As Filed with the Securities and Exchange Commission on
January 14, 1994
Registration Nos. 33-62312
811-7706
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. ____ / /
Post-Effective Amendment No. 2 /X/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT /X/
COMPANY ACT OF 1940
Amendment No. 4 /X/
(Check appropriate box or boxes.)
LEHMAN BROTHERS FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
200 Vesey Street
New York, New York 10285
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 640-0600
Steven Spiegel
Lehman Brothers Funds, Inc.
200 Vesey Street, New York, New York 10285
(Name and Address of Agent for Service)
Copies to:
Gary S. Schpero, Esq. Mary E. Moran , Esq.
Simpson Thacher & Bartlett The Boston Company Advisors, Inc.
425 Lexington Avenue Exchange Place - 53 State Street
New York, New York 10017 Boston, Massachusetts 02109
(212) 455- 2000 (617) 248- 3492
_________________________
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the Registration Statement.
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b), or
/ / on (date) pursuant to paragraph (b), or
/X/ 60 days after filing pursuant to paragraph (a), or
/ / on (date) pursuant to paragraph (a) of Rule 485
_________________________
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number of shares of Common Stock,
<PAGE>
$0.001 par value per share, of all series and classes of the
Registrant, then existing or thereafter created, and will file a
Rule 24f-2 Notice within 60 days after the close of the Registrant's fiscal
year.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Registration Statement on Form N-1A
LEHMAN BROTHERS DAILY INCOME FUND
LEHMAN BROTHERS MUNICIPAL INCOME FUND
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A
Item
No. Location
Part A Prospectus
Item 1. Cover Page . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . Background and Expense
Information
Item 3. Condensed Financial Information . . Not Applicable
Item 4. General Description of Registrant . . Investment Objectives and
Policies; Additional
Information
Item 5. Management of the Fund . . . . . . . Management of the Funds;
Purchase of Shares;
Additional Information
Item 6. Capital Stock and Other Securities . Dividends; Taxes;
Additional Information
Item 7. Purchase of Securities Being Offered Valuation of Shares;
Purchase of Shares
Item 8. Redemption or Repurchase . . . . . . Redemption of Shares
Item 9. Pending Legal Proceedings . . . . . . Not Applicable
Statement of Additional
Part B Information
Item 10. Cover Page . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . Not Applicable
Item 13. Investment Objectives and Policies . Investment Objectives and
Policies
Item 14. Management of the Fund . . . . . . . Management of the Funds
<PAGE>
Item 15. Control Persons and Principal Holders Management of the Funds
of Securities . . . . . . . . . . . .
Item 16. Investment Advisory and Other Management of the Funds;
Services . . . . . . . . . . . . . . Auditors
Item 17. Brokerage Allocation and Other Investment Objectives and
Practices . . . . . . . . . . . . . . Policies; Additional
Purchase and Redemption
Information
Item 18. Capital Stock and Other Securities . Investment Objectives and
Policies
Item 19. Purchase, Redemption and Pricing of Additional Purchase and
Securities Being Offered . . . . . . Redemption Information
Item 20. Tax Status . . . . . . . . . . . . . Additional Information
Concerning Taxes
Item 21. Underwriters . . . . . . . . . . . . Additional Purchase and
Redemption Information
Item 22. Calculation of Performance Data . . . Additional Yield
Information
Item 23. Financial Statements . . . . . . . . Financial Statement
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE>
_______________________________________________________________________________
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
_______________________________________________________________________________
SUBJECT TO COMPLETION, DATED JANUARY 14, 1994
PROSPECTUS
Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund
Investment Portfolios of Lehman Brothers Funds, Inc.
This Prospectus describes the Lehman Brothers Daily Income Fund (the
"Daily Income Fund") and the Lehman Brothers Municipal Income Fund (the
"Municipal Income Fund" and, together with the Daily Income Fund, the "Funds").
Each of the Funds is a separate, diversified money market portfolio of
Lehman Brothers Funds, Inc. (the "Company"), an open-end, management investment
company.
The Daily Income Fund's investment objective is to provide investors with
as high a level of current income as is consistent with stability of principal.
The Daily Income Fund invests in a portfolio consisting of a broad range of
U.S. dollar-denominated short-term instruments, including U.S. government and
U.S. and foreign bank and commercial obligations and repurchase agreements
relating to such obligations. Under normal market conditions, at least 25% of
the Daily Income Fund's total assets will be invested in obligations of issuers
in the banking industry and repurchase agreements relating to such obligations.
The Municipal Income Fund's investment objective is to provide investors
with as high a level of current income exempt from federal income tax as is
consistent with stability of principal. The Municipal Income Fund invests
substantially all of its assets in short-term tax-exempt obligations issued by
state and local governments and tax-exempt derivative securities. All or a
portion of the Municipal Income Fund's dividends may be a specific preference
item for purposes of the federal individual and corporate alternative minimum
taxes.
<PAGE>
An investment in the Funds is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the Funds will be able to maintain a
net asset value of $1.00 per share.
Lehman Brothers Inc. sponsors the Funds and acts as distributor of the
Funds' shares. Lehman Brothers Global Asset Management Inc. serves as the
Funds' investment adviser.
The address of the Funds is 200 Vesey Street, New York, New York 10285.
Yield and other information regarding the Funds may be obtained through a
Lehman Brothers Investment Representative or by calling 800-451-2010.
This Prospectus briefly sets forth certain information about the Funds
that investors should know before investing. Investors are advised to read this
Prospectus and retain it for future reference. Additional information about the
Funds, contained in a Statement of Additional Information dated _______,
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 800-451-2010. The Statement of Additional Information
is incorporated in its entirety by reference into this Prospectus.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_________________________
Lehman Brothers
__________________, 1994
<PAGE>
BENEFITS TO INVESTORS
The Funds offer investors several important benefits:
- -- Professionally managed portfolios of high quality money market
instruments, providing investment diversification that is otherwise beyond
the means of many individual investors.
- -- Investment liquidity through convenient purchase and redemption
procedures.
- -- Stability of principal through maintenance of a constant net asset value
of $1.00 per share.
- -- A convenient way to invest without the administrative and recordkeeping
burdens normally associated with the direct ownership of securities.
BACKGROUND AND EXPENSE INFORMATION
The following Expense Summary lists the costs and expenses that a
shareholder can expect to incur as an investor in each Fund, based upon
estimated expenses and average net assets for the current fiscal year. Each
Fund offers two classes of shares: Select Shares, which are available on a no-
load basis to all investors except for investors who are investing through a
CDSC Fund Exchange (as defined under "Purchase of Shares"), and CDSC Shares,
which are available to investors who are investing through a CDSC Fund Exchange
and are subject to a contingent deferred sales charge ("CDSC") upon redemption
as described below. In the case of the CDSC Shares, the Expense Summary assumes
payment of the maximum CDSC.
Expense Summary
<TABLE>
<CAPTION>
Daily Income Municipal Income
Fund Fund
------------------------------------ ------------------------------------
Select CDSC Select CDSC
Shares Shares Shares Shares
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum CDSC (as a percentage of proceeds)<F1> . None 2.00% None 2.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Advisory Fees (after waivers)<F2> . . . . . . . 0.28% 0.28% 0.25% 0.25%
Rule 12b-1 fees (after waivers)<F3> . . . . . . 0.18% 0.18% 0.18% 0.18%
Other Expenses--including Administration Fees
(estimated, after waivers)<F4> . . . . . . . . 0.29% 0.29% 0.27% 0.27%
Total Fund Operating Expenses (estimated,
after waivers)<F5> . . . . . . . . . . . . . . 0.75% 0.75% 0.70% 0.70%
<PAGE>
____________________
<FN>
<F1> Each Fund's CDSC Shares are 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.
Each Fund's CDSC Shares will be deemed to have been purchased on the
same date as the shares of the funds which have been exchanged through a
CDSC Fund Exchange. The CDSC set forth in the table above is the maximum
charge imposed on redemptions of CDSC Shares, and investors may pay an
actual CDSC of less than 2%. See "Redemption of Shares."
<F2> Reflects voluntary waivers of advisory fees, which are expected to be in
effect until at least August 1, 1994. Absent such voluntary waivers, the
ratio of advisory fees to average net assets would be 0.30% for each
Fund.
<F3> Reflects voluntary waivers of Rule 12b-1 fees which are expected to be
in effect until at least August 1, 1994. Absent such voluntary waivers,
the ratio of Rule 12b-1 fees to average net assets would be 0.25% for
each Fund.
<F4> Reflects voluntary waivers of administration fees, which are expected to
be in effect until at least August 1, 1994. Absent such voluntary
waivers, the ratio of other expenses to average net assets would be
0.31% for the Daily Income Fund and 0.31% for the Municipal Income Fund.
<F5> Absent the voluntary waivers referred to above, the ratio of total fund
operating expenses to average net assets are expected to be 0.86% for
the Daily Income Fund and 0.86% for the Municipal Income Fund.
</TABLE>
Example
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return :
<PAGE>
<TABLE>
<CAPTION>
Daily Municipal
Income Income
Fund Fund
------------------------------ -------------------------------
1 year 3 years 1 year 3 years
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Select Shares (assuming complete redemption at end of each time
period) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $24 $ 7 $22
CDSC Shares:
Assuming complete redemption at end of each time
period<F1> . . . . . . . . . . . . . . . . . . . . . . . . $28 $24 $ 27 $22
Assuming no redemption . . . . . . . . . . . . . . . . . . . $ 8 $24 $ 7 $22
____________________
<FN>
<F1> 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 Funds' independent auditors.
Long-term shareholders in mutual funds with Rule 12b-1 fees, such as the
Funds, 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 OBJECTIVES AND POLICIES
Each Fund has separate investment objectives and policies, which are set
forth below under the captions "The Daily Income Fund" and "The Municipal
Income Fund." There can be no assurance that the Funds will achieve their
investment objectives. Each Fund invests only in securities which are purchased
with and payable in U.S. dollars and which have (or, pursuant to regulations
adopted by the Securities and Exchange Commission (the "SEC") , will be
deemed to have) remaining maturities of thirteen months or less at the date of
purchase by the Fund. The Funds maintain a dollar-weighted average portfolio
maturity of 90 days or less. The Funds follow these policies to maintain a
constant net asset value of $1.00 per share, although there is no assurance
that they can do so on a continuing basis.
Each Fund will limit its portfolio investments to securities that are
determined by its investment adviser to present minimal credit risks pursuant
to guidelines established by the Company's Board of Directors and which are
<PAGE>
"Eligible Securities" at the time of acquisition by the Fund. The term
"Eligible Securities" includes securities rated by the "Requisite NRSROs" in
one of the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt securities and
comparable unrated securities. "Requisite NRSROs" means (a) any two nationally
recognized statistical rating organizations ("NRSROs") that have issued a
rating with respect to a security or class of debt obligations of an issuer, or
(b) one NRSRO, if only one NRSRO has issued such a rating at the time that the
Fund acquires the security. A discussion of the ratings categories of the
NRSROs is contained in the Appendix to the Statement of Additional Information.
The Daily Income Fund
The Daily Income Fund's investment objective is to provide investors with
as high a level of current income as is consistent with stability of principal.
In pursuing its investment objective, the Fund, which operates as a diversified
investment company, invests in a broad range of U.S. dollar-denominated short-
term instruments, including U.S. government and U.S. and foreign bank and
commercial obligations.
The Fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities ("U.S. government
securities"). In addition, the Fund may not invest more that 5% of its total
assets in Eligible Securities that have not received the highest rating from
the Requisite NRSROs and comparable unrated securities ("Second Tier
Securities") and may not invest more than 1% of its total assets in the Second
Tier Securities of any one issuer. The Fund may invest more than 5% (but no
more than 25%) of the then-current value of the Fund's total assets in the
securities of a single issuer for a period of up to three business days,
provided that (a) the securities either are rated by the Requisite NRSROs in
the highest short-term rating category or are securities of issuers that have
received such rating with respect to other short-term debt securities or are
comparable unrated securities, and (b) the Fund does not make more than one
such investment at any one time.
The following descriptions illustrate the kinds of instruments in which
the Fund invests:
The Fund may purchase obligations of issuers in the banking industry, such
as commercial paper, notes, certificates of deposit, bankers' acceptances and
time deposits and U.S. dollar-denominated instruments issued or supported by
the credit of U.S. or foreign banks or savings institutions having total assets
at the time of purchase in excess of $1 billion. The Fund may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its assets.
The Fund may invest in commercial paper, other short-term obligations and
repurchase agreements. The Fund may invest without limit in U.S. dollar-
denominated commercial paper and obligations of foreign issuers.
The Fund may invest substantially in U.S. dollar-denominated securities of
foreign issuers, including obligations of foreign banks or foreign branches of
U.S. banks and debt securities of foreign issuers, where the investment adviser
<PAGE>
deems the instrument to present minimal credit risks. Investments in foreign
banks or foreign issuers present certain risks, including those resulting from
future political and economic developments and the possible imposition of
foreign governmental laws or restrictions and reduced availability of public
information. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements applicable to domestic issuers.
The Fund may purchase obligations issued or guaranteed by the U.S.
government or its agencies and instrumentalities. Obligations of certain
agencies and instrumentalities of the U.S. government are backed by the full
faith and credit of the United States. Others are backed by the right of the
issuer to borrow from the U.S. Treasury or are backed only by the credit of the
agency or instrumentality issuing the obligation.
In addition, the Fund may, when deemed appropriate in light of the Fund's
investment objective, invest in high quality, short-term obligations issued by
state and local governmental issuers which carry yields that are competitive
with those of other types of money market instruments of comparable quality.
The Municipal Income Fund
The Municipal Income Fund's investment objective is to provide investors
with as high a level of current income exempt from federal income tax as is
consistent with stability of principal. All or a portion of the Fund's
dividends may be a specific preference item for purposes of the federal
individual and corporate alternative minimum taxes.
In pursuing its investment objective, the Fund, which operates as a
diversified investment company, invests substantially all of its assets in a
diversified portfolio of short-term tax-exempt obligations issued by or on
behalf of states, territories and possessions of the United States, the
District of Columbia, and their respective authorities, agencies,
instrumentalities and political subdivisions and tax-exempt derivative
securities such as tender option bonds, participations, beneficial interests in
trusts and partnership interests (collectively "Municipal Obligations"). Except
as described below, the Fund will not knowingly purchase securities the
interest on which is subject to federal income tax. (See, however, "Taxes"
below concerning treatment of dividends paid by the Fund for purposes of the
federal alternative minimum tax applicable to particular categories of
investors.)
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance, and opinions
relating to the validity of and the tax-exempt status of payments received by
the Fund from tax-exempt derivative securities are rendered by counsel to the
respective sponsors of such securities. The Fund and its investment adviser
will rely on such opinions and will not review independently the underlying
proceedings relating to the issuance of Municipal Obligations, the creation of
any tax-exempt derivative securities or the bases for such opinions.
Except during temporary defensive periods, the Fund will invest
substantially all, but in no event less than 80%, of its total assets in
<PAGE>
Municipal Obligations. The Fund may hold uninvested cash reserves pending
investment and during temporary defensive periods including when suitable
tax-exempt obligations are unavailable. There is no percentage limitation on
the amount of assets which may be held uninvested. Uninvested cash reserves
will not earn income. In addition to or in lieu of holding uninvested cash
reserves under the aforementioned circumstances, the Fund may elect to invest
in high quality, short-term instruments of the types in which the Daily Income
Fund may invest and repurchase agreements with respect to such instruments, the
income from which is subject to federal income tax.
The two principal classifications of Municipal Obligations which may be
held by the Fund are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as the user of the
facility being financed. Revenue securities include private activity bonds
which are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
The Tax Reform Act of 1986 (the "Act") substantially revised provisions of
prior law affecting the issuance and use of proceeds of certain tax-exempt
obligations. A new definition of private activity bonds was applied to many
types of bonds, including those which were industrial development bonds under
prior law. Interest on private activity bonds is tax-exempt only if the bonds
fall within certain defined categories of qualified private activity bonds and
meet the requirements specified in those respective categories. The Act
generally did not change the tax treatment of bonds issued to finance
governmental operations. The changes generally apply to bonds issued after
August 15, 1986, with certain transitional rule exemptions. As used in this
Prospectus, the term "private activity bonds" also includes industrial
development revenue bonds issued pursuant to the Internal Revenue Code of 1986,
as amended (the "Code"). The portion of dividends paid by the Fund that is
attributable to interest on certain private activity bonds is an item of tax
preference for purposes of the federal individual and corporate alternative
minimum taxes.
The Fund's portfolio may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Although the Fund may invest more than 25% of its net assets in (i)
Municipal Obligations whose issuers are in the same state and (ii) Municipal
Obligations the interest on which is paid solely from revenues of similar
projects, it does not presently intend to do so on a regular basis. To the
extent the Fund's assets are concentrated in Municipal Obligations that are
payable from the revenues of similar projects, are issued by issuers located in
the same state or are private activity bonds, the Fund will be subject to the
<PAGE>
peculiar risks presented by the laws and economic conditions relating to such
states, projects and bonds to a greater extent than it would be if its assets
were not so concentrated.
Investment Limitations
The investment limitations enumerated below, as well as the Municipal
Income Fund's policy of investing at least 80% of its total assets in Municipal
Obligations, are fundamental and may not be changed by the Company's Board of
Directors without the affirmative vote of the holders of a majority of the
relevant Fund's outstanding shares. Each Fund's investment objective and the
other investment policies described herein may be changed by the Board of
Directors at any time. If there is a change in the investment objective of a
Fund, shareholders of that Fund should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs. (A complete list of the Funds' investment limitations that cannot be
changed without a vote of shareholders is contained in the Statement of
Additional Information under "Investment Objectives and Policies.")
1. Neither Fund may borrow money, except from banks for temporary
purposes and then in amounts not exceeding one-third of the value of its
total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or one-
third of the value of its total assets at the time of such borrowing.
Additional investments will not be made by a Fund when borrowings exceed
5% of its total assets.
2. Neither Fund may purchase any securities which would cause 25% or
more of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, except that the Daily
Income Fund will invest 25% or more of the value of its total assets in
obligations of issuers in the banking industry or in obligations, such as
repurchase agreements, secured by such obligations (unless the Fund is in
a temporary defensive position); provided that there is no limitation with
respect to investments in U.S. government securities or, in the case of
the Municipal Income Fund, Municipal Obligations (other than those backed
only by the assets and revenues of non-governmental users).
3. Neither Fund may 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.
The third investment limitation listed above will give the Daily Income
Fund the ability to invest, with respect to 25% of the value of its total
assets, more than 5% in any one issuer (excluding investments in U.S.
government securities) only in the event that Rule 2a-7 under the Investment
Company Act of 1940, as amended (the "1940 Act"), is amended in the future. The
Daily Income Fund's operating policy, which complies with Rule 2a-7 as
currently in effect, provides that, with certain exceptions, the Fund may not
<PAGE>
invest more than 5% of its total assets in the securities of any one issuer,
except for U.S. government securities.
Other Investment Practices
Floating and Variable Rate Notes. The Funds may purchase variable or
floating rate notes, which are instruments that provide for adjustments in the
interest rate on certain reset dates or whenever a specified interest rate
index changes, respectively. Such notes might not be actively traded in a
secondary market but, in some cases, a Fund may be able to resell such notes in
the dealer market. Variable and floating rate notes typically are rated by
credit rating agencies, and their issuers must satisfy the same quality
criteria as set forth above. The Funds invest in variable or floating rate
notes only when the investment adviser deems the investment to involve minimal
credit risk.
Certain of the floating or variable rate notes that may be purchased by
the Funds may carry a demand feature that would permit the holder to tender
them back to the issuer of the underlying instrument, or to a third party, at
par value prior to maturity. Where necessary to ensure that such a note is an
Eligible Security, a Fund will require that the issuer's obligation to pay the
principal of the note be backed by an unconditional third-party letter or line
of credit, guarantee or commitment to lend. If a floating or variable rate
demand note is not actively traded in a secondary market, it may be difficult
for a Fund to dispose of the note if the issuer were to default on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights, and the Fund could, for this or other reasons, suffer a loss to
the extent of the default. While, in general, the Funds will invest only in
securities that mature within thirteen months of purchase, the Funds may invest
in floating or variable rate demand notes which have nominal maturities in
excess of thirteen months, if such instruments carry demand features that
comply with conditions established by the SEC .
Repurchase Agreements. The Funds may purchase instruments from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase them at an agreed upon time and price ("repurchase
agreements"). The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price. Default by the seller would, however, expose the relevant
Fund to possible loss because of adverse market action or delay in connection
with the disposition of the underlying obligations.
Reverse Repurchase Agreements. The Funds may borrow funds for temporary
purposes by entering into reverse repurchase agreements in accordance with
their investment limitations described above. Pursuant to such agreements, a
Fund would sell portfolio securities to financial institutions and agree to
repurchase them at an agreed upon date and price. The Funds would 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.
<PAGE>
Loans of Portfolio Securities. The Funds may lend their portfolio
securities consistent with their investment policies. The Funds may lend
portfolio securities against collateral, consisting of cash or securities which
are consistent with their permitted investments, which is equal at all times to
at least 100% of the value of the securities loaned. There is no limitation on
the amount of securities that may be loaned. Such loans would involve risks of
delay in receiving additional collateral or in recovering the securities loaned
or even loss of rights in the collateral should the borrower of the securities
fail financially. However, loans will be made only to borrowers deemed by the
Funds' investment adviser to be of good standing and only when, in the
adviser's judgment, the income to be earned from the loans justifies the
attendant risks.
When-Issued Securities. The Funds 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 and yield. The
Funds will generally not pay for such securities or start earning interest 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. Each 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 Funds do not intend to purchase
when-issued securities for speculative purposes but only in furtherance of
their investment objectives.
Stand-by Commitments. The Funds may enter into put transactions, including
transactions sometimes referred to as stand-by commitments, with respect to
securities held in their portfolios. In a put transaction, a Fund acquires the
right to sell a security at an agreed upon price within a specified period
prior to its maturity date, and a stand-by commitment entitles a Fund to same-
day settlement and to receive an exercise price equal to the amortized cost of
the underlying security plus accrued interest, if any, at the time of exercise.
In the event that the party obligated to purchase the underlying security from
a Fund defaults on its obligation to purchase the underlying security, then
that Fund might be unable to recover all or a portion of any loss sustained
from having to sell the security elsewhere. Acquisition of puts will have the
effect of increasing the cost of securities subject to the put and thereby
reducing the yields otherwise available from such securities.
Tender Option Bonds. The Municipal Income Fund may purchase tender option
bonds. A tender option bond is a municipal obligation (generally held pursuant
to a custodial arrangement) having a maturity longer than 13 months and bearing
interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the municipal
obligation's fixed coupon rate and the rate, as determined by remarketing or
similar agent at or near the commencement of such period, that would cause the
securities coupled with the tender option, to trade at or near par on the date
of such determination. Thus, after payment of this fee, the security holder
<PAGE>
effectively holds a demand obligation that bears interest at the prevailing
short-end tax exempt rate. The Fund's investment adviser will consider on an
ongoing basis the creditworthiness of the issuer of the underlying municipal
obligation, of any custodian and of the third party provider of the tender
option. In certain instances and for certain tender option bonds, the option
may be terminable in the event of a default in payment of principal or interest
on the underlying municipal obligation and for other reasons.
Municipal Lease Obligations. The Municipal Income Fund may invest in
municipal obligations that constitute participations in a lease obligation or
installment purchase contract obligation (hereafter collectively called
"municipal lease obligations") of a municipal authority or entity. Although
municipal lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a municipal
lease obligation is ordinarily backed by the municipality's covenant to budget
for, appropriate and make the payments due under the lease obligation. However,
certain municipal lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Although nonappropriation municipal lease obligations are
secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. The Fund will seek to minimize the special
risks associated with such securities by not investing more than 10% of its
assets in municipal lease obligations that contain non-appropriation clauses,
and by only investing in those non-appropriation leases where (1) the nature of
the leased equipment or property is such that its ownership or use is essential
to a governmental function of the municipality, (2) appropriate covenants will
be obtained from the municipal obligor prohibiting the substitution or purchase
of similar equipment if lease payments are not appropriated, (3) the lease
obligor has maintained good market acceptability in the past, (4) the
investment is of a size that will be attractive to institutional investors, and
(5) the underlying leased equipment has elements of portability and/or use that
enhance its marketability in the event foreclosure on the underlying equipment
were ever required. Municipal lease obligations provide a premium interest rate
which along with regular amortization of the principal may make them attractive
for a portion of the assets of the Municipal Income Fund.
Custodial Receipts and Certificates. The Municipal Income Fund may acquire
custodial receipts or certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or
both, on certain municipal obligations. The underwriter of these certificates
or receipts typically purchases municipal obligations and deposits the
obligations in an irrevocable trust or custodial account with a custodian bank,
which then issues receipts or certificates that evidence ownership of the
periodic unmatured coupon payments and the final principal payment on the
obligations. Although under the terms of a custodial receipt, the Fund would be
typically authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund could be required to assert through the
custodian bank those rights as may exist against the underlying issuer. Thus,
in the event the underlying issuer fails to pay principal and/or interest when
due, the Fund may be subject to delays, expenses and risks that are greater
than those that would have been involved if the Fund had purchased a direct
obligation of the issuer. In addition, in the event that the trust or custodial
<PAGE>
account in which the underlying security has been deposited is determined to be
an association taxable as a corporation instead of a non-taxable entity, the
yield on the underlying security would be reduced in recognition of any taxes
paid.
STRIPS. Each Fund may invest in separately traded principal and interest
components of securities backed by the full faith and credit of the U.S.
Treasury. The principal and interest components of U.S. Treasury bonds with
remaining maturities of longer than ten years are eligible to be traded
independently under the Separate Trading of Registered Interest and Principal
of Securities ("STRIPS") program. Under the STRIPS program, the principal and
interest components are separately issued by the U.S. Treasury at the request
of depository financial institutions, which then trade the component parts
separately. Under the stripped bond rules of the Code, investments by a Fund in
STRIPS will result in the accrual of interest income on such investments in
advance of the receipt of the cash corresponding to such income. The interest
component of STRIPS may be more volatile than that of U.S. Treasury bills with
comparable maturities. In accordance with Rule 2a-7, the Funds' investments in
STRIPS are limited to those with maturity components not exceeding thirteen
months. The Funds will not actively trade in STRIPS. Each Fund will limit
investments in STRIPS to 20% of its total assets.
Participation Interests. The Funds may purchase participation certificates
issued by a bank, insurance company or other financial institution in
obligations owned by such institutions or affiliated organizations that may
otherwise be purchased by the Funds, and loan participation certificates. A
participation certificate gives a Fund an undivided interest in the underlying
obligations in the proportion that the Fund's interest bears to the total
principal amount of such obligations. Certain of such participation
certificates may carry a demand feature that would permit the holder to tender
them back to the issuer or to a third party prior to maturity. See "Floating
and Variable Rate Notes" for additional information with respect to demand
instruments that may be purchased by the Funds. The Funds may invest in
participation certificates even if the underlying obligations carry stated
maturities in excess of thirteen months, upon compliance with certain
conditions contained in Rule 2a-7. Loan participation certificates are
considered by the Funds to be "illiquid" for purposes of their investment
policies with respect to illiquid securities as set forth under "Illiquid
Securities" below.
Other Money Market Funds. Each Fund may invest up to 10% of the value of
its total assets in shares of other money market funds. A Fund will invest in
other money market funds only if such funds are subject to the requirements of
Rule 2a-7 and are considered to present minimal credit risks, and its
investment adviser will monitor the policies and investments of other money
market funds in which it invests, based on information furnished to
shareholders of those funds, with respect to their compliance with their
investment objectives and Rule 2a-7.
Illiquid Securities. Neither Fund will knowingly invest more than 10% of
the value of its total assets in illiquid securities, including time deposits
and repurchase agreements having maturities longer than seven days. Securities
that have readily available market quotations are not deemed illiquid for
<PAGE>
purposes of this limitation (irrespective of any legal or contractual
restrictions on resale). The Funds may invest in commercial obligations issued
in reliance on the so-called "private placement exemption" from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended ("Section
4(2) paper"). The Funds may also purchase securities that are not registered
under the Securities Act of 1933, as amended, but which can be sold to
qualified institutional buyers in accordance with Rule 144A under that Act
("Rule 144A securities"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to institutional
investors such as the Funds who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Funds through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. Rule 144A securities generally must be
sold to other qualified institutional buyers. If a particular investment in
Section 4(2) paper or Rule 144A securities is not determined to be liquid, that
investment will be included within the 10% limitation on investment in illiquid
securities. The 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. The Funds' investment adviser will monitor the liquidity of
such restricted securities under the supervision of the Board of Directors. See
"Investment Objective and Policies--Additional Information on Portfolio
Instruments and Investment Practices--Illiquid and Restricted
Securities" in the Statement of Additional Information.
_________________________
PURCHASE OF SHARES
Purchases of Fund shares must be made through a brokerage account
maintained through Lehman Brothers Inc. ("Lehman Brothers") or a broker that
clears securities transactions through Lehman Brothers on a fully disclosed
basis (an "Introducing Broker"). Each Fund reserves the right to reject any
purchase order and to suspend the offering of shares for a period of time.
The minimum initial investment in each Fund is $5,000 and the minimum
subsequent investment is $1,000, except for purchases of the Daily Income Fund
through (a) Individual Retirement Accounts ("IRAs") and Self-Employed
Retirement Plans, for which the minimum initial and subsequent investments are
$1,000 and $500, respectively, and (b) retirement plans qualified under Section
403(b)(7) of the Internal Revenue Code of 1986, as amended (the "Code"), for
which the minimum and subsequent investment is $500. In addition, for
participants with an automatic purchase arrangement in connection with their
brokerage accounts, there is no minimum initial or subsequent investment. There
are no minimum investment requirements for employees of American Express and
its subsidiaries, including Lehman Brothers. The Funds reserve the right at any
time to vary the initial and subsequent investment minimums. No certificates
are issued for Fund shares.
The Funds' shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective.
However, each Fund's CDSC Shares are subject to a CDSC upon redemption, as
<PAGE>
described below under "Redemption of Shares." A purchase order becomes
effective when Lehman Brothers or an Introducing Broker receives, or converts
the purchase amount into, federal funds (i.e., monies of member banks within
the Federal Reserve System held on deposit at a Federal Reserve Bank). When
orders for the purchase of Fund shares are paid for in federal funds, or are
placed by an investor with sufficient federal funds or cash balance in the
investor's brokerage account with Lehman Brothers or the Introducing Broker,
the order becomes effective on the day of receipt if received 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 Funds calculate their net
asset value. See "Valuation of Shares." Purchase orders received after the
close of regular trading on the NYSE are effective as of the time the net asset
value is next determined. When orders for the purchase of Fund shares are paid
for other than in federal funds, Lehman Brothers or the Introducing Broker,
acting on behalf of the investor, will complete the conversion into, or itself
advance, federal funds, and the order becomes effective on the day following
its receipt by Lehman Brothers or the Introducing Broker. Shares purchased
begin to accrue income dividends on the next business day following the day
that the purchase order becomes effective.
Each Fund's Select Shares are available on a no-load basis to all
investors except for investors who are investing through a CDSC Fund Exchange
(as defined below). Investors who are investing in a Fund in connection with a
CDSC Fund Exchange may purchase only CDSC Shares pursuant to such exchange. For
purposes of this Prospectus, a "CDSC Fund Exchange" is an exchange of shares of
another fund in the Lehman Brothers Group of Funds which is subject to a CDSC
upon redemption for shares in one of the Funds.
REDEMPTION OF SHARES
Holders of Select Shares may redeem their shares without
charge on any day the Funds calculate their net asset value. Holders of CDSC
Shares may also redeem their shares on any day the Funds calculate their net
asset value, subject to any applicable CDSC as described below. 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 in the case of CDSC Shares) on the
business day following 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.
<PAGE>
Holders of Select Shares who purchase securities through
Lehman Brothers or the Introducing Broker may take advantage of special
redemption procedures under which Fund shares will be redeemed automatically to
the extent necessary to satisfy debit balances arising in the shareholder's
account with Lehman Brothers or the Introducing Broker. One example of how an
automatic redemption may occur involves the purchase of securities. If a
shareholder purchases securities but does not pay for them by settlement date,
the number of Select Shares necessary to cover the debit will be
redeemed automatically as of the settlement date, which usually occurs five
business days after the trade date. Shareholders not wishing to participate in
these arrangements should notify their Lehman Brothers Investment
Representative.
A Fund account that is reduced by a shareholder to a value of $1,000 or
less ($500 for IRAs and Self-Employed Retirement Plans) may be subject to
redemption by that 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 and Self-Employed Retirement Plans). In addition, the Funds may redeem
shares involuntarily or suspend the right of redemption as permitted under the
1940 Act, as described in the Statement of Additional Information under
"Additional Purchase and Redemption Information."
Fund shares may be redeemed in one of the following ways:
Redemption through Lehman Brothers
Redemption requests may be made through Lehman Brothers or an Introducing
Broker.
Redemption by Mail
Shares may be redeemed by submitting a written request for redemption to:
Lehman Brothers Funds, Inc.
c/o The Shareholder Services Group, Inc.
P.O. Box 9184
Boston, Massachusetts 02009-9184
A written redemption request to the Funds' transfer agent must (a) state
the number of shares to be redeemed, (b) indicate the name of the Fund from
which such shares are to be redeemed, (c) identify the shareholder's account
number and (d) be signed by each registered owner exactly as the shares are
registered. Any signature appearing on a redemption request must be guaranteed
by a domestic bank, a savings and loan institution, a domestic credit union, a
member bank of the Federal Reserve System or a member firm of a national
securities exchange. The Funds' 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 Funds' transfer agent receives all required
documents in proper form.
<PAGE>
Contingent Deferred Sales Charge on CDSC Shares
A CDSC payable to Lehman Brothers is imposed on any redemption of CDSC
Shares, however effected, that causes the current value of a shareholder's CDSC
Share account to fall below the dollar amount of all payments by the
shareholder for the purchase of CDSC Shares ("purchase payments") during the
preceding two years. No charge is imposed to the extent that the net asset
value of the CDSC Shares redeemed does not exceed (a) the current net asset
value of CDSC Shares purchased through reinvestment of dividends or capital
gains distributions, plus (b) the current net asset value of CDSC Shares
purchased more than two years prior to the redemption, plus (c) increases in
the net asset value of the shareholder's CDSC 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 day of the preceding Lehman Brothers statement month. Each Fund's CDSC
Shares will be deemed to have been purchased on the same date as the shares of
the funds which have been exchanged through a CDSC Fund Exchange. The following
table sets forth the rates of the CDSC for redemptions of CDSC Shares:
Year Since Purchase CDSC
Payment Was Made
First 2.00%
Second 1.00%
Third 0.00%
The purchase payment from which a redemption of CDSC 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 CDSC Shares of a
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) redemption 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 a Fund by merger, acquisition of assets or otherwise; and (g)
redemptions of shares owned by employees of American Express and its
subsidiaries, including Lehman Brothers.
<PAGE>
EXCHANGE PRIVILEGE
Shares of each Fund may be exchanged without charge for shares of
the same class of the other Fund. In addition, CDSC Shares of each 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 Mexican Growth and Income Portfolio, as its primary investment objective
seeks long-term capital appreciation, and as its secondary investment objective
seeks current income, by investing primarily in equity and debt securities of
Mexican issuers.
Lehman Latin America Dollar Income Portfolio, seeks a high level of total
return, consisting of income and capital appreciation, by investing in U.S.
dollar-denominated debt obligations of Latin American governmental and
corporate issuers.
Lehman Selected Growth Stock Portfolio, seeks long-term capital appreciation by
investing primarily in common stocks which the fund's investment adviser
believes to have the potential for above-average capital appreciation, with an
emphasis on the stocks of small- and medium-sized companies.
Additional Funds. It is contemplated that additional funds will become
available into which holders of CDSC Shares will exchange their 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. Holders of CDSC Shares may exchange their shares without the
imposition of an exchange fee. In the event holders of CDSC Shares of a Fund
exchange all or a portion of their CDSC Shares for shares in any of the funds
listed above imposing a CDSC higher than that imposed by the Fund on the CDSC
Shares, 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 CDSC Shares 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.
<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 Funds 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. The Funds' assets are valued on the basis of amortized
cost, which involves valuing a portfolio instrument at its cost and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. The Funds seek to maintain a constant net asset value
of $1.00 per share, although there can be no assurance that they can do so on a
continuing basis. Further information regarding the Funds' valuation policies
is contained in the Statement of Additional Information.
MANAGEMENT OF THE FUNDS
The business and affairs of the Funds 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 Funds, including agreements with its distributors,
investment adviser, administrator, custodian and transfer agent. The day-to-day
operations of the Funds are delegated to their 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 Funds
contains general background information regarding each director and executive
officer of the Company.
Investment Adviser--Lehman Brothers Global Asset Management Inc.
Lehman Brothers Global Asset Management Inc. ("LBGAM") serves as the
investment adviser to the Funds. LBGAM currently serves as investment adviser
to ten money market portfolios of Lehman Brothers Institutional Funds Group
Trust and, together with other Lehman Brothers investment advisory affiliates,
had in excess of $14 billion in assets under management as of
January 4, 1994. Subject to the supervision and direction of the
Company's Board of Directors, LBGAM manages the portfolios of the Funds in
accordance with the Funds' respective investment objectives and policies, makes
investment decisions for the Funds and places orders to purchase and sell
securities. As compensation for the services of LBGAM as investment adviser to
the Funds, LBGAM is paid a monthly fee by each Fund at the annual rate of 0.30%
of the value of such Fund's average daily net assets.
LBGAM is a wholly owned subsidiary of Lehman Brothers Holdings Inc.
("Holdings"). All of the issued and outstanding common stock (representing 92%
<PAGE>
of the voting stock) of Holdings is held by American Express Company. LBGAM is
located at American Express Tower, World Financial Center, New York, New York
10285.
