund may
invest in a broader range of investments than those eligible for the List, (ii)
the Fund may employ certain additional investment techniques, as described under
"Investment Objective and Policies - Other Investment Practices," (iii) shares
of the Fund will be purchased and sold by shareholders on an ongoing basis, and
(iv) the Fund will be subject to various limitations on its operations,
including those imposed under the Internal Revenue Code of 1986, as amended (the
"Code").
LBGAM is located at Three World Financial Center, New York, New York 10285.
LBGAM is a wholly owned subsidiary of Lehman Brothers Holdings, Inc.
("Holdings"). All of the issued and outstanding common stock (representing 92%
of the voting stock) of Holdings is held by American Express Company ("American
Express"). On January 21, 1994, American Express announced plans to issue a
special dividend to its common shareholders consisting of the common stock of
Holdings which it owns immediately preceding such dividend. In addition,
American Express' plan to spin off Holdings provides that American Express would
be entitled to certain payments from or due to Holdings. Final terms of the
proposed transaction, which is expected to be completed during the second
quarter of 1994 and would result in Holdings emerging as an independent publicly
owned corporation, have not yet been determined.
ADMINISTRATOR - THE BOSTON COMPANY ADVISORS, INC.
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the Fund's
administrator. As administrator, Boston Advisors calculates the net asset value
of the Fund's shares and generally assists in all aspects of the Fund's
administration and operation. As compensation for Boston Advisors' services as
administrator, the Fund pays Boston Advisors a monthly fee at the annual rate of
0.20% of the value of the Fund's average daily net assets. Boston Advisors is a
wholly owned subsidiary of The Boston Company, Inc. ("TBC"), which is in turn a
wholly owned subsidiary of Boston Group Holdings, Inc. ("BGH").
12
<PAGE>
BGH is a wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). Boston
Advisors is located at One Boston Place, Boston, Massachusetts 02108.
Prior to May 21, 1993, BGH, the parent company of TBC, Boston Advisors and
Boston Safe Deposit and Trust Company ("Boston Safe"), was owned by Lehman
Brothers. In connection with the sale of BGH by Lehman Brothers to Mellon,
Lehman Brothers and its affiliates (except First Data) conditionally agreed
(with certain exceptions including one for certain of Lehman Brothers' current
businesses) not to provide Custody Services, Administration Services or Master
Trust Services (as each is defined in the agreement with Mellon) for periods of
from one to seven years depending on the affiliate, the service and the client.
Thus, Lehman Brothers has agreed not to provide Custody Services or
Administration Services to the Fund. In addition, for the seven-year period
commencing on May 21, 1993, Lehman Brothers has agreed, consistent with its
fiduciary duties and assuming certain service quality standards are met, to
continue to recommend BGH and its subsidiaries as the providers of such Custody
Services and Administration Services as are currently to be provided by BGH and
its subsidiaries to the Fund.
DISTRIBUTOR
Lehman Brothers, located at Three World Financial Center, New York, New York
10285, is distributor of the Fund's shares. Lehman Brothers, a leading full
service investment firm serving U.S. and foreign securities and commodities
markets, meets the diverse financial needs of individuals, institutions and
governments around the world.
The Company has adopted a services and distribution plan with respect to the
Fund (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the
Fund has agreed to pay Lehman Brothers a service fee, accrued daily and paid
monthly, at an annual rate of .25% of the value of the Fund's average daily net
assets, and a distribution fee, accrued daily and paid monthly, at an annual
rate of .75% of the value of the Fund's average daily net assets. The service
fee is used by Lehman Brothers to pay its Investment Representatives or
Introducing Brokers for servicing shareholder accounts. The distribution fee is
paid to Lehman Brothers for advertising, marketing and distributing Fund shares,
including compensation for its initial expense of paying Investment
Representatives or Introducing Brokers a commission upon the sale of Fund shares
and accruals for interest on the amount of the foregoing expenses that exceed
the amount of the distribution fee and the CDSC received by the Distributor.
Under the Plan, Lehman Brothers may retain all or a portion of the distribution
fee, and may make payments out of its distribution fee to Investment
Representatives or Introducing Brokers that engage in the sale of Fund shares or
provide support services in connection with the distribution of the shares. The
payments to Lehman Brothers Investment Representatives and Introducing Brokers
for selling shares of the Fund may include a commission paid at the time of sale
and a continuing fee based upon the value of the average daily net assets of the
Fund's shares sold that remain invested in the Fund. The service fee is credited
at the rate of .25% of the value of the average daily net assets of the Fund's
shares that remain invested in the Fund. The Plan also provides that Lehman
Brothers may make payments to assist in the distribution of the Fund's shares
out of the other fees received by it or its affiliates from the Fund, its past
profits or any other sources available to it. From time to time, Lehman Brothers
may waiver receipt of fees under the Plan while retaining the ability to be paid
under the Plan thereafter. The fees payable to Lehman Brothers under the Plan
and payments by Lehman Brothers to its Investment Representatives or Introducing
Brokers are payable without regard to actual expenses incurred.