Administrator--The Boston Company Advisors, Inc.
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the Funds'
administrator. As administrator, Boston Advisors calculates the net asset value
of the Funds' shares and generally assists in all aspects of the Funds'
administration and operation. As compensation for Boston Advisors' services as
administrator, each Fund pays Boston Advisors a monthly fee at the annual rate
of 0.20% of the value of such 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"). 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 Funds. 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 Funds.
Distributor and Plan of Distribution
Lehman Brothers, located at Three World Financial Center,
New York, New York 10285, is distributor of the Funds' shares. Lehman Brothers,
a leading full service investment firm, meets the diverse financial needs of
individuals, institutions and governments around the world. American Express
Company and its subsidiaries, other than Lehman Brothers, are principally
engaged in the businesses of providing travel-related services, investment
services, information services, international banking services and investors'
diversified financial services.
The Company has adopted a plan of distribution with respect to each
class of each Fund (the "Plan of Distribution") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan of Distribution, each Fund has agreed
with respect to each class to pay Lehman Brothers monthly for
advertising, marketing and distributing its shares at an annual rate of 0.25%
of its average daily net assets. Under the Plan of Distribution, Lehman
Brothers may retain all or a portion of the payments made to it pursuant to the
Plan and may make payments to its Investment Representatives or Introducing
Brokers that engage in the sale of Fund shares. The Plan of Distribution also
provides that Lehman Brothers may make payments to assist in the distribution
<PAGE>
of the Funds' shares out of the other fees received by it or its affiliates
from the Funds, its past profits or any other sources available to it. From
time to time, Lehman Brothers may waive receipt of fees under the Plan of
Distribution for either Fund while retaining the ability to be paid under such
Plan thereafter. The fees payable to Lehman Brothers under the Plan of
Distribution for advertising, marketing and distributing shares of the Funds
and payments by Lehman Brothers to its Investment Representatives or
Introducing Brokers are payable without regard to actual expenses incurred.
Lehman Brothers Investment Representatives and any other person entitled to
receive compensation for selling shares of the Funds may receive different
levels of compensation for selling one particular class of shares over another
in a Fund.
Expenses
Each Fund bears its own expenses. The Funds' expenses include taxes,
interest, fees and salaries of the directors and officers who are not
directors, officers or employees of the Funds' 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 Funds to the extent required by applicable state law for certain
expenses that are described in the Statement of Additional Information relating
to the Funds.
DIVIDENDS
The Funds declare dividends from their net investment income (i.e., income
other than net realized long- and short-term capital gains) on each day the
Funds are open for business and pay dividends monthly. Distributions of net
realized long- and short-term capital gains, if any, are declared and paid
annually after the close of the Funds' fiscal year in which they have been
earned. Unless a shareholder instructs a Fund to pay dividends or capital gains
distributions in cash and credit them to the shareholder's account at Lehman
Brothers, dividends and distributions from a Fund will be reinvested
automatically in additional shares of the same class of that 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. The Funds do
not expect to realize net long-term capital gains.
TAXES
Each Fund will be treated as a separate entity for federal income tax
purposes, and thus the provisions of the Code applicable to regulated
investment companies generally will be applied to each Fund separately, rather
<PAGE>
than to the Company as a whole. In addition, net realized long-term capital
gains, net investment income and operating expenses will be determined
separately for each Fund. Each Fund intends to qualify each year as a
"regulated investment company" under the Code. A regulated investment company
is exempt from federal income tax on amounts distributed to its shareholders.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Fund distribute to its
shareholders each taxable year (i) at least 90% of its investment company
taxable income for such year and (ii) at least 90% of the excess of its tax-
exempt interest income over certain deductions disallowed with respect to such
income. In general, each Fund's investment company taxable income will be its
taxable income (including dividends and short-term capital gains, if any)
subject to certain adjustments and excluding the excess of any net long-term
capital gain for the taxable year over the net short-term capital loss, if any,
for such year. Each Fund intends to distribute substantially all of its
investment company taxable income each year. Such distributions will be taxable
as ordinary income to Fund shareholders who are not currently exempt from
federal income taxes, whether such income is received in cash or reinvested in
additional shares. (Federal income taxes for distributions to an IRA or a
qualified retirement plan are deferred under the Code.) It is anticipated that
none of a Fund's distributions will be eligible for the dividends received
deduction for corporations. The Funds do not expect to realize long-term
capital gains and, therefore, do not contemplate payment of any "capital gain
dividends" as described in the Code.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by the shareholders and paid by a Fund on December 31 of
such year in the event such dividends are actually paid during January of the
following year.
Shareholders will be advised at least annually as to the federal income
tax status of distributions made to them each year.
The Municipal Income Fund
Dividends paid by the Municipal Income Fund which are derived from
exempt-interest income may be treated by the Fund's shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code,
unless under the circumstances applicable to the particular shareholder the
exclusion would be disallowed. (See the Statement of Additional Information
under "Additional Information Concerning Taxes.")
The Municipal Income Fund may hold without limit certain private activity
bonds issued after August 7, 1986. Shareholders must include, as an item of tax
preference, the portion of dividends paid by the Fund that is attributable to
interest on such bonds in their federal alterative minimum taxable income for
purposes of determining liability (if any) for the 26% or 28%
alternative minimum tax applicable to individuals and the 20% alternative
minimum tax and the environmental tax applicable to corporations.
Corporate shareholders must also take all exempt-interest dividends into
account in determining certain adjustments for federal alternative minimum tax
and environmental tax purposes. The environmental tax applicable to
<PAGE>
corporations is imposed at the rate of .12% on the excess of the corporation's
modified federal alternative minimum taxable income over $2,000,000.
Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the
taxability of such benefits.
To the extent, if any, dividends paid to shareholders by the Municipal
Income Fund are derived from taxable income or from long-term or short-term
capital gains, such dividends will not be exempt from federal income tax,
whether such dividends are paid in the form of cash or additional shares, and
may also be subject to state and local taxes. Under state or local law, the
Municipal Income Fund's distributions of net investment income may be taxable
to investors as dividend income though a substantial portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes.
_________________________
The foregoing discussion is only a brief summary of some of the important
federal tax considerations generally affecting the Funds and their
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 Funds or their shareholders, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
investors in the Funds should consult their tax advisers with
specific reference to their own tax situation.
YIELDS
From time to time, the "yields," "effective yields" and, in the case of
the Municipal Income Fund, "tax-equivalent yields" for shares of the Funds may
be quoted in advertisements or in reports to shareholders. The "yield" quoted
in advertisements for each Fund's shares refers to the income generated by an
investment in a Fund's shares over a specified period (such as a seven-day
period) identified in the advertisement. This income is then "annualized"; that
is, the amount of income generated by the investment during that period is
assumed to be generated each such period over a 52-week or one-year period and
is shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in Fund
shares is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. The "tax-equivalent yield" demonstrates the level of taxable
yield necessary to produce an after tax yield equivalent to the Municipal
Income Fund's tax-free yield. It is calculated by increasing the yield
(calculated as above) by the amount necessary to reflect the payment of federal
taxes at a stated rate. The "tax-equivalent yield" will always be higher than
the "yield."
Each Fund's yields may be compared to those of other mutual funds with
similar objectives, to bond or other relevant indices, or to rankings prepared
by independent services or other financial or industry publications that
monitor the performance of mutual funds, or to the average yields reported by
<PAGE>
the Bank Rate Monitor from money market deposit accounts offered by the 50
leading banks and thrift institutions in the top five standard metropolitan
statistical areas. For example, such data are reported in national financial
publications such as IBC/Donoghue's Money Fund Report (Registered Trademark),
Ibbotson Associates of Chicago, The Wall Street Journal and The New York Times,
reports prepared by Lipper Analytical Service, Inc. and publications of a local
or regional nature.
A Fund's yield figures represent past performance, will fluctuate and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. The methods used to compute the Funds'
yields are described in more detail in the Statement of Additional Information.
Investors may call 800-451-2010 to obtain current yield information.
ADDITIONAL INFORMATION
The Company was incorporated under the laws of the State of Maryland on
May 5, 1993. The authorized capital stock of the Company consists of
10,000,000,000 shares having a par value of $.001 per share. The Company's
Charter currently authorizes the issuance of
five series of shares, corresponding to shares of the Daily
Income Fund and the Municipal Income Fund as well as shares of three 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 Funds 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. Each Fund currently offers two classes of shares: "Select Shares"
and "CDSC Shares." The Select Shares and CDSC Shares of each Fund represent
identical interests in that Fund; however, the CDSC Shares of each Fund are
subject to a CDSC as described under "Redemption of Shares."
All shares of the Company have equal voting rights and will be voted in
the aggregate, and not by series or class, except where voting by series or
class is required by law or where the matter involved affects only
one series or class. Under the corporate law of Maryland, the Company's
state of incorporation, and the Company's By-Laws (except as required under the
1940 Act), the Company is not required and does not currently intend to hold
annual meetings of shareholders for the election of directors. Shareholders,
however, do have the right to call for a meeting to consider the removal of one
or more of the Company's directors if such a request is made, in writing, by
the holders of at least 10% of the Company's outstanding voting securities.
All shares of the Company, when issued, will be fully paid and
nonassessable.
<PAGE>
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place, Boston, Massachusetts 02108, and serves as custodian of the Funds'
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 Funds' transfer agent.
Each 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 Funds' printing and mailing
costs, the Funds may consolidate the mailing of their 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 Funds may consolidate the mailing of their
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 a 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 Funds' transfer
agent. Shareholders may direct inquiries regarding the Funds to their Lehman
Brothers Investment Representative.
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Funds' 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 Funds
or its distributor. This Prospectus does not constitute an offering by the
Funds or by the distributor in any jurisdiction in which such offering may not
lawfully be made.
TABLE OF CONTENTS
Page
Benefits to Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background and Expense Information . . . . . . . . . . . . . . . . . . . . .
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . .
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Funds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
Lehman Brothers Daily
Income Fund
Lehman Brothers Municipal
Income Fund
Prospectus
________, 1994
Lehman Brothers
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Registration Statement on Form N-1A
LEHMAN MEXICAN GROWTH AND INCOME PORTFOLIO
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A
Item
No. Location
Part A Prospectus
Item 1. Cover Page . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . Summary
Item 3. Condensed Financial Information . . Not Applicable
Item 4. General Description of Registrant . . Summary; Investment
Objectives and Policies;
Additional Information;
Risk Factors and Special
Considerations
Item 5. Management of the Fund . . . . . . . Summary; Management of the
Fund; Purchase of Shares;
Redemption of Shares;
Additional Information
Item 6. Capital Stock and Other Securities . Summary; Dividends; Taxes;
Additional Information
Item 7. Purchase of Securities Being Offered Summary; Valuation of
Shares; Purchase of Shares
Item 8. Redemption or Repurchase . . . . . . Summary; Redemption of
Shares
Item 9. Pending Legal Proceedings . . . . . . Not Applicable
Part B Statement of Additional
Information
Item 10. Cover Page . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . Not Applicable
<PAGE>
Item 13. Investment Objectives and Policies . Investment Objectives and
Policies
Item 14. Management of the Fund . . . . . . . Management of the Fund
Item 15. Control Persons and Principal Holders Management of the Fund
of Securities . . . . . . . . . . . .
Item 16. Investment Advisory and Other Management of the Fund;
Services . . . . . . . . . . . . . . Auditors
Item 17. Brokerage Allocation and Other Investment Objectives and
Practices . . . . . . . . . . . . . . Policies; Additional
Purchase and Redemption
Information
Item 18. Capital Stock and Other Securities . Investment Objectives and
Policies
Item 19. Purchase, Redemption and Pricing of Additional Purchase and
Securities Being Offered . . . . . . Redemption Information
Item 20. Tax Status . . . . . . . . . . . . . Additional Information
Concerning Taxes
Item 21. Underwriters . . . . . . . . . . . . Additional Purchase and
Redemption Information
Item 22. Calculation of Performance Data . . . Performance Data
Item 23. Financial Statements . . . . . . . . Not Applicable
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE>
_______________________________________________________________________________
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
_______________________________________________________________________________
SUBJECT TO COMPLETION, DATED JANUARY 14, 1994
PROSPECTUS
Lehman Mexican Growth And Income Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
This Prospectus describes the Lehman Mexican Growth and Income Portfolio
(the "Fund"), a non-diversified portfolio of Lehman Brothers Funds, Inc. (the
"Company"), an open-end management investment company.
The Fund's primary investment objective is to seek long-term capital
appreciation. As a secondary investment objective, the Fund will seek current
income. The Fund will, under normal market conditions, invest substantially all
of its assets in equity and debt securities of Mexican issuers.
Investment in the Fund's shares involves certain special considerations
not typically associated with investments in U.S. securities. See "Risk Factors
and Special Considerations."
Lehman Brothers Inc. sponsors the Fund and acts as distributor of the
Fund's shares. Lehman Brothers Global Asset Management Limited 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 800-451-2010.
Shares of the Fund are being offered during an initial subscription period
scheduled to end on April 18, 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 __________,
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 800-451-2010. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
<PAGE>
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_________________________
Lehman Brothers
__________________, 1994
<PAGE>
_________________________
All references in this Prospectus to "U.S. dollars," "dollars," "$," or
"US$" are to United States dollars. Effective January 1, 1993, the Mexican
Congress approved the establishment of a new currency unit, the new peso, which
replaced the old peso at a rate of one new peso per one thousand old pesos.
Unless otherwise specified, all references in this Prospectus to "new pesos,"
"pesos" or "Ps" refer to new Mexican Pesos. No representation is made that the
peso or U.S. dollar amounts shown in this Prospectus could have been or could
be converted into U.S. dollars or pesos, as the case may be, at any particular
rate or at all.
Unless otherwise indicated, U.S. dollar equivalent information in the
Prospectus for the peso as of a specified date is based on the free exchange
rate for such date published by Banco de Mexico and U.S. dollar information in
pesos for a period is based on the average of the daily free exchange rates for
the days in the period. The free exchange rate is the rate quoted by banks and
foreign exchange houses in Mexico for U.S. dollars against pesos. On January 7,
1994, the free exchange rate published by Banco de Mexico (the "free exchange
rate") was Ps. 3.101 = $1.00. See "The United Mexican States -- The External
Sector of the Economy--Exchange Controls and Foreign Exchange Rates" in the
Statement of Additional Information for additional information on the
historical rate of exchange between the dollar and the peso.
<PAGE>
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 and debt securities of
Mexican issuers that is otherwise beyond the means of many individual
investors.
-- 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 Objectives. The Fund's primary investment objective is to seek long-
term capital appreciation. As a secondary investment objective, the Fund will
seek current income. The Fund will, under normal market conditions, invest
substantially all of its assets in equity and debt securities of Mexican
issuers. It is anticipated that, under normal market conditions, the Fund will
invest from 50% to 80% of its total assets in equity securities of Mexican
issuers and from 20% to 50% of its total assets in debt securities of Mexican
issuers.
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 April 18, 1994, subject
to extension as agreed by the Fund and Lehman Brothers. On the fifth business
day after termination of the subscription period, or on such other day as may
be agreed upon by the Fund and Lehman Brothers, subscriptions for shares will
be payable and shares will be issued. Following termination of the subscription
period, 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
<PAGE>
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 Limited
("LBGAM") serves as investment adviser to the Fund. LBGAM is an indirect,
wholly owned subsidiary of Lehman Brothers, a leading full service investment
firm serving U.S. and foreign securities and commodities markets. LBGAM,
together with other Lehman Brothers investment advisory affiliates, had in
excess of $14 billion in assets under management as of January 4, 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."
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. See "Risk Factors and Special
Considerations." The Fund's investment in equity and debt securities of Mexican
issuers involves certain considerations and risks not typically associated with
investing in securities of United States companies or the United States
government, including (1) restrictions on foreign investment, (2) greater price
volatility, (3) limited liquidity and relatively small market capitalization of
the Mexican securities market, (4) risks associated with high rates of
inflation and interest and (5) political and social uncertainties. See "The
Mexican Securities Markets" and "Risk Factors and Special Considerations" in
the Prospectus as well as "The Mexican Securities Markets" and "The United
Mexican States" in the Statement of Additional Information.
The Fund's portfolio of Mexican debt securities is expected to consist
primarily of securities that would be considered to have a credit quality rated
below investment grade by internationally recognized credit rating
organizations. Non-investment grade securities are commonly referred to as
"junk bonds" and are regarded as predominately speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations and involve major risk exposure to adverse conditions.
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
<PAGE>
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.
The Fund is classified as a "non-diversified" investment company under the U.S.
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
there are no limitations on the percentage of the Fund's assets that may be
invested in the securities of a single issuer. The Fund intends to comply,
however, with the diversification requirements imposed on regulated investment
companies by the U.S. Internal Revenue Code of 1986, as amended (the "Code").
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 Objectives and Policies--Other Investment
Practices."
<PAGE>
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
<TABLE>
<S> <C>
Shareholder Transaction Expenses
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<F1> . . . . . . . . . . . . . . . . . . . . . . 1.00%
Other Expenses--including Administration
Fees (estimated, after expense reimbursements)<F2> . . . . . . 0.45%
Total Fund Operating Expenses (estimated, after expense
reimbursements)<F3> . . . . . . . . . . . . . . . . . . . . . 2.20%
____________________
<FN>
<F1> 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."
<F2> 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 0.74%.
<F3> 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 2.20% of 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
2.49%.
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Expenses, assuming complete redemption at the end of each time
period:<F1> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42 $69
Expenses, assuming no redemption: . . . . . . . . . . . . . . . . . . . . . $22 $69
____________________
<FN>
<F1> 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 OBJECTIVES AND POLICIES
The Fund's primary investment objective is to seek long-term capital
appreciation. As a secondary investment objective, the Fund will seek current
income. The Fund will, under normal market conditions, invest substantially all
of its assets in equity and debt securities of Mexican issuers. It is
anticipated that, under normal market conditions, the Fund will invest from 50%
to 80% of its total assets in equity securities of Mexican issuers and from 20%
to 50% of its total assets in debt securities of Mexican issuers. Mexican
issuers are defined as (i) companies organized under the laws of Mexico; (ii)
companies whose securities are principally traded in Mexico; (iii) subsidiaries
of companies described in clauses (i) or (ii) above that issue debt securities
guaranteed by, or securities payable with (or convertible into) the stock of,
companies described in clauses (i) or (ii); (iv) companies that finance
operations in Mexico by means of equity securities denominated in pesos; (v)
companies that derive at least 50% of their revenues primarily from either
goods or services produced in Mexico or sales made in Mexico; (vi) issuers of
depositary shares for Mexican equity securities; (vii) the Mexican government
and its agencies and instrumentalities, including Banco de Mexico (the Mexican
<PAGE>
central bank); and (viii) Mexican public sector entities, including any entity
fully or partly owned by the entities described in the foregoing clause (vii).
There can be no assurance that the Fund will achieve its investment objectives.
For a discussion of certain risks and considerations associated with an
investment in the Fund, see "Risk Factors and Special Considerations." For a
discussion of the Mexican securities markets and more general considerations
relating to investments in Mexican securities, see "The Mexican Securities
Markets" in the Prospectus and "The Mexican Securities Markets" and "The United
Mexican States" in the Statement of Additional Information.
Equity Securities
The equity securities in which the Fund may invest include common stock,
preferred stock, convertible debt securities, warrants and rights to purchase
common stock and preferred stock of Mexican issuers. The Fund will limit its
equity investments to those traded on an exchange, principally the Bolsa
Mexicana de Valores, S.A. de C.V., the Mexican Stock Exchange (the "Exchange").
In addition, the Fund's equity investments will be limited to those of Mexican
issuers having market capitalizations of at least $50 million at the time of
purchase.
The Fund seeks to identify and invest in companies it believes offer
potential for long-term capital appreciation. In evaluating prospective
investments, LBGAM will utilize internal financial, economic and credit
analysis resources as well as information obtained from other sources. In
selecting industries and companies for investment, LBGAM will consider factors
such as overall growth prospects, competitive position in domestic and export
markets, technology, research and development, productivity, labor costs, raw
material costs and sources, profit margins, return on investment, capital
resources, government regulation and management.
Debt Securities
The debt securities in which the Fund may invest include bonds,
debentures, commercial paper, notes and bills. The Fund's investments in debt
securities may include debt securities issued or guaranteed by the Mexican
Government, its agencies or instrumentalities, as well as Mexican public sector
entities and private Mexican issuers. These debt securities may be denominated
either in pesos or U.S. dollars. The Fund has established no rating criteria
for the Mexican issuers' debt securities in which it may invest. The Fund
invests in debt securities of issuers that it determines to be suitable
investments regardless of their ratings. See "Risk Factors and Special
Considerations--Risks of Investment in Mexican Securities."
Although LBGAM will consider available securities ratings when making
investment decisions, LBGAM performs its own credit analysis. LBGAM's analysis
may include consideration of the issuer's experience and management strength,
changing financial condition, borrowing requirements or debt maturity schedules
and its responsiveness to changes in business conditions and interest rates.
LBGAM will also consider relative values based on anticipated cash flows,
interest coverage, asset coverage, earnings prospects and other factors. The
analysis of LBGAM is not, however, necessarily comparable to any established
rating standards.
<PAGE>
Among the obligations of the Mexican Government in which the Fund may
invest are Cetes, which are peso-denominated treasury bills issued by the
Mexican Government through weekly auctions with maturities that range from 7 to
728 days, the most common terms being 28, 91, 182, 364 and 728 days; Tesobonos,
which are short-term bonds issued by the Mexican Government and which are
denominated in U.S. dollars and paid at maturity in the peso equivalent
calculated at the free exchange rate; Bondes, which are development bonds
issued by the Mexican Government denominated in pesos and payable in pesos and
with a minimum term of 364 days; and Ajustabonos, which are adjustable bonds
issued directly by the Mexican Government and denominated in pesos with the
face amount adjusted every thirteen weeks by the quarterly inflation rate.
Among the obligations of Mexican commercial and development banks in which
the Fund may invest are bills of exchange, certificates of deposit, time
deposits, bonds, notes, bankers acceptances, pagares and commercial paper
(issued or guaranteed, as to payment of principal and interest, by the banks).
Bills of exchange are negotiable instruments, issued by Mexican private
entities to finance current transactions, that generally mature within six
months and that are accepted or endorsed by a bank and carry the bank's credit.
Certificates of deposit are negotiable instruments issued by banks with
maturities ranging from a few days to several years. Promissory notes of
Mexican banks are negotiable instruments issued or endorsed by such banks and,
as a result, guaranteed by such banks, or backed by a bank letter of credit as
to the payment of principal and interest. Promissory notes generally have
maximum maturities of 182 days. Banker's acceptances issued by Mexican banks
are of two types: public and private. Private acceptances are issued by banks
directly to buyers, whereas public acceptances are created through the making
of loans by banks to corporations, with the resulting obligations being
guaranteed by banks and then resold. Bank bills, certificates of deposit and
promissory notes are usually issued at face value, pay interest periodically or
at maturity, and are traded by dealers in the secondary market. Pagares are
similar to certificates of deposit, except that pagares pay interest at
maturity only and have a maximum term of 12 months, whereas certificates of
deposit pay interest monthly and are issued for terms of up to 24 months.
The Fund may also invest in debt obligations of Mexican corporations. The
development of a market for Mexican corporate debt obligations other than
short-term instruments has been a relatively recent phenomenon. As Mexico has
instituted certain political and economic reforms, and as privatizations of
companies previously owned or controlled by the government have occurred,
access to international capital markets, primarily the Eurobond market, has
expanded. Issuances of Eurobonds by Mexican corporations have consisted
primarily of fixed rate, U.S. dollar-denominated bonds. The Mexican corporate
debt obligations in which the Fund may invest include bonds, debentures, notes
and commercial paper and will generally be unsecured. Most of these debt
obligations will bear interest at fixed rates. However, the Fund may also
invest in corporate debt obligations with variable rates of interest.
Temporary Investments
For temporary defensive purposes, e.g., during periods in which LBGAM
determines that changes in the Mexican securities markets or other economic or
political conditions affecting Mexico warrant, the Fund may vary from its
<PAGE>
investment objectives and may invest, without limit (except for the limitations
as described under "Investment Objectives 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 objectives and policies and to meet operating expenses. Also, for
temporary defensive purposes the Fund may change the relative percentages of
equity securities and debt securities held in its portfolio.
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
and in amounts not to exceed 33-1/3% of its total assets (including the amount
borrowed) less its liabilities (excluding the amount borrowed). 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 invest a substantial portion of their assets in Mexican
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. For a discussion of possible consequences under U.S. federal
income tax laws of the Fund's investment in foreign investment funds, see
"Taxes."
<PAGE>
Repurchase Agreements. The Fund may purchase instruments from Mexican and
non-Mexican 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 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.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements, pursuant to which it would sell portfolio securities to financial
institutions and agree to repurchase them at an agreed upon date and price. The
Fund would consider entering into reverse repurchase agreements to avoid
otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by the Fund may decline below the price
of the securities the Fund is obligated to repurchase.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
consistent with its investment policies. The Fund may lend portfolio securities
against collateral, consisting of cash or securities which are consistent with
its permitted investments, which is equal at all times to at least 100% of the
value of the securities loaned. There is no limitation on the amount of
securities that may be loaned. Such loans would involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by 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.
American Depositary Receipts. The Fund may hold securities of Mexican
issuers in the form of American Depositary Receipts ("ADRs"). ADRs are receipts
typically issued by a U.S. bank or trust company that evidence ownership of
underlying securities issued by a non-U.S. corporation and may be converted
into the underlying securities. For purposes of the Fund's investment policies,
the Fund's investments in ADRs will be deemed to be investments in the
underlying equity securities of the Mexican issuers which they represent.
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 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 objectives.
Illiquid Securities. The Fund will not knowingly invest more than 15% of
the value of its total assets in illiquid securities, including time deposits
and repurchase agreements having maturities longer than seven days. Securities
that have readily available market quotations are not deemed illiquid for
purposes of this limitation (irrespective of any legal or contractual
<PAGE>
restrictions on resale). The Mexican securities market is substantially
smaller, less liquid and more volatile than major U.S. securities markets. 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
Objectives and Policies--Additional Information on Portfolio Instruments and
Certain Investment Practices--Illiquid and Restricted Securities" in the
Statement of Additional Information.
Structured Investments. Included among the issuers of Mexican debt
securities in which the Fund may invest are entities organized and operated
solely for the purpose of restructuring the investment characteristics of
various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity
and arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified debt securities and the issuance by that entity of one or
more classes of securities ("Structured Investments") backed by, or
representing interests in, the underlying securities. The cash flow on the
underlying securities may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to Structured Investments is dependent
on the extent of the cash flow on the underlying securities. Because Structured
Investments of the type in which the Fund may invest typically involve no
credit enhancement, their credit risk will generally be equivalent to that of
the underlying securities.
The Fund is permitted to invest in a class of Structured Investments that
is either subordinate or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing. See
<PAGE>
"Investment Objectives and Policies--Other Investment Practices--Leverage."
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Fund's investment in
these Structured Investments may be limited by the restrictions contained in
the 1940 Act described above under "Investment Objectives and Policies--Other
Investment Practices--Other Investment Funds." Structured Investments are
typically sold in private placement transactions, and there currently is no
active trading market for Structured Investments.
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, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
The Fund may invest in warrants for equity securities that are acquired as
units with debt instruments and warrants for debt 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.
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 extend
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, investment 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 various market risks (such
as interest rates, currency exchange rates and broad or specific market
movements) or to seek to increase the Fund's income or gain. The Fund does not
intend to engage in such investment strategies except in limited circumstances.
Few of these strategies can practicably be used by the Fund at the present time
because the instruments needed to implement these strategies are not generally
available and such instruments may not become available for extensive use in
the future. Techniques and investments may change, however, over time as new
instruments and strategies are developed or regulatory changes occur.
<PAGE>
Subject to the constraints described above, the Fund may purchase and sell
(or write) exchange-listed and over-the-counter put and call options on
securities, financial futures contracts and equity and fixed-income indices and
other financial instruments, enter into financial futures contracts, enter into
interest rate transactions and enter into currency transactions (collectively,
these transactions are referred to in this Prospectus as "Hedging and Other
Strategic Transactions"). The Fund's interest rate transactions may take the
form of swaps, caps, floors and collars, and the Fund's currency transactions
may take the form of currency forward contracts and other similar transactions,
currency futures contracts, currency swaps and options on currencies or
currency futures contracts.
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 or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the 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 authorized
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 Objectives and
Policies--Additional Information Regarding Hedging and Other Strategic
Transactions--Risks of Hedging and Other Strategic Transactions Outside the
United States." 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.
<PAGE>
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 Objectives 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 borrow money, except (a) from banks and in 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.
2. The Fund may not purchase any securities which would cause 25% or
more of the value of its total assets at the time of such purchase
to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry; provided
that there is no limitation with respect to investments in U.S.
government securities.
Under the 1940 Act, the Fund may not purchase during the existence of any
underwriting syndicate any security a principal underwriter of which is an
affiliate of LBGAM, unless such securities are registered under the U.S.
Securities Act of 1933, as amended. Affiliates of LBGAM engage from time to
time in the underwriting business for Mexican issuers. The Fund may seek an
exemption from the SEC permitting the Fund to purchase securities in public
offerings in which an affiliate of LBGAM participates as an underwriter,
although there can be no assurance that such relief will be obtained. In
addition, the Fund is prohibited by the 1940 Act from investing more than 5% of
<PAGE>
its total assets in the securities of any bank, broker-dealer or other company
that, in its most recent fiscal year, derived more than 15% of its gross
revenues from securities-related activities. Mexican commercial banks may
engage in securities-related activities such as placing securities, managing
investment funds and rendering investment advice.
THE MEXICAN SECURITIES MARKETS
The information set forth in this section is based on material obtained by
the Fund from the Mexican Stock Exchange and from other sources believed to be
accurate but has not been independently verified by the Fund, LBGAM or Lehman
Brothers.
The Exchange
The Mexican Stock Exchange is currently Mexico's only stock exchange and
is located in Mexico City. The Mexican Stock Exchange was first founded in
1894, and is organized as a corporation with shares owned by 26 brokerage
firms, each of which is authorized to trade on the Exchange floor. Both debt
and equity securities are traded on the Mexican Stock Exchange, including
stocks and bonds of private sector corporations, commercial paper, bankers'
acceptances, certificates of deposit, Government debt, as more specifically
described below, and special hedge instruments linked to the U.S. dollar. As of
November 30, 1993 approximately 65% of the total market capitalization was
comprised of equity securities, with the remainder of the market comprised
primarily of debt instruments.
The Mexican Government created the Institute for the Deposit of Securities
("Indeval"), which commenced operations in 1980 as an agency of the Government,
to serve as a centralized depository for shares. Indeval operates as the
centralized depository institution for securities and renders services of
custody, settlement, transfer and registration of all securities traded on the
Mexican Stock Exchange, creating a system which obviates any need for physical
transfer of securities. In 1987, Indeval was dissolved as a government agency
and restructured as a private corporation owned by its Mexican clients (all of
the Mexican brokerage houses, banks and insurance companies) and changed its
corporate name to S.D. Indeval, S.A. de C.V., Institucion para el Deposito de
Valores. The Fund maintains its listed portfolio securities with Indeval.
Indeval charges a monthly custody fee of 0.003% of the market value of assets
held by each brokerage firm or account holder.
The following table shows the trading volume on the Mexican Stock
Exchange in Mexican pesos during the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
MEXICAN STOCK EXCHANGE TRADING VOLUME
(US$ billions)
Through
Year ended December 31, July 30,
---------------------------------------------------------------------------------------- ----------
Securities 1985 1986 1987 1988 1989 1990 1991 1992 1993
---------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cetes . . . . . . . . . . . 68.0 64.1 169.4 360.2 393.3 675.1 1,511.4 3,206.0 164.0
Fixed income securities . . 3.0 4.8 4.0 4.2 3.3 4.6 8.1 11.5 7.8
Equity securities . . . . . 2.0 3.7 15.1 5.6 6.1 12.1 31.6 44.0 24.0
Total . . . . . . . . . . . 73.0 72.6 188.5 370.0 402.7 691.8 1,551.1 3,261.5 195.8
____________________
<FN>
Source: Mexican Stock Exchange
</TABLE>
The Equity Market
Since the 1800s, equity securities have been traded in Mexico and used to
finance companies in a variety of industries. Notwithstanding the long history
of the Mexican equity market, when compared to markets in the U.S., Europe and
parts of Asia, it is small and far less liquid. For a variety of reasons,
trading volume in equities had declined in importance relative to other
instruments in the securities market during the 1980s. In 1979, for example,
equity trading represented 26% of total Mexican Stock Exchange trading as
opposed to 1987, when equity trading represented only 7% of the total. Since
1990, the equity market has grown in importance due to continued economic
stability and the Government's policy of encouraging institutional investment
as well as an increased in new equity issues by both private and public sector
Mexican companies. The Government's privatization program was partially
conducted through public offers for sale of equity. As of November 30, 1933,
468 companies were listed on the Mexican Stock Exchange, of which 238 were
mutual funds. During 1992, 27.9 billion equity securities were traded on the
Mexican Stock Exchange; total turnover amounted to Ps. 119.3 billion ($38.4
billion). Of the companies listed that year, the five most actively traded
companies accounted for 31.5% of total turnover.
The Debt Market
Currently, securities traded in the debt market comprise a large variety
of debt obligations. The list of debt obligations traded in Mexico includes the
following Mexican Government-issued securities, all of which are traded on the
Mexican Stock Exchange: (i) Bondes--long term development bonds, bearing
variable interest rates, sold through weekly auctions through Banco de Mexico,
<PAGE>
acting also as placement and paying agent, (ii) Ajustabonos--long-term bonds,
also issued through auctions conducted by the Banco de Mexico, with a variable
face amount that adjusts every thirteen weeks depending on the quarterly
inflation rate, upon which face amount is applied a fixed interest rate, (iii)
Tesobonos--short-term dollar denominated bonds payable at maturity in pesos
according to the free exchange rate and (iv) Cetes--long- or short-term debt
securities sold at weekly auctions through Banco de Mexico, acting also as
placement and paying agent.
A variety of other special purpose bonds are traded on the Mexican Stock
Exchange, including Government bonds issued by Banco de Mexico such as
development bonds and urban renovation bonds, as well as bank development bonds
and industrial development bonds. Mexican banks also issue bankers' acceptances
and certificates of deposit that pay interest either at maturity or monthly,
and Mexican private sector corporations often issue a variety of their own debt
instruments.
For a more comprehensive discussion of the Mexican securities markets, see
the Statement of Additional Information under "The Mexican Securities Markets."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund, and in Mexican equity and debt securities in
general, involves certain risk factors and special considerations not typically
associated with investing in the securities of United States issuers, including
those discussed below.
Risks of Investment in Mexican Securities
Investments in equity and debt securities issued by Mexican issuers
involve special considerations and risks, including the risks associated with
high rates of inflation and interest particular to the Mexican economy, the
limited liquidity and relatively small market capitalization of the Mexican
securities markets, relatively higher price volatility, restrictions on foreign
investment and political, economic and social uncertainties. These and other
factors may affect the value of the Fund's shares. See "The Mexican Securities
Markets" in the Prospectus and in the Statement of Additional Information and
"The United Mexican States" in the Statement of Additional Information.
The Fund has not established rating criteria for the Mexican debt
securities in which it may invest. The Fund invests in debt securities that
LBGAM determines to be suitable investments regardless of whether such debt is
rated. As a result, the Fund's portfolio of Mexican debt securities is expected
to consist primarily of securities that would be considered to have a credit
quality rated below investment grade by internationally recognized credit
rating organizations such as Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P"). Non-investment grade securities (i.e.,
rated Ba1 or lower by Moody's or BB+ or lower by S&P) are commonly referred to
as "junk bonds" and are regarded as predominately speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations and involve major risk exposure to adverse
conditions. Some of the debt securities held by the Fund, which may not be
<PAGE>
paying interest currently or may be in payment default, may be comparable to
securities rated as low as C by Moody's or CCC or lower by S&P. These
securities are considered to have extremely poor prospects of ever attaining
any real investment standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions and/or to be in default or not current in payment of interest or
principal.
Low rated and unrated debt instruments generally offer a higher current
yield than that available from higher grade issues, but typically involve
greater risk. Low rated and unrated securities are especially subject to
adverse changes in general economic conditions, to changes in financial
condition of their issuers and to price fluctuations in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
issuers of low rated and unrated instruments may experience financial stress
that could adversely affect their ability to make payments of principal and
interest and increase the possibility of default. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of low rated and unrated securities
especially in a market characterized by a low volume of trading.
Market Liquidity; Volatility
The Mexican securities market is substantially smaller, less liquid and
more volatile than the major securities markets in the United States. At
December 31, 1992, the aggregate market value of equity securities listed on
the Mexican Stock Exchange was approximately Ps. 433.3 billion (approximately
US$138.7 billion), compared to $4.03 trillion for equity securities listed on
the New York Stock Exchange at December 31, 1992. The stock of Telefonos de
Mexico, S.A. de C.V. ("Telmex") accounts for approximately 15% of the aggregate
market capitalization of the Mexican Stock Exchange, while no single stock
issue accounts for more than 2% of the aggregate market capitalization of the
New York Stock Exchange. Thus, the performance of the Mexican Stock Exchange is
highly influenced by the performance of Telmex. Additionally, prices of equity
securities traded on the Mexican Stock Exchange are generally more volatile
than prices of equity securities traded on the New York Stock Exchange. The
combination of price volatility and the relatively limited liquidity of the
Mexican Stock Exchange may have an adverse impact on the investment performance
of the Fund.
The Mexican Economy
Although, since 1988, the Mexican economy has experienced gradual
improvements in a number of areas, during the past decade the Mexican economy
has experienced low or negative rates of growth and high rates of inflation,
interest and underemployment. Inflation rates in December 1992 were in excess
of 12% per annum. Mexico is currently one of the largest debtor nations (among
developing countries) to commercial banks and foreign governments. Relatively
high rates of interest and inflation continue to affect adversely the Mexican
economy and the companies in which the Fund intends to invest. In addition, the
peso rates of exchange have continued to decline on a daily basis relative to
the U.S. dollar. See "Risk Factors and Special Considerations--Currency
Fluctuation and Exchange Controls" below. This trend has a tendency to
<PAGE>
contribute to high Mexican rates of inflation and higher interest rates. In
addition, due to a surge in imports resulting from Mexico's economic recovery
and lower tariffs, Mexico's current account deficit has been growing steadily.
Political Factors
Mexico is a federal, democratic republic with a tripartite division of
powers: executive, legislative and judicial. The chief executive is the
President, who is elected by popular vote for a period of six years and who may
not be re-elected. Currently, the President is Carlos Salinas de Gortari, whose
term expires on December 1, 1994. There can be no assurance that Mr. Salinas's
successor will continue the current government's economic policies. Since the
1930s, the Mexican political climate has remained stable and exhibited
continuity. The Partido Revolucionario Institucional (the Institutional
Revolutionary Party, or the "PRI") is the dominant political party in Mexico.
Since 1929, the PRI has won all presidential elections and has held a majority
in Congress. Until 1989, it also had won all of the state governorships. In the
elections held on November 8, 1992, the PRI won three gubernatorial contests
but with narrower margins than before. In the event the PRI's control of the
legislature were to decrease substantially in future elections, it is possible
that changes in the Mexican government's economic policy could result and the
Mexican securities markets could react in a negative manner.
The Fund is unable to predict the future course of Mexican politics;
however, the replacement of President Salinas de Gortari or his political
appointees or the election of a government which implements a different
economic policy may have a significant effect upon the nature of future
economic policies in Mexico. The impact of future events and changes and any
political and economic instability in Mexico on the Fund cannot be predicted,
although they may have an adverse effect on the Fund's intended operations and
performance.
Currency Fluctuation and Exchange Controls
Most of the equity and debt securities in the Fund's portfolio and the
equity securities underlying the convertible securities in which the Fund may
invest will be denominated in pesos. As a result, these securities must
increase in market value at a rate in excess of the rate of any decline in the
value of the peso against the U.S. dollar in order to avoid a decline in their
equivalent U.S. dollar value. Accordingly, a change in the value of the peso
against the U.S. dollar may result in a corresponding change in the value of
the Fund's equity and debt securities denominated in pesos. The Fund will
compute its income from these peso assets on the date that such income is
earned by the Fund at the foreign exchange rate in effect on that date, and if
the value of the peso falls relative to the U.S. dollar between recognition of
income and the date the Fund makes distributions, the Fund could be required to
liquidate portfolio securities to make distributions to stockholders unless the
Fund successfully hedges against declines in the value of the peso. There can
be no assurance that the Fund will be able to liquidate securities in order to
meet such distribution requirements. The Fund is permitted to borrow money to
make distributions required to maintain its status as a regulated investment
company for U.S. tax purposes. If the exchange rate declines between the time
the Fund incurs expenses in U.S. dollars and the time such expenses are paid,
the amount of pesos required to be converted into U.S. dollars in order to pay
<PAGE>
expenses in U.S. dollars will be greater than the equivalent amount in pesos of
such expenses at the time they are incurred. The Fund does not expect to hedge
against a decline in the value of the peso except in limited circumstances. The
risk of currency devaluations and fluctuations should be carefully considered
by investors in determining whether to purchase shares of the Fund.
In August 1976, the Mexican government established a policy of allowing
the peso to float against the dollar and other currencies. Under this policy,
the peso has consistently declined against the dollar. In November 1987, Banco
de Mexico withdrew from the free exchange market, which resulted in a further
devaluation of the peso. In January 1989, the Mexican government established a
policy with respect to the controlled exchange rate under which the peso was
devalued by an average of approximately Ps. .001 per day. On November 11, 1991,
the controlled rate of exchange was eliminated and a policy was established to
allow the peso to be devalued by up to Ps. 0.0002 per day, to be controlled
through open market transactions by Banco de Mexico. The present market rate of
exchange between the peso and other currencies is influenced by the forces of
supply and demand in the foreign exchange markets. On October 20, 1992, the
daily devaluation rate was raised to maximum of Ps. 0.0004 per day. Since the
abolition of the controlled rate, Banco de Mexico has endeavored to keep the
free market exchange rate within a range of 1% above and below the targeted
rate through interventions in the foreign exchange market. The free market
exchange rate on January 7, 1994, as published by Banco de Mexico, was Ps.
3.101 per US$1.00.
See "The United Mexican States--The External Sector of the Economy--
Exchange Controls and Foreign Exchange Rates" in the Statement of Additional
Information for a table which sets forth the average and closing controlled
rate of exchange and free rate of exchange for the peso against the U.S. dollar
for the periods indicated therein.
Mexican Foreign Investment Laws
Under Mexican law, there are limitations and restrictions on the
percentage of the capital stock of certain Mexican corporations which may be
owned by non-Mexican nationals. Pursuant to the Foreign Investment Law, which
became effective on December 28, 1993, restrictions on foreign investment in
certain industries that existed under prior law were removed or liberalized.
Under the new law, investment in a limited number of strategic and other
industries (such as petroleum exploration and recovery) is reserved to the
Government or to Mexican nationals. Foreign investment in other industries is
permitted in any proportion, subject to certain restrictions. For example, the
maximum percentage of the capital stock of air transport companies which may be
owned by foreign nationals is 25%. Under the Law of Credit Institutions,
foreign investment in commercial banks is permitted up to 30%. Subject to
certain exceptions, no corporation or individual may acquire, directly or
indirectly, more than 5% of the capital stock of any commercial bank, although
the Ministry of Finance and Public Credit may authorize investment up to 10%.
In addition, under the Mexican Securities Market Law, foreign investment in the
share capital of Mexican brokerage houses is permitted up to 30% of such share
capital (in the aggregate), provided that no corporation or individual may
acquire, directly or indirectly, more than 10% of such share capital. Under
recent amendments to the banking and securities laws, designed to implement
<PAGE>
NAFTA, foreign financial institutions may create Mexican financial services
subsidiaries.
Under current Mexican foreign investment regulations, non-Mexican
nationals may invest in the equity securities of certain listed Mexican
companies, which otherwise would be required to be held by Mexican nationals,
through special trust arrangements established with Mexican banks. The first
such arrangement was established with Nacional Financiera, S.N.C. ("Nafin"),
the Mexican national development bank. Under that arrangement, called the
Master Trust, all shares of Mexican companies acquired for the benefit of non-
Mexican nationals through certificates of participation are held in a series of
special Indeval accounts in the name of Nafin as trustee. Under the Master
Trust arrangement, Nafin is record owner of the shares held in these special
Indeval accounts and must vote such shares in agreement with the votes cast by
the majority of the stockholders holding shares of the same class. Under the
Master Trust arrangement, the non-Mexican national beneficiaries have only the
right to receive dividends and other distributions in respect of the shares
underlying such certificates of participation and to dispose of such
certificates.
Current foreign investment regulations also contemplate that Mexican
companies may issue neutral shares which have no voting rights and which may be
acquired freely by non-Mexican nationals, subject to the prior authorization of
the Ministry of Commerce and Industrial Development and the National Securities
Commission.
Although current Mexican regulations and trust arrangements will permit
the Fund to invest freely in most equity securities traded on the Mexican Stock
Exchange and to hold stock issued upon conversion of the Fund's convertible
debt securities, there can be no assurance that Mexican foreign investment
regulations will not change in the future in a manner which adversely affects
the ability of the Fund to acquire publicly traded Mexican securities or
beneficial ownership thereof or to hold the stock issuable upon conversion of
its convertible debt securities. If, as a result of a change in Mexican foreign
investment regulations, the Fund were unable to hold stock (either directly or
through a trust arrangement) of Mexican companies issuable upon conversion of
its convertible debt securities, it would either have to dispose of the
convertible debt securities prior to conversion, or convert the securities and
dispose of the resulting stock at the time of conversion, in order to realize
the conversion value of such convertible debt securities.
Mexican Securities Laws and Accounting Rules
There is less or different publicly available information about the
issuers of Mexican securities than is regularly published by issuers in the
United States. All Mexican companies listed on the Mexican Stock Exchange must
incorporate the effects of inflation directly in accounting records and in
their published financial statements. Thus, Mexican financial statements and
reported earnings may differ from those of companies in other countries.
However, in order to allow comparable analysis with previous accounting
standards, the Mexican Securities Commission has required all companies listed
on the Mexican Stock Exchange to include notes to their financial statements
which report financial data in a way which is consistent with previous rules.
Also, there is generally less governmental supervision and regulation of
<PAGE>
exchanges, brokers and issuers in Mexico than there is in the United States.
Mexican corporate laws regarding fiduciary responsibility and protection of
stockholders are less developed than those in the United States.
Non-Diversified Status
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means that there are no limitations on the percentage of the
Fund's assets that may be invested in the securities of a single issuer. As a
non-diversified investment company, the Fund may invest a greater proportion of
its assets in the obligations of a smaller number of issuers and, as a result,
may be subject to greater risk with respect to portfolio securities. The
concentration requirement under the Fund's investment limitations, however,
prohibits the Fund from purchasing a security that would result in 25% or more
of the Fund's total assets to be invested in a single industry (such
prohibition does not apply to U.S. Government Securities). In addition, the
Fund intends to comply with the diversification requirements imposed on
regulated investment companies by the Code. See "Taxes."
Changes in Interest Rates
The value of the debt securities in which the Fund invests can be expected
to change as levels of interest rates in the relevant markets fluctuate. Except
to the extent that values are affected independently by other factors such as
developments relating to a specific issuer, when interest rates decline, the
value of a fixed-income security can generally be expected to rise. Conversely,
when interest rates rise, the value of a fixed-income security can generally be
expected to fall. These fluctuations can be expected to be greater with respect
to investments in fixed-income securities with longer maturities than
investments in securities with shorter maturities.
Other Investment Practices
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 Objectives 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, dealer or other financial
institution (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
<PAGE>
Shares of the Fund are being offered through Lehman Brothers, the Fund's
distributor, during a period scheduled to end on April 18, 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. On the fifth business day after termination of the
Subscription Period, or on such other day as may be agreed upon by the Fund and
Lehman Brothers (the "Closing Date"), subscriptions for shares will be payable
and shares will be issued. Following termination of the Subscription Period,
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.
Minimum Investments
<PAGE>
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,
including Lehman Brothers, 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
<PAGE>
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 Mexican Growth and Income 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 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 day of the preceding Lehman Brothers statement month. The following
table sets forth the rates of the CDSC for redemptions of Fund shares:
<PAGE>
Year Since Purchase CDSC
Payment Was Made
First 2.00%
Second 1.00%
Third 0.00%
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) redemption 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, including Lehman Brothers.
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 Latin America Dollar Income Portfolio, seeks a high level of total
return, consisting of income and capital appreciation, by investing in U.S.
dollar-denominated debt obligations of Latin American governmental and
corporate issuers.
Lehman Selected Growth Stock Portfolio, seeks long-term capital appreciation by
investing primarily in equity securities which the fund's investment adviser
believes to have the potential for above-average capital appreciation, with an
emphasis on the stocks of small- and medium-sized companies.
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.
<PAGE>
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.
VALUATION OF SHARES
The net asset value per share is calculated on each day, Monday through
Friday, except on days on which the NYSE or the Mexican Stock Exchange 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. In valuing the Fund's assets, any assets or liabilities initially
expressed in terms of pesos are translated into U.S. dollars at the then
current free or controlled exchange rate. Further information regarding the
Fund's valuation policies is contained in the Statement of Additional
Information.
<PAGE>
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 Limited
Lehman Brothers Global Asset Management Limited ("LBGAM") serves as
investment adviser to the Fund. LBGAM, together with other Lehman Brothers
investment advisory affiliates, had in excess of $14 billion in assets under
management as of January 4, 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 objectives 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.
Mr. Ian King, an Investment Manager for Equity Securities at LBGAM, has
primary responsibility for the management of the equity component of the Fund's
investment portfolio. Mr. King has been with LBGAM since 1992. From 1989 to
1992, Mr. King was employed by Invesco MIM, most recently with responsibilities
for emerging markets investments. Mr. Michael Zelouf, a Director for Fixed
Income Securities at LBGAM, has primary responsibility for the management of
the debt component of the Fund's investment portfolio. Mr. Zelouf has been with
LBGAM since 1989, prior to which he had been a Fund Manager at Fuji
International Finance Limited.
LBGAM is an affiliate of Lehman Brothers, a leading full service
investment firm serving U.S. and foreign securities and commodities markets.
LBGAM operates principally from the United Kingdom, is a member of the United
Kingdom Investment Management Regulatory Organization and is registered with
the SEC as an investment adviser under the U.S. Investment Advisers Act of
1940, as amended. LBGAM is an indirect wholly owned subsidiary of Lehman
Brothers Holdings, Inc. ("Holdings"), all of the issued and outstanding common
stock (representing 92% of the voting stock) of which is held by American
Express Company. LBGAM is located at Two Broadgate, London EC2M 7HA, England.
Lehman Brothers has established an Advisory Committee, comprised of Lehman
Brothers research analysts specializing in Latin American and emerging markets,
to consult periodically with LBGAM with respect to the management of the Fund.
The Advisory Committee will consult with LBGAM with respect to economic,
political and market trends and developments affecting Mexico and may also
consult with respect to particular investments. The following individuals serve
on the Advisory Committee:
<PAGE>
Lawrence D. Krohn--Senior Vice President and Chief Economist for Latin
America, Lehman Brothers, New York. Mr. Krohn is responsible for all
economic and political analysis of the Latin American region for
Lehman Brothers and is the principal author of Lehman Brothers'
weekly publication, Emerging Markets.
Maryam Mansoury--Emerging Market Strategist within the Equity Research
Department, Lehman Brothers, London. Ms. Mansoury covers the Latin
American market as well as other emerging markets.
Steven H. Nagourney--Managing Director and Chief Global Portfolio
Strategist, Lehman Brothers, New York. Mr. Nagourney is responsible
for, among other things, Lehman Brothers' overview of general global
investment trends and quantitative analysis of the effect of market
and economic trends on portfolio investments.
Kenneth Telljohann--Product Manager and Market Strategist for Emerging
Markets Fixed Income Securities, Lehman Brothers, New York.
Paul Tice--Vice President, International Group, Lehman Brothers Fixed
Income Research Department, New York. Mr. Tice is responsible for
emerging markets credit research, focusing on sovereign and private
sector issuers primarily in Latin America and Asia.
By virtue of the research and analytic services being furnished by Lehman
Brothers to LBGAM with respect to the Fund, LBGAM may be considered an
investment adviser to the Fund. Accordingly, Lehman Brothers has entered into a
written agreement with LBGAM with respect to the provision of such services.
Lehman Brothers receives no compensation, however, pursuant to such agreement.
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"). 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
<PAGE>
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. American Express Company and its
subsidiaries, other than Lehman Brothers, are principally engaged in the
businesses of providing travel-related services, investment services,
information services, international banking services and investors' diversified
financial services.
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 waive 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,
<PAGE>
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 2.20% 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 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
Internal Revenue Code of 1986, as amended (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.
In order to qualify as a regulated investment company, the Fund must satisfy
certain requirements relating to the diversification of its assets. Due to
Mexican restrictions on foreign ownership of Mexican equity securities, a
substantial amount of the Fund's assets may be held in Indeval accounts in the
Master Trust. See "Risk Factors and Special Considerations-Mexican Foreign
Investment Laws." The Fund intends to take the position that it owns the
equity shares held in the Indeval accounts. However, since there is no
published authority directly on point, there can be no assurance that the
Internal Revenue Service or the courts will agree with the Fund's position. If
the Fund were treated as only owning an interest in the Master Trust and not
the underlying shares in the Indeval accounts, the Fund could fail to qualify
as a regulated investment company. 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
<PAGE>
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 (including options and futures
contracts of foreign currencies). See "Investment Objectives 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. It is not anticipated that a significant portion
of such dividends, if any, will 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.
<PAGE>
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 subject to certain taxes imposed by Mexico with respect to
dividends, capital gains and other income. If the Fund qualifies as a regulated
investment company, if certain distribution requirements are satisfied and if
more than 50% in value of the Fund's total assets at the close of any taxable
year consists of stocks or securities of Mexican corporations the Fund may
elect to treat any Mexican income taxes paid by it that can be treated as
income taxes under U.S. income tax regulations as paid by its shareholders. The
Fund expects to qualify for and may make this election. For any year that the
Fund makes such an election, an amount equal to the Mexican income taxes paid
by the Fund that can be treated as income taxes under U.S. income tax
principles will be included in the income of its shareholders and each
shareholder will be entitled (subject to certain limitations) to credit the
amount included in his income against his U.S. tax liabilities, if any, or to
deduct such amount from his U.S. taxable income, if any. The Fund will report
annually to its shareholders the amount per share of such Mexican income taxes
that must be included in each shareholder's gross income and the amount that
will be available for deductions or credit.
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to non-
corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number, (ii) the 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.
_________________________
<PAGE>
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 800-451-2010 to obtain current performance
figures.
<PAGE>
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 only one series
or class. Under the corporate law of Maryland, the Company's state of
incorporation, and the Company's By-Laws (except as required under the 1940
Act), the Company is not required and does not currently intend to hold annual
meetings of shareholders for the election of directors. Shareholders, however,
do have the right to call for a meeting to consider the removal of one or more
of the Company's directors if such a request is made, in writing, by the
holders of at least 10% of the Company's outstanding voting securities.
All shares of the Company, when issued, will be fully paid and
nonassessable.
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.
<PAGE>
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
Page
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background and Expense Information . . . . . . . . . . . . . . . . . . . .
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . .
The Mexican Securities Markets . . . . . . . . . . . . . . . . . . . . . .
Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . .
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
Lehman Mexican Growth
and Income Portfolio
Prospectus
________, 1994
Lehman Brothers
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Registration Statement on Form N-1A
LEHMAN LATIN AMERICA DOLLAR INCOME PORTFOLIO
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A
Item Location
No.
Part A Prospectus
Item 1. Cover Page . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . Summary
Item 3. Condensed Financial Information . . Not Applicable
Item 4. General Description of Registrant . . Summary; Investment
Objective and Policies;
Additional Information;
Risk Factors and Special
Considerations
Item 5. Management of the Fund . . . . . . . Summary; Management of the
Fund; Purchase of Shares;
Redemption of Shares;
Additional Information
Item 6. Capital Stock and Other Securities . Summary; Dividends; Taxes;
Additional Information
Item 7. Purchase of Securities Being Offered Summary; Valuation of
Shares; Purchase of Shares
Item 8. Redemption or Repurchase . . . . . . Summary; Redemption of
Shares
Item 9. Pending Legal Proceedings . . . . . . Not Applicable
Part B Statement of Additional
Information
Item 10. Cover Page . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . Table of Contents
<PAGE>
Item 12. General Information and History . . . Not Applicable
Item 13. Investment Objectives and Policies . Investment Objective and
Policies
Item 14. Management of the Fund . . . . . . . Management of the Fund
Item 15. Control Persons and Principal Holders Management of the Fund
of Securities . . . . . . . . . . . .
Item 16. Investment Advisory and Other Management of the Fund;
Services . . . . . . . . . . . . . . Auditors
Item 17. Brokerage Allocation and Other Investment Objective and
Practices . . . . . . . . . . . . . . Policies; Additional
Purchase and Redemption
Information
Item 18. Capital Stock and Other Securities . Investment Objective and
Policies
Item 19. Purchase, Redemption and Pricing of Additional Purchase and
Securities Being Offered . . . . . . Redemption Information
Item 20. Tax Status . . . . . . . . . . . . . Additional Information
Concerning Taxes
Item 21. Underwriters . . . . . . . . . . . . Additional Purchase and
Redemption Information
Item 22. Calculation of Performance Data . . . Performance Data
Item 23. Financial Statements . . . . . . . . Not Applicable
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE>
_______________________________________________________________________________
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
_______________________________________________________________________________
SUBJECT TO COMPLETION, DATED JANUARY 14, 1994
PROSPECTUS
Lehman Latin America Dollar Income Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
This Prospectus describes the Lehman Latin America Dollar Income Portfolio
(the "Fund"), a non-diversified portfolio of Lehman Brothers Funds, Inc. (the
"Company"), an open-end management investment company.
The Fund's investment objective is to seek a high level of total return,
consisting of income and capital appreciation. The Fund will, under normal
market conditions, invest substantially all of its assets in U.S. dollar-
denominated debt obligations of Latin American governmental and corporate
issuers.
Investment in the Fund's shares involves certain special considerations
not typically associated with investments in U.S. securities. The Latin
American debt obligations in which the Fund invests are considered speculative.
See "Risk Factors and Special Considerations."
Lehman Brothers Inc. sponsors the Fund and acts as distributor of the
Fund's shares. Lehman Brothers Global Asset Management Limited 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 800-451-2010.
Shares of the Fund are being offered during an initial subscription period
scheduled to end on May 16, 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 __________,
1994, as amended or supplemented from time to time, has been filed with the
<PAGE>
Securities and Exchange Commission and is available to investors without charge
by calling 800-451-2010. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_________________________
Lehman Brothers
__________________, 1994
<PAGE>
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 consisting of U.S. dollar-
denominated debt obligations of Latin American governmental and
corporate issuers that is otherwise beyond the means of many
individual investors.
-- 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 a high level
of total return, consisting of income and capital appreciation. The Fund will,
under normal market conditions, invest substantially all of its assets in U.S.
dollar-denominated debt obligations of Latin American governmental and
corporate issuers.
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 16, 1994, subject to
extension as agreed by the Fund and Lehman Brothers. On the fifth business day
after termination of the subscription period, or on such other day as may be
agreed upon by the Fund and Lehman Brothers, subscriptions for shares will be
payable and shares will be issued. Following termination of the subscription
period, 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
<PAGE>
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 Limited
("LBGAM") serves as investment adviser to the Fund. LBGAM is an indirect,
wholly owned subsidiary of Lehman Brothers, a leading full service investment
firm serving U.S. and foreign securities and commodities markets. LBGAM,
together with other Lehman Brothers investment advisory affiliates, had in
excess of $14 billion in assets under management as of January 4, 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."
Dividends and Distributions. The Fund declares dividends on each day the Fund is
open for business and pays dividends monthly from net investment income, and
distributes net long-term capital gains, if any, annually. Distributions of
short-term capital gains, if any, may be paid more frequently with dividends
from net investment income. These 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 objective. See "Risk Factors and Special
Considerations." The Fund's investment in debt securities of Latin American
issuers involves certain considerations and risks not typically associated with
investing in securities of United States companies or the United States
government, including (1) greater price volatility, (2) limited liquidity and
relatively small market capitalization of Latin American securities markets,
(3) risks associated with high rates of inflation and interest, (4) large
amounts of external debt and (5) political and social uncertainties. See "Risk
Factors and Special Considerations."
The Fund's Latin American debt securities will be primarily securities that
would be considered to have a credit quality rated below investment grade by
internationally recognized credit rating organizations. Non-investment grade
securities are commonly referred to as "junk bonds" and are regarded as
predominately speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations and involve
major risk exposure to adverse conditions.
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
<PAGE>
amount borrowed). Borrowed money creates an opportunity for greater capital
gain but at the same time increases exposure to capital risk.
The Fund is classified as a "non-diversified" investment company under the U.S.
Investment Company Act of 1940, as amended (the "1940 Act"), which means that
there are no limitations on the percentage of the Fund's assets that may be
invested in the securities of a single issuer. The Fund intends to comply,
however, with the diversification requirements imposed on regulated investment
companies by the U.S. Internal Revenue Code of 1986, as amended (the "Code").
The Fund may invest in illiquid securities and engage in hedging and other
strategic transacting and certain other investment practices, which may entail
certain risks. See "Investment Objectives and Policies -- Other Investment
Practices."
<PAGE>
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
<TABLE>
<S> <C>
Shareholder Transaction Expenses
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<F1> . . . . . . . . . . . . . . . . . . . . . . . 0.75%
Other Expenses--including Administration
Fees (estimated, after expense reimbursements)<F2> . . . . . . . 0.45%
Total Fund Operating Expenses (estimated, after expense
reimbursements)<F3> . . . . . . . . . . . . . . . . . . . . . . 1.95%
____________________
<FN>
<F1> Lehman Brothers receives an annual 12b-1 fee of .75% of the value of the
Fund's average daily net assets consisting of a .50% distribution fee
and a .25% service fee. See "Management of the Fund-Distributor."
<F2> 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 0.75%.
<F3> 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 1.95% of 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
2.05%.
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1 year 3 years
------------ ------------
<S> <C> <C>
Expenses, assuming complete redemption at the end of each time
period:<F1> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40 $61
Expenses, assuming no redemption: . . . . . . . . . . . . . . . . . . . . . $20 $61
____________________
<FN>
<F1> 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 a high level of total return,
consisting of income and capital appreciation. It is the Fund's policy, under
normal market conditions, to invest substantially all of its assets in U.S.
dollar-denominated debt obligations of Latin American governmental and
corporate issuers. 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 "Risk Factors and Special
Considerations."
For purposes of the Fund's investment objective, Latin America includes
all of the countries of Central and South American, including Mexico, and the
islands of the Caribbean, not including Cuba. Latin American issuers include
(i) the government of a Latin American country, its agencies or
instrumentalities, or the central bank of such country; (ii) Latin American
public sector entities, including any entity fully or partly owned by the
<PAGE>
entities described in the foregoing clause (i); (iii) companies organized under
the laws of a Latin American country; (iv) companies whose securities are
principally traded in Latin American countries; (v) subsidiaries of companies
described in clauses (iii) or (iv) above that issue debt securities guaranteed
by, or securities payable with (or convertible into) the stock of, companies
described in clauses (iii) or (iv); and (vi) companies that derive at least 50%
of their revenues primarily from either goods or services produced in Latin
America or sales made in Latin America.
The Latin American debt obligations in which the Fund invests will be
issued or guaranteed by a Latin American issuer and may take the form of bonds,
notes, bills, debentures, convertible securities, warrants, bank obligations,
short-term paper, loan participations and assignments and interests issued by
entities organized and operated for the purpose of restructuring the investment
characteristics of Latin American debt obligations. The Fund will be subject to
no restrictions on the maturities of the Latin American debt obligations in
which it invests; those maturities may range from overnight to in excess of 30
years. LBGAM estimates that the weighted average life of the Fund's Latin
American debt obligations will generally range from approximately 5 to 12
years.
Under normal market conditions, the Fund will invest in obligations of
issuers in at least three Latin American countries. The Fund is not limited,
however, with respect to the proportion of its total assets that may be
invested in the obligations of issuers located in any one Latin American
country.
The Fund will purchase a Latin American debt obligation if LBGAM believes
that the yield and potential for capital appreciation of the obligation are
sufficiently attractive in light of the risks of ownership of the obligation.
In evaluating a particular Latin American debt obligation, LBGAM will consider
factors such as: price, coupon and yield to maturity; the credit quality of the
issuer; the issuer's available cash flow and the related coverage ratios; the
property, if any, securing the obligation; and the express terms of the
obligation, including default and early redemption provisions. The Fund has no
established rating criteria for the Latin American debt obligations in which it
may invest. See "Risk Factors and Special Considerations." The Fund invests in
debt securities of issuers that it determines to be suitable investments
regardless of their ratings. The Fund will not invest more than 10% of its
total assets in obligations which are in payment default. Although LBGAM will
consider available securities ratings when making investment decisions, LBGAM
performs its own credit analysis. LBGAM's analysis may include consideration of
the issuer's experience and management strength, changing financial condition,
borrowing requirements or debt maturity schedules and its responsiveness to
changes in business and economic conditions.
Governmental Obligations
The Fund expects that a substantial portion of its Latin American
governmental debt obligations will consist of "Brady Bonds." Brady Bonds are
debt securities, generally denominated in U.S. dollars, issued under the
framework of the "Brady Plan," an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. The Brady
<PAGE>
Plan framework, as it has developed, contemplates the exchange of external
commercial bank debt for newly issued bonds (Brady Bonds). Brady Bonds may also
be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. Investors should recognize that Brady
Bonds have been issued only recently, and accordingly do not have a long
payment history. Brady Bonds issued to date generally have maturities of
between 15 and 30 years from the date of issuance and have traded at a deep
discount from their face value. As of the date of this Prospectus, the
following Latin American countries have issued Brady Bonds: Mexico, Costa Rica,
Venezuela, Brazil and Argentina. In addition, the Dominican Republic has
announced plans to issue Brady Bonds. The Fund may invest in Brady Bonds of
Latin American countries that have been issued to date, as well as those which
may be issued in the future. In addition to Brady Bonds, the Fund may invest in
Latin American governmental obligations issued as a result of debt
restructuring agreements outside of the scope of the Brady Plan. A substantial
portion of the Brady Bonds and other sovereign debt securities in which the
Fund invests are likely to be acquired at a discount, which involves certain
considerations discussed below under "Investment Objective and Policies--Other
Investment Practices -- Zero Coupon Securities, Pay-in-Kind Bonds and Discount
Obligations."
Corporate Obligations
The Fund may invest up to 50% of its total assets in the obligations of
Latin American corporations, provided that no more than 10% of the Fund's total
assets will be invested in securities issued by any one corporation. The
development of a market for Latin American corporate debt obligations other
than short-term instruments has been a relatively recent phenomenon. As
political and economic reforms have been adopted by certain Latin American
countries, and as privatizations of companies previously owned or controlled by
the governments of such countries have occurred, access to international
capital markets, primarily the Eurobond market, has expanded. Issuances of
Eurobonds by Latin American corporations have consisted primarily of fixed
rate, U.S. dollar-denominated bonds.
The Latin American corporate debt obligations in which the Fund may invest
include bonds, debentures, notes and commercial paper and will generally be
unsecured. Most of these debt obligations will bear interest at fixed rates.
However, the Fund may also invest in corporate debt obligations with variable
rates of interest or which involve equity features, such as contingent interest
or participations based on revenues, sales or profits (i.e., interest or other
payments, often in addition to a fixed rate of return, that are based on the
borrower's attainment of specified levels of revenues, sales or profits and
thus enable the holder of the security to share in the potential success of the
venture).
Temporary Investments
For temporary defensive purposes, e.g., during periods in which LBGAM
determines that changes in Latin American securities markets or other economic
or political conditions affecting Latin America warrant, the Fund may vary from
its investment objectives and may invest, without limit (except for the
limitations described under "Investment Objective and Policies--Investment
Restrictions"), in certain high quality short-term debt instruments described
<PAGE>
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 ("S&P"), a
rating of Prime-1 by Moody's Investors Service, Inc. ("Moody's"), 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
and in amounts not to exceed 33-1/3% of its total assets (including the amount
borrowed) less its liabilities (excluding the amount borrowed). 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 invest a substantial portion of their assets in U.S.
dollar-denominated Latin American debt 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. For a
discussion of possible consequences under U.S. federal income tax laws of the
Fund's investment in foreign investment funds, see "Taxes."
Repurchase Agreements. The Fund may purchase instruments from Latin
American and other 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 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,
<PAGE>
expose the Fund to possible loss because of adverse market action or delay in
connection with the disposition of the underlying obligations.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements, pursuant to which it would sell portfolio securities to financial
institutions and agree to repurchase them at an agreed upon date and price. The
Fund would consider entering into reverse repurchase agreements to avoid
otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by the Fund may decline below the price
of the securities the Fund is obligated to repurchase.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
consistent with its investment policies. The Fund may lend portfolio securities
against collateral, consisting of cash or securities which are consistent with
its permitted investments, which is equal at all times to at least 100% of the
value of the securities loaned. There is no limitation on the amount of
securities that may be loaned. Such loans would involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the 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 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 objectives.
Illiquid Securities. The Fund will not knowingly invest more than 15% of
the value of its total assets in illiquid securities, including time deposits
and repurchase agreements having maturities longer than seven days. Securities
that have readily available market quotations are not deemed illiquid for
purposes of this limitation (irrespective of any legal or contractual
restrictions on resale). Latin American securities markets are substantially
smaller, less liquid and more volatile than major U.S. securities markets. 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
<PAGE>
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 and Investment Practices --
Illiquid and Restricted Securities" in the Statement of Additional Information.
Loan Participations and Assignments. The Fund may invest up to 10% of its
total assets in fixed and floating rate loans ("Loans") arranged through
private negotiations between a borrower and one or more financial institutions
("Lenders"). The Fund may invest in such Loans in the form of participations in
Loans ("Participations") and assignments of all or a portion of Loans from
third parties ("Assignments"). The Fund considers these investments to be
investments in debt securities for purposes of its investment objectives and
policies. The Fund anticipates that its investments in Loans will be primarily
in defaulted sovereign obligations of Latin American countries which have not
restructured their debt to commercial banks. The Fund will invest in such
obligations only when LBGAM believes that the price is sufficiently attractive
relative to the prospects for debt restructuring and/or resumption of payments.
As of the date of this Prospectus, Latin American countries with such non-
performing Loans include Bolivia, Ecuador and Peru. Participations typically
will result in the Fund having a contractual relationship only with the Lender,
not with the borrower. The Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Fund
generally will have not right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Fund may not benefit directly from any collateral
supporting the Loan in which it has purchased the Participation. As a result,
the Fund will assume the credit risk of both the borrower and the Lender that
is selling the Participation. In the event of the insolvency of the Lender
selling a Participation, the Fund may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the
borrower. The Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by LBGAM to be
creditworthy. When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the borrower on the Loan, except that under
certain circumstances such rights may be more limited than those held by the
assigning Lender. The market for Assignments and Participations is not highly
liquid, and such investments may be subject to the considerations relating to
less liquid investments described above under "Investment Objective and
Policies -- Other Investment Practices -- Illiquid Securities." Based upon the
current position of the staff of the Securities and Exchange Commission (the
"SEC"), the Fund will treat investments in Participations and Assignments as
illiquid for purposes of its limitation on investments in illiquid securities.
The Fund may revise its policy based on any future change in the SEC's
position.
<PAGE>
Structured Investments. Included among the issuers of Latin American debt
securities in which the Fund may invest are entities organized and operated
solely for the purpose of restructuring the investment characteristics of
various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity
and arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified debt securities and the issuance by that entity of one or
more classes of securities ("Structured Investments") backed by, or
representing interests in, the underlying securities. The cash flow on the
underlying securities may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to Structured Investments is dependent
on the extent of the cash flow on the underlying securities. Because Structured
Investments of the type in which the Fund may invest typically involve no
credit enhancement, their credit risk will generally be equivalent to that of
the underlying securities.
The Fund is permitted to invest in a class of Structured Investments that
is either subordinate or unsubordinated to the right of payment of another
class. Subordinated Structured Investments typically have higher yields and
present greater risks than unsubordinated Structured Investments. Although the
Fund's purchase of subordinated Structured Investments would have a similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the limitations
placed on the extent of the Fund's assets that may be used for borrowing. See
"Investment Objective and Policies--Other Investment Practices--Leverage."
Certain issuers of Structured Investments may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Fund's investment in
these Structured Investments may be limited by the restrictions contained in
the 1940 Act described above under "Other Investment Practices -- Other
Investment Funds." Structured Investments are typically sold in private
placement transactions, and there currently is no active trading market for
Structured Investments.
Zero Coupon Securities, Pay-in-Kind Bonds and Discount Obligations. The
Fund may invest in zero coupon securities and pay-in-kind bonds. In addition,
as indicated above, a substantial portion of the Fund's sovereign debt
securities may be acquired at a discount ("Discount Obligations"). These
investments involve special risk considerations. Zero coupon securities are
debt securities that pay no cash income but are sold at substantial discounts
from their value at maturity. When a zero coupon security is held to maturity,
its entire return, which consists of the amortization of discount, comes from
the difference between its purchase price and its maturity value. This
difference is known at the time of purchase, so that investors holding zero
coupon securities until maturity know at the time of their investment what the
expected return on their investment will be. Certain zero coupon securities
also are sold at substantial discounts from their maturity value and provide
for the commencement of regular interest payments at a deferred date. The Fund
also may purchase pay-in-kind bonds. Pay-in kind bonds pay all or a portion of
their interest in the form of additional debt or equity securities.
<PAGE>
Zero coupon securities, pay-in-kind bonds and Discount Obligations tend to
be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities and Discount Obligations
appreciates more during periods of declining interest rates and depreciates
more during periods of rising interest rates than ordinary interest-paying debt
securities with similar maturities. Under current federal income tax law, the
Fund is required to accrue as income each year the value of securities received
in respect of pay-in-kind bonds and a portion of the original issue discount
with respect to zero coupon securities and other securities issued at a
discount to the stated redemption price. In addition, the Fund will elect
similar treatment for any market discount with respect to Discount Obligations.
Accordingly, the Fund may have to dispose of portfolio securities under
disadvantageous circumstances in order to generate current cash to satisfy
certain distribution requirements See "Taxes."
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, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
The Fund may invest in [warrants for equity securities that are acquired as
units with debt instruments and] warrants for debt 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.
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.
Investments in convertible securities generally entail greater risk than
investments in non-convertible fixed income securities of the same issuer but
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 various market risks (such
as interest rates and broad or specific market movements), or to seek to
increase the Fund's income or gain. The Fund does not intend to engage in such
<PAGE>
investment strategies except in limited circumstances. Few of these strategies
can practicably be used by the Fund at the present time because the instruments
needed to implement these strategies are not generally available and such
instruments may not become available for extensive use in the future.
Techniques and investments may change, however, over time as new instruments
and strategies are developed or regulatory changes occur.
Subject to the constraints described above, the Fund may purchase and sell
(or write) exchange-listed and over-the-counter put and call options on
securities, financial futures contracts and fixed-income indices and other
financial instruments, enter into financial futures contracts and enter into
interest rate transactions (collectively, these transactions are referred to in
this Prospectus as "Hedging and Other Strategic Transactions"). The Fund's
interest rate transactions may take the form of swaps, caps, floors and
collars.