EXPENSES
The Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges of the
custodian, transfer agent and dividend disbursing agent, certain insurance
premiums, outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. The Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and sale
of portfolio securities. LBGAM and Boston Advisors have agreed to reimburse the
Fund to the extent required by applicable state law for certain expenses that
are described in the Statement of Additional Information relating to the Fund.
In addition, LBGAM and Boston Advisors have agreed to reimburse the Fund for
total operating expenses in excess of 2.10% of average net assets for a period
of at least one year from the date of this Prospectus.
DIVIDENDS
The Fund's policy is to distribute its investment income and net realized
capital gains, if any, once a year, normally at the end of the year in which
earned or at the beginning of the next year. Unless a shareholder instructs the
Fund to pay dividends or capital gains distributions in cash and credit them to
the shareholder's account at Lehman Brothers, dividends and distributions will
be reinvested automatically in additional
13
<PAGE>
shares of the Fund at net asset value. Shares redeemed during the month are
entitled to dividends and distributions declared up to and including the date of
redemption.
TAXES
The Fund intends to qualify and elect to be treated as a "regulated investment
company" for federal income tax purposes under Subchapter M of the Code. If the
Fund qualifies as a regulated investment company and distributes to its
shareholders at least 90% of its investment company taxable income, then the
Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax at a rate of 35% on
any undistributed income. If in any year the Fund should fail to qualify as a
regulated investment company, the Fund would be subject to federal tax in the
same manner as an ordinary corporation, and distributions to shareholders would
be taxable to such holders as ordinary income to the extent of the earnings and
profits of the Fund. Distributions in excess of earnings and profits will be
treated as a tax-free return of capital, to the extent of a holder's basis in
its shares, and any excess, as a long- or short-term capital gain.
The Fund may engage in hedging involving foreign currencies, forward contracts,
options and futures contracts. See "Investment Objective and Policies - Other
Investment Practices -
Hedging and Other Strategic Transactions." Such transactions will be subject to
special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Fund (that is, may affect whether
gains or losses are ordinary or capital), accelerate recognition of income to
the Fund and defer recognition of certain of the Fund's losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. In addition, these provisions (1) will require the Fund to
"mark-to-market" certain types of positions in its portfolio (that is, treat
them as if they were closed out) and (2) may cause the Fund to recognize income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. The extent to which the Fund may be able to use such hedging
techniques and continue to qualify as a regulated investment company may be
limited by the 30% limitation discussed above. The Fund intends to monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any forward
contracts, option, futures contract, or hedged investment in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
Distributions to shareholders of net investment income will be taxable as
ordinary income whether paid in cash or reinvested in additional shares. Federal
income taxes for distributions to an IRA or a qualified retirement plan are
deferred under the Code. A portion of such dividends may qualify for the
dividends-received deduction generally available for corporate shareholders
under the Code. Shareholders receiving distributions from the Fund in the form
of additional shares pursuant to the dividend reinvestment plan will be treated
for federal income tax purposes as receiving a distribution in an amount equal
to the fair market value of the additional shares on the date of such a
distribution.
Distributions to shareholders of net capital gain that are designated by the
Fund as "capital gains dividends" will be taxable as long-term capital gains,
whether paid in cash or additional shares, regardless of how long the shares
have been held by such shareholders.
Dividends and distributions by the Fund are generally taxable to the
shareholders at the time the dividend or distribution is made (even if paid or
reinvested in additional shares). Any dividend declared by the Fund in October,
November or December of any calendar year, however, which is payable to
shareholders of record on a specified date in such a month and which is not paid
on or before December 31 of such year will be treated as received by the
Shareholders as of December 31 of such year, provided that the dividend is paid
during January of the following year.
A notice detailing the tax status of dividends and distributions paid by the
Fund will be mailed annually to the shareholders of the Fund.
Gain or loss, if any, recognized on the sale or other disposition of shares of
the Fund will be taxed as capital gain or loss if the shares are capital assets
in the shareholder's hands. Generally, a shareholder's gain or loss will be a
long-term gain or loss if the shares have been held for more than one year. If a
shareholder sells or otherwise disposes of a share of the Fund before holding it
for more than six months, any loss on the sale or other disposition of such
share shall be treated as a long-term capital loss to the extent of any capital
gain dividends received by the shareholder with respect to such share. A loss
realized on a sale or exchange of shares may be disallowed if other shares are
acquired (whether under the Plan or otherwise) within a 61-day period beginning
30 days before and ending 30 days after the date that the shares are disposed
of.
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to
14
<PAGE>
furnish the Fund with the shareholder's correct taxpayer identification number,
(ii) the IRS notifies the Fund that the shareholder has failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect, or (iii) when required to do so, the shareholder fails
to certify that he or she is not subject to backup withholding.