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 fluctuations, to protect
the Fund's unrealized gains in the 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 authorized 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 or financial instrument. 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.
<PAGE>
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 Objectives 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 borrow money, except (a) from banks and in 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.
2. The Fund may not purchase any securities which would cause 25% or
more of the value of its total assets at the time of such purchase to
be invested in the securities of one or more issuers conducting their
principal business activities in the same industry; provided that
there is no limitation with respect to investments in U.S. government
securities.
Under the 1940 Act, the Fund may not purchase during the existence of any
underwriting syndicate any security a principal underwriter of which is an
affiliate of LBGAM, unless such securities are registered under the U.S.
Securities Act of 1933, as amended. Affiliates of LBGAM engage from time to
time in the underwriting business in Latin America. The Fund may seek an
exemption from the SEC permitting the Fund to purchase securities in public
offerings in which an affiliate of LBGAM participates as an underwriter,
although there can be no assurance that such relief will be obtained. In
addition, the Fund is prohibited by the 1940 Act from investing more than 5% of
its total assets in the securities of any bank, broker-dealer or other company
that, in its most recent fiscal year, derived more than 15% of its gross
revenues from securities-related activities. Latin American commercial banks
may engage in securities-related activities such as placing securities,
managing investment funds and rendering investment advice.
_________________________
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund, and in Latin American debt securities in general,
involves certain risk factors and special considerations not typically
associated with investing in the securities of United States issuers. An
investor in the Fund should be aware of certain risk factors and special
considerations relating not only to investing in Latin American economies, but
also, more generally, to international investing and investing in smaller
capital markets, including those discussed below. Consequently, the Fund should
be considered as a means of diversifying an investment portfolio and not in
itself a balanced investment program.
Risks of Investment in Latin American Securities
Investments in debt securities issued by Latin American issuers involve
special considerations and risks, including the risks associated with high
rates of inflation and interest with respect to the various economies, the
limited liquidity and relatively small market capitalization of the Latin
American securities markets, relatively higher price volatility, large amounts
of external debt and political, economic and social uncertainties, including
the possible imposition of exchange controls or other foreign governmental laws
or restrictions which may affect investment opportunities and the payment of
principal or interest on the Fund's investments. In addition, with respect to
certain foreign countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which could affect investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rates of
inflation, capital investment, resources, self-sufficiency and balance of
payments position. Certain foreign investments may also be subject to foreign
withholding taxes. These risks are often heightened for investments in smaller
capital markets and in Latin American countries. These and other factors may
affect the value of the Fund's shares.
The Latin American Economy
The Latin American economies have experienced considerable difficulties in
the past decade. Although there have been significant improvements in recent
years, the Latin American economies continue to experience significant
problems, including high inflation rates and high interest rates. Inflation and
rapid fluctuations in interest rates have had and may continue to have very
negative effects on the economies and securities markets of certain Latin
American countries. The emergence of the Latin American economies and
securities markets will require continued economic and fiscal discipline which
has been lacking at times in the past, as well as stable political and social
conditions. Recovery may also be influenced by international economic
conditions, particularly those in the U.S. and by world prices for oil and
other commodities. There is no assurance that the economic initiatives will be
successful.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in Latin
<PAGE>
American countries. For example, some of the currencies of Latin American
countries have experienced steady devaluations relative to the U.S. dollar, and
major adjustments have been made in certain of such currencies periodically. In
addition, governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government owns or controls many companies,
including the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in Latin American
countries, which could affect private sector companies and the Fund, as well as
the value of securities in the Fund's portfolio.
Lack of Ratings for Latin American Debt Securities
Latin American governmental and corporate debt securities are subject to
certain risk factors and special considerations generally associated with low
rated and unrated securities. The Fund and LBGAM have not established rating
criteria for the Latin American debt securities in which the Fund invests. The
Fund invests in debt securities of Latin American companies that LBGAM
determines to be suitable investments regardless of whether such debt is rated.
As a result, the Fund's portfolio of Latin American debt securities is expected
to consist of securities that would be considered to have a credit quality
rated below investment grade by internationally recognized credit rating
organizations such as Moody's and S&P. Non-investment grade securities (that
is, rated Ba1 or lower by Moody's or BB+ or lower by S&P) are commonly referred
to as "junk bonds" and are regarded as predominately speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations and involve major risk exposure to adverse
conditions. Some of the debt securities held by the Fund, which may not be
paying interest currently or may be in payment default, may be comparable to
securities rated as low as C by Moody's or CCC or lower by S&P. These
securities are considered to have extremely poor prospects of ever attaining
any real investment standing, to have a current identifiable vulnerability to
default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions and/or to be in default or not current in payment of interest or
principal.
Low rated and unrated debt instruments generally offer a higher current
yield than that available from higher grade issues, but typically involve
greater risk. Low rated and unrated securities are especially subject to
adverse changes in general economic conditions, to changes in financial
condition of their issuers and to price fluctuations in response to changes in
interest rates. During periods of economic downturn or rising interest rates,
issuers of low rated and unrated instruments may experience financial stress
that could adversely affect their ability to make payments of principal and
interest and increase the possibility of default. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of low rated and unrated securities
especially in a market characterized by a low volume of trading.
Governmental Debt
Certain Latin American countries such as Argentina, Brazil and Mexico are
among the largest debtors to commercial banks and foreign governments. At
<PAGE>
times, certain Latin American countries have declared moratoria on the payment
of principal and/or interest on outstanding debt. Trading and investment in
debt obligations issued or guaranteed by Latin American governmental entities
involves a high degree of risk. The governmental entity that controls the
repayment of the debt may not be willing or able to repay the principal and/or
interest when due in accordance with the terms of such obligations. A
governmental entity's willingness or ability to repay principal and interest
due in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of foreign
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the governmental entity's dependence on
expected disbursements from third parties such as foreign governments,
multilateral agencies and others, the governmental entity's policy toward the
International Monetary Fund and the political constraints to which governmental
entity may be subject. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may
further impair such debtor's ability or willingness to timely service its
debts. As a result, governmental entities may default on their debt. Holders of
such debt (including the Fund) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental entities
have defaulted may be collected in whole or in part. There is no bankruptcy
proceeding by which sovereign debt on which a governmental entity has defaulted
may be collected in whole or in part.
Changes In Interest Rates
Because the Fund will generally invest in fixed-income securities, the net
asset value of the Fund's portfolio, and hence its shares, can be expected to
change as general levels of interest rates fluctuate, although the market
values of securities rated below investment grade and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities. Except to the extent that values are affected
independently by other factors such as developments relating to a specific
issuer, when interest rates decline, the value of a fixed-income portfolio can
generally be expected to rise. Conversely, when interest rates rise, the value
of a fixed-income portfolio can generally be expected to decline. These
fluctuations can be expected to be greater with respect to investments in
fixed-income securities with longer maturities than investments in securities
with shorter maturities. Brady Bonds and other debt obligations acquired at a
discount are subject to greater fluctuations of market value in response to
changing interest rates than debt obligations of comparable maturities which
are not subject to such discount. There is no limitation on the average
maturity of the Fund's portfolio.
Market Liquidity; Volatility
The Latin American securities markets are substantially smaller, less
liquid and more volatile than the major securities markets in the United
<PAGE>
States. The secondary markets for Latin American debt securities, including
Latin American Brady Bonds, are not as liquid as the secondary markets for
higher rated securities and in certain cases may be illiquid. A limited number
of issuers in most, if not all, Latin American securities markets may represent
a disproportionally large percentage of market capitalization and trading
volume. Such markets are characterized by relatively few market makers,
participants in the market being mostly institutional investors including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume of Latin American debt securities is generally
lower than that for higher-rated U.S. securities. The combination of price
volatility and the relatively limited liquidity of the Latin American
securities markets may affect the Fund's ability to acquire or dispose of Latin
American debt securities at the price and time it wishes to do so, and
consequently may have an adverse impact on the investment performance of the
Fund.
Latin American Market Characteristics and Accounting Rules
In addition to their smaller size, lesser liquidity and greater
volatility, Latin American securities markets are less developed than U.S.
securities markets with respect to disclosure, reporting and regulatory
standards. There is less publicly available information about the issuers of
Latin American securities than is regularly published by issuers in the United
States. Further, corporate laws regarding fiduciary responsibility and
protection of stockholders may be considerably less developed than those in the
United States. Latin American issuers may not be subject to the same
accounting, auditing and financial reporting standards as U.S. companies.
Inflation accounting rules in some Latin American countries require, for
companies that keep accounting records in the local currency, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
company's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits for certain Latin American companies. Thus, Latin American
statements and reported earnings may differ from those of companies in other
countries, including the United States.
Latin American markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
failed to keep pace with the volume of securities transactions making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines
in the value of such portfolio security or, if the Fund has entered into a
contract to sell the security, could result in possible liability to the
purchaser. Brokerage commissions and other transaction costs on foreign
securities exchanges are generally higher than in the U.S.
Satisfactory custodial services for investment securities may not be
available in some Latin American countries, which may result in the Fund
<PAGE>
incurring additional costs and delays in transporting and custodying securities
outside such countries.
Taxes
Payments to holders of the Latin American debt securities in which the
Fund may invest may be subject to foreign withholding and other taxes. Although
the holders of such debt securities may be entitled to tax gross-up payments
from the issuers of such instruments, there is no assurance that such payments
will be made.
Non-Diversified Status
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means that there are no limitations on the percentage of the
Fund's assets that may be invested in the securities of a single issuer. As a
non-diversified investment company, the Fund may invest a greater proportion of
its assets in the obligations of a smaller number of issuers and, as a result,
may be subject to greater risk with respect to portfolio securities. However,
the Fund intends to comply with the diversification requirements imposed on
regulated investment companies by the Code. See "Taxes."
Other Investment Practices
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 16, 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. On the fifth business day after termination of the
Subscription Period, or on such other day as may be agreed upon by the Fund and
Lehman Brothers (the "Closing Date"), subscriptions for shares will be payable
and shares will be issued. Following termination of the Subscription Period,
the Fund will begin a continuous offering of shares. Investors will not be
<PAGE>
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.
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,
including Lehman Brothers, the minimum initial investment is $1,000 and the
<PAGE>
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:
<PAGE>
Lehman Latin America Dollar Income 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 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 day of the preceding Lehman Brothers statement month. The following
table sets forth the rates of the CDSC for redemptions of Fund shares:
Year Since Purchase CDSC
Payment Was Made
First 2.00%
Second 1.00%
Third 0.00%
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
<PAGE>
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) redemption 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, including Lehman Brothers.
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 Mexican Growth and Income Portfolio, as its primary investment objective
seeks long-term capital appreciation, and as its secondary investment objective
seeks current income, by investing primarily in equity and debt securities of
Mexican issuers.
Lehman Selected Growth Stock Portfolio, seeks long-term capital appreciation by
investing primarily in equity securities which the fund's investment adviser
believes to have the potential for above-average capital appreciation, with an
emphasis on the stocks of small- and medium-sized companies.
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
<PAGE>
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.
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. In valuing the Fund's assets, any assets or liabilities initially
expressed in terms of a foreign currency are converted to U.S. dollar
equivalents at the then current exchange rate. 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
<PAGE>
contains general background information regarding each director and executive
officer of the Company.
Investment Adviser--Lehman Brothers Global Asset Management Limited
Lehman Brothers Global Asset Management Limited ("LBGAM") serves as
investment adviser to the Fund. LBGAM, together with other Lehman Brothers
investment advisory affiliates, had in excess of $14 billion in assets under
management as of January 4, 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 objectives 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.
Mr. Michael Zelouf, a Director for Fixed Income Securities at LBGAM, has
primary responsibility for the management of the Fund's investment portfolio.
Mr. Zelouf has been with LBGAM since 1989, prior to which he had been a Fund
manager at Fuji International Finance Limited.
LBGAM is an affiliate of Lehman Brothers, a leading full service
investment firm serving U.S. and foreign securities and commodities markets.
LBGAM operates principally from the United Kingdom, is a member of the United
Kingdom Investment Management Regulatory Organization and is registered with
the SEC as an investment adviser under the U.S. Investment Advisers Act of
1940, as amended. LBGAM is an indirect, wholly owned subsidiary of Lehman
Brothers Holdings, Inc. ("Holdings"), all of the issued and outstanding common
stock representing 92% of the voting stock) of which is held by American
Express Company. LBGAM is located at Two Broadgate, London EC2M 7HA, England.
Lehman Brothers has established an Advisory Committee, comprised of Lehman
Brothers research analysts specializing in Latin American and emerging markets,
to consult periodically with LBGAM with respect to the management of the Fund.
The Advisory Committee will consult with LBGAM with respect to economic,
political and market trends and developments affecting Latin America, and may
also consult with respect to particular investments. The following individuals
serve on the Advisory Committee:
Lawrence D. Krohn--Senior Vice President and Chief Economist for Latin
America, Lehman Brothers, New York. Mr. Krohn is responsible for all
economic and political analysis of the Latin American region for
Lehman Brothers and is the principal author of Lehman Brothers'
weekly publication, Emerging Markets.
Maryam Mansoury--Emerging Market Strategist within the Equity Research
Department, Lehman, Brothers, London. Ms. Mansoury covers the Latin
American market as well as other emerging markets.
Steven H. Nagourney--Managing Director and Chief Global Portfolio
Strategist, Lehman Brothers, New York. Mr. Nagourney is responsible
for, among other things, Lehman Brothers' overview of general global
investment trends and quantitative analysis of the effect of market
and economic trends on portfolio investments.
<PAGE>
Kenneth Telljohann--Product Manager and Market Strategist for Emerging
Markets Fixed Income Securities, Lehman Brothers, New York.
Paul Tice--Vice President, International Group, Lehman Brothers Fixed
Income Research Department, New York. Mr. Tice is responsible for
emerging markets credit research, focusing on sovereign and private
sector issuers primarily in Latin America and Asia.
By virtue of the research and analytic services being furnished by Lehman
Brothers to LBGAM with respect to the Fund, LBGAM may be considered an
investment adviser to the Fund. Accordingly, Lehman Brothers has entered into a
written agreement with LBGAM with respect to the provision of such services.
Lehman Brothers receives no compensation, however, pursuant to such agreement.
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"). 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. American Express Company and its
subsidiaries, other than Lehman Brothers, are principally engaged in the
businesses of providing travel-related services, investment services,
information services, international banking services and investors' diversified
financial services.
<PAGE>
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 .50% 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 waive 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 1.95% of average
net assets for a period of at least one year from the date of this Prospectus.
<PAGE>
DIVIDENDS
The Fund declares dividends from its net investment income (i.e., income
other than net realized long- and short-term capital gains) on each day the
Fund is open for business and pays dividends monthly on the last day of the
Lehman Brothers statement month. Distributions of net long-term capital gains,
if any, are declared and paid annually after the close of the Fund's fiscal
year in which they have been earned. Distributions of short-term capital gains,
if any, may be paid more frequently with dividends from net investment income.
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 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
Internal Revenue Code of 1986, as amended (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 (including options and futures
contracts of foreign currencies). 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
<PAGE>
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. It is not anticipated that a significant portion
of such dividends, if any, will 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 subject to certain taxes imposed by foreign countries with
respect to dividends, capital gains and other income. If the Fund qualifies as
a regulated investment company, if certain distribution requirements are
satisfied and if more than 50% in value of the Fund's total assets at the close
of any taxable year consists of stocks or securities of foreign corporations
the Fund may elect to treat any foreign income taxes paid by it that can be
treated as income taxes under U.S. income tax regulations as paid by its
shareholders. The Fund expects to qualify for and may make this election. For
any year that the Fund makes such an election, an amount equal to the foreign
<PAGE>
income taxes paid by the Fund that can be treated as income taxes under U.S.
income tax principles will be included in the income of its shareholders and
each shareholder will be entitled (subject to certain limitations) to credit
the amount included in his income against his U.S. tax liabilities, if any, or
to deduct such amount from his U.S. taxable income, if any. The Fund will
report annually to its shareholders the amount per share of such foreign income
taxes that must be included in each shareholder's gross income and the amount
that will be available for deductions or credit.
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to non-
corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number, (ii) the 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
<PAGE>
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 addition to the foregoing, the Fund may make available information as
to its "yield" and "effective yield" over a thirty-day period, as calculated in
accordance with the SEC's prescribed formula. The "effective yield" assumes
that the income earned by an investment in the Fund is reinvested and will
therefore be slightly higher than the yield because of the compounding effect
of this assumed reinvestment.
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 800-451-2010 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 only one series
or class. Under the corporate law of Maryland, the Company's state of
<PAGE>
incorporation, and the Company's By-Laws (except as required under the 1940
Act), the Company is not required and does not currently intend to hold annual
meetings of shareholders for the election of directors. Shareholders, however,
do have the right to call for a meeting to consider the removal of one or more
of the Company's directors if such a request is made, in writing, by the
holders of at least 10% of the Company's outstanding voting securities.
All shares of the Company, when issued, will be fully paid and
nonassessable.
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.
<PAGE>
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
Page
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background and Expense Information . . . . . . . . . . . . . . . . . . . .
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . .
Risk Factors and Special Considerations . . . . . . . . . . . . . . . . . .
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
Lehman Latin America
Dollar Income Portfolio
Prospectus
________, 1994
Lehman Brothers
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Registration Statement on Form N-1A
LEHMAN SELECTED GROWTH STOCK PORTFOLIO
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
N-1A
Item
No. Location
Part A Prospectus
Item 1. Cover Page . . . . . . . . . . . . . Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . Summary
Item 3. Condensed Financial Information . . Not Applicable
Item 4. General Description of Registrant . . Summary; Investment
Objective and Policies;
Additional Information
Item 5. Management of the Fund . . . . . . . Summary; Management of the
Fund; Purchase of Shares;
Redemption of Shares;
Additional Information
Item 6. Capital Stock and Other Securities . Summary; Dividends; Taxes;
Additional Information
Item 7. Purchase of Securities Being Offered Summary; Valuation of
Shares; Purchase of Shares
Item 8. Redemption or Repurchase . . . . . . Summary; Redemption of
Shares
Item 9. Pending Legal Proceedings . . . . . . Not Applicable
Part B Statement of Additional
Information
Item 10. Cover Page . . . . . . . . . . . . . Cover Page
Item 11. Table of Contents . . . . . . . . . . Table of Contents
Item 12. General Information and History . . . Not Applicable
Item 13. Investment Objectives and Policies . Investment Objective and
Policies
<PAGE>
Item 14. Management of the Fund . . . . . . . Management of the Fund
Item 15. Control Persons and Principal Holders Management of the Fund
of Securities . . . . . . . . . . . .
Item 16. Investment Advisory and Other Management of the Fund;
Services . . . . . . . . . . . . . . Auditors
Item 17. Brokerage Allocation and Other Investment Objective and
Practices . . . . . . . . . . . . . . Policies; Additional
Purchase and Redemption
Information
Item 18. Capital Stock and Other Securities . Investment Objective and
Policies
Item 19. Purchase, Redemption and Pricing of Additional Purchase and
Securities Being Offered . . . . . . Redemption Information
Item 20. Tax Status . . . . . . . . . . . . . Additional Information
Concerning Taxes
Item 21. Underwriters . . . . . . . . . . . . Additional Purchase and
Redemption Information
Item 22. Calculation of Performance Data . . . Performance Data
Item 23. Financial Statements . . . . . . . . Not Applicable
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE>
_______________________________________________________________________________
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
_______________________________________________________________________________
SUBJECT TO COMPLETION, DATED JANUARY 14, 1994
PROSPECTUS
Lehman Selected Growth Stock Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
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, 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 800-451-2010.
Shares of the Fund are being offered during an initial subscription period
scheduled to end on April 18, 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 __________,
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 800-451-2010. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
_________________________
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_________________________
Lehman Brothers
__________________, 1994
<PAGE>
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 April 18, 1994, subject
to extension as agreed by the Fund and Lehman Brothers. On the fifth business
day after termination of the subscription period, or on such other day as may
be agreed upon by the Fund and Lehman Brothers, subscriptions for shares will
be payable and shares will be issued. Following termination of the subscription
period, the Fund will begin a continuous offering of shares.
<PAGE>
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 $14 billion in assets
under management as of January 4, 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."
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. See "Investment Objective and
Policies." 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 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."
<PAGE>
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
<TABLE>
<S> <C>
Shareholder Transaction Expenses
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<F1> . . . . . . . . . . . . . . . . . . . . . . 1.00%
Other Expenses--including Administration
Fees (estimated, after expense reimbursements)<F2> . . . . . . 0.35%
Total Fund Operating Expenses (estimated, after expense
reimbursements)<F3> . . . . . . . . . . . . . . . . . . . . . 2.10%
____________________
<FN>
<F1> 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."
<F2> 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%.
<F3> 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>
<PAGE>
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:
<TABLE>
<CAPTION>
1 year 3 years
------------ ------------
<S> <C> <C>
Expenses, assuming complete redemption at the end of each time
period:<F1> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41 $66
Expenses, assuming no redemption: . . . . . . . . . . . . . . . . . . . . . $21 $66
____________________
<FN>
<F1> 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, preferred
stocks and warrants. See "Investment Objective and Policies--Other Investment
Practices." 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
<PAGE>
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
<PAGE>
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 the 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 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
and in amounts not to exceed 33-1/3% of its total assets (including the amount
borrowed) less its liabilities (excluding the amount borrowed). In addition to
the foregoing, the Fund may borrow up to 5% of its total assets (including the
<PAGE>
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 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.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements, pursuant to which it would sell portfolio securities to financial
institutions and agree to repurchase them at an agreed upon date and price. The
Fund would consider entering into reverse repurchase agreements to avoid
otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by the Fund may decline below the price
of the securities the Fund is obligated to repurchase.
Loans of Portfolio Securities. The Fund may lend its portfolio securities
consistent with its investment policies. The Fund may lend portfolio securities
against collateral, consisting of cash or securities which are consistent with
its permitted investments, which is equal at all times to at least 100% of the
value of the securities loaned. There is no limitation on the amount of
securities that may be loaned. Such loans would involve risks of delay in
receiving additional collateral or in recovering the securities loaned or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by 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 or start earning income on them until they are
received. Securities purchased on a when-issued basis are recorded as an asset
<PAGE>
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 knowingly invest more than 15% of
the value of its total assets in illiquid securities, including time deposits
and repurchase agreements having maturities longer than seven days. Securities
that have readily available market quotations are not deemed illiquid for
purposes of this limitation (irrespective of any legal or contractual
restrictions on resale). 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.
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,
<PAGE>
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 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
<PAGE>
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 and in 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.
<PAGE>
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 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 April 18, 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. On the fifth business day after termination of the
Subscription Period, or on such other day as may be agreed upon by the Fund and
Lehman Brothers (the "Closing Date"), subscriptions for shares will be payable
and shares will be issued. Following termination of the Subscription Period,
<PAGE>
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.
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,
<PAGE>
including Lehman Brothers, 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:
<PAGE>
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 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 day of the preceding Lehman Brothers statement month. The following
table sets forth the rates of the CDSC for redemptions of Fund shares:
Year Since Purchase CDSC
Payment Was Made
First 2.00%
Second 1.00%
Third 0.00%
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
<PAGE>
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) redemption 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, including Lehman Brothers.
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 Mexican Growth and Income Portfolio, as its primary investment objective
seeks long-term capital appreciation, and as its secondary investment objective
seeks current income, by investing primarily in equity and debt securities of
Mexican issuers.
Lehman Latin America Dollar Income Portfolio, seeks a high level of total
return, consisting of income and capital appreciation, by investing in U.S.
dollar-denominated debt obligations of Latin American governmental and
corporate issuers.
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
<PAGE>
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.
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.
<PAGE>
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 $14 billion in assets under
management as of January 4, 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 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. LBGAM is
located at American Express Tower, World Financial Center, New York, New York
10285.
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"). 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.
<PAGE>
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. American Express Company and its
subsidiaries, other than Lehman Brothers, are principally engaged in the
businesses of providing travel-related services, investment services,
information services, international banking services and investors' diversified
financial services.
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.
<PAGE>
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 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
<PAGE>
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
<PAGE>
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 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
<PAGE>
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 800-451-2010 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 in 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 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.
<PAGE>
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.
<PAGE>
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
Page
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Background and Expense Information . . . . . . . . . . . . . . . . . . . .
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . .
Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Fund's Performance . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
Lehman Selected Growth
Stock Portfolio
Prospectus
________, 1994
Lehman Brothers
<PAGE>
Subject to Completion, Dated January 14, 1994
Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund
Investment Portfolios of Lehman Brothers Funds, Inc.
Statement of Additional Information ________, 1994
This Statement of Additional Information is meant to be read in conjunction
with the Prospectus for the Lehman Brothers Daily Income Fund (the "Daily
Income Fund") and the Lehman Brothers Municipal Income Fund (the "Municipal
Income Fund" and, together with the Daily Income Fund, the "Funds"), dated
___________, 1994 as amended or supplemented from time to time,
and is incorporated by reference in its entirety into the Prospectus. Each of
the Funds is a separate, diversified money market portfolio of Lehman
Brothers Funds, Inc. (the "Company"), an open-end, management investment
company. Because this Statement of Additional Information is not itself a
prospectus, no investment in shares of the Funds should be made solely upon the
information contained herein. Copies of the Prospectus may be obtained by
calling 800-451-2010. Capitalized terms used but not defined herein have the
same meanings as in the Prospectus.
TABLE OF CONTENTS
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Municipal Obligations --The Municipal
Income Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Purchase and Redemption Information . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . .
Management of the Funds . . . . . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Taxes . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Yield Information . . . . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Fund Shares . . . . . . . . . . . . . .
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
As stated in the Prospectus, the investment objective of the Daily Income Fund
is to provide investors with as high a level of current income as is consistent
with stability of principal. The investment objective of the Municipal Income
Fund is to provide investors with as high a level of current income exempt from
federal income tax as is consistent with stability of principal. The following
policies supplement the description of each Fund's investment objective and
policies in the Prospectus.
The Funds are managed to provide stability of capital while achieving
competitive yields. The investment adviser intends to follow a value-oriented,
research-driven and risk-averse investment strategy, engaging in a full range
of economic, strategic, credit and market-specific analyses in researching
potential investment opportunities.
Portfolio Transactions
Subject to the general control of the Company's Board of Directors, Lehman
Brothers Global Asset Management Inc. ("LBGAM"), the Funds' investment adviser,
is responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for a Fund. LBGAM generally
purchases portfolio securities for the Funds either directly from the issuer or
from dealers who specialize in money market instruments. Such purchases are
usually without brokerage commissions. In making portfolio investments, LBGAM
seeks to obtain the best net price and the most favorable execution of orders.
To the extent that the execution and price offered by more than one dealer are
comparable, LBGAM may, in its discretion, effect transactions in portfolio
securities with dealers who provide the Company with research advice or other
services. Research advice and other services furnished by brokers through whom
the Funds effect securities transactions may be used by LBGAM in servicing
accounts in addition to the Funds, and not all such services will necessarily
benefit the Funds.
Transactions in the over-the-counter market are generally principal
transactions with dealers, and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, the Funds, where possible, will deal directly with the dealers
who make a market in the securities involved except in those circumstances
where better prices and execution are available elsewhere.
LBGAM may seek to obtain an undertaking from issuers of commercial paper
or dealers selling commercial paper to consider the repurchase of such
securities from the Daily Income Fund prior to their maturity at their original
cost plus interest (interest may sometimes be adjusted to reflect the actual
maturity of the securities) if LBGAM believes that the Fund's anticipated need
for liquidity makes such action desirable. Certain dealers (but not issuers)
have charged and may in the future charge a higher price for commercial paper
where they undertake to repurchase prior to maturity. The payment of a higher
price in order to obtain such an undertaking reduces the yield which might
otherwise be received by the Fund on the commercial paper. The Company's Board
<PAGE>
of Directors has authorized LBGAM to pay a higher price for commercial paper
where it secures such an undertaking if LBGAM believes that the prepayment
privilege is desirable to assure the Fund's liquidity and such an undertaking
cannot otherwise be obtained.
Investment decisions for each Fund are made independently from those for
the other Fund or other investment company portfolio or accounts advised by
LBGAM. Such other portfolios may also invest in the same securities as the
Funds. When purchases or sales of the same security are made at substantially
the same time on behalf of such other portfolios, transactions are averaged as
to price, and available investments allocated as to amount, in a manner which
LBGAM believes to be equitable to each portfolio, including the Funds. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtainable for a Fund. To the
extent permitted by law, LBGAM may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for such other
portfolios in order to obtain best execution.
The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with Lehman Brothers Inc. ("Lehman Brothers"), LBGAM or
any affiliated person (as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of either of them, except to the extent
permitted by the Securities and Exchange Commission (the "SEC"). However,
pursuant to an exemption granted by the SEC, the Funds may engage in
transactions involving certain money market instruments with Lehman Brothers
and certain of its affiliates acting as principal. The Funds will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which Lehman Brothers or any affiliate thereof is a member, except
to the extent permitted by the SEC. Under certain circumstances, the Funds may
be at a disadvantage because of these limitations in comparison with other
investment company portfolios which have a similar investment objective but are
not subject to such limitations.
The Municipal Income Fund may participate, if and when practicable, in
bidding for the purchase of "Municipal Obligations" directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. The Fund will engage in this practice, however, only when LBGAM,
in its sole discretion, believes such practice to be in the Fund's interest.
"Municipal Obligations" consist of municipal obligations (as defined in the
Prospectus) and tax-exempt derivatives such as tender option bonds,
participations, beneficial interests in trusts and partnership interests.
The Funds do not intend to seek profits through short-term trading. Each
Fund's annual portfolio turnover will be relatively high, but is not expected
to have a material effect on its net income. Each Fund's portfolio turnover
rate is expected to be zero for regulatory reporting purposes.
<PAGE>
Additional Information on Portfolio Instruments and Investment Practices
U.S. Government Obligations. Examples of the types of U.S. government
obligations that may be held by the Daily Income Fund include, in addition to
U.S. Treasury Bills, the obligations of the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, Federal
National Mortgage Association, Federal Financing Bank, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Federal Farm Credit
Banks, Maritime Administration, Resolution Trust Corporation, Tennessee Valley
Authority, U.S. Postal Service and Washington D.C. Armory Board.
Bank Obligations. For purposes of the Daily Income Fund's investment
policies with respect to obligations of issuers in the banking industry, the
assets of a bank or savings institution will be deemed to include the assets
of its domestic and foreign branches. The Daily Income Fund's investments in
the obligations of foreign branches of U.S. banks and of foreign banks and
other foreign issuers may subject the Daily Income Fund to investment risks
that are different in some respects from those of investment in obligations
of U.S. domestic issuers. Such risks include future political and economic
developments, the possible seizure or nationalization of foreign deposits, the
possible adoption of foreign governmental restrictions which might adversely
affect the payment of principal and interest on such obligations. In addition,
foreign branches of U.S. banks and foreign banks may be subject to less
stringent reserve requirements and foreign issuers generally are subject to
different accounting, auditing, reporting and record keeping standards than
those applicable to U.S. issuers. The Daily Income Fund will acquire securities
issued by foreign branches of U.S. banks or foreign issuers only when the
Fund's investment adviser believes that the risks associated with such
instruments are minimal.
Among the bank obligations in which the Daily Income Fund may invest are
notes issued by banks. These notes, which are exempt from registration under
federal securities laws, are not deposits of the banks and are not insured by
the Federal Deposit Insurance Corporation or any other insurer. Holders of
notes rank on a par with other unsecured and unsubordinated creditors of the
banks. Notes may be sold at par or sold on a discount basis and may bear fixed
or floating rates of interest.
Variable and Floating Rate Instruments. Securities purchased by the Funds
may include variable and floating rate instruments, which provide for
adjustments in the interest rate on certain reset dates or whenever a specified
interest rate index changes, respectively. Variable and floating rate
instruments are subject to the credit quality standards described in the
Prospectus. In some cases the Funds may require that the obligation to pay the
principal of the instrument be backed by a letter or line of credit or
guarantee. Such instruments may carry stated maturities in excess of 397 days
provided that the maturity-shortening provisions stated in Rule 2a-7 under
the 1940 Act are satisfied. Although a particular variable or floating rate
<PAGE>
demand instrument might not be actively traded in a secondary market, in some
cases, the Funds may be entitled to principal on demand and may be able to
resell such notes in the dealer market. With respect to the floating and
variable rate notes and demand notes described in the Prospectus, a Fund's
investment adviser will consider the earning power, cash flows and other
liquidity ratios of the issuers of such notes and will continuously monitor
their financial ability to meet payment obligations when due.
Variable and floating rate demand instruments held by a Fund may have
maturities of more than thirteen months provided: (i) the Fund is entitled to
the payment of principal at any time, or during specified intervals not
exceeding 13 months, upon giving the prescribed notice (which may not exceed 30
days), and (ii) the rate of interest on such instruments is adjusted at
periodic intervals which may extend up to 13 months (397 days). Variable and
floating rate notes that do not provide for payment within seven days may be
deemed illiquid and subject to the 10% limitation on such investments.
In determining a Fund's average weighted portfolio maturity and whether a
variable or floating rate demand instrument has a remaining maturity of 13
months or less, each instrument will be deemed by the Fund to have a maturity
equal to the longer of the period remaining until its next interest rate
adjustment or the period remaining until the principal amount can be recovered
through demand. In determining whether an unrated variable or floating rate
demand instrument is of comparable quality at the time of purchase to
securities in which a Fund may invest, LBGAM will follow guidelines adopted by
the Company's Board of Directors.
Repurchase Agreements. The repurchase price under the repurchase
agreements described in the Prospectus generally equals the price paid by a
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
Company's custodian, sub-custodian or in the Federal Reserve/Treasury book-
entry system. Repurchase agreements are considered to be loans by a Fund
under the 1940 Act.
Reverse Repurchase Agreements. Whenever the Funds enter into reverse
repurchase agreements as described in the Prospectus, they will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained. Reverse repurchase
agreements are considered to be borrowings by the Funds under the 1940 Act.
Loans of Portfolio Securities. Each Fund has the ability to lend
securities from its portfolio to brokers, dealers and other financial
organizations. There is no investment restriction on the amount of securities
that may be loaned. A Fund may not lend its portfolio securities to Lehman
Brothers or its affiliates without specific authorization from the SEC. Loans
of portfolio securities by a Fund will be collateralized by cash, letters of
credit or securities which are consistent with its permitted investments, which
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. From time to time, a Fund may
return a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party, which is
<PAGE>
unaffiliated with the Fund or Lehman Brothers, and which is acting as a
"finder." With respect to loans by the Funds of their portfolio securities,
the Funds would continue to accrue interest on loaned securities and would also
earn income on loans. Any cash collateral received by a Fund in connection with
such loans would be invested in securities in which such Fund is permitted to
invest.
When-Issued Securities. As stated in the Prospectus, the Daily Income Fund
may purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase when-issued securities, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. Because the Fund will set aside cash or liquid assets
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and ability to manage its portfolio might be affected in the event
its commitments to purchase when-issued securities ever exceeded 25% of the
value of its assets. When the Fund engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous. The Fund does not intend to purchase
when-issued securities for speculative purposes but only in furtherance of its
investment objective. The Fund reserves the right to sell these securities
before the settlement date if it is deemed advisable.
Tender Option Bonds. The Municipal Income Fund may invest in tender option
bonds. The Fund will not purchase tender option bonds unless (a) the demand
feature applicable thereto is exercisable by the Fund within 13 months of the
date of such purchase upon no more than 30 days' notice and thereafter is
exercisable by the Fund no less frequently than annually upon no more than 30
days' notice and, (b) at the time of such purchase, LBGAM reasonably expects
that, (i) based upon its assessment of current and historical interest rate
trends, prevailing short-term tax-exempt rates will not exceed the stated
interest rate on the underlying Municipal Obligations at the time of the next
tender fee adjustment, and (ii) the circumstances which might entitle the
grantor of a tender option to terminate the tender option would not occur prior
to the time of the next tender opportunity. At the time of each tender
opportunity, the Fund will exercise the tender option with respect to any
tender option bonds unless LBGAM reasonably expects that, (a) based upon its
assessment of current and historical interest rate trends, prevailing short-
term tax-exempt rates will not exceed the stated interest rate on the
underlying Municipal Obligations at the time of the next tender fee adjustment,
and (b) the circumstances which might entitle the grantor of a tender option to
terminate the tender option would not occur prior to the time of the next
tender opportunity. The Fund will exercise the tender feature with respect to
tender option bonds, or otherwise dispose of their tender option bonds, prior
<PAGE>
to the time the tender option is scheduled to expire pursuant to the terms of
the agreement under which the tender option is granted. The Fund otherwise will
comply with the provisions of Rule 2a-7 under the 1940 Act in connection with
the purchase of tender option bonds, including, without limitation, the
requisite determination by the Board of Directors that the tender option bonds
in question meet the quality standards described in Rule 2a-7. In the event of
a default of the Municipal Obligation underlying a tender option bond, or the
termination of the tender option agreement, the Fund would look to the maturity
date of the underlying security for purposes of compliance with Rule 2a-7 and,
if its remaining maturity was greater than 13 months, the Fund would sell the
security as soon as would be practicable. The Fund will purchase tender option
bonds only when it is satisfied that (a) the custodial and tender option
arrangements, including the fee payment arrangements, will not adversely affect
the tax-exempt status of the underlying Municipal Obligations and (b) payment
of any tender fees will not have the effect of creating taxable income for the
Fund. Based on the tender option bond arrangement, the Fund expects to value
the tender option bond at par; however, the value of the instrument will be
monitored to assure that it is valued at fair value.
Stand-By Commitments. Each Fund may acquire rights to "put" its securities
at an agreed upon price within a specified period prior to their maturity date.
The Funds may also enter into put transactions sometimes referred to as "stand-
by commitments," which entitle the holder to same-day settlement and to receive
an exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. Each Fund's right to
exercise a stand-by commitment will be unconditional and unqualified.
The Funds expect that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, a Fund may pay for certain stand-by commitments
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to a stand-by commitment (thus reducing the yield to
maturity otherwise available for the same securities). The Funds intend to
enter into stand-by commitments solely to facilitate portfolio liquidity and do
not intend to exercise their rights thereunder for trading purposes. The
acquisition of a stand-by commitment will not affect the valuation of the
underlying security, which will continue to be valued in accordance with the
amortized cost method. The actual stand-by commitment will be valued at zero in
determining net asset value. Where a Fund pays any consideration directly or
indirectly for a stand-by commitment, its cost will be reflected as unrealized
depreciation for the period during which the stand-by commitment is held by the
Fund and will be reflect in realized gain or loss when the stand-by commitment
is exercised or expires.
In the event that the issuer of a stand-by commitment acquired by a
Fund defaults on its obligation to purchase the underlying security, then that
Fund might be unable to recover all or a portion of any loss sustained from
having to sell the security elsewhere.
If the value of the underlying security increases, the potential for
unrealized or realized gain is reduced by the cost of the stand-by commitment.
The maturity of a portfolio security will not be considered shortened by a
stand-by commitment to which such obligation is subject. Therefore, stand-by
<PAGE>
commitment transactions will not affect the average weighted maturity of a
Fund's portfolio.
Asset-Backed and Receivable-Backed Securities. The Daily Income Fund may
invest in asset-backed and receivable-backed securities. Several types of
asset-backed and receivable-backed securities have been offered to investors,
including interests in pools of credit card receivables and motor vehicle
retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on these securities
are passed through to certificate holders. In addition, asset-backed securities
often carry credit protection in the form of extra collateral, subordinate
certificates, cash reserve accounts and other enhancements. An investor's
return on these securities may be affected by early prepayment of principal on
the underlying receivables or sales contracts. Any asset-backed or
receivable-backed securities held by the Fund must comply with the portfolio
maturity and quality requirements contained in Rule 2a-7 under the 1940 Act.
The Fund will monitor the performance of these investments and will not acquire
any such securities unless rated in the highest rating category by at least two
NRSROs.
Illiquid and Restricted Securities. Neither Fund may invest more than 10%
of its net assets in illiquid securities, including securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered
illiquid for purposes of this limitation.
The SEC has adopted Rule 144A under the Securities Act of 1933, as amended
(the "1933 Act"), which allows for a broader institutional trading market for
securities otherwise subject to restrictions on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of the
1933 Act for resales of certain securities to qualified institutional buyers.
The Funds' investment adviser anticipates that the market for certain
restricted securities such as institutional commercial paper and institutional
municipal securities will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers.
Each Fund's investment adviser will monitor the liquidity of restricted
and other illiquid securities under the supervision of the Board of Directors.
In reaching liquidity decisions with respect to Rule 144A securities, the
Funds' investment adviser will consider, inter alia, the following factors: (1)
the unregistered nature of a Rule 144A security; (2) the frequency of trades
and quotes for a Rule 144A security; (3) the number of dealers wishing to
purchase or sell the Rule 144A security and the number of other potential
purchasers; (4) dealer undertakings to make a market in the Rule 144A security;
(5) the trading markets for the Rule 144A security; and (6) the nature of the
Rule 144A security and the nature of the marketplace trades (e.g., the time
needed to dispose of the Rule 144A security, the method of soliciting offers
and the mechanics of the transfer).
<PAGE>
The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by NRSROs for obligations that
may be purchased by each Fund.
Investment Limitations
The Prospectus summarizes certain investment limitations that may not be
changed without the affirmative vote of the holders of a majority of a Fund's
outstanding shares (as defined below under "Additional Information Concerning
Fund Shares"). Investment limitations numbered 1 through 7 may not be changed
without such a vote of shareholders; investment limitations 8 through 13 may be
changed by a vote of the Company's Board of Directors at any time.
1. Neither Fund may purchase securities of any one issuer if as a result
more than 5% of the value of the Fund's total assets would be invested in
the securities of such issuer, except that up to 25% of the value of the
Fund's total assets may be invested without regard to such 5% limitation
and provided that there is no limitation with respect to investments in
U.S. government securities.
2. Neither Fund may borrow money, except from banks for temporary
purposes and then in amounts not exceeding one-third of the value of its
total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing and in
amounts not in excess of the lesser of the dollar amounts borrowed or one-
third of the value of its total assets at the time of such borrowing.
Additional investments will not be made by a Fund when borrowings exceed
5% of its total assets.
3. Neither Fund may purchase any securities which would cause 25% or
more of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, except that the Daily
Income Fund will invest 25% or more of the value of its total assets in
obligations of issuers in the banking industry or in obligations, such as
repurchase agreements, secured by such obligations (unless the Fund is in
a temporary defensive position); provided that there is no limitation with
respect to investments in U.S. government securities or, in the case of
the Municipal Income Fund, Municipal Obligations (other than those backed
only by the assets and revenues of non-governmental users).
4. Neither Fund may make loans, except that each Fund may purchase or
hold debt instruments in accordance with its investment objective and
policies, and the Daily Income Fund may enter into repurchase agreements
with respect to portfolio securities.
5. Neither Fund may act as an underwriter of securities, except insofar
as a Fund may be deemed an underwriter under applicable securities laws in
selling portfolio securities.
6. Neither Fund may purchase or sell real estate or real estate limited
partnerships, provided that a Fund may purchase securities of issuers
which invest in real estate or interests therein.
<PAGE>
7. Neither Fund may purchase or sell commodities contracts, or invest in
oil, gas or mineral exploration or development programs or in mineral
leases.
8. Neither Fund may knowingly invest more than 10% of the value of its
net assets in securities that may be illiquid because of legal or
contractual restrictions on resale or securities for which there are no
readily available market quotations.
9. Neither Fund may purchase securities on margin, make short sales of
securities or maintain a short position.
10. Neither Fund may write or sell puts, calls, straddles, spreads or
combinations thereof.
11. Neither Fund may invest in securities if as a result the Fund would
then have more than 5% of its total assets in securities of companies
(including predecessors) with less than three years of continuous
operation.
12. Neither Fund may purchase securities of other investment companies
except as permitted under the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization.
13. Neither Fund may invest in warrants.
In addition, without the affirmative vote of the holders of a majority of
the Municipal Income Fund's outstanding shares, that Fund may not change its
policy of investing at least 80% of its total assets (except during temporary
defensive periods) in Municipal Obligations.
In order to permit the sale of Fund shares in certain states, the Funds
may make commitments more restrictive than the investment policies and
limitations above. Should a Fund determine that any such commitments are no
longer in its best interests, it will revoke the commitment by terminating
sales of its shares in the state involved. Further, with respect to the
above-stated third limitation, each Fund will consider wholly owned finance
companies to be in the industries of their parents, if their activities are
primarily related to financing the activities of their parents, and will divide
utility companies according to their services; for example, gas, gas
transmission, electric and gas, electric, and telephone will each be considered
a separate industry.
ADDITIONAL INFORMATION CONCERNING MUNICIPAL OBLIGATIONS--
THE MUNICIPAL INCOME FUND
Municipal Obligations include debt obligations issued by governmental entities
to obtain funds for various public purposes, including the construction of a
wide range of public facilities, the refunding of outstanding obligations, the
payment of general operating expenses and the extension of loans to public
institutions and facilities. Private activity bonds that are or were issued by
or on behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Obligations if the interest
<PAGE>
paid thereon is exempt from federal income tax. Opinions relating to the
validity of Municipal Obligations and to the exemption of interest thereon from
federal income taxes are rendered by counsel to the issuers or bond counsel to
the respective issuing authorities at the time of issuance. Neither the Fund
nor its investment adviser will review independently the underlying proceedings
relating to the issuance of Municipal Obligations or the bases for such
opinions.
The Fund may hold tax-exempt derivatives which may be in the form of
tender option bonds, participations, beneficial interests in a trust,
partnership interests or other forms. A number of different structures have
been used. For example, interests in long-term fixed rate Municipal Obligations
held by a bank as trustee or custodian are coupled with tender option, demand
and other features when tax-exempt derivatives are created. Together, these
features entitle the holder of the interest to tender (or put) the underlying
Municipal Obligation to a third party at periodic intervals and to receive the
principal amount thereof. In some cases, Municipal Obligations are represented
by custodial receipts evidencing rights to receive specific future interest
payments, principal payments or both, on the underlying municipal securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying municipal securities at its
face value to the sponsor (usually a bank or broker-dealer or other financial
institution), which is paid periodic fees equal to the difference between the
bond's fixed coupon rate and the rate that would cause the bond, coupled with
the tender option, to trade at par on the date of a rate adjustment. The Fund
may hold tax-exempt derivatives, such as participation interests and custodial
receipts, for Municipal Obligations which give the holder the right to receive
payment of principal subject to the conditions described above. The Internal
Revenue Service has not ruled on whether the interest received on tax-exempt
derivatives in the form of participation interests or custodial receipts is
tax-exempt, and accordingly, purchases of any such interests or receipts are
based on the opinion of counsel to the sponsors of such derivative securities.
Neither the Fund nor its investment adviser will review independently the
underlying proceedings related to the creation of any tax-exempt derivatives or
the bases for such opinions.
As described in the Prospectus, the two principal classifications of
Municipal Obligations consist of "general obligation" and "revenue" issues, and
the Fund's portfolio may include "moral obligation" issues, which are normally
issued by special purpose authorities. There are, of course, variations in the
quality of Municipal Obligations both within a particular classification and
between classifications, and the yields on Municipal Obligations depend upon a
variety of factors, including general money market conditions, the financial
condition of other issuer, general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation and the rating of
the issue. The ratings of NRSROs represent their opinions as to the quality of
Municipal Obligations. It should be recognized, however, that ratings are
general and are not absolute standards of quality, and Municipal Obligations
with the same maturity, interest rate and rating may have different yields
while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by the
Fund, an issue of Municipal Obligations may cease to be rated or its rating may
be reduced below the minimum rating required for purchase by the Fund. The
<PAGE>
Fund's investment adviser will consider such an event in determining whether
the Fund should continue to hold the obligation.
An issuer's obligations under its Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.
Among other instruments, the Fund may purchase short-term General
Obligation Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue
Anticipation Notes, Tax-Exempt Commercial Paper, Construction Loan Notes and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, the Fund may invest in other types
of tax-exempt instruments such as municipal bonds, private activity bonds and
pollution control bonds, provided they have remaining maturities of 13 months
or less at the time of purchase.
The payment of principal and interest on most securities purchased by the
Fund will depend upon the ability of the issuers to meet their obligations. The
District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities, and authorities and each multi-state agency of
which a state is a member is a separate "issuer" as that term is used in this
Statement of Additional Information and the Prospectus. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem each Fund's shares is included in the
Prospectus. The issuance of shares is recorded on a Fund's books, but share
certificates are not issued for Fund shares.
The Funds offer their shares to the public on a continuous basis.
Purchase of Fund shares must be made through a brokerage account maintained
through Lehman Brothers or with a broker that clears securities transactions
through Lehman Brothers on a fully disclosed basis (an "Introducing Broker").
Under the 1940 Act, a Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period during which the New York
Stock Exchange is closed, other than customary weekend and holiday closings, or
during which trading on said Exchange is restricted, or during which (as
determined by the SEC by rule or regulation) an emergency exists as a result of
which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Fund may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.) Each Fund is obligated to
<PAGE>
redeem shares solely in cash up to $250,000 or 1% of such Fund's net asset
value, whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount will also be in cash unless the Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable. In such a case, a Fund may make
payment wholly or partly in readily marketable securities or other property,
valued in the same way as that Fund determines net asset value. See "Net Asset
Value" below for an example of when such redemption or form of payment might be
appropriate. Redemption in kind is not as liquid as a cash redemption.
Shareholders who receive a redemption in kind may incur transaction costs, if
they sell such securities or property, and may receive less than the redemption
value of such securities or property upon sale, particularly where such
securities are sold prior to maturity.
The Funds normally transmit payment of redemption proceeds for credit to
the shareholder's account at Lehman Brothers or the Introducing Broker on the
business day following receipt of the redemption request but, in any event,
payment will be made within seven days thereafter.
The Prospectus describes special redemption procedures for certain
shareholders who engage in purchases of securities through Lehman Brothers or
an Introducing Broker, under which Fund shares are redeemed automatically to
satisfy debit balances arising in the shareholder's account on the settlement
date of other securities transactions. A shareholder may choose not to redeem
Fund shares automatically by notifying Lehman Brothers or the Introducing
Broker, and by making payment for securities purchased by the settlement date,
which is usually five business days after the trade date.
Net Asset Value
The Prospectus discusses the time at which the net asset value of the Funds is
determined for purposes of sales and redemptions. The following is a
description of the procedures used by the Funds in valuing their assets.
The valuation of each Fund's portfolio securities is based upon their
amortized cost, which does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing an instrument at
its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if it
sold the instrument.
Pursuant to the 1940 Act, each Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of thirteen months or less and invest only in securities
determined by LBGAM to be of eligible quality with minimal credit risks.
Pursuant to the rule, the Company's Board of Directors also have
established procedures designed to stabilize, to the extent reasonably
possible, the price per share of each Fund as computed for the purpose of sales
and redemptions at $1.00. Such procedures include review of each Fund's
<PAGE>
portfolio holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value calculated by
using available market quotations or market equivalents deviates from $1.00 per
share based on amortized cost.
The rule also provides that the extent of any deviation between a Fund's
net asset value based upon available market quotations or market equivalents
and the $1.00 per share net asset value based on amortized cost must be
examined by the Board of Directors. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, pursuant to the
rule the Board of Directors must cause the Fund to take such corrective action
as the Board of Directors regards as necessary and appropriate, including:
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity; withholding dividends or
paying distributions from capital or capital gains; redeeming shares in kind;
or establishing a net asset value per share by using available market
quotations.
EXCHANGE PRIVILEGE
Holders of a Fund's CDSC Shares may exchange all or part of their CDSC Shares
for shares of certain other funds in the Lehman Brothers Group of Funds, as
indicated in the Prospectus, to the extent such shares are offered for sale in
the shareholder's state of residence. There currently is no charge for this
service, and exchanges are made on the basis of relative net asset value per
share at the time of exchange. CDSC Shares of a Fund exchanged for shares of
another fund will be subject to the higher applicable CDSC of the two funds
and, for purposes of calculating CDSC rates, will be deemed to have been held
since the date the CDSC Shares being exchanged were purchased.
The exchange privilege enables holders of a Fund's CDSC Shares to acquire
shares in a fund with different investment objectives when they believe that a
shift between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is to be made. Prospectuses may be obtained from any Lehman Brothers
Investment Representative.
Exercise of the exchange privilege is treated as a sale and repurchase for
federal income tax purposes and, depending on the circumstances, a short- or
long-term capital gain or loss may be realized. The price of the shares of the
fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting
documents, a Fund's CDSC Shares submitted for exchange are redeemed at the
then-current net asset value and, subject to any applicable CDSC, the proceeds
immediately invested in shares of the fund being acquired. Lehman Brothers
reserves the right to reject any exchange request. The exchange privilege may
be modified or terminated at any time after notice to shareholders.
<PAGE>
MANAGEMENT OF THE FUNDS
Directors and Officers
The Company's directors and executive officers, their addresses, principal
occupations during the past five years and other affiliations are as follows:
<TABLE>
<CAPTION>
Name and Address Position with the Company Principal Occupations During Past 5
Years and Other Affiliations
<S> <C> <C>
Steven Spiegel<F1> Chairman of the Board and Managing Director, Lehman Brothers Inc.;
World Financial Center Director President, Lehman Brothers Global Asset
New York, New York 10285 Management Inc.; formerly Chairman,
Lehman Brothers International (Europe).
Burt N. Dorsett<F2><F3> Director Managing Partner, Dorsett McCabe Capital
201 East 62nd Street Management, Inc.; Director, Research
New York, New York 10021 Corporation Technologies; formerly
President, Westinghouse Pension
Investments Corporation; formerly
Executive Vice President and Trustee,
College Retirement Equities Fund, Inc.;
formerly Investment Officer, University
of Rochester.
Kathleen C. Holmes<F2><F3> Director Managing Director, Wharton School
Wharton Financial Financial Institutions Center,
Institutions Center University of Pennsylvania; Senior
3620 Locust Walk Partner and Management Consultant,
3301 Steinberg Hall Furash & Company.
Dietrich Hall
Philadelphia, Pennsylvania 19104-6367
John N. Hatsopoulos<F2><F3> Director Executive Vice President and Chief
Thermo Electron Corp. Financial Officer, Thermo Electron Corp.
81 Wyman Street
Waltham, Massachusetts 02254
President
Clinton Kendrick Chief Operating Officer Lehman
World Financial Center Brothers Global Asset Management Inc.;
New York, New York formerly President and Chief Executive
10285 Officer, Hyperion Capital Management;
formerly President and Director,
Alliance Capital Management.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Name and Address Position with the Company Principal Occupations During Past 5
Years and Other Affiliations
<S> <C> <C>
John M. Winters Vice President Senior Vice President, Lehman Brothers
World Financial Center Inc.
New York, New York 10285
Vincent Nave Treasurer and Chief Financial Officer Senior Vice President, The Boston
One Boston Place Financial Company Advisors, Inc. and Boston Safe
Boston, Massachusetts 02109 Deposit and Trust Company.
Francis J. McNamara, III Secretary Senior Vice President and General
One Boston Place Counsel, The Boston Company Advisors,
Boston, Massachusetts 02109 Inc.
____________________
<FN>
<F1> Director considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
<F2> Audit Committee Member.
<F3> Nominating Committee Member.
</TABLE>
Two directors of the Company, Messrs. Spiegel and Dorsett, serve as
directors or trustees of other investment companies for which Lehman Brothers,
LBGAM or one of their affiliates serves as distributor or investment adviser.
No employee of Lehman Brothers, LBGAM or The Boston Company Advisors, Inc.
("Boston Advisors") receives any compensation from the Company for acting as an
officer or director of the Company. The Company pays each director who is not a
director, officer or employee of Lehman Brothers, LBGAM or Boston Advisors or
any of their affiliates, a fee of $20,000 per annum plus $500 per meeting
attended and reimburses them for travel and out-of-pocket expenses.
By virtue of the responsibilities assumed by Lehman Brothers, LBGAM,
Boston Advisors and their affiliates under their respective agreements with the
Company, the Company itself requires no employees in addition to its officers.
Investment Adviser
LBGAM serves as investment adviser to the Funds pursuant to separate written
advisory agreements approved by the Company's Board of Directors, including a
majority of the directors who are not "interested persons" (as defined in the
1940 Act) of the Company or LBGAM, on July 26, 1993. The services provided by
LBGAM under its advisory agreements and the fees paid to LBGAM are described in
the Prospectus. LBGAM bears all expenses in connection with the performance of
its services and pays the salaries of all officers or employees who are
employed by both it and the Company. Unless sooner terminated, each advisory
agreement will continue in effect until July 25, 1995 and from year to year
thereafter if such continuance is approved at least annually by the Company's
Board of Directors or by a vote of a majority (as defined under "Additional
Description Concerning Fund Shares") of the outstanding shares of the related
Fund and, in either case, by a majority of the directors who are not parties to
<PAGE>
such agreement or "interested persons" of any party by votes cast in person at
a meeting called for such purpose. Each advisory agreement will be terminable
by the Company or LBGAM on 60 days' written notice, and will terminate
immediately in the event of its assignment.
Administrator
As the Funds' administrator, Boston Advisors has agreed to provide the
following services: (i) assist generally in supervising a Fund's operations,
providing and supervising the operation of an automated data processing system
to process purchase and redemption orders, providing information concerning a
Fund to its shareholders of record, handling shareholder problems, supervising
the services of employees whose principal responsibility and function is to
preserve and strengthen shareholder relations; (ii) prepare reports to a Fund's
shareholders and prepare tax returns and reports to and filings with the SEC;
(iii) compute the respective net asset value per share of each Fund; (iv)
provide the services of certain persons who may be elected as directors or
appointed as officers of the Company by the Board of Directors; and (v)
maintain the registration or qualification of a Fund's shares for sale under
state securities laws.
Distributor and Plan of Distribution
Lehman Brothers acts as distributor of each Fund's shares. Each Fund's shares
are sold on a continuous basis by Lehman Brothers as agent, although Lehman
Brothers is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of a Fund (excluding preparation and printing expenses
necessary for the continued registration of a Fund's shares) and of preparing,
printing and distributing all sales literature.
Rule 12b-1 (the "Rule") adopted by the SEC under the 1940
Act provides, among other things, that an investment company may bear expenses
of distributing its shares only pursuant to a plan adopted in accordance with
the Rule. The Company's Board of Directors has adopted such a plan with respect
to each Fund (the "Plan of Distribution"). The Board of Directors believes that
there is a reasonable likelihood that the Plan of Distribution will benefit the
related Fund and its shareholders.
A quarterly report of the amounts expended with respect to each class
of each Fund under the Plan of Distribution, and the purposes for which
such expenditures were incurred, must be made to the Board of Directors for its
review. In addition, the Plan of Distribution provides that it may not be
amended with respect to a class of a Fund to increase materially the
costs which may be borne for distribution pursuant to the Plan of Distribution
without the approval of shareholders of that class, and that
other material amendments of the Plan of Distribution must be approved by the
Board of Directors, and by the Directors who are neither "interested person"
(as defined in the 1940 Act) of the Company nor have any direct or indirect
financial interest in the operation of the Plan of Distribution or any related
agreements, by vote cast in person at a meeting called for the purpose of
considering such amendments. The Plan of Distribution and any related
<PAGE>
agreements are subject to annual approval by such vote cast in person at a
meeting called for the purpose of voting on the Plan. The Plan of Distribution
may be terminated with respect to a class of a Fund at any time by vote
of a majority of the Directors who are not "interested persons" and have no
direct or indirect financial interest in the operation of the Plan of
Distribution or in any related agreement or by vote of a majority of the shares
of that class.
Custodian and Transfer Agent
Boston Safe Deposit and Trust Company ("Boston Safe"), a wholly owned
subsidiary of The Boston Company, Inc., is located at One Boston Place, Boston,
Massachusetts 02108, and serves as the Company's custodian pursuant to a
custody agreement. Under the custody agreement, Boston Safe holds each Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end market
value of securities held in custody and also receives securities transaction
charges, including out-of-pocket expenses. The assets of the Company are held
under bank custodianship in compliance with the 1940 Act.
The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation, is located at One Exchange Place, Boston, Massachusetts 02019, and
serves as the Company's transfer agent. Under the transfer agency
agreement, TSSG maintains the shareholder account records for the Company,
handles certain communications between shareholders and the Company and
distributes dividends and distributions payable by the Company and produces
statements with respect to account activity for the Company and its
shareholders. For these services, TSSG receives a monthly fee computed on the
basis of the number of shareholder accounts that it maintains for the Company
during the month and is reimbursed for out-of-pocket expenses.
Expenses
A Fund's expenses include taxes, interest, fees and salaries of the Company's
trustees and officers who are not directors, officers or employees of the
Company'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 and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
The Funds also pay for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities. LBGAM and Boston Advisors
have agreed that if, in any fiscal year, the expenses borne by a Fund exceed
the applicable expense limitations imposed by the securities regulations of any
state in which shares of that Fund are registered or qualified for sale to the
public, they will reimburse that Fund for any excess to the
extent required by such regulations in the same proportion that each of their
fees bears to the Fund's aggregate fees for investment advice and
administrative services. Unless otherwise required by law, such reimbursement
would be accrued and paid on the same basis that the advisory and
administration fees are accrued and paid by that Fund. To each Fund's
knowledge, of the expense limitations in effect on the date of this Statement
<PAGE>
of Additional Information, none is more restrictive than two and one-half
percent (2-1/2%) of the first $30 million of a Fund's average annual net
assets, two percent (2%) of the next $70 million of the average annual net
assets and one and one-half percent (1-1/2%) of the remaining average annual
net assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting a Fund and its shareholders that are not described in the Prospectus.
No attempt is made to present a detailed explanation of the tax treatment of a
Fund or its shareholders or possible legislative changes, and the discussion
here and in the Prospectus is not intended as a substitute for careful tax
planning.
As stated in the Prospectus, each Fund intends to qualify as a regulated
investment company under the Code. In order to so qualify under the Code for a
taxable year, a Fund must satisfy the distribution requirement described in the
Prospectus, derive at least 90% of its gross income for the year from certain
qualifying sources, comply with certain diversification tests and derive less
than 30% of its gross income for the year from the sale or other disposition of
securities and certain other investments held for less than three months.
Interest (including original issue discount plus accrued market discount)
received by a Fund at maturity or disposition of a security held for less than
three months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of the 30% requirement.
However, any income in excess of such interest will be treated as gross income
from the sale of other disposition of securities for this purpose.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail currently to distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income
(excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and any capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
If for any taxable year a Fund does not qualify for tax treatment as a
regulated investment company, all of that Fund's taxable income will be subject
to tax at regular corporate rates without any deduction for distributions to
Fund shareholders. In such event, dividend distributions to shareholders would
be taxable as ordinary income to the extent of that Fund's earnings and
profits, and would be eligible for the dividends received deduction in the case
of corporate shareholders.
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends or 31% of gross proceeds realized upon
sale paid to its shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to backup
withholding by the Internal Revenue Service for failure properly to include on
their return payments of taxable interest or dividends, or who have failed to
<PAGE>
certify to a Fund that they are not subject to backup withholding when required
to do so or that they are "exempt recipients."
Although each Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income tax, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or
in which it is otherwise deemed to be conducting business, a Fund may be
subject to the tax laws of such states or localities. In addition, in those
states and localities which have income tax laws, the treatment of the Fund and
its shareholders under such laws may differ from the treatment under federal
income tax laws. Shareholders are advised to consult their tax
advisers concerning the application of state and local taxes.
The Municipal Income Fund
As described above and in the Prospectus, the Municipal Income Fund is designed
to provide institutions with current tax-exempt interest income. The Fund is
not intended to constitute a balanced investment program and is not designed
for investors seeking capital appreciation or maximum tax-exempt income
irrespective of fluctuations in principal. Shares of the Fund would not be
suitable for tax-exempt institutions and may not be suitable for retirement
plans qualified under Section 401 of the Code, H.R. 10 plans and individual
retirement accounts since such plans and accounts are generally tax-exempt and,
therefore, not only would not gain any additional benefit from the Fund's
dividends being tax-exempt but also such dividends would be taxable when
distributed to the beneficiary. In addition, the Fund may not be an appropriate
investment for entities which are "substantial users" of facilities financed by
private activity bonds or "related persons" thereof. "Substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt person who
regularly uses a part of such facilities in his or her trade or business and
whose gross revenues derived with respect to the facilities financed by the
issuance of bonds are more than 5% of the total revenues derived by all users
of such facilities, or who occupies more than 5% of the usable area of such
facilities or for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its
partners and an S Corporation and its shareholders.
In order for the Fund to pay exempt-interest dividends for any taxable
year, at the close of each quarter of its taxable year at least 50% of the
aggregate value of the Fund's assets must consist of exempt-interest
obligations. After the close of its taxable year, a Fund will notify its
shareholders of the portion of the dividends paid by the Fund which constitutes
an exempt-interest dividend with respect to such taxable year. However, the
aggregate amount of dividends so designated by a Fund cannot exceed the excess
of the amount of interest exempt from tax under Section 103 of the Code
received by the Fund for the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. The percentage of
total dividends paid by the Fund with respect to any taxable year which
qualifies as federal exempt-interest dividends will be the same for all
shareholders of the Fund receiving dividends for such year.
<PAGE>
Interest on indebtedness incurred by a shareholder to purchase or carry
the Fund's shares is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the shareholder's taxable year.
While the Fund does not expect to realize long-term capital gains, any net
realized long-term capital gains will be distributed at least annually. The
Fund will generally have no tax liability with respect to such gains, and the
distributions will be taxable to the Fund's shareholders as long-term capital
gains, regardless of how long a shareholder has held the Fund's shares. Such
distributions will be designated as a capital gain dividend in a written notice
mailed by the Fund to its shareholders not later than 60 days after the close
of the Fund's taxable year.
Similarly, while the Fund does not expect to earn any investment company
taxable income, taxable income earned by the Fund will be distributed to its
shareholders. In general, the Fund's investment company taxable income will be
its taxable income (for example, any short-term capital gains) subject to
certain adjustments and excluding the excess of any net long-term capital gain
for the taxable year over the net short-term capital loss, if any, for such
year. The Fund will be taxed on any undistributed investment company taxable
income of the Fund. To the extent such income is distributed by the Fund
(whether in cash or additional shares), it will be taxable to the Fund's
shareholders as ordinary income.
DIVIDENDS
Each Fund's net investment income for dividend purposes consists of (i)
interest accrued and original issue discount earned on that Fund's assets, plus
(ii) the amortization of market discount and minus the amortization of market
premium on such assets, and less (iii) accrued expenses directly attributable
to that Fund and the general expenses (e.g., legal, accounting and directors'
fees) of the Company prorated to such Fund on the basis of its relative net
assets. The amortization of market discount on a Fund's assets is not included
in the calculation of net income. Any realized short-term capital gains may
also be distributed as dividends to Fund shareholders.
The Company uses its best efforts to maintain the net asset value per
share of each Fund at $1.00. As a result of a significant expense or realized
or unrealized loss incurred by a Fund, it is possible that a Fund's net asset
value per share may fall below $1.00.
ADDITIONAL YIELD INFORMATION
The "yields", "effective yields" and "tax-equivalent yields" are calculated
separately for each Fund. The seven day yield for shares in a Fund is
calculated by determining the net change in the value of a hypothetical
preexisting account in a Fund having a balance of one share at the beginning of
the period, dividing the net change by the value of the account at the
beginning of the period to obtain the base period return, and multiplying the
base period return by 365/7. The net change in the value of an account in a
Fund includes the value of additional shares purchased with dividends from the
<PAGE>
original share and dividends declared on the original share and any such
additional shares, net of all fees charged to all shareholder accounts in
proportion to the length of the base period and the Fund's average account
size, but does not include gains and losses or unrealized appreciation and
depreciation. In addition, the effective annualized yield may be computed on a
compounded basis (calculated as described above) by adding 1 to the base period
return, raising the sum to a power equal to 365/7, and subtracting 1 from the
result. A tax-equivalent yield for the Municipal Income Fund's shares is
computed by dividing the portion of the yield (calculated as above) that is
exempt from federal income tax by one minus a stated federal income tax rate
and adding that figure to that portion, if any, of the yield that is not exempt
from federal income tax. Similarly, based on the calculations described above,
30-day (or one-month) yields, effective yields and tax-equivalent yields may
also be calculated.
From time to time, in advertisements or in reports to shareholders, a
Fund's yield may be quoted and compared to that of other money market funds or
accounts with similar investment objectives and to bond or other relevant
indices. For example, the yield of the Fund may be compared to the
IBC/Donoghue's Money Fund Average, which is an average compiled by
IBC/Donoghue's MONEY FUND REPORT (Registered Trademark) of Holliston, MA 01746,
a widely recognized independent publication that monitors the performance of
money market funds, or to the average yields reported by the Bank Rate Monitor
from money market deposit accounts offered by the 50 leading banks and thrift
institutions in the top five standard metropolitan statistical areas.
Yield will fluctuate, and any quotation of yield should not be considered
as representative of the future performance of the Fund. Since yields
fluctuate, yield data cannot necessarily be used to compare an investment in a
Fund's shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Shareholders should remember that performance and yield
are generally functions of the kind and quality of the investments held in a
portfolio, portfolio maturity, operating expenses and market conditions.
ADDITIONAL INFORMATION CONCERNING FUND SHARES
As used in this Statement of Additional Information and the Prospectus, a
"majority of the outstanding shares" of a Fund or of a particular portfolio
means the lesser of (1) 67% of that Fund's shares or of the portfolio
represented at a meeting at which the holders of more than 50% of the
outstanding shares of that Fund or portfolio are present in person or by proxy,
or (2) more than 50% of the outstanding shares of a Fund or of the portfolio.
The By-Laws of the Company provide that the Company shall not be required
to hold an annual meeting of shareholders in any year in which the election of
directors to the Company's Board of Directors is not required to be acted upon
under the 1940 Act. The law under certain circumstances provides shareholders
with the right to call for a meeting of shareholders to consider the removal of
one or more directors. To the extent required by law, the Company will assist
in shareholder communication in such matters.
<PAGE>
Each share of a particular Fund is entitled to such dividends and
distributions out of the assets belonging to that Fund as are declared in the
discretion of the Company's Board of Directors. In determining a Fund's net
asset value, assets belonging to a particular Fund are credited with a
proportionate share of any general assets of the Company not belonging to a
particular Fund and are charged with the direct liabilities in respect of that
Fund and with a share of the general liabilities of the Company which are
normally allocated in proportion to the relative asset values of the respective
Funds at the time of allocation.
In the event of the liquidation or dissolution of the Company, shares of a
Fund are entitled to receive the assets attributable to that Fund that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the Funds, of any general assets not attributable to a
Fund that are available for distribution. Shareholders are not entitled to any
preemptive rights.
Subject to the provisions of the Company's Charter,
determinations by the Board of Directors as to the direct and allocable
liabilities, and the allocable portion of any general assets of the Company,
with respect to a particular Fund are conclusive.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), 425 Lexington Avenue, New York, New York 10017,
serves as counsel to the Company.
AUDITORS
The statement of assets and liabilities of the Funds which appears in this
Statement of Additional Information has been audited by Ernst & Young,
independent auditors, whose report thereon appears elsewhere
herein, and has been included herein in reliance upon the report of said firm
as independent auditors. Ernst & Young has offices at 200
Clarendon Street, Boston, Massachusetts 02116-5072.
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper and Bank Money Market Instruments
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The following summarizes the two highest rating categories used
by Standard & Poor's for commercial paper:
"A-1" -- Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1 +."
"A-2" -- Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-l."
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the two highest rating categories
used by Moody's for commercial paper:
"Prime-1" -- Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Principal repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" -- Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
The two highest rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1" and "Duff 2." Duff & Phelps employs three
designations, "Duff 1+," "Duff 1" and "Duff 1 -," within the highest rating
category. The following summarizes the two highest rating categories used by
Duff & Phelps for commercial paper:
"Duff 1+" -- Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
<PAGE>
"Duff 1" -- Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1 - " -- Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"Duff 2" -- Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The two highest rating
categories of Fitch for short-term obligations are "F-1" and "F-2." Fitch
employs two designations, "F-l+" and "F-l," within the highest rating category.
The following summarizes the two highest rating categories used by Fitch for
short-term obligations:
"F-1 + " -- Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" -- Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-l+."
"F-2" -- Securities possess good credit quality. Issues carrying this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-l+" and "F-1" categories.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch commercial paper ratings assess the likelihood of an
untimely payment of principal or interest of debt having a maturity of one year
or less which is issued by a bank holding company or an entity within the
holding company structure. The following summarizes the two highest ratings
used by Thomson BankWatch:
"TBW-1 " -- This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" -- This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-l."
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The highest rating category of IBCA for
short-term debt is "A." IBCA employs two designations, "Al+" and "Al," within
<PAGE>
the highest rating category. The following summarizes the two highest rating
categories used by IBCA for short-term debt ratings:
"Al +" -- Obligations are supported by the highest capacity for timely
repayment.
"Al" -- Obligations are supported by a strong capacity for timely
repayment.
"A2" -- Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic, or financial conditions.
Note: Various NRSROs utilize rankings within rating categories indicated
by a + or -. The Funds, in accordance with industry practice, recognize such
rankings within categories as gradations, viewing the example S&P's ratings of
A-1 + and A-1 as being in S&P's highest rating category.
Corporate Bonds
S&P. Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a strong capacity to pay interest and repay principal and
differ from the highest rated issues only in a small degree.
Moody's. Bonds rated Aaa by Moody's are judged to be of the best quality.
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. Bonds rated Aa are judged to be of high quality by all
standards. They are rated lower than the best bonds because the margins of
protection may not be as large or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities. Moody's applies
numerical modifiers 1, 2 and 3 in each generic rating classification from Aa
through B in its corporate bond rating system. The modifier 1 indicates that
the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
IBCA. Bonds rated AAA by IBCA are obligations for which there is the
lowest expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial such that adverse changes in business,
economic or financial conditions are unlikely to increase investment risk
significantly. Bonds rated AA are obligations for which there is a very low
expectation of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
Fitch. Bonds rated AAA by Fitch are considered to be investment grade and
of the highest quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
<PAGE>
Duff & Phelps. Bonds rated AAA by Duff & Phelps are deemed to be of the
highest credit quality: the risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt. AA indicates high credit quality:
protection factors are strong, and risk is modest but may vary slightly from
time to time because of economic conditions.
Municipal Long-Term Debt Ratings
The following summarizes the two highest ratings used by Standard & Poor's
for municipal long-term debt:
"AAA" -- This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" -- Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
PLUS (+) or MINUS (-) -- The rating of "AA" may be modified by the
addition of a plus or minus sign to show relative standing within this rating
category.
The following summarizes the two highest ratings used by Moody's for
municipal long-term debt:
"Aaa" -- Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa" -- Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in "Aaa" securities.
Moody's applies numerical modifiers 1, 2 and 3 in generic classification
of "Aa" in its bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks at the lower end of its generic rating category.
The following summarizes the two highest ratings used by Duff & Phelps for
municipal long-term debt:
"AAA" -- Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" -- Debt is considered of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
<PAGE>
To provide more detailed indications of credit quality, the "AA" rating
may be modified by the addition of a plus (+) or minus (-) sign to show
relative standing within this rating category.
Con. ( - - - ) -- Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
The following summarizes the two highest ratings used by Fitch for
municipal bonds:
"AAA" -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
To provide more detailed indications of credit quality, the Fitch rating
of "AA" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standing within this rating category.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long-term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the two highest rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" -- This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" -- This designation indicates a superior ability to repay principal
and interest on a timely basis with limited incremental risk versus issues
rated in the highest category.