Ordinary income dividends paid by the Fund to shareholders who are non-resident
aliens or foreign entities will be subject to a 30% withholding tax unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law or the income is "effectively connected" with a U.S. trade
or business. Generally, subject to certain exceptions, capital gain dividends
paid to non-resident shareholders or foreign entities will not be subject to
U.S. tax. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the U.S. withholding tax.
--------------------------
The foregoing discussion is only a brief summary of the important federal tax
considerations generally affecting the Fund and its shareholders. As noted
above, IRAs receive special tax treatment. No attempt is made to present a
detailed explanation of the federal, state or local income tax treatment of the
Fund or its shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situation.
THE FUND'S PERFORMANCE
From time to time, the Fund may advertise its "average annual total return" over
various periods of time. Total return figures show the average percentage change
in the value of an investment in the Fund from the beginning date of the
measuring period to the end of the measuring period. These figures reflect
changes in the price of the shares and assume that any income dividends and/or
capital gains distributions made by the Fund during the period were reinvested
in shares of the Fund. Total return figures include any applicable CDSC. These
figures also take into account the service and distribution fees payable with
respect to Fund shares.
Total return figures will be given for the recent one-, five-and ten-year
periods, or the life of the Fund to the extent it has not been in existence for
any such periods, and may be given for other periods as well, such as on a
year-by-year basis. When considering average annual total return figures for
periods longer than one year, it is important to note that the total return for
any one year in the period might have been greater or less than the average for
the entire period. "Aggregate total return" figures may be used for various
periods, representing the cumulative change in value of an investment in Fund
shares for the specific period (again reflecting changes in share prices and
assuming reinvestment of dividends and distributions). Aggregate total return
may be calculated either with or without the effect of any applicable CDSC, may
be shown by means of schedules, charts or graphs and may indicate subtotals of
the various components of total return (that is, change in the value of initial
investment, income dividends and capital gains distributions).
In reports or other communications to shareholders or in advertising materials,
performance of Fund shares may be compared with that of other mutual funds or
classes of shares of other mutual funds, as listed in the rankings prepared by
Lipper Analytical Services, Inc. or similar independent services that monitor
the performance of mutual funds, or other industry or financial publications
such as BARRON'S, BUSINESS WEEK, CDA INVESTMENT TECHNOLOGIES, INC., CHANGING
TIMES, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY,
MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, USA TODAY and THE WALL
STREET JOURNAL. Performance figures are based on historical earnings and are not
intended to indicate future performance. The Statement of Additional Information
contains a further description of the methods used to determine performance.
Investors may call 800-861-4171 to obtain current performance figures.
ADDITIONAL INFORMATION
The Company was incorporated under the laws of the State of Maryland on May 5,
1993. The authorized capital stock of the Company consists of 10,000,000,000
shares having a par value of $.001 per share. The Company's Charter currently
authorizes the issuance of five series of shares, corresponding to shares of the
Fund and four other investment portfolios of the Company. The Company's Board of
Directors may, in the future, authorize the issuance of additional series of
capital stock representing shares of additional investment portfolios or
additional classes of shares of the Fund or the Company's other investment
portfolios. The Company has received an order from the SEC permitting it,
subject to certain terms and conditions, to establish multiple classes of shares
within each series.
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class is
required by law or where the matter involved affects one series or class. Under
the corporate law of Maryland, the Company's state of incorporation, and the
Company's By-Laws (except as required under the 1940 Act), the Company is not
required and does not currently intend to hold annual meetings of shareholders
for the election of directors. Shareholders, however, do have the right to call
for a
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meeting to consider the removal of one or more of the Company's directors if
such a request is made, in writing, by the holders of at least 10% of the
Company's outstanding voting securities.
All shares of the Company, when issued, will be fully paid and nonassessable.
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston Place,
Boston, Massachusetts 02108, and serves as custodian of the Fund's investments.
The Shareholder Services Group, Inc., a subsidiary of First Data Corporation, is
located at One Exchange Place, Boston, Massachusetts 02109, and serves as the
Fund's transfer agent.
The Fund sends shareholders a semi-annual and audited annual report, which
includes listings of investment securities held by the Fund at the end of the
period covered. In an effort to reduce the Fund's printing and mailing costs,
the Fund may consolidate the mailing of its semi-annual and annual reports by
household. This consolidation means that a household having multiple accounts
with the identical address of record would receive a single copy of each report.
In addition, the Fund may consolidate the mailing of its Prospectus so that a
shareholder having multiple accounts (E.G., individual, IRA and/ or
Self-Employed Retirement Plan accounts) would receive a single Prospectus
annually. When the Fund's annual report is combined with the Prospectus into a
single document, the Fund will mail the combined document to each shareholder to
comply with legal requirements. Any shareholder who does not want this
consolidation to apply to his or her account should contact his or her Lehman
Brothers Investment Representative or the Fund's transfer agent. Shareholders
may direct inquiries regarding the Fund to their Lehman Brothers Investment
Representative.
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