PLUS (+) or MINUS (-) -- The ratings may include a plus or minus sign
designation which indicates where within the respective category the issue is
placed.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the two highest
rating categories used by IBCA for long-term debt ratings:
<PAGE>
"AAA" -- Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly.
"AA" -- Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within these rating categories.
Municipal Note Ratings
A Standard & Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less.
The following summarizes the two highest rating categories used by
Standard & Poor's Corporation for municipal notes:
"SP-1" -- The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" -The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the two highest ratings used by Moody's
Investors Service, Inc. for short term notes:
"MIG-1"/"VMIG-1" -- Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" -- Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
Duff & Phelps and Fitch use the short-term ratings described under
Commercial Paper and Bank Money Market Instruments for municipal notes.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
Lehman Brothers Funds, Inc.
We have audited the accompanying statement of assets and liabilities of Lehman
Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund
(portfolios of Lehman Brothers Funds, Inc., the "Fund") as of July 14, 1993.
This financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in a material respects, the financial position of the Lehman
Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund of Lehman
Brothers Funds, Inc. at July 14, 1993, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG
_________________________
ERNST & YOUNG
Boston, Massachusetts
July 15, 1993
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
AS OF JULY 14, 1993
<TABLE>
<CAPTION>
Daily Municipal
Income Income
Fund Fund
-------------------------- ------------------------
<S> <C> <C>
ASSETS:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 $ 50,000
Deferred offering expenses <F2> . . . . . . . . . . . . . . . . . . . . 452,900 179,463
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502,900 229,463
LIABILITIES:
Accrued offering expenses <F2> . . . . . . . . . . . . . . . . . . . . . 452,900 179,463
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 $ 50,000
Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Net Asset Value, offering and redemption
price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.00 $ 1.00
The accompanying notes are an integral part of this statement.
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
<FN>
<F1> Lehman Brothers Funds, Inc. (the "Company") was incorporated under
the laws of the State of Maryland on May 5, 1993 and is registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Company offers two Funds (the "Funds"); Lehman
Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund. The
Company has had no operations other than organizational matters and the
issuance and sale of shares ("initial shares") of common stock of 50,000
in each Fund on July 14, 1993, to Lehman Brothers Inc.
<F2> Costs incurred by the Funds in connection with their organization and
the initial offering costs of their shares have been deferred and will be
amortized over a five-year period using the straight-line method from the
date upon which the Funds commence their investment activities. In the
<PAGE>
event that the initial shares purchased by Lehman Brothers, Inc. are
redeemed during the amortization period by any holder thereof, the Funds
will be reimbursed for any unamortized organization costs in the same
proportion as the number of shares redeemed bears to the initial shares
outstanding at the time of redemption.
<F3> The Company intends to comply with the requirements of the Internal
Revenue Code of 1986, as amended, and intends to make the requisite
distributions of income to its shareholders that will be sufficient to
relieve it from all or substantially all federal income taxes.
</TABLE>
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Daily Income Fund
Portfolio of Investments
<TABLE>
<CAPTION>
November 30, 1993
(unaudited)
Market
Face Value
Value (Note 1)
- ------------ -----------
<C> <S> <C>
COMMERCIAL PAPER - 43.8%
$500,000 ABN - AMRO NA,
3.400% 01/24/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 491,930
500,000 Alliance & Leic,
3.390% 01/31/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 491,456
4,000,000 Beta Finance,
3.380% 02/16/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,933,307
Broadway Capital Corporation:
26,649,000 3.150% 12/15/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,581,378
5,154,000 3.150% 12/20/1993 +. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,141,824
6,000,000 Canadian Imperial Holdings,
3.280% 01/24/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,917,920
Central Hispano, North America:
3,000,000 3.260% 01/10/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,962,280
2,400,000 3.390% 02/10/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,358,907
2,000,000 3.380% 02/14/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,967,000
1,000,000 3.380% 02/22/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 984,238
2,000,000 CND Imperial Holding,
3.320% 02/08/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,966,431
Countrywide Funding:
9,000,000 3.120% 12/03/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,963,775
15,765,000 3.120% 12/20/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,722,237
15,000,000 3.120% 12/27/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,964,000
500,000 Credit Lyonnais,
3.220% 12/20/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 493,739
CSC Enterprises:
6,800,000 3.200% 12/03/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,785,493
10,000,000 3.160% 12/06/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,972,000
Den Danske,
2,000,000 3.350% 02/03/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,966,314
2,000,000 3.240% 03/11/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,967,060
General Electric Capital Corporation:
2,000,000 3.320% 02/02/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,966,800
2,500,000 3.230% 02/16/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,459,625
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
Portfolio of Investments - (continued)
<TABLE>
<CAPTION>
November 30, 1993
(unaudited)
Market
Face Value
Value (Note 1)
- ------------ -----------
<C> <S> <C>
General Motor Acceptance:
2,000,000 3.375% 01/05/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,982,750
13,000,000 3.375% 01/11/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,879,344
5,000,000 3.400% 01/11/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,957,500
12,000,000 3.375% 01/12/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,887,500
1,000,000 3.350% 02/02/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 983,157
10,000,000 Golden Managers Acceptance,
3.160% 12/08/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,971,125
2,000,000 Goldman Sachs,
3.410% 02/09/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,965,756
20,000,000 Household Financial Corporation,
3.160% 12/08/1993 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,938,750
1,000,000 Kingdom of Sweden,
3.410% 01/14/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 984,787
$2,000,000 McKenna Triangle National,
3.330% 01/25/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,967,995
Merrill Lynch & Company:
4,000,000 3.270% 01/10/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,949,497
2,000,000 3.250% 02/17/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,968,403
3,000,000 3.250% 02/17/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950,979
2,000,000 Morgan Stanley,
3.350% 02/07/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,966,128
25,000,000 Nationwide Building,
3.280% 01/10/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,797,278
Nordbanken,
500,000 3.430% 01/05/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 492,568
4,000,000 3.290% 01/11/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,967,100
27,000,000 3.290% 01/18/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,738,445
3,000,000 3.330% 01/18/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,957,820
1,000,000 3.440% 02/01/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 982,800
1,500,000 3.310% 02/22/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,475,175
3,000,000 3.310% 02/22/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950,074
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
Portfolio of Investments - (continued)
<TABLE>
<CAPTION>
November 30, 1993
(unaudited)
Market
Face Value
Value (Note 1)
- ------------ -----------
<C> <S> <C>
Postipankki US:
10,000,000 3.400% 01/18/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,903,422
17,000,000 3.290% 01/21/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,832,210
6,000,000 3.350% 03/01/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,899,500
3,000,000 3.290% 03/08/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950,650
10,000,000 SFC USA Inc.,
3.420% 01/25/1994 +. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,943,333
Svenska Handelsbanken:
4,000,000 3.290% 02/15/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,934,200
5,000,000 3.280% 03/02/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,917,544
Swedbank Inc.:
15,000,000 3.300% 01/13/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,861,125
15,000,000 3.300% 01/14/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,859,750
6,000,000 3.300% 01/20/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,941,150
2,000,000 United Airlines First Funding,
3.240% 01/24/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,971,478
12,400,000 Working Capital Management LP,
3.170% 01/07/1994 + . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,304,262
-----------
TOTAL COMMERCIAL PAPER
(Cost $365,091,269) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365,091,269
-----------
-----------
CORPORATE BONDS AND NOTES - 23.7%
BANKING AND FINANCE - 21.6%
25,000,000 Abbey National Treasury Services,
3.650% 11/15/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,982,954
1,250,000 Bankers Trust Corporation, New York, Note,
9.375% 05/15/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,282,391
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
Portfolio of Investments - (continued)
<TABLE>
<CAPTION>
November 30, 1993
(unaudited)
Market
Face Value
Value (Note 1)
- ------------ -----------
<C> <S> <C>
CORPORATE BONDS AND NOTES - (CONTINUED)
BANKING AND FINANCE - (CONTINUED)
Bear Stearns Company INC., Medium Term Note:
$25,000,000 3.500% 10/05/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000,000
15,000,000 3.550% 10/21/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000,000
24,000,000 Capital Auto Receivables, Series 1993-3, Class A-1,
3.300% 11/15/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,993,261
1,250,000 FCC National Bank, Wilmington, Delaware,
3.620% 01/25/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250,451
General Motors Acceptance Corporation, Medium Term Note:
6,000,000 6.050% 06/01/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,067,574
2,450,000 8.700% 10/17/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,545,364
35,000,000 Goldman Sachs Group LP,
3.375% 10/12/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000,000
10,000,000 Household Financial Corporation, Trust #324, Medium Term Note,
3.400% 08/18/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,985,811
35,000,000 Morgan Stanley Group Inc., Medium Term Note,
3.375% 11/08/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000,000
------------
180,107,806
------------
LEASING - 1.1%
9,000,000 Concord Leasing Inc., Promissory Note,
3.262% 09/21/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000,000
-----------
OTHER - 1.0%
8,000,000 Secondary Market Services Corporation,
3.400% 09/01/2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000
------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $197,107,806) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,107,806
------------
------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
Portfolio of Investments - (continued)
<TABLE>
<CAPTION>
November 30, 1993
(unaudited)
Market
Face Value
Value (Note 1)
- ------------ -----------
<C> <S> <C>
CERTIFICATES OF DEPOSIT - 9.1%
YANKEE CERTIFICATE OF DEPOSIT - 4.9%
Fuji Bank, Japan:
15,000,000 3.150% 12/06/1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000,000
15,000,000 3.150% 12/07/1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000,000
1,000,000 Mitsubishi Bank,
3.340% 02/01/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,017
200,000 Mitsubishi Bank Limited, New York, Branch Deposit Note,
10.300% 03/23/1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . 203,787
10,000,000 Sanwa Bank Limited,
3.370% 01/31/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,999,832
------------
41,203,636
------------
EURO CERTIFICATE OF DEPOSIT - 4.2%
20,000,000 Norinchukin Bank London,
3.300% 01/21/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000,281
15,000,000 Sumitomo Trust and Banking, London,
3.330% 01/26/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,999,306
------------
34,999,587
------------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $76,203,223). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,203,223
------------
------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
DAILY INCOME FUND
Portfolio of Investments - (continued)
<TABLE>
<CAPTION>
November 30, 1993
(unaudited)
Market
Face Value
Value (Note 1)
- ------------ -----------
<C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 6.1%
$20,000,000 Federal Farm Credit Banks,
3.200% 09/07/1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,983,569
Federal National Mortgage Association:
25,000,000 3.600% 10/07/1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000,000
5,000,000 3.350% 09/02/1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000
1,000,000 Student Loan Marketing Association, Note, Series BF,
3.585% 11/27/1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,005,555
------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $50,989,124). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,989,124
------------
------------
REPURCHASE AGREEMENTS - 17.3%
50,000,000 Agreement with First Boston, dated 11/30/93 bearing 3.360% to be
repurchased at $94,128,785 on 12/01/93, collateralized by $61,995,714
market value of numerous Government Agency Obligations having maturities
between 04/01/20 and 10/01/22 . . . . . . . . . . . . . . . . . . . . . . . 50,000,000
94,120,000 Agreement with Paine Webber Group, dated 11/30/93 bearing 3.320% to be
repurchased at $50,004,611 on 12/01/93, collateralized by $122,727,999
market value of numerous Government Agency Obligations having maturities
between 10/25/11 and 10/01/31 . . . . . . . . . . . . . . . . . . . . . . . 94,120,000
------------
TOTAL REPURCHASE AGREEMENTS
(Cost $144,120,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,120,000
------------
------------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost $833,511,422*) . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 833,511,422
OTHER ASSETS AND LIABILITIES (Net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.0) (236,558)
----- ------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% $ 833,274,864
----- ------------
----- ------------
<FN>
- ---------------
* Aggregate cost for Federal tax purposes.
+ Annualized yield at date of purchase.
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Daily Income Fund
Statement of Assets and Liabilities
November 30, 1993 (unaudited)
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $833,511,422)(Note 1)
See accompanying schedule:
Securities. . . . . . . . . . . . . . . . . . . . . . . . $ 689,391,422
Repurchase Agreements . . . . . . . . . . . . . . . . . . 144,120,000 $ 833,511,422
------------
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,209
Receivable for Fund shares sold . . . . . . . . . . . . . . 10,541,203
Interest receivable . . . . . . . . . . . . . . . . . . . . 3,219,288
Unamortized organization costs (Note 5) . . . . . . . . . . 424,506
------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . 847,766,628
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Daily Income Fund
Statement of Assets and Liabilities
November 30, 1993 (unaudited)
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
LIABILITIES:
Payable for Fund shares redeemed. . . . . . . . . . . . . . $ 12,452,980
Dividends payable . . . . . . . . . . . . . . . . . . . . . 997,817
Organization costs payable. . . . . . . . . . . . . . . . . 429,473
Distribution fee payable (Note 3) . . . . . . . . . . . . . 238,600
Investment advisory fee payable (Note 2). . . . . . . . . . 133,541
Administration fee payable (Note 2) . . . . . . . . . . . . 89,028
Transfer agent fees payable (Note 2). . . . . . . . . . . . 74,810
Custodian fees payable (Note 2) . . . . . . . . . . . . . . 26,750
Accrued expenses and other payables . . . . . . . . . . . . 48,765
-------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . $ 14,491,764
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 833,274,864
------------
------------
NET ASSETS consist of:
Accumulated net realized gain on investments sold . . . . . $ 699
Par value . . . . . . . . . . . . . . . . . . . . . . . . . 833,274
Paid-in capital in excess of par value. . . . . . . . . . . 832,440,891
------------
Total Net Assets. . . . . . . . . . . . . . . . . . . . . $ 833,274,864
------------
------------
NET ASSET VALUE, offering price and redemption price
per share ($833,274,864 - 833,274,165 shares of
beneficial interest outstanding). . . . . . . . . . . . . . $1.00
------------
------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Daily Income Fund
Statement of Assets and Liabilities
For the Period Ended November 30, 1993 (unaudited)*
- ------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,158,053
EXPENSES:
Investment advisory fee (Note 2). . . . . . . . . . . . . . $ 467,414
Distribution fee (Note 3) . . . . . . . . . . . . . . . . . 389,511
Administration fee (Note 2) . . . . . . . . . . . . . . . . 311,609
Transfer agent fees (Note 2). . . . . . . . . . . . . . . . 179,587
Amortization of organization costs (Note 5) . . . . . . . . 30,144
Custodian fees (Note 2) . . . . . . . . . . . . . . . . . . 26,750
Legal and audit fees. . . . . . . . . . . . . . . . . . . . 17,667
Directors' fees and expenses (Note 2) . . . . . . . . . . . 14,185
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,680
Fees waived by investment adviser, administrator,
and distributor (Note 2). . . . . . . . . . . . . . . . . . (665,517)
---------
Total Expenses. . . . . . . . . . . . . . . . . . . . . . 864,030
---------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . . . . 4,294,023
---------
NET REALIZED GAIN ON INVESTMENTS SOLD (Note 1) . . . . . . . . . 699
---------
NET INCREASE IN ASSETS RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,294,722
---------
---------
<FN>
- ---------------
* The Lehman Brothers Daily Income Fund commenced operations on August 2, 1993.
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Daily Income Fund
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Period
Ended
11/30/93*
(unaudited)
___________
<S> <C>
Net investment income. . . . . . . . . . . . . . . . . . . . $ 4,294,023
Net realized gain on investments during the period . . . . . 699
-----------
Net increase in net assets resulting from operations . . . . 4,294,722
Distributions to shareholders from
Net investment income . . . . . . . . . . . . . . . . . (4,294,023)
Net increase in net assets from Fund share
transactions (Note 4) . . . . . . . . . . . . . . . . . 833,224,165
------------
Net increase in net assets . . . . . . . . . . . . . . . . . 833,224,864
NET ASSETS:
Beginning of period. . . . . . . . . . . . . . . . . . . . . 50,000
------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . $833,274,864
------------
------------
<FN>
- ---------------
* The Lehman Brothers Daily Income Fund commenced operations
on August 2, 1993.
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Daily Income Fund
Financial Highlights
For a Fund share outstanding throughout the period
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Period
Ended
11/30/93*
(unaudited)
------------
<S> <C>
Net Asset Value, beginning of period . . . . . . . . . $1.00
-------
Income from investment operations:
Net investment income. . . . . . . . . . . . . . . . . 0.0091
-------
Less distributions:
Distributions from net investment income . . . . . . . (0.0091)
-------
Net Asset Value, end of period . . . . . . . . . . . . $1.00
-------
Total Return ++. . . . . . . . . . . . . . . . . . . . 0.92%
-------
-------
Ratios to average net assets/supplemental
data: . . . . . . . . . . . . . . . . . . . . . . .
Net Assets, end of period (in 000's) . . . . . . . . . $833,275
Ratios of net investment income to average
net assets . . . . . . . . . . . . . . . . . . . . . 2.76% **
Ratios of operating expenses to average
net assets + . . . . . . . . . . . . . . . . . . . . 0.55% **
<FN>
- -----------------------
* The Fund commenced operations on August 2, 1993.
** Annualized.
+ Annualized expense ratio before waiver of fees by investment adviser,
administrator, and distributor for the period ended November 30, 1993 was
0.98%.
++ Total return represents aggregate total return for the period indicated.
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES - 102.1%
ALABAMA - 0.9%
$2,150,000 Phoenix City, Alabama, Industrial Development Board, Environmental Impact Revenue,
(Mead Project),
2.700% due 12/1/23+++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,150,000
-------------
ARIZONA - 4.6%
9,000,000 Apache County, Arizona, Industrial Development Authority Revenue, Series 83A,
2.300% due 12/15/18++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000,000
Pima County, Arizona, Industrial Development Authority Revenue:
1,000,000 (Tucson Electric Power Project),
2.550% due 5/1/25 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
500,000 (Tucson),
2.400% due 12/1/22++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
-------------
10,500,000
-------------
CALIFORNIA - 11.3%
400,000 California Health Facilities, Hospital Revenue, Series B,
2.350% due 10/1/21++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
3,650,000 California Higher Education Loan Authority, Series E-1,
2.350% due 12/1/22++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,650,000
2,805,000 California State, Revenue Anticipation Notes,
3.500% due 6/28/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,816,538
1,000,000 Chino, California, Tax and Revenue Anticipation Notes,
3.250% due 7/29/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001,220
1,000,000 Huntington Beach, California, Tax and Revenue Anticipation Notes,
3.250% due 7/29/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001,865
300,000 Los Angeles County, California, Housing Authority, (Riverpark Apartments Project)
3.400% due 9/1/10++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
300,000 Los Angeles County, California, Metropolitan Transportation Authority,
2.100% due 7/1/20++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
300,000 Los Angeles County, California, Multifamily Housing Authority Revenue,
2.300% due 10/1/14++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
9,000,000 Los Angeles County, California, Tax and Revenue Anticipation Notes,
3.000% due 6/30/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,011,048
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
1,700,000 Marin County, California, Tax and Revenue Anticipation Notes,
3.000% due 7/6/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,700,031
200,000 Placer County, California, Industrial Development Authority, Industrial Revenue,
(Chesapeake Industries Project),
2.300% due 12/1/95++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
200,000 Sacramento County, California, Multifamily Housing Authority Revenue, Series A,
2.200% due 4/15/07++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
3,000,000 Sacramento County, California, Tax and Revenue Anticipation Notes,
3.000% due 7/29/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,005,278
800,000 San Francisco, California, Tax Anticipation Notes,
3.250% due 7/15/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 802,534
1,000,000 Southern California Rapid Transportation District, Series A,
3.000% due 2/22/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,355
-------------
25,688,869
-------------
COLORADO - 0.9%
800,000 Colorado Student Obligation Bond Authority, Series A,
2.550% due 3/1/24++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
1,250,000 Englewood, Colorado, Industrial Development Authority Revenue,
2.550% due 12/1/10 ++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250,000
-------------
2,050,000
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
Market
MUNICIPAL BONDS AND NOTES (CONTINUED)
DISTRICT OF COLUMBIA - 1.8%
$4,000,000 District of Columbia, Revenue, (George Washington University),
2.500% due 3/1/06++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,000,000
-------------
FLORIDA - 3.3%
1,500,000 Dade County, Florida, Solid Waste, Industrial Development Authority Revenue, Series A,
2.400% due 12/1/13++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
500,000 Florida Housing Finance Agency Revenue, Multifamily Housing,
2.600% due 12/1/11++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
2,830,000 Sarasota County, Florida, Health Facilities Authority,
2.500% due 12/1/19 ++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,830,000
1,500,000 St. John County, Florida, Industrial Development Authority Revenue, Series 86,
2.600% due 12/1/16++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
1,100,000 St. Lucie County, Florida, Pollution Control Revenue,
2.450% due 5/1/27++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100,000
-------------
7,430,000
-------------
GEORGIA - 1.5%
3,000,000 Georgia Municipal Electric Authority, Power Reserve, Series 1985A,
10.500% due 1/1/20+++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,305,070
--------------
ILLINOIS - 9.5%
4,000,000 Chicago, Illinois, Revenue Bonds, Tax Anticipation Notes,
2.750% due 1/6/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000
4,300,000 Illinois Health Facilities Authority, Pooled Financing, Series F,
2.350% due 8/1/15++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300,000
Illinois State, Certificates of Obligation:
500,000 3.250% due 4/15/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,795
1,000,000 3.250% due 5/16/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001,470
2,000,000 3.500% due 6/15/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,006,810
5,100,000 Illinois State, Toll Highway Authority, Toll Revenue,
2.250% due 1/1/10++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,100,000
4,500,000 St. Charles, Illinois, Industrial Development Authority Revenue, (Pier 1),
2.700% due 12/15/26 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000
-------------
21,409,075
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
INDIANA - 5.5%
2,000,000 Indiana Health Facilities Financing Authority, Aces Methodist Hospital Inc., Series B,
2.500% due 9/1/22 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,000,000
8,500,000 Indiana Secondary Market Education Loan Revenue, Series B,
2.400% due 12/1/14++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,500,000
2,000,000 Indianapolis, Indiana, Economic Development Authority Revenue,
3.300% due 9/1/95 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
-------------
12,500,000
-------------
IOWA - 1.3%
3,000,000 Iowa State, Transportation Authority Revenue, Series A,
3.250% due 6/30/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,007,953
-------------
KENTUCKY - 1.5%
$1,000,000 Kentucky Housing Corporation, Housing Revenue, Series D,
2.750% due 1/1/22+++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
2,495,000 Kentucky Rural Economic Development Authority Revenue,
2.700% due 12/1/09++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,495,000
-------------
3,495,000
-------------
LOUISIANA - 0.7%
1,000,000 Louisiana Housing Finance Agency Revenue, Multifamily, (Alouette - A),
3.600% due 1/1/26++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
500,000 Louisiana Public Facilities Authority Revenue, Healthcare Systems, (Sisters of Charity),
2.750% due 1/1/15+++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
-------------
1,500,000
-------------
MAINE - 2.3%
2,270,000 Maine State, Tax and Revenue Anticipation Notes,
3.500% due 6/30/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,279,239
3,000,000 Mid-Maine Waste Action Corporation, Revenue Authority,
4.000% due 8/1/12+++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000
-------------
5,279,239
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
MARYLAND - 4.2%
5,000,000 Baltimore, Maryland, Pollution Control Revenue, (FMC Corporation),
2.300% due 2/1/00++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000,000
4,500,000 Maryland State Community Development Administration, Multifamily Housing, Series B,
2.800% due 4/1/17+++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,123
-------------
9,500,123
-------------
MICHIGAN - 1.7%
500,000 Michigan State, Higher Education Student Loan Revenue Authority, Series XIIB,
2.400% due 10/1/13++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
3,380,000 Michigan State, Municipal Bond Authority Revenue Notes, Series B-3,
3.000% due 5/5/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,383,630
-------------
3,883,630
-------------
MINNESOTA - 0.3%
600,000 Beltrami County, Minnesota, Environmental Control Revenue,
1.900% due 12/1/21+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
MISSISSIPPI - 0.1%
150,000 Mississippi Business Finance Corporation, Series C, (Aircruisers Project),
2.450% due 10/1/04++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150,000
-------------
MISSOURI - 4.3%
2,305,000 Kirksville, Missouri, Industrial Development Authority Revenue, (Optech Project),
2.700% due 10/1/09 ++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,305,000
Missouri Higher Education Loan Authority:
1,500,000 Student Loan,
2.550% due 6/1/17++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
4,000,000 Series ,
2.550% due 6/1/20 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000
2,000,000 University of Missouri, Capital Projects Notes, Series FY-4,
3.000% due 6/30/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,905
-------------
9,805,905
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
NEVADA - 0.4%
$500,000 Clark County, Nevada, Industrial Development Authority Revenue, (Nevada Power Company),
2.750% due 11/1/18++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500,000
Nevada State, Department Commission, Industrial Development Authority, Series A:
200,000 Series A, (Kinplex Project),
2.450% due 1/1/09++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
300,000 Series A, (Master Halco Project),
2.650% due 12/1/09++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
-------------
1,000,000
-------------
NEW MEXICO - 1.1%
1,000,000 Albuquerque, New Mexico, Revenue, (Charter Hospital, Inc. Project),
2.200% due 3/1/14++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
500,000 Farmington, New Mexico, Pollution Control Revenue, Series 85A,
2.800% due 2/1/15+++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499,955
1,000,000 New Mexico State, Severance Tax, Series B,
7.000% due 1/1/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,003,428
-------------
2,503,383
-------------
NEW YORK - 7.2%
5,000,000 New York, New York, City Municipal Water Finance Authority,
2.750% due 4/15/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,525
8,030,000 New York, New York, Revenue Anticipation Notes, Series B,
3.500% due 6/30/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,062,654
3,140,000 New York State, Mortgage Agency Revenue, Series 32B,
2.750% due 3/1/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,140,000
-------------
16,203,179
-------------
NORTH CAROLINA - 0.9%
2,000,000 Bladen County, North Carolina, Industrial Facilities and Pollution Control Revenue,
2.650% due 11/1/20++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
OHIO - 3.8%
600,000 Columbus, Ohio, Economic Development Authority Revenue,
2.350% due 12/1/95++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600,000
5,000,000 Ohio State, Environmental Improvement Development Revenue,
2.550% due 3/1/23 +++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000
2,200,000 Ohio State University, General Receipts, Series B,
2.250% due 12/1/12++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200,000
Student Loan Funding Corporation, Ohio, Cincinnati Loan Revenue:
300,000 Series 1983A,
2.500% due 12/29/98 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
500,000 Series A-1,
2.600% due 1/1/07++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
-------------
8,600,000
-------------
OKLAHOMA - 0.3%
550,000 Central Oklahoma, Transportation and Parking Authority Revenue,
8.200% due 7/1/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566,380
-------------
PENNSYLVANIA - 6.7%
$7,200,000 Pennsylvania State, Economic Development Authority, Solid Waste Disposal,
2.700% due 12/1/19+++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200,000
2,000,000 Pennsylvania State, Higher Education Facilities Authority Revenue,
2.400% due 6/1/99++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
2,200,000 Philadelphia, Pennsylvania, Hospital and Higher Education Facilities Authority,
2.500% due 6/1/23 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200,000
3,800,000 Schuylkill County, Pennsylvania, Industrial Development Authority, Resource Recovery,
4.500% due 12/1/06+++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800,000
-------------
15,200,000
-------------
PUERTO RICO - 0.4%
1,000,000 Commonwealth of Puerto Rico, Government Development Bank,
2.250% due 12/1/15++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
SOUTH CAROLINA - 0.4%
1,000,000 York County, South Carolina, Pollution Control Revenue, (NRU Project), Series 84N-4,
2.700% due 9/15/14+++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000,000
-------------
SOUTH DAKOTA - 0.9%
2,000,000 South Dakota School District, Certificate of Participation,
4.050% due 12/30/93 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,002,250
-------------
TENNESSEE - 4.3%
300,000 Chatanooga, Tennessee, Industrial Development Revenue,
2.250% due 12/15/12++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
4,000,000 Coffee County, Tennessee, Industrial Development Board, Series M,
3.550% due 12/1/01++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000
1,500,000 Hamilton County, Tennessee, Industrial Development Board, Industrial Development Revenue,
(Seaboard Feeds Chatanooga Project),
2.600% due 12/1/17++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
2,000,000 Metropolitan Government of Nashville and Davidson County, Tennessee, University, Series 85A,
2.600% due 1/15/13 ++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
2,000,000 Metropolitan Nashville Airport Authority, Tennessee, Tennessee Airport Revenue,
2.250% due 7/1/19 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000
-------------
9,800,000
-------------
TEXAS - 10.8%
700,000 Capital Health Facilities Development Corporation, Texas, Health Facilities,
2.600% due 12/1/16 ++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
5,400,000 City of Houston, Texas, Airport Authority Revenue,
2.650% due 1/13/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,400,000
3,400,000 Mansfield, Texas, Industrial Development Authority, (Corporation Project),
2.700% due 11/1/26 ++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400,000
North Texas Higher Education Authority:
2,600,000 Series F,
2.500% due 4/1/20++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600,000
8,000,000 Student Loan Revenue,
2.350% due 3/1/05++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000,000
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
Market
Face Value
Value (Note 1)
- ------- ----------
<C> <S> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
TEXAS - (CONTINUED)
San Antonio, Texas, Housing Finance Corporation, Multifamily Housing:
$300,000 (Cape Cod Apartments),
2.550% due 6/1/20 ++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000
1,000,000 (Mesa Ridge Apartments Project),
2.550% due 11/1/20 ++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
3,000,000 Texas State, Tax and Revenue Anticipation Notes,
3.250% due 8/31/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,010,912
-------------
24,410,912
-------------
UTAH - 6.3%
3,000,000 Carbon County, Utah, Solid Waste Revenue,
2.800% due 7/1/08 +++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000
2,000,000 Intermountain Power Agency, Utah, Power Supply Revenue,
11.000% due 1/1/94. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,073,537
7,500,000 Tooele County, Utah, (Hazardous Waste Treatment Project), Series A,
2.700% due 11/1/26 +++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500,000
1,600,000 Utah State, Board of Regents, Student Loan Revenue,
2.400% due 11/1/13 ++ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600,000
-------------
14,173,537
-------------
VIRGINIA - 1.8%
Virginia State, Housing Development Authority, Commonwealth Mortgage:
$1,000,000 Series B, Subseries B- Stem II,
2.950% due 7/1/27+++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
3,000,000 Series I, Subseries I- Stem,
2.800% due 7/1/20+++. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000
-------------
4,000,000
-------------
WASHINGTON - 0.4%
900,000 Snohomish County, Washington, Public Utilities Revenue,
5.500% due 1/1/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901,936
-------------
WISCONSIN - 0.7%
1,500,000 Milwaukee, Wisconsin, Metropolitan Sewer District,
5.100% due 9/1/94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,525,379
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
LEHMAN BROTHERS FUNDS, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1993 (UNAUDITED)
MUNICIPAL INCOME FUND
<TABLE>
<S> <C> <C>
MUNICIPAL BONDS AND NOTES (CONTINUED)
TOTAL INVESTMENTS (Cost $231,141,820*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.1% 231,141,820
OTHER ASSETS AND LIABILITIES (Net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.1) (4,680,646)
------ -------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% $ 226,461,174
------ -------------
------ -------------
<FN>
__________________________
* Aggregate cost for Federal tax purposes.
+ Variable rate demand notes are payable upon not more than one business day's
notice. The interest rate shown reflects the rate currently in effect.
++ Variable rate demand notes are payable upon not more than seven business days'
notice.
The interest rate shown reflects the rate currently in effect.
+++ Put bonds and notes have demand features which mature within one year.
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ----------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Municipal Income Fund
Statement of Assets and Liabilities
November 30, 1993 (Unaudited)
- ----------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $231,141,820) (Note 1)
See accompanying schedule. . . . . . . . . . . . . . . $ 231,141,820
Receivable for Fund shares sold . . . . . . . . . . . . . 4,520,743
Interest receivable . . . . . . . . . . . . . . . . . . . 1,536,889
Unamortized organization costs (Note 5) . . . . . . . . . 169,198
--------------
Total Assets . . . . . . . . . . . . . . . . . . . . . 237,368,650
LIABILITIES:
Payable for Fund shares redeemed. . . . . . . . . . . . . $ 6,874,450
Payable for investment securities purchased . . . . . . . 3,438,070
Dividends payable . . . . . . . . . . . . . . . . . . . . 204,470
Organization costs payable. . . . . . . . . . . . . . . . 156,026
Distribution fee payable (Note 3) . . . . . . . . . . . . 63,895
Investment advisory fee payable (Note 2). . . . . . . . . 49,658
Due to custodian. . . . . . . . . . . . . . . . . . . . . 42,641
Administration fee payable (Note 2) . . . . . . . . . . . 33,105
Custodian fees payable (Note 2) . . . . . . . . . . . . . 15,550
Transfer agent fees payable (Note 2). . . . . . . . . . . 4,439
Accrued expenses and other payables . . . . . . . . . . . 25,172
------------
Total Liabilities. . . . . . . . . . . . . . . . . . . 10,907,476
--------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $ 226,461,174
--------------
--------------
NET ASSETS consist of:
Accumulated net realized gain on investments sold . . . . $ 300
Par value . . . . . . . . . . . . . . . . . . . . . . . . 226,461
Paid-in capital in excess of par value. . . . . . . . . . 226,234,413
--------------
Total Net Assets . . . . . . . . . . . . . . . . . . . $ 226,461,174
--------------
--------------
NET ASSET VALUE, offering price and redemption price
per share ($226,461,174 - 226,460,874 shares of
beneficial interest outstanding). . . . . . . . . . . . . $1.00
--------------
--------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ---------------------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Municipal Income Fund
Statement of Operations
For the Period Ended November 30, 1993 (Unaudited)*
- ---------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,243,332
EXPENSES:
Investment advisory fee (Note 2). . . . . . . . . . . . . $ 138,466
Distribution fee (Note 3) . . . . . . . . . . . . . . . . 115,388
Administration fee (Note 2) . . . . . . . . . . . . . . . 92,310
Legal and audit fees. . . . . . . . . . . . . . . . . . . 17,667
Custodian fees (Note 2) . . . . . . . . . . . . . . . . . 15,550
Directors' fees and expenses (Note 2) . . . . . . . . . . 14,185
Amortization of organization costs (Note 5) . . . . . . . 12,015
Transfer agent fees (Note 2). . . . . . . . . . . . . . . 11,240
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 23,175
Fees waived by investment adviser, administrator and
distributor (Note 2). . . . . . . . . . . . . . . . . . (180,322)
------------
Total Expenses . . . . . . . . . . . . . . . . . . . . 259,674
--------------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . . 983,658
--------------
NET REALIZED GAIN ON INVESTMENTS SOLD (Note 1) . . . . . . . 300
--------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . $ 983,958
--------------
--------------
<FN>
_____
* The Lehman Brothers Municipal Income Fund commenced operations on August 2,
1993.
</TABLE>
See Notes to Financial Statements.
<PAGE>
- -----------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Municipal Income Fund
Statement of Changes in Net Assets
- ------------------------------------------
<TABLE>
<CAPTION>
Period
Ended
11/30/93*
(Unaudited)
--------------
<S> <C>
Net investment income. . . . . . . . . . . . . . . . . . . . $ 983,658
Net realized gain on investments sold during the period. . . 300
--------------
Net increase in net assets resulting from operations . . . . 983,958
Distributions to shareholders from net investment income . . (983,658)
Net increase in net assets from Fund share
transactions (Note 4) . . . . . . . . . . . . . . . . . . 226,410,874
--------------
Net increase in net assets . . . . . . . . . . . . . . . . . 226,411,174
NET ASSETS:
Beginning of period. . . . . . . . . . . . . . . . . . . . . 50,000
--------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . $ 226,461,174
--------------
--------------
<FN>
_____
* The Lehman Brothers Municipal Income Fund commenced operations on August 2,
1993.
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ----------------------------------------------------------------
LEHMAN BROTHERS FUNDS, INC.
Lehman Brothers Municipal Income Fund
Financial Highlights
For a Fund share outstanding throughout the period
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Period
Ended
11/30/93*
(Unaudited)
---------
<S> <C>
Net Asset Value, beginning of period $1.00
---------
Income from investment operations:
Net investment income. . . . . . . . . . . . 0.0071
---------
Less distributions:
Distributions from net investment income (0.0071)
---------
Net Asset Value, end of period . . . . . . . $1.00
---------
Total Return++ . . . . . . . . . . . . . . . 0.72%
---------
---------
Ratios to average net assets/supplemental
data:. . . . . . . . . . . . . . . . . . .
Net assets, end of period (in 000's) . . . . $226,461
Ratios of net investment income to average
net assets . . . . . . . . . . . . . . . . 2.13%**
Ratios of operating expenses to average
net assets+. . . . . . . . . . . . . . . . 0.56%**
_________________________________________________________
<FN>
* The Fund commenced operations on August 2, 1993.
** Annualized.
+ Annualized expense ratio before waiver of fees by the investment adviser,
administrator and distributor for the period ended November 30, 1993 was
0.95%.
++ Total return represents aggregate total return for the period indicated.
</TABLE>
See Notes to Financial Statements.
<PAGE>
Lehman Brothers Funds, Inc.
Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Lehman Brothers Funds, Inc. (the "Company") was incorporated under the
laws of the State of Maryland on May 5, 1993. It is an open-end management
investment company, which consists of two funds: Lehman Brothers Daily Income
Fund ("Daily Income Fund") and Lehman Brothers Municipal Income Fund
("Municipal Income Fund") (the "Funds"). The following is a summary of
significant accounting policies consistently followed by the Funds in the
preparation of their financial statements.
PORTFOLIO VALUATION: Securities are valued at amortized cost which
approximates market value. Amortized cost valuation involves valuing a security
at cost initially and, thereafter, assuming a constant amortization to maturity
of any discount or premium, regardless of the effect of fluctuating interest
rates on the market value of the security.
REPURCHASE AGREEMENTS: The Funds may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Fund's holding period.
This arrangement results in a fixed rate of return that is not subject to
market fluctuations during the Fund's holding period. The value of the
collateral is at least equal at all times to the total amount of the repurchase
obligations, including interest. In the event of counterparty default, the Fund
has the right to use the collateral to offset losses incurred. There is
potential loss to the Fund in the event the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities, including the
risk of a possible decline in the value of the underlying securities during the
period while the Fund seeks to assert its rights. The Funds review the value of
the collateral and the creditworthiness of those banks and dealers with which
the Funds enter into repurchase agreements to evaluate potential risks.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses on investments sold
are recorded on the basis of identified cost. Interest income is recorded on
the accrual basis.
<PAGE>
Lehman Brothers Funds, Inc.
Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FEDERAL INCOME TAXES: The Funds intend to qualify as regulated investment
companies by complying with the requirements of the Internal Revenue Code of
1986, as amended and applicable to regulated investment companies and by
distributing substantially all of their taxable income to their shareholders.
Therefore, no Federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income of each Fund are declared daily and paid monthly. Capital gains, unless
offset by any available capital loss carryforward, are distributed to
shareholders annually after the close of the fiscal year in which earned or
more frequently to maintain the Fund's net asset value of $1.00 per share. In
order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make
additional distribution of any undistributed ordinary income or capital gains
before each
December 31, and expects to make any other distributions as are necessary to
avoid the application of this tax.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
Lehman Brothers Global Asset Management Inc. ("LBGAM"), serves as each
Fund's investment adviser pursuant to separate investment advisory agreements.
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"). The remainder of Holding's voting stock is owned by Nippon Life
Insurance Company. Under the investment advisory agreements, each Fund pays a
monthly fee at an annual rate of 0.30% of the value of such Fund's respective
average daily net assets. For the period ended November 30, 1993, LBGAM waived
fees of $333,872 and $88,808 for the Daily Income Fund and the Municipal Income
Fund, respectively.
The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect wholly
owned subsidiary of Mellon Bank Corporation, ("Mellon") serves as the Funds'
administrator pursuant to an administration agreement. Under the administration
agreement each Fund pays a monthly fee at the annual rate of 0.20% of the value
of its respective average daily net assets. For the period ended November 30,
1993, Boston Advisors waived fees of $222,582 and $59,205 for the Daily Income
Fund and Municipal Income Fund, respectively.
No employee of Lehman Brothers, LBGAM, Boston Advisors or of any parent,
subsidiary or affiliate thereof receives any compensation from the Company for
serving as an officer or Director of the Company. The Company pays each
Director who is not an officer or employee of Lehman Brothers, LBGAM or Boston
Advisors or any parent, subsidiary, or affiliate thereof $20,000 per annum,
plus $500 per meeting attended, and reimburses each such Director for travel
and out-of-pocket expenses.
<PAGE>
Lehman Brothers Funds, Inc.
Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Funds' custodian. The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation ("FDC"), serves as the Funds'
transfer agent. American Express retains a 21.5% interest in FDC.
3. DISTRIBUTION ARRANGEMENTS
Lehman Brothers acts as distributors of Fund shares.
Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a plan
of distribution (the "Plan of Distribution") with respect to each Fund. Under
the Plan of Distribution each Fund compensates Lehman Brothers monthly for
advertising, marketing and distributing its shares, at an annual rate of 0.25%
of the value of its respective average daily net assets. For the period ended
November 30, 1993, Lehman Brothers waived fees of $109,063 and $32,309 for the
Daily Income Fund and the Municipal Income Fund, respectively.
4. SHARES OF CAPITAL STOCK
The Board of Directors have authority to issue 10,000,000,000 shares of
capital stock ($0.001 par value). Since the Funds have sold shares, issued
shares as reinvestments of dividends and redeemed shares only at a
constant net asset value of $1 per share, the number of shares represented by
such sales, reinvestments and redemptions is the same as the amounts shown
below for such transactions.
The Table below summarizes transactions of the Daily Income Fund:
<TABLE>
<CAPTION>
PERIOD ENDED
11/30/93*
<S> <C>
Sold . . . . . . . . . . . . . . $1,579,302,037
Dividend Reinvestment. . . . . . 3,186,563
Redeemed . . . . . . . . . . . . (749,264,435)
--------------
Net increase . . . . . . . . . . $ 833,224,165
--------------
--------------
<FN>
__________________
*The Daily Income Fund commenced operations on August 2, 1993.
</TABLE>
<PAGE>
Lehman Brothers Funds, Inc.
Lehman Brothers Daily Income Fund
Lehman Brothers Municipal Income Fund
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The Table below summarizes transactions of the Municipal Income Fund:
<TABLE>
<CAPTION>
PERIOD ENDED
11/30/93*
<S> <C>
Sold . . . . . . . . . . . . . . $ 403,149,759
Dividend Reinvestment. . . . . . 769,235
Redeemed . . . . . . . . . . . . (177,508,120)
--------------
Net increase . . . . . . . . . . $ 226,410,874
--------------
--------------
<FN>
__________________
*The Municipal Income Fund commenced operations on August 2, 1993.
</TABLE>
5. ORGANIZATION COSTS
The Funds bear all costs in connection with their organization including
fees and expenses of registering and qualifying their shares for distribution
under Federal and state securities regulations. All such costs are being
amortized on the straight-line method over a period of five years from the
commencement of operations of the Funds. In the event that any of the initial
shares of the Funds are redeemed during such amortization period, the Funds
will be reimbursed for any unamortized organization costs in the same
proportion as the number of shares redeemed bears to the number of initial
shares held at the time of redemption.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 14, 1994
Lehman Mexican Growth and Income Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
Statement of Additional Information ________________, 1994
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus for the Lehman Mexican Growth And Income
Portfolio (the "Fund"), dated _______________, 1994, as amended or supplemented
from time to time, and is incorporated by reference in its entirety into the
Prospectus. The Fund is a non-diversified portfolio of Lehman Brothers Funds,
Inc. (the "Company"), an open-end, management investment company. Because this
Statement of Additional Information is not itself a prospectus, no investment
in shares of the Fund should be made solely upon the information contained
herein. Copies of the Prospectus may be obtained by calling 800-451-2010.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
TABLE OF CONTENTS
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . .
The Mexican Securities Markets . . . . . . . . . . . . . . . . . . . . . .
Additional Purchase and Redemption Information . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . .
The United Mexican States . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Fund Shares . . . . . . . . . . . . . . .
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
As stated in the Prospectus, the primary investment objective of the Fund is to
seek long-term capital appreciation, and as a secondary investment objective,
the Fund will seek current income. The following policies supplement the
description of the Fund's investment objectives and policies in the Prospectus.
Portfolio Transactions
Subject to the general control of the Company's Board of Directors, Lehman
Brothers Global Asset Management Limited ("LBGAM"), the Fund's investment
adviser, is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Fund. Transactions
on United States and some foreign stock exchanges, including the Mexican Stock
Exchange, involve the payment of negotiated brokerage commissions, which may
vary among different brokers. The cost of securities purchased from
underwriters includes an underwriter's commission or concession, and the prices
at which securities are purchased from and sold to dealers in the U.S. and some
foreign over-the-counter markets include an undisclosed dealer spread. In
making portfolio investments, LBGAM seeks to obtain the best net price and the
most favorable execution of orders. To the extent that the execution and price
offered by more than one broker or dealer are comparable, LBGAM may, in its
discretion, effect transactions in portfolio securities with brokers or dealers
who provide the Company with research advice or other services. Research advice
and other services furnished by brokers through whom the Fund effects
securities transactions may be used by LBGAM in servicing accounts in addition
to the Fund, and not all such services will necessarily benefit the Fund.
With respect to over-the-counter transactions, the Fund, where possible,
will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere.
Investment decisions for the Fund are made independently from those for
the other investment company portfolios or accounts advised by LBGAM. Such
other portfolios may also invest in the same securities as the Fund. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other portfolios, transactions are averaged as to price, and
available investments allocated as to amount, in a manner which LBGAM believes
to be equitable to each portfolio, including the Fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtainable for the Fund. To the extent
permitted by law, LBGAM may aggregate the securities to be sold or purchased
for the Fund with those to be sold or purchased for such other portfolios in
order to obtain best execution.
The Fund will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with Lehman Brothers Inc. ("Lehman Brothers"), LBGAM or
any affiliated person (as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of either of them, except to the extent
<PAGE>
permitted by the Securities and Exchange Commission (the "SEC"). However,
pursuant to an exemption granted by the SEC, the Fund may engage in
transactions involving certain money market instruments with Lehman Brothers
and certain of its affiliates acting as principal. The Fund will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which Lehman Brothers or any affiliate thereof is a member, except
to the extent permitted by the SEC. Under certain circumstances, the Fund may
be at a disadvantage because of these limitations in comparison with other
investment company portfolios which have similar investment objectives but are
not subject to such limitations.
It is anticipated that the Fund's annual portfolio turnover rate generally
will not exceed 150%. This rate is calculated by dividing the lesser of sales
or purchases of portfolio securities for any given year by the average monthly
value of the Fund's portfolio securities for that year. For purposes of this
calculation, no regard is given to securities having a maturity or expiration
date at the time of acquisition of one year or less. Portfolio turnover
directly affects the amount of transaction costs that are borne by the Fund. In
addition, the sale of securities held by the Fund for not more than one year
will give rise to short-term capital gain or loss for U.S. federal income tax
purposes. The U.S. federal income tax requirement that the Fund derive less
than 30% of its gross income from the sale or other disposition of stock or
securities held less than three months may limit the Fund's ability to dispose
of its securities. See "Additional Information Concerning Taxes."
Additional Information on Portfolio Instruments and Certain Investment
Practices
U.S. Government Obligations. Examples of the types of U.S. government
securities that may be held by the Fund include, in addition to U.S. Treasury
Bills, the obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, Federal Financing Bank, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal Farm Credit Banks, Maritime Administration,
Resolution Trust Corporation, Tennessee Valley Authority, U.S. Postal Service
and Washington D.C. Armory Board.
Bank Obligations. Certain Mexican bank obligations are described in
the Prospectus under the caption "Investment Objectives and Policies." More
generally, bank obligations include negotiable certificates of deposit,
bankers' acceptances, fixed time deposits and deposit notes. A certificate of
deposit is a short-term negotiable certificate issued by a commercial bank
against funds deposited in the bank and is either interest-bearing or purchased
on a discount basis. A bankers' acceptance is a short-term draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction. The borrower is liable for payment as is the bank,
which unconditionally guarantees to pay the draft at its face amount on the
maturity date. Bankers' Acceptances issued by Mexican banks are of two types
and are described in the Prospectus. Fixed time deposits are obligations of
branches of United States banks or foreign banks which are payable at a stated
<PAGE>
maturity date and bear a fixed rate of interest. Although fixed time deposits
do not have a market, there are no contractual restrictions on the right to
transfer a beneficial interest in the deposit to a third party. Fixed time
deposits subject to withdrawal penalties and with respect to which a Fund
cannot realize the proceeds thereon within seven days are deemed "illiquid" for
the purposes of the seventh investment limitation set forth under "Investment
Objectives and Policies--Investment Limitations" below. Deposit notes are notes
issued by commercial banks which generally bear fixed rates of interest and
typically have original maturities ranging from eighteen months to five years.
Banks may be subject to extensive governmental regulations that may
limit both the amounts and types of loans and other financial commitments that
may be made and the interest rates and fees that may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations. Bank obligations may be general obligations of
the parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation. Investors should also be
aware that securities of foreign banks and foreign branches of U.S. banks may
involve investment risks in addition to those relating to domestic bank
obligations. Such risks include future political and economic developments, the
possible seizure or nationalization of foreign deposits, the possible adoption
of foreign governmental restrictions which might adversely affect the payment
of principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and foreign issuers generally are subject to different accounting,
auditing, reporting and record keeping standards than those applicable to U.S.
issuers.
Convertible Securities. As fixed income securities, convertible
securities are investments that provide for a stable stream of income with
generally higher yields than common stocks. Of course, like all fixed income
securities, there can be no assurance of current income because the issuers of
the convertible securities may default on their obligations. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation. A convertible security, in addition to providing fixed
income, offers the potential for capital appreciation through the conversion
feature, which enables the holder to benefit from increases in the market price
of the underlying common stock. There can be no assurance of capital
appreciation, however, because securities prices fluctuate. Convertible
securities generally are subordinated to other similar but non-convertible
securities of the same issuer, although convertible bonds, as corporate debt
obligations, enjoy seniority in right of payment to all equity securities, and
convertible preferred stock is senior to common stock, of the same issuer.
Because of the subordination feature, however, convertible securities typically
have lower ratings than similar non-convertible securities.
Repurchase Agreements. The repurchase price under the repurchase
agreements described in the Prospectus generally equals the price paid by the
<PAGE>
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
Company's custodian, sub-custodian or in the Federal Reserve/Treasury book-
entry system. Repurchase agreements are considered to be loans by the Fund
under the 1940 Act.
Reverse Repurchase Agreements. Whenever the Fund enters into reverse
repurchase agreements as described in the Prospectus, it will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained.
Loans of Portfolio Securities. The Fund has the ability to lend
securities from its portfolio to brokers, dealers and other financial
organizations. There is no investment restriction on the amount of securities
that may be loaned. The Fund may not lend its portfolio securities to Lehman
Brothers or its affiliates without specific authorization from the SEC. Loans
of portfolio securities by the Fund will be collateralized by cash, letters of
credit or securities which are consistent with its permitted investments, which
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. From time to time, the Fund may
return a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party, which is
unaffiliated with the Fund or Lehman Brothers, and which is acting as a
"finder." With respect to loans by the Fund of its portfolio securities, the
Fund would continue to accrue interest on loaned securities and would also earn
income on loans. Any cash collateral received by the Fund in connection with
such loans would be invested in securities in which the Fund is permitted to
invest.
When-Issued Securities. As stated in the Prospectus, the Fund may
purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price). When the Fund agrees to purchase
when-issued securities, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. When the Fund engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous. The Fund does not intend to purchase when-
issued securities for speculative purposes but only in furtherance of its
investment objective. The Fund reserves the right to sell these securities
before the settlement date if it is deemed advisable.
Illiquid and Restricted Securities. The Fund may not invest more than
15% of its net assets in illiquid securities, including securities that are
illiquid by virtue of the absence of a readily available market or legal or
<PAGE>
contractual restrictions on resale. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered
illiquid for purpose of this limitation.
The SEC has adopted Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"), which allows for a broader institutional trading
market for securities otherwise subject to restrictions on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. The Fund's investment adviser anticipates that the market
for certain restricted securities such as institutional commercial paper and
institutional municipal securities will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers.
The Fund's investment adviser will monitor the liquidity of
restricted and other illiquid securities under the supervision of the Board of
Directors. In reaching liquidity decisions with respect to Rule 144A
securities, the Fund's investment adviser will consider, inter alia, the
following factors: (1) the unregistered nature of a Rule 144A security; (2)
the frequency of trades and quotes for a Rule 144A security; (3) the number of
dealers wishing to purchase or sell the Rule 144A security and the number of
other potential purchasers; (4) dealer undertakings to make a market in the
Rule 144A security; (5) the trading markets for the Rule 144A security; and (6)
the nature of the Rule 144A security and the nature of the marketplace trades
(e.g., the time needed to dispose of the Rule 144A security, the method of
soliciting offers and the mechanics of the transfer).
The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by nationally recognized rating
agencies for obligations that may be purchased by the Fund.
Additional Information Regarding Hedging and Other Strategic Transactions
As described in the Prospectus under "Investment Objectives and Policies--
Other Investment Practices--Hedging and Other Strategic Transactions", the Fund
is authorized to use a variety of investment strategies to hedge various market
risks (such as interest rates, currency exchange rates and broad or specific
market movements), to manage the effective maturity or duration of debt
instruments held by the Fund, or, with respect to certain strategies, to seek
to increase the Fund's income or gain (such investment strategies and
transactions are referred to herein as "Hedging and Other Strategic
Transactions").
A detailed discussion of Hedging and Other Strategic Transactions follows
below. Few of these strategies can practicably be used by the Fund at the
present time because the instruments needed to implement these strategies are
not generally available and such instruments may not become available for
extensive use in the future. Techniques and instruments may change, however,
over time as new instruments and strategies are developed or regulatory changes
occur. In addition, the Fund's ability to pursue certain of these strategies
<PAGE>
may be limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment
companies which are not operated as commodity pools. See "Taxes" in the
Prospectus.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Hedging and Other
Strategic Transactions involving options require segregation of Fund assets in
special accounts, as described below under "Investment Objectives and
Policies--Additional Information Regarding Hedging and Other Strategic
Transactions--Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. The Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser
of the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial futures contract, index, currency or other
instrument might be intended to protect the Fund against an increase in the
price of the underlying instrument that it intends to purchase in the future by
fixing the price at which it may purchase the instrument. An "American" style
put or call option may be exercised at any time during the option period,
whereas a "European" style put or call option may be exercised only upon
expiration or during a fixed period prior to expiration. Exchange-listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to the options. The discussion below uses the OCC as an example, but is
also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
<PAGE>
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed
by an exchange, (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits, (4) interruption of the
normal operations of the OCC or an exchange, (5) inadequacy of the facilities
of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-
listed options, which generally have standardized terms and performance
mechanics, all of the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guaranties and security, are
determined by negotiation of the parties. It is anticipated that any Portfolio
authorized to use OTC options will generally only enter into OTC options that
have cash settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Fund or fails to make a cash
settlement payment due in accordance with the terms of that option, the Fund
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Thus, LBGAM must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
met. The Fund will enter into OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers," or broker-dealers, domestic or foreign banks, or other
financial institutions that LBGAM deems to be creditworthy. In the absence of a
change in the current position of the staff of the SEC, OTC options purchased
by the Fund and the amount of the Fund's obligation pursuant to an OTC option
sold by the Fund (the cost of the sell-back plus the in-the-money amount, if
any) or the value of the assets held to cover such options will be deemed
illiquid.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
<PAGE>
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
The Fund may purchase and sell call options on securities that are traded
on U.S. and foreign securities exchanges and in the OTC markets, and on
securities indices, currencies and futures contracts. All calls sold by the
Fund must be "covered" (that is, the Fund must own the securities or futures
contract subject to the call), or must otherwise meet the asset segregation
requirements described below for so long as the call is outstanding. Even
though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the Fund to hold
a security or instrument that it might otherwise have sold.
The Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
The Fund may purchase and sell put options on securities (whether or not
it holds the securities in its portfolio) and on securities indices, currencies
and futures contracts. The Fund will not sell put options if, as a result, more
than 50% of the Fund's assets would be required to be segregated to cover its
potential obligations under put options other than those with respect to
futures contracts. In selling put options, the Fund faces the risk that it may
be required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures Contracts and Options on Futures
Contracts. The Fund may trade financial futures contracts or purchase or sell
put and call options on those contracts as a hedge against anticipated interest
rate, currency or market changes, and for risk management purposes, or the Fund
may seek to increase the Fund's income or gain. Futures contracts are generally
bought and sold on the commodities exchanges on which they are listed with
payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver
to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
certain instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.
The Fund's use of financial futures contracts and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC. Maintaining a futures
contract or selling an option on a futures contract will typically require the
Fund to deposit with a financial intermediary, as security for its obligations,
an amount of cash or other specified assets ("initial margin") that initially
is from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
<PAGE>
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
The Fund will not enter into a futures contract or option thereon if,
immediately thereafter, the sum of the amount of its initial margin and
premiums required to maintain permissible non-bona fide hedging positions in
futures contracts and options thereon would exceed 5% of the current fair
market value of the Fund's net assets; however, in the case of an option that
is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The value of all futures contracts
sold by the Fund (adjusted for the historical volatility relationship between
the Fund and the contracts) will not exceed the total market value of the
Fund's securities. The segregation requirements with respect to futures
contracts and options thereon are described below under "Investment Objectives
and Policies--Additional Information Regarding Hedging and Other Strategic
Transactions--Use of Segregated and Other Special Accounts."
Options on Securities Indices and Other Financial Indices. The Fund may
purchase and sell call and put options on securities indices and other
financial indices. In so doing, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, options on indices settle by cash settlement; that is,
an option on an index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option (except if, in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments comprising the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value. Currency
transactions include currency forward contracts, coberturas, exchange-listed
currency futures contracts and options thereon, exchange-listed and OTC options
on currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties, at a price
<PAGE>
set at the time of the contract. Coberturas are similar to forward currency
exchange contracts, except that they are settled in cash and can be purchased
only from a Mexican bank or a Mexican broker-dealer. The Fund would purchase
the cobertura from the Counterparty, in exchange for payment of a fee, and
would receive on the expiration date cash equal to the difference between the
peso/dollar exchange rate on the date that the cobertura was purchased and the
expiration date. The Fund's most significant risk in purchasing a cobertura is
that a Counterparty will default on its payment obligations thereon. A currency
swap is an agreement to exchange cash flows based on the notional difference
among two or more currencies and operates similarly to an interest rate swap,
which is described below under "Investment Objectives and Policies--Additional
Information Regarding Hedging and Other Strategic Transactions--Swaps, Caps,
Floors and Collars". The Fund may enter into currency transactions only with
Counterparties that LBGAM deems to be creditworthy.
The Fund's dealings in forward currency contracts, coberturas and other
currency transactions such as futures contracts, options, options on futures
contracts and swaps will be limited to hedging and other non-speculative
purposes, including transaction hedging and position hedging. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of the Fund's portfolio securities or the receipt of income
from them. Position hedging is entering into a currency transaction with
respect to portfolio securities positions denominated or generally quoted in
that currency. The Fund will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly
or partially to offset other transactions, than the aggregate market value (at
the time of entering into the transaction) of the securities held by the Fund
that are denominated or generally quoted in or currently convertible into the
currency, other than with respect to proxy hedging as described below.
The Fund may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or
decline in value relative to other currencies to which the Fund has or in which
the Fund expects to have exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of its
securities, the Fund may also engage in proxy hedging. Proxy hedging is often
used when the currency to which the Fund's holdings is exposed is difficult to
hedge generally or difficult to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency, the changes in the value
of which are generally considered to be linked to a currency or currencies in
which some or all of the Fund's securities are or are expected to be
denominated, and to buy dollars. The amount of the contract would not exceed
the market value of the Fund's securities denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If the Fund enters into
a currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Investment Objectives and Policies--
Additional Information Regarding Hedging and Other Strategic Transactions--Use
of Segregated and Other Special Accounts."
<PAGE>
Combined Transactions. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple currency transactions (including forward currency contracts), multiple
interest rate transactions and any combination of futures, options, currency
and interest rate transactions, instead of a single Hedging and Other Strategic
Transaction, as part of a single or combined strategy when, in the judgment of
LBGAM, it is in the best interests of the Fund to do so. A combined transaction
will usually contain elements of risk that are present in each of its component
transactions. Although combined transactions will normally be entered into by
the Fund based on LBGAM's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase the risks or
hinder achievement of the Fund management objective.
Swaps, Caps, Floors and Collars. The Fund may enter into interest rate,
currency and equity swaps, the purchase or sale of related caps, floors and
collars and other derivatives. The Fund will enter into these transactions
primarily to seek to preserve a return or spread on a particular investment or
portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price
of securities the Fund anticipates purchasing or selling at a later date. The
Fund will use these transactions for non-speculative purposes and will not sell
caps or floors if it does not own securities or other instruments providing the
income the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (for example, an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal). An equity
swap is an agreement to exchange cash flows on a national principal amount
based on changes in the values of the reference index. A currency swap is an
agreement to exchange cash flows on a notional amount based on changes in the
values of the currency exchange rates. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified interest rate, currency exchange
rate or index exceeds a predetermined rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specified interest rate,
currency exchange rate or index falls below a predetermined rate or amount. A
collar is a combination of a cap and a floor that preserves a certain return
with a predetermined range of rates or values.
The Fund will usually enter into swaps on a net basis, that is, the two
payments streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as these swaps,
caps, floors, collars and other similar derivatives are entered into for good
faith hedging or other non-speculative purposes, they do not constitute senior
securities under the Investment Company Act of 1940, as amended, and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. The
Fund will not enter into any swap, cap, floor, collar or other derivative
transaction unless LBGAM deems the Counterparty to be creditworthy. If a
Counterparty defaults, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
<PAGE>
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.
The liquidity of swap agreements will be determined by LBGAM based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 10% restriction on investments in securities that are not
readily marketable.
The Fund will maintain cash and appropriate liquid assets (i.e., high
grade debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If the Fund enters into a swap agreement on
a net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If the
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Investment Objectives and Policies--Additional
Information Regarding Hedging and Other Strategic Transactions--Use of
Segregated and Other Special Accounts" below.
Risk Factors. Hedging and Other Strategic Transactions have special risks
associated with them, including possible default by the Counterparty to the
transaction, illiquidity and, to the extent the LBGAM's view as to certain
market movements is incorrect, the risk that the use of the Hedging and Other
Strategic Transactions could result in losses greater than if they had not been
used. Use of put and call options could result in losses to the Fund, force the
sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause the Fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures
and options markets could be illiquid in some circumstances and certain over-
the-counter options could have no markets. As a result, in certain markets, the
Fund might not be able to close out a transaction without incurring substantial
losses. Although the Fund's use of futures and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time it will tend to limit any potential gain to
the Fund that might result from an increase in value of the position. Finally,
the daily variation margin requirements for futures contracts create a greater
<PAGE>
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result
in losses to the Fund if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that the Fund is engaging in proxy
hedging. Currency transactions are also subject to risks different from those
of other portfolio transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
adversely affected by government exchange controls, limitations or restrictions
on repatriation of currency, and manipulations or exchange restrictions imposed
by governments. These forms of governmental actions can result in losses to the
Fund if it is unable to deliver or receive currency or monies in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures contracts are subject to the same
risks that apply to the use of futures contracts generally. Further, settlement
of a currency futures contract for the purchase of most currencies must occur
at a bank based in the issuing nation. Trading options on currency futures
contracts is relatively new, and the ability to establish and close out
positions on these options is subject to the maintenance of a liquid market
that may not always be available. Currency exchange rates may fluctuate based
on factors extrinsic to that country's economy.
Losses resulting from the use of Hedging and Other Strategic Transactions
will reduce the Fund's net asset value, and possibly income, and the losses can
be greater than if Hedging and Other Strategic Transactions had not been used.
Risks of Hedging and Other Strategic Transactions Outside the United
States. When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may
not involve a clearing mechanism and related guarantees, and will be subject to
the risk of governmental actions affecting trading in, or the prices of,
foreign securities, currencies and other instruments. The value of positions
taken as part of non-U.S. Hedging and Other Strategic Transactions also could
be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in the Fund's ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States, (4) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States and (5)
lower trading volume and liquidity.
Use of Segregated and Other Special Accounts. Use of many Hedging and
Other Strategic Transactions by the Fund will require, among other things, that
the Fund segregate cash, liquid high grade debt obligations or other assets
with its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
<PAGE>
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade debt obligations at least equal to the current amount of the
obligation must be segregated with the custodian or sub-custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. A
call option on securities written by the Fund, for example, will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high grade debt obligations sufficient to purchase and deliver the securities
if the call is exercised. A call option sold by the Fund on an index will
require the Fund to own portfolio securities that correlate with the index or
to segregate liquid high grade debt obligations equal to the excess of the
index value over the exercise price on a current basis. A put option on
securities written by the Fund will require the Fund to segregate liquid high
grade debt obligations equal to the exercise price. Except when the Fund enters
into a forward contract in connection with the purchase or sale of a security
denominated in a foreign currency or for other non-speculative purposes, which
requires no segregation, a currency contract that obligates the Fund to buy or
sell a foreign currency will generally require the Fund to hold an amount of
that currency or liquid securities denominated in that currency equal to the
Fund's obligations or to segregate liquid high grade debt obligations equal to
the amount of the Fund's obligations.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Fund
will not be required to do so. As a result, when the Fund sells these
instruments it will segregate an amount of assets equal to its obligations
under the options. OCC-issued and exchange-listed options sold by the Fund
other than those described above generally settle with physical delivery, and
the Fund will segregate an amount of assets equal to the full value of the
option. OTC options settling with physical delivery or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid debt or equity securities or other acceptable
assets. The Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap
on a daily basis and will segregate with its custodian, or designated sub-
custodian, an amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Hedging and Other Strategic Transactions may be covered by means other
than those described above when consistent with applicable regulatory policies.
<PAGE>
The Fund may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding
obligation in related options and Hedging and Other Strategic Transactions. The
Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contracts
or forward contract, the Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Hedging and Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
Investment Limitations
The Prospectus summarizes certain investment limitations that may not be
changed without the affirmative vote of the holders of a majority of the Fund's
outstanding shares (as defined below under "Additional Information Concerning
Fund Shares"). Investment limitations numbered 1 through 6 may not be changed
without such vote of shareholders; investment limitations 7 through 11 may be
changed by a vote of the Company's Board of Directors at any time.
1. The Fund may not borrow money, except (a) from banks and in 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.
2. The Fund may not purchase any securities which would cause 25% or
more of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry; provided that there is
no limitation with respect to investments in U.S. government securities.
3. The Fund may not make loans, except that it may purchase or hold debt
instruments in accordance with its investment objectives and policies, and
may enter into repurchase agreements with respect to portfolio securities.
4. The Fund may not act as an underwriter of securities, except insofar
as it may be deemed an underwriter under applicable securities laws in
selling portfolio securities.
5. The Fund may not purchase or sell real estate or real estate limited
partnerships, provided that it may purchase securities of issuers which
invest in real estate or interests therein.
6. The Fund may not purchase or sell commodities contracts except in
connection with Hedging and Other Strategic Transactions, or invest in
<PAGE>
oil, gas or mineral exploration or development programs or in mineral
leases.
7. The Fund may not knowingly invest more than 15% of the value of its
net assets in securities that may be illiquid because of legal or
contractual restrictions on resale or securities for which there are no
readily available market quotations.
8. The Fund may not purchase securities on margin, make short sales of
securities or maintain a short position, except that the Fund may make
short sales against the box and except in connection with Hedging and
Other Strategic Transactions.
9. The Fund may not write or sell puts, calls, straddles, spreads or
combinations thereof except in connection with Hedging and Other Strategic
Transactions.
10. The Fund may not invest in securities if as a result the Fund would
then have more than 5% of its total assets in securities of companies
(including predecessors) with less than three years of continuous
operation, except that this restriction will not apply to U.S. government
securities.
11. The Fund may not purchase securities of other investment companies
except as permitted under the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization.
In order to permit the sale of Fund shares in certain states, the
Fund may make commitments more restrictive than the investment policies and
limitations above. Should the Fund determine that any such commitments are no
longer in its best interest, it will revoke the commitment by terminating sales
of its shares in the state involved.
THE MEXICAN SECURITIES MARKETS
The information in this section is based on material obtained by the Fund from
the Mexican Stock Exchange and other sources believed to be accurate but has
not been independently verified by the Fund, LBGAM or Lehman Brothers.
The Mexican Stock Exchange
General. The Mexican Stock Exchange is currently Mexico's only stock
exchange and is located in Mexico City. The Mexican Stock Exchange was first
founded in 1894, and is organized as a corporation with shares owned by 26
brokerage firms, each of which is authorized to trade on the Exchange floor.
Each of the brokerage firms controls one seat on the Mexican Stock Exchange.
The Board of Directors of the Mexican Stock Exchange is responsible for the
management of the Exchange, including the admission of new brokers, the
development of accounting and reporting standards for members and the review of
applications for listing. No broker may become a member of the Mexican Stock
Exchange unless it has been registered in the National Registry of Securities
and Brokers.
<PAGE>
Both debt and equity securities are traded on the Mexican Stock Exchange,
including stocks and bonds of private sector corporations, commercial paper,
bankers' acceptances, certificates of deposit, Government debt, as more
specifically described below, and special hedge instruments linked to the U.S.
dollar. As of November 30, 1993, approximately 65% of the total market
capitalization was comprised of equity securities, with the remainder of the
market comprised primarily of debt instruments.
The Mexican government created the Institute for the Deposit of Securities
("Indeval"), which commenced operations in 1980 as an agency of the Government,
to serve as a centralized depository for shares. Indeval operates as the
centralized depository institution for securities and renders services of
custody, settlement, transfer and registration of all securities traded on the
Mexican Stock Exchange, creating a system which obviates any need for physical
transfer of securities. In 1987, Indeval was dissolved as a government agency
and restructured as a private corporation owned by its Mexican clients (all of
the Mexican brokerage houses, banks and insurance companies) and changed its
corporate name to S.D. Indeval, S.A. de C.V., Institucion para el Deposito de
Valores. The Fund maintains its listed portfolio securities with Indeval,
through eligible account holders. Indeval charges a monthly custody fee of
0.003% of the market value of assets held by each brokerage firm or account
holder.
The following table shows the trading volume on the Mexican Stock Exchange
in Mexican pesos during the periods indicated.
<TABLE>
<CAPTION>
MEXICAN STOCK EXCHANGE TRADING VOLUME
(US$ billions)
Through
Year ended December 31, July 30,
----------------------------------------------------------------------------------------- ----------
Securities 1985 1986 1987 1988 1989 1990 1991 1992 1993
---------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cetes . . . . . . . . . . . 68.0 64.1 169.4 360.2 393.3 675.1 1,511.4 3,206.0 164.0
Fixed income securities . . 3.0 4.8 4.0 4.2 3.3 4.6 8.1 11.5 7.8
Equity securities . . . . . 2.0 3.7 15.1 5.6 6.1 12.1 31.6 44.0 24.0
Total . . . . . . . . . . . 73.0 72.6 188.5 370.0 402.7 691.8 1,551.1 3,261.5 195.8
____________________
<FN>
Source: Mexican Stock Exchange
</TABLE>
Regulation. The Comision Nacional de Valores (the "CNV"), established in
1946, was empowered pursuant to the Ley de Mercado de Valores ("Securities
Market Law") in 1975 to supervise the Mexican Stock Exchange, brokers and
<PAGE>
companies and other entities selling securities to the public, and to ensure
compliance with the Securities Market Law. In addition, under the Securities
Market Law, the CNV has the authority to regulate the process of offering and
trading of securities and the use of non-public information in connection with
the purchase and sale of securities. Under its broad grant of powers, the CNV
has established guidelines and requirements which must be met before an issuer
may list securities on the Mexican Stock Exchange and offer securities to the
public in Mexico. These standards include: minimum asset requirements and an
established operating history and management structure. In addition, the CNV
requires all registered issuers to publish and furnish to the CNV on a timely
basis financial and operating information such as annual audited financial
statements and unaudited quarterly financial statements and establishes rules
for the preparation of such statements. The CNV also is responsible for causing
the registration of all debt and equity issues in the Registro Nacional de
Valores e Intermediarios ("National Securities and Intermediaries Register")
and for promulgating general rules regulating market operations, limitations on
brokers' activities and establishing reporting requirements regarding the
operations of the Stock Exchange. The CNV is empowered to investigate possible
infractions of the Securities Market Law or any of its own rules and
regulations, suspend trading in particular securities, consult with the
Government or Government entities in securities matters, intervene in the
management in brokerage firms and resolve disputes relating to the Mexican
securities market.
Effective January 1, 1990, the Securities Market Law was amended to
regulate the use of non-public information in the context of purchases and
sales of securities. Directors and certain individuals involved in management
of a listed company, stockholders holding more than 10% of the company's
ordinary share capital, independent advisers to the company, management
employees of the brokerage houses and any other individual deemed to have
inside information may not trade in company securities for three months from
the date they acquire the information. Stockholders must also report to the CNV
purchases or sales by reason of which their holdings exceed or fall below the
10% ownership floor.
In August 1980, the Exchange established a contingency fund to guarantee
the obligations of brokers to their clients and to create greater financial
stability in the market. Brokers are obliged to make contributions to the fund
on a semi-annual basis.
On July 23, 1993, the Mexican Congress approved amendments to the
Securities Market Law, which became effective on July 24, 1993. The changes to
the Securities Market Law provide, among other things, for the
internationalization of the Mexican Stock Exchange by permitting and regulating
the intermediation and public offering of securities issued by non-Mexican
entities on the Mexican Stock Exchange. Also, such amendments provide
additional sanctions for the illegal use of privileged information and set
forth the framework for the exchange of information with non-Mexican regulatory
authorities.
<PAGE>
The Equity Markets
Since the 1800s, equity securities have been traded in Mexico and used to
finance companies in a variety of industries. Notwithstanding the long history
of the Mexican equity market, when compared to markets in the U.S., Europe and
parts of Asia, it is small and far less liquid. For a variety of reasons,
trading volume in equities had declined in importance relative to other
instruments in the securities market during the 1980s. In 1979, for example,
equity trading represented 26% of total Mexican Stock Exchange trading as
opposed to 1987, when equity trading represented only 7% of the total. Since
1990, the equity market has grown in importance due to continued economic
stability and the Government's policy of encouraging institutional investment
as well as an increased in new equity issues by both private and public sector
Mexican companies. The Government's privatization program was partially
conducted through public offers for sale of equity. As of November 30, 1993,
468 companies were listed on the Mexican Stock Exchange, of which 238 were
mutual funds, with an aggregate market capitalization of Ps. 526.5 billion
($169.4 billion). During 1992, 27.9 billion equity securities were traded on
the Mexican Stock Exchange and total turnover amounted to Ps. 119.3 billion
($38.4 billion). Of the companies listed that year, the five most actively
traded companies accounted for 31.5% of total turnover.
The following table shows the value in Mexican pesos and U.S. dollars of
new equity issues floated on the Mexican Stock Exchange for the periods
indicated.
<TABLE>
<CAPTION>
Corporate Loans
--------------------------------
Pesos US$
Year millions millions
--------------- ---------------
<S> <C> <C>
1986 . . . . . . . . . . . . . . . . . . . . . . 8.8 13.7
1987 . . . . . . . . . . . . . . . . . . . . . . 639.3 451.2
1988 . . . . . . . . . . . . . . . . . . . . . . 150.2 64.7
1989 . . . . . . . . . . . . . . . . . . . . . . 683.3 269.6
1990 . . . . . . . . . . . . . . . . . . . . . . 2,256.1 791.3
1991 . . . . . . . . . . . . . . . . . . . . . . 7,245.3 2,390.4
1992 . . . . . . . . . . . . . . . . . . . . . . 2,563.2 817.9
1993 (through July 30) . . . . . . . . . . . . . 1,366.9 423.9
____________________
<FN>
Source: Mexican Stock Exchange
</TABLE>
Companies that wish to list securities are required to be registered with
the National Securities and Intermediaries Register and be listed on the
Exchange. The Exchange and the CNV cooperate with respect to listing
requirements, including preparation of a full prospectus covering all aspects
<PAGE>
of the business, five year financial statements and an annual financial
forecast. Applications for listing are approved by a committee ("Junta de
Gobierno") consisting of representatives of Banco de Mexico, the Exchange,
Nafinsa, the CNV, the Stockbrokers' Association and the Ministries of Finance
("SHCP"), Commerce and Program and Planning.
In addition to the shares described in the Prospectus under the caption
"Risk Factors and Special Considerations--Mexican Foreign Investment Laws,"
non-voting preferred shares are currently outstanding in the market. Mexican
company law grants stockholders preemptive rights to ensure that their
ownership will not be diluted in the event of an issuance of additional shares.
The Mexican Stock Exchange, however, does not have a rights market in which
such rights may be traded, nor may those rights be traded independently.
Trading of shares on the Mexican Stock Exchange is subject to limitations
on advances in share prices. Shares are traded only in whole number peso
values, with certain allowed increases in price determined by the price range
for the security ("puja"). Thus, for shares trading in the price range Ps.5.02-
10.00, for example, the share price may advance only in multiples of Ps.0.020.
When the share price is Ps.10.00, a higher bid must be at least Ps.10.020.
Trading units are determined in accordance with the price of the share as shown
below.
<TABLE>
<CAPTION>
Price Range "Puja" Trading
(Ps.) (ps.) Unit
- --------------- --------------- ---------------
<S> <C> <C>
0.01-0.20 . . . . . . . . . . . . . . . . . . . . 0.001 100,000
0.21-5.00 . . . . . . . . . . . . . . . . . . . . 0.010 10,000
5.02-10.00 . . . . . . . . . . . . . . . . . . . 0.020 5,000
10.05-50.00 . . . . . . . . . . . . . . . . . . . 0.050 2,000
50.10 - upwards . . . . . . . . . . . . . . . . . 0.100 1,000
____________________
<FN>
Source: Mexican Stock Exchange
</TABLE>
The following table shows the average daily value of trading in equity
securities on the Mexican Stock Exchange since 1985.
<PAGE>
MEXICAN STOCK EXCHANGE EQUITY TURNOVER
<TABLE>
<CAPTION>
Year-End
Millions Millions Market
Year Ended of new pesos of dollars Capitalization
December 31 (average daily) (average day) (US$ million)
- ----------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
1985 . . . . . . . . . . . . . 3.14 10.12 3,241.04
1986 . . . . . . . . . . . . . 10.28 16.12 5,572.14
1987 . . . . . . . . . . . . . 63.96 45.04 8,715.68
1988 . . . . . . . . . . . . . 48.74 21.33 15,184.38
1989 . . . . . . . . . . . . . 99.39 39.76 26,562.71
1990 . . . . . . . . . . . . . 151.67 52.94 40,939.86
1991 . . . . . . . . . . . . . 332.23 109.42 101,718.65
1992 . . . . . . . . . . . . . 434.50 140.37 138,749.07
1993 (through July 30) . . . . 702.52 215.08 136,754.88
____________________
<FN>
Source: Mexican Stock Exchange
</TABLE>
Trading. Trading on the Mexican Stock Exchange takes place from 8:30 a.m.
to 2:30 p.m. each weekday other than public holidays.
The Exchange's procedures are designed to ensure that transactions are
effected at the first available opportunity in the market. Trading in active
shares is by open outcry. "Operaciones en Corro," in which a broker must
register a firm bid or asked price for a certain lot of shares, are the only
transactions permitted during the first daily trading session of the Exchange.
"Operaciones de Cruce," in which the broker must announce the price of the
transactions on the Exchange and can effect closing if no third party makes a
higher bid or lower offer for the shares, ensure market prices for share
transactions between two clients of the same broker. The Mexican Stock Exchange
does not have formal market makers, although in operation, companies whose
shares are most actively traded can expect certain brokerage houses to make a
market in their shares.
The Exchange provides for automatic suspension of trading in particular
securities if, during the day, a bid or offer is made or a transaction closes
at a price more than 5% above or below the opening price of the security for
that day (taking into account the puja). In such event, trading of the
particular security is halted for sixty minutes (although brokers may continue
to make bids and offers which are recorded by the Exchange during the period).
When the sixty minutes have elapsed, the original transaction, if any, is
cancelled and a new transaction is consummated at the lowest offer or highest
bid given during the period, which in turn establishes the new reference price.
If it again becomes necessary to suspend dealing, the suspension period is
ninety minutes. In any event, no suspension period may extend beyond the close
<PAGE>
of trading. This system is not applicable to securities traded, through
American Depositary Receipts or other instruments, in foreign markets.
Settlement of share transactions normally occurs within 48 hours although
in transactions involving shares in mutual funds, settlement may occur on the
same day or within 24 hours depending on the fund. Deferred settlement, even if
by mutual agreement, is not permitted. Most securities are on deposit with
Indeval. Indeval has fully automated securities clearance systems.
Stock Exchange Indices. The Mexican Stock Exchange issues a market index,
Indice de Precios y Cotizaciones ("IPC") (also known as the BMV index) based on
a group of approximately the 40 most traded issues. The composition of the
index is reviewed every two months and adjusted to account for changes in the
trading volume of shares. Calculation of the index differs from the standard
Aggregate Value Method (which divides the current market capitalization of the
shares in the index by the base market capitalization) by reason of a positive
adjustment to reflect the value of paid out dividends. The IPC therefore
measures growth by means of the total return to stockholders, rather than only
capital growth. The base of the index was established at 781.62 on October 30,
1978; however, the base changed to 0.781 as of January 1, 1993. The following
table shows the number of listed companies and the IPC index in nominal and
real terms.
<TABLE>
<CAPTION>
Total IPC Index
Listed --------------------------------------
Year Companies Real<F1> Nominal
- ---- --------------- ------------------ ------------------
<S> <C> <C> <C>
1985 . . . . . . . . . . . . . 157 196.627 11.197
1986 . . . . . . . . . . . . . 155 401.783 47.101
1987 . . . . . . . . . . . . . 190 347.807 105.670
1988 . . . . . . . . . . . . . 203 459.090 211.532
1989 . . . . . . . . . . . . . 204 759.590 418.925
1990 . . . . . . . . . . . . . 199 877.475 628.790
1991 . . . . . . . . . . . . . 207 1,681.558 1,431.460
1992 . . . . . . . . . . . . . 199 1,846.416 1,759.440
1993 (through July 30) . . . . 206 1,769.710 1,769.710
____________________
<FN>
<F1> The real index is calculated using July 30, 1993 money values.
Source: Mexican Stock Exchange and AVM
</TABLE>
The Mexican Stock Exchange also issues a derivatives market index, Indice
Mexico ("INMEX") based on a sample of 25 companies which is adjusted every six
months. The INMEX measures the daily change in the market capitalization of the
25 companies which are reflected on the basis of active trading volume.
<PAGE>
The Debt Market
The debt market in Mexico began to develop rapidly after the promulgation of
the Securities Market Law in 1975. Prior to that time the debt market had been
relatively inactive. Since 1975, the debt market has expanded rapidly and now
provides an increased capital base for the Mexican Government and Mexican
private sector companies.
Debt Instruments. Currently, securities traded in the debt market comprise
a large variety of debt obligations. The list of debt obligations traded in
Mexico includes the following Mexican Government-issued securities, all of
which are traded on the Mexican Stock Exchange: (i) Bondes--long term
development bonds, bearing variable interest rates, sold through weekly
auctions through Banco de Mexico, acting also as placement and paying agent,
(ii) Ajustabonos--long-term bonds, also issued through auctions conducted by
the Banco de Mexico, with a variable face amount that adjusts every thirteen
weeks depending on the quarterly inflation rate, upon which face amount is
applied a fixed interest rate, (iii) Tesobonos--short-term dollar denominated
bonds payable at maturity in pesos according to the free exchange rate and (iv)
Cetes--long- or short-term debt securities sold at weekly auctions through
Banco de Mexico, acting also as placement and paying agent.
A variety of other special purpose bonds are traded on the Mexican Stock
Exchange, such as development bonds and urban renovation bonds. Mexican banks
also issue bankers' acceptances and certificates of deposit that pay interest
either at maturity or monthly.
In addition to debt instruments issued by the Mexican Government and
Mexican banks, Mexican private sector corporations have issued their own debt
instruments, such as corporate bonds, both secured and unsecured, with short-
and long-term maturities, and commercial paper.
The following table shows the amount of certain Mexican debt obligations
outstanding in U.S. dollars for the period shown.
<PAGE>
<TABLE>
<CAPTION>
DEBT MARKET VALUE
(US$ millions)
Year ended December 31,
----------------------------------------------------------------
1990 1991 1992
------------------- -------------------- --------------------
<S> <C> <C> <C>
Debt Instruments
Short term: 48,048 39,444 33,630
Cetes . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,255 23,878 18,950
Pagafes . . . . . . . . . . . . . . . . . . . . . . . . . . 537 16 --
Tesobonos . . . . . . . . . . . . . . . . . . . . . . . . . 422 306 295
Bondes . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,700 989 2,954
Bankers Acceptances . . . . . . . . . . . . . . . . . . . . 2,746 2,082 4,026
Negotiable Bank Promissory Notes . . . . . . . . . . . . . . 10,359 11,138 6,557
Commercial Paper . . . . . . . . . . . . . . . . . . . . . . 1,030 1,026 20
Certificates of Deposit . . . . . . . . . . . . . . . . . . -- 9 843
Long term: 25,439 39,910 37,639
Bondes . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,928 18,131 8,803
Ajustabonos . . . . . . . . . . . . . . . . . . . . . . . . 5,020 12,863 11,573
Petrobonos . . . . . . . . . . . . . . . . . . . . . . . . . 296 -- --
Bibs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 -- --
Bonos Renovacion Urbana . . . . . . . . . . . . . . . . . . 7 8 8
Debentures . . . . . . . . . . . . . . . . . . . . . . . . . 1,679 3,427 5,444
Bankers' Bonds . . . . . . . . . . . . . . . . . . . . . . . 2,329 3,555 5,228
Certificados de Participacion . . . . . . . . . . . . . . . 169 1,185 3,628
Medium-term Promissory Notes -- 742 2,955
____________________
<FN>
Source: The Mexican Stock Exchange and Banco de Mexico
</TABLE>
Trading. The Mexican debt market operates on the same schedule as the
equity market. Certain Government or related issues are sold through auction,
while corporate instruments are sold at fixed prices. Unit prices for peso-
denominated instruments generally range from Ps.10 to Ps.100, while dollar-
denominated instruments are issued in $1,000 units. Generally, debt
transactions are settled within 24 hours with the exception of corporate debt
transactions, which are settled in 48 hours, and certain Government issues,
which are often settled on the same day. All certificates representing Mexican
government obligations are held by Banco de Mexico, while all other
certificates are held by Indeval.
Rating Agency. The CNV authorized the establishment of Calificadora de
Valores, S.A. de C.V. ("CAVAL"), Mexico's first credit rating agency, in
November 1989. CAVAL is privately owned and has begun to rate Mexican issuers
and debt obligations. Ultimately, it is expected that all debt obligations and
<PAGE>
securities registered with the CNV will be rated by a Mexican rating agency
such as CAVAL. Two additional rating agencies have been approved by the CNV.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem the Fund's shares is included in the
Prospectus. The issuance of shares is recorded on the Fund's books, and
certificates for Fund shares are issued upon request to the Fund's transfer
agent.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Fund may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.) The Fund is obligated to redeem
shares solely in cash up to $250,000 or 1% of the Fund's net asset value,
whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount will also be in cash unless the Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable. In such a case, the Fund may
make payment wholly or partly in readily marketable securities or other
property, valued in the same way as the Fund determines net asset value.
Redemption in kind is not as liquid as a cash redemption. Shareholders who
receive a redemption in kind may incur transaction costs, if they sell such
securities or property, and may receive less than the redemption value of such
securities or property upon sale, particularly where such securities are sold
prior to maturity.
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their Fund shares for shares of
certain other funds in the Lehman Brothers Group of Funds, as indicated in the
Prospectus, to the extent such shares are offered for sale in the shareholder's
state of residence. Exchanges of Fund shares for shares of the Lehman Brothers
Daily Income Fund or the Lehman Brothers Municipal Income Fund can only be made
for CDSC Shares of such funds. There currently is no charge for this service,
and exchanges are made on the basis of relative net asset value per share at
the time of exchange. Shares of the Fund exchanged for shares of another fund
will be subject to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates, will be deemed to have been held since the
date the Fund shares being exchanged were purchased.
The exchange privilege enables shareholders of the Fund to acquire shares
in a fund with different investment objectives when they believe that a shift
between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the fund shares being
<PAGE>
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is to be made. Prospectuses may be obtained from any Lehman Brothers
Investment Representative.
Exercise of the exchange privilege is treated as a sale and repurchase for
federal income tax purposes and, depending on the circumstances, a short- or
long-term capital gain or loss may be realized. The price of the shares of the
fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting
documents, Fund shares submitted for exchange are redeemed at the then-current
net asset value and, subject to any applicable CDSC, the proceeds immediately
invested in shares of the fund being acquired. Lehman Brothers reserves the
right to reject any exchange request. The exchange privilege may be modified or
terminated at any time after notice to shareholders.
VALUATION OF SHARES
The Prospectus discusses the time at which the net asset value of the Fund is
determined for purposes of sales and redemptions. The following is a
description of the procedures used by the Fund in valuing its assets.
Securities traded on an exchange will be valued on the basis of the last
sale price on the principal market on which such securities are traded, on the
date on which the valuation is made or, in the absence of sales in such market,
at the mean between the closing bid and asked prices. Over-the-counter
securities will be valued on the basis of the bid price at the close of
business on each day, or, if market quotations for those securities are not
readily available, at fair value, as determined in good faith by the Company's
Board of Directors. Securities which are traded both in the over-the-counter
market and on a stock exchange will be valued according to the broadest and
most representative market. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined
by the Company's Board of Directors. Amortized cost involves valuing an
instrument at its original cost to the Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. All other
securities and other assets of the Fund will be valued at fair value as
determined in good faith by the Company's Board of Directors.
MANAGEMENT OF THE FUND
Directors and Officers
The Company's directors and executive officers, their addresses, principal
occupations during the past five years and other affiliations are as follows:
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with the Company Principal Occupations During Past 5
Years and Other Affiliations
<S> <C> <C>
Steven Spiegel<F1> Chairman of the Board and Managing Director, Lehman Brothers Inc.;
World Financial Center Director President, Lehman Brothers Global Asset
New York, New York 10285 Management Inc.; formerly Chairman,
Lehman Brothers International (Europe).
Burt N. Dorsett<F2><F3> Director Managing Partner, Dorsett McCabe Capital
201 East 62nd Street Management, Inc.; Director, Research
New York, New York 10021 Corporation Technologies; formerly
President, Westinghouse Pension
Investments Corporation; formerly
Executive Vice President and Trustee,
College Retirement Equities Fund, Inc.;
formerly Investment Officer, University
of Rochester.
Kathleen C. Holmes<F2><F3> Director Managing Director, Wharton School
Wharton Financial Financial Institutions Center,
Institutions Center University of Pennsylvania; Senior
3620 Locust Walk Partner and Management Consultant,
3301 Steinberg Hall Furash & Company.
Dietrich Hall
Philadelphia, Pennsylvania 19104-6367
John N. Hatsopoulos<F2><F3> Director Executive Vice President and Chief
Thermo Electron Corp. Financial Officer, Thermo Electron Corp.
81 Wyman Street
Waltham, Massachusetts 02254
Clinton Kendrick President Chief Operating Officer, Lehman Brothers
World Financial Center Global Asset Management Inc.; formerly
New York, New York 10285 President and Chief Executive Officer,
Hyperion Capital Management; formerly
President and Director, Alliance Capital
Management.
John M. Winters Vice President Senior Vice President, Lehman Brothers
World Financial Center Inc.
New York, New York 10285
Vincent Nave Treasurer and Chief Financial Officer Senior Vice President, The Boston
One Boston Place Financial Company Advisors, Inc. and Boston Safe
Boston, Massachusetts 02109 Deposit and Trust Company.
<PAGE>
Francis J. McNamara, III Secretary Senior Vice President and General
One Boston Place Counsel, The Boston Company Advisors,
Boston, Massachusetts 02109 Inc.
____________________
<FN>
<F1> Director considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
<F2> Audit Committee Member.
<F3> Nominating Committee Member.
</TABLE>
Two directors of the Company, Messrs. Spiegel and Dorsett, serve as
directors or trustees of other investment companies for which Lehman Brothers,
LBGAM or one of their affiliates serves as distributor or investment adviser.
No employee of Lehman Brothers, LBGAM or The Boston Company Advisors, Inc.
("Boston Advisors") receives any compensation from the Company for acting as an
officer or director of the Company. The Company pays each director who is not a
director, officer or employee of Lehman Brothers, LBGAM or Boston Advisors or
any of their affiliates, a fee of $20,000 per annum plus $500 per meeting
attended and reimburses them for travel and out-of-pocket expenses.
By virtue of the responsibilities assumed by Lehman Brothers, LBGAM,
Boston Advisors and their affiliates under their respective agreements with the
Company, the Company itself requires no employees in addition to its officers.
Investment Adviser
LBGAM serves as investment adviser to the Fund pursuant to a written advisory
agreement approved by the Company's Board of Directors, including a majority of
the directors who are not "interested persons" (as defined in the 1940 Act) of
the Company or LBGAM, on ___________, 1994. The services provided by LBGAM
under its advisory agreement and the fees paid to LBGAM are described in the
Prospectus under "Management of the Fund." LBGAM bears all expenses in
connection with the performance of its services and pays the salaries of all
officers or employees who are employed by both it and the Company. Unless
sooner terminated, the advisory agreement will continue in effect until
______________, 1996 and from year to year thereafter if such continuance is
approved at least annually by the Company's Board of Directors or by a vote of
a majority (as defined under "Additional Information Concerning Fund Shares")
of the outstanding shares of the Fund and, in either case, by a majority of the
directors who are not parties to such agreement or "interested persons" of any
party by votes cast in person at a meeting called for such purpose. The
advisory agreement is terminable by the Company or LBGAM on 60 days' written
notice, and will terminate immediately in the event of its assignment.
Administrator
As the Fund's administrator, Boston Advisors has agreed to provide the
following services: (i) assist generally in supervising the Fund's operations,
providing and supervising the operation of an automated data processing system
<PAGE>
to process purchase and redemption orders, providing information concerning the
Fund to its shareholders of record, handling shareholder problems, supervising
the services of employees whose principal responsibility and function is to
preserve and strengthen shareholder relations; (ii) prepare reports to the
Fund's shareholders and prepare tax returns and reports to and filings with the
SEC; (iii) compute the net asset value per share of the Fund; (iv) provide the
services of certain persons who may be elected as directors or appointed as
officers of the Company by the Board of Directors; and (v) maintain the
registration or qualification of the Fund's shares for sale under state
securities laws.
Distributor
Lehman Brothers acts as distributor of the Fund's shares. The Fund's shares are
initially being offered during a subscription period, and will thereafter be
sold on a continuous basis by Lehman Brothers as agent, although Lehman
Brothers is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of the Fund (excluding preparation and printing
expenses necessary for the continued registration of the Fund's shares) and of
preparing, printing and distributing all sales literature.
During the initial subscription period for the Fund's shares, Lehman
Brothers forwards investors' funds for the purchase of shares on the fifth
business day following the termination of the subscription period, or on such
other day as may be agreed upon by the Fund and Lehman Brothers (the "Closing
Date"). Following the subscription period, Lehman Brothers forwards investors'
funds for the purchase of shares five business days after placement of purchase
orders (the "Settlement Date"). When payment is made by the investor before the
Closing Date or a Settlement Date, as the case may be, unless otherwise
directed by the investor, the funds will be held as a free credit balance in
the investor's brokerage account, and Lehman Brothers may benefit from the
temporary use of the funds. The investor may designate another use for the
funds prior to the Closing Date or Settlement Date, as the case may be, such as
an investment in a money market fund in the Lehman Brothers Group of Funds. If
the investor instructs Lehman Brothers to invest the funds in a money market
fund, the amount of the investment will be included as part of the average
daily net assets of both the Fund and the money market fund, and affiliates of
Lehman Brothers which serve the funds in an investment advisory capacity will
benefit from the fact that they are receiving fees from both such investment
companies for managing these assets computed on the basis of their average
daily net assets. The Company's Board of Directors has been advised of the
benefits to Lehman Brothers resulting from delayed settlement procedures and
will take such benefits into consideration when reviewing the advisory and
distribution agreements for continuance.
Rule 12b-1 (the "Rule") adopted by the SEC under the 1940 Act provides,
among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Company's Board of Directors has adopted a services and distribution
plan with respect to the Fund pursuant to Rule 12b-1 (the "Plan"). To
compensate Lehman Brothers for the services it provides and for the expense it
bears as distributor of the Fund's shares, the Board of Directors believes that
<PAGE>
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
A quarterly report of the amounts expended with respect to the Fund under
the Plan, and the purposes for which such expenditures were incurred, must be
made to the Board of Directors for its review. In addition, the Plan provides
that it may not be amended with respect to the Fund to increase materially the
costs which may be borne for distribution pursuant to the Plan without the
approval of shareholders of the Fund, and that other material amendments of the
Plan must be approved by the Board of Directors, and by the Directors who are
neither "interested persons" (as defined in the 1940 Act) of the Company nor
have any direct or indirect financial interest in the operation of the Plan or
any related agreements, by vote cast in person at a meeting called for the
purpose of considering such amendments. The Plan and any related agreements are
subject to annual approval by such vote cast in person at a meeting called for
the purpose of voting on the Plan. The Plan may be terminated with respect to
the Fund at any time by vote of a majority of the Directors who are not
"interested persons" and have no direct or indirect financial interest in the
operation of the Plan or in any related agreement or by vote of a majority of
the shares of the Fund.
Custodian and Transfer Agent
Boston Safe Deposit and Trust Company ("Boston Safe"), a wholly owned
subsidiary of The Boston Company, Inc., is located at One Boston Place, Boston,
Massachusetts 02108, and serves as the Company's custodian pursuant to a
custody agreement. Under the custody agreement, Boston Safe holds the Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end market
value of securities held in custody and also receives securities transaction
charges, including out-of-pocket expenses. Boston Safe is authorized to
establish separate accounts for foreign securities owned by the Fund to be held
with foreign branches of other domestic banks as well as with certain foreign
banks and securities depositories. The assets of the Company are held under
bank custodianship in compliance with the 1940 Act.
The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation, is located at One Exchange Place, Boston, Massachusetts 02019, and
serves as the Company's transfer agent. Under the transfer agency agreement,
TSSG maintains the shareholder account records for the Company, handles certain
communications between shareholders and the Company and distributes dividends
and distributions payable by the Company and produces statements with respect
to account activity for the Company and its shareholders. For these services,
TSSG receives a monthly fee computed on the basis of the number of shareholder
accounts that it maintains for the Company during the month and is reimbursed
for out-of-pocket expenses.
Expenses
The Fund's expenses include taxes, interest, fees and salaries of the Company's
trustees and officers who are not directors, officers or employees of the
Company's service contractors, SEC fees, state securities qualification fees,
<PAGE>
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer 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 that if, in any fiscal year, the expenses borne by the Fund exceed
the applicable expense limitations imposed by the securities regulations of any
state in which shares of the Fund are registered or qualified for sale to the
public, they will reimburse the Fund for any excess to the extent required by
such regulations in the same proportion that each of their fees bears to the
Fund's aggregate fees for investment advice and administrative services. Unless
otherwise required by law, such reimbursement would be accrued and paid on the
same basis that the advisory and administration fees are accrued and paid by
the Fund. To the Fund's knowledge, of the expense limitations in effect on the
date of this Statement of Additional Information, none is more restrictive than
two and one-half percent (2-1/2%) of the first $30 million of the Fund's
average annual net assets, two percent (2%) of the next $70 million of the
average annual net assets and one and one-half percent (1-1/2%) of the
remaining average annual net assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
As stated in the Prospectus, the Fund intends to qualify as a "regulated
investment company" under the Code. In order to so qualify under the Code for a
taxable year, the Fund must, among other things, (a) derive in each taxable
year at least 90% of its gross income from dividends, interest, payments with
respect to loans of securities, gains from the sale or other disposition of
stock or securities, or foreign currencies, or other income derived with
respect to its business of investing in such stock, securities or currencies
(including, but not limited to, gains from options, futures or forward
contracts); (b) derive in each taxable year less than 30% of its gross income
from the sale or other disposition of any of the following that are held for
less than three months (the "30% limitation"): (i) stock or securities,
(ii) options, futures or forward contracts, or (iii) foreign currencies (or
foreign currency options, futures or forward contracts) that are not directly
related to its principal business of investing in stock or securities (or
options and futures with respect to stocks or securities); and (c) diversify
its holdings so that, at the end of each quarter of each taxable year, (i) at
least 50% of the value of the Fund's assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies,
and other securities which, with respect to any one issuer, do not represent
more than 5% of the value of the Fund's assets nor more than 10% of the voting
<PAGE>
securities of such issuer, and (ii) not more than 25% of the value of the
Fund's assets is invested in the securities of any issuer (other than U.S.
Government securities or the securities of other regulated investment
companies). Legislation under consideration by the U.S. Congress would repeal
the 30% limitation described in (b) above. It is currently unclear whether the
legislation will become law and, if enacted, the form it will take.
If the Fund qualifies as a regulated investment company, 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. In addition, the Fund will be subject to a nondeductible
4% excise tax on the amount by which the aggregate income it distributes in any
calendar year is less than the sum of: (a) 98% of the Fund's ordinary income
for such calendar year; (b) 98% of the excess of capital gains over capital
losses for the one-year period ending on October 31 of each year; and (c) 100%
of the undistributed ordinary income and gains from prior years.
The Fund intends to distribute sufficient income so as to avoid both
corporate income tax and the excise tax.
The Fund will maintain accounts and calculate income by reference to the
U.S. dollar for U.S. federal income tax purposes. Investments generally will be
maintained and income therefrom calculated by reference to certain foreign
currencies and such calculations will not necessarily correspond to the Fund's
distributable income and capital gains for U.S. federal income tax purposes as
a result of fluctuations in currency exchange rates.
Furthermore, exchange control regulations may restrict the ability of the
Fund to repatriate investment income or the proceeds of sales of securities.
These restrictions and limitations may limit the Fund's ability to make
sufficient distributions to satisfy the 90% distribution requirement and avoid
the 4% excise tax.
The Fund intends to make investments which may, for federal income tax
purposes, constitute investments in shares of foreign corporations. If the Fund
purchases shares in certain foreign investment entities, called "passive
foreign investment companies" ("PFICs"), the Fund may be subject to U.S.
federal income tax on a portion of any "excess distribution" or gain from the
disposition of the shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either the Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If the Fund were to
invest in a PFIC and (if the Fund received the necessary information available
from the PFIC, which may be difficult to obtain) elected to treat the PFIC as a
"qualified electing fund" under the Code, in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and
calendar year distribution requirements described above.
<PAGE>
Distributions to shareholders of designated by the Fund as "capital gains
dividends" will be taxable as long-term capital gains and will not be eligible
for the dividends received deduction. The current maximum federal income tax
rate imposed on individuals with respect to long-term capital gains is limited
to 28%, whereas the current maximum federal income tax rate imposed on
individuals with respect to ordinary income (and short-term capital gains,
which are taxed at the same rates as ordinary income) is 39.6%. With respect to
corporate taxpayers, long-term capital gains are currently taxed at the same
federal income tax rates as ordinary income and short-term capital gains.
As described in the Prospectus, the Fund expects to elect to "pass-
through" foreign taxes paid by the Fund to its shareholders. In general, a
shareholder may elect each year whether to claim deductions or credits for
foreign taxes. No deductions for foreign taxes may be claimed, however, by non-
corporate shareholders (including certain foreign shareholders as described
below) who do not itemize deductions. If a shareholder elects to credit foreign
taxes, the amount of credit that may be claimed in any year may not exceed the
same proportion of the U.S. tax against which such credit is taken that the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. If the
Fund makes this election, a shareholder will be treated as receiving foreign
source income in an amount equal to the sum of his proportionate share of
Mexican taxes paid by the Fund and the portion of dividends paid by the Fund
representing income earned from foreign sources. This limitation must be
applied separately to certain categories of income and the related foreign
taxes.
Although the Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income tax, depending on
the extent of its activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting a business, the Fund may be
subject to the tax laws of such states or localities. In addition, in those
state and localities which have income tax laws, the treatment of the Fund and
its shareholders under such laws may differ from the treatment under federal
income tax laws. Shareholders are urged to consult their tax advisers
concerning the application of state and local taxes.
Mexican Taxes
The following is a general summary of the principal tax consequences under
Mexican law, as currently in effect, of an investment by the Fund in securities
of Mexican issuers. This summary does not purport to be a comprehensive
description of all tax consequences that may be relevant in connection with any
such investment made by the Fund.
Payments of interest or principal made by the Mexican Government to the
Fund, in connection with securities issued thereby, would generally not be
subject to Mexican withholding tax, and gains realized by the Fund from the
sale or other disposition of such securities would not be subject to
withholding or capital gains taxes.
<PAGE>
Payments of interest (including discount) made by Mexican issuers (other
than the Mexican Government) to the Fund, in connection with debt securities
issued thereby, would generally be subject to a Mexican withholding tax
assessed at a rate of 15%. However, the Fund intends to register with the
Mexican Ministry of Finance and Public Credit and, subject to such registration
being approved, such rate would be reduced to 4.9% for the years 1994 and 1995.
Payment of principal made by Mexican issuers (other than the Mexican
Government) to the Fund, in connection with securities issued thereby, would
not be subject to Mexican withholding tax. Gains realized by the Fund from the
sale or other disposition of such securities, except with respect to securities
publicly placed in Mexico, would not be subject to withholding or capital gains
taxes. Gains realized by the Fund from the sale or disposition of securities
publicly placed in Mexico would be subject to the same withholding tax as that
assessed on interest payments to the Fund by Mexican issuers (other than the
Mexican Government).
The United States and Mexico have entered into a Convention for the
Avoidance of Double Taxation and a Protocol thereto (the "Tax Treaty"), which
became effective on January 1, 1994. As a result of the Tax Treaty, the Mexican
withholding tax rate will be reduced to 10% for the Fund in respect of bonds or
securities issued by Mexican issuers that are regularly and substantially
traded on a recognized securities market. This rate will be further reduced to
4.9% starting on January 1, 1999.
Dividends paid in respect of shares issued by Mexican companies and owned
by the Fund would not be subject to Mexican withholding or other tax. Gains on
the sale of such shares owned by the Fund would not be subject to Mexican taxes
if the transaction is carried out through the Mexican Stock Exchange or markets
recognized by the Mexican Ministry of Finance and Credit. Gains on sales made
under other circumstances may be subject to Mexican taxes. Gains on the sale or
other disposition of ADRs by the Fund would not be subject to Mexican tax.
THE UNITED MEXICAN STATES
The information set forth in this Section is based on material obtained by the
Fund from various Mexican governmental and other sources believed to be
accurate but has not been independently verified by the Fund, LBGAM or Lehman
Brothers.
Area, Population and Society
Mexico, a nation consisting of 31 states and a Federal District (comprising
Mexico City), is the fifth largest nation in the American continent and the
thirteenth largest in the world, occupying a territory of 759,529 square miles
(1,967,183 square kilometers). To the north, Mexico shares a border of 2,067
miles (3,326 km) with the United States of America, and to the south it has
borders with Guatemala and Belize. Its coastline extends over 6,303 miles
(10,143 km) along both the Gulf of Mexico and the Pacific Ocean.
Mexico is the second most populous nation in Latin America, with a
population of 81.2 million reported in the 1990 census. Approximately 71% of
Mexico's population is located in urban areas. Mexico's three largest cities
<PAGE>
are Mexico City, Guadalajara and Monterrey, with estimated populations in 1990
of 15.0 million, 2.8 million and 2.5 million, respectively. The annual rate of
population growth averaged 3.3% in the 1960s and 1970s. In the 1980s,
Government efforts in the areas of family planning and birth control, together
with declining birth rates among women under 35 and those living in urban
areas, resulted in a reduction of the population growth rate to a projected
1.9% in 1993.
Mexico is generally classified as a middle income developing country and
had a per capita GNP in 1991 of $2,870, compared with $22,560 in the United
States, $2,610 in Venezuela, $2,160 in Chile and $2,920 in Brazil. Life
expectancy in Mexico was 70 years in 1991, compared with 76 years in the United
States, 70 years in Venezuela, 72 years in Chile and 67 years in Brazil. Adult
illiteracy was estimated at 13% in 1990, compared with less than 5% in the
United States, 12% in Venezuela, 7% in Chile and 19% in Brazil. Infant
mortality in 1991 was 29 per 1,000 live births in Mexico, compared with 9 in
the United States, 18 in Chile, 26 in Venezuela and 67 in Brazil.
Form of Government
The present form of government was established by the Constitution, which took
effect on May 1, 1917. The Constitution establishes Mexico as a Federal
Republic and provides for the separation of the executive, judicial and
legislative branches of government. The President and the members of Congress
are elected by popular vote of Mexican citizens over 18 years of age.
Executive authority is vested in the President, who is elected for a six-
year term. The current President of Mexico is Carlos Salinas de Gortari, whose
term expires on December 1, 1994. The Constitution provides that the President
may serve only one six-year term and may never be re-elected. The executive
branch consists of 18 ministries, the office of the Federal Attorney General,
the Federal District Department (Mexico City) and the office of the Attorney
General of the Federal District, the chief officials of all of which are
appointed by the President.
Judicial authority is vested in the Supreme Court of Justice, and Circuit
and District Courts. The Supreme Court has 21 ordinary members who are
appointed for life by the President (subject to ratification by the Senate).
Legislative authority is vested in the Congress, which is composed of the
Senate and the Chamber of Deputies. Senators serve a six-year term, Deputies
serve a three-year term and neither may serve consecutive terms in the same
Chamber. The Senate has 64 members, two from each state and two from the
Federal District. The Chamber of Deputies has 500 members, of whom 300 are
elected by direct vote of the electoral districts and 200 are elected by a
system of proportional representation based on the proportion of the vote cast
for those parties that receive at least 1.5% of the national vote. The
Constitution provides that the President may veto bills and that Congress may
override such vetoes with a two-thirds majority of each *Chamber.
The Partido Revolucionario Institucional (the Institutional Revolutionary
Party, or the "PRI") is the dominant political party in Mexico. Since 1929, the
PRI has won all presidential elections and has held a majority in Congress.
<PAGE>
Until 1989 it had also won all of the state governorships. Currently, the
Partido Accion Nacional (the National Action Party, or the "PAN"), the oldest
opposition party in the country, holds three state governorships.
In the congressional election held on August 18, 1991, when half of the
Senate seats were up for election, the PRI won 31 seats and the remaining seat
was won by the PAN -- the third time opposition representatives have held seats
in the Senate. The other half of the Senate will continue for the remainder of
its six-year term and is composed of 30 seats held by the PRI and two seats
held by the Partido de la Revolucion Democratica (the Party of the Democratic
Revolution, or the "PRD").
In the Chamber of Deputies, 320 of the 500 seats were won by the PRI and
89 by the PAN in the August 1991 elections. Four other parties hold seats in
the Chamber of Deputies: the PRD (41 seats), the Partido del Frente Cardenista
de Reconstruccion Nacional (the Cardenist National Reconstruction Party, or the
"PFCRN") (23 seats), the Partido Autentico de la Revolucion Mexicana (the
Authentic Party of the Mexican Revolution, or the "PARM") (15 seats) and the
Partido Popular Socialista (the Popular Socialist Party, or the "PPS") (12
seats). At present, no party holds the two-thirds majority in the Chamber of
Deputies required for amendment of the Constitution, unlike the Senate where
the PRI continues to be the predominant party.
Proposed amendments to the Constitution (currently pending ratification by
the legislatures of a majority of the states) provide that, commencing with the
Federal elections scheduled for 1997, the Senate will include four senators
from each state and the Federal District. The proposed constitutional
amendments also create an Electoral Tribunal to resolve controversies related
to Federal elections.
Foreign Affairs
Mexico has diplomatic ties with approximately 157 countries. It is a charter
member of the United Nations and a founding member of the Organization of
American States, the International Monetary Fund ("IMF"), the World Bank, the
International Finance Corporation ("IFC") and the Inter-American Development
Bank ("IDB"). Mexico is also a non-borrowing regional member of the Caribbean
Development Bank. In 1986, Mexico became a party to GATT. In 1991, Mexico
became a founding member of the European Bank for Reconstruction and
Development ("EBRD") and was admitted into the Pacific Basin Economic Co-
operation Conference. In June 1993, the Organization for Economic Cooperation
and Development ("OECD") announced that it has invited Mexico to begin
discussions with the OECD toward Mexico becoming a member of that organization.
The Economy
During the period from World War II through the mid-1970s, Mexico enjoyed
sustained and stable growth in per capita income and GDP.
In the early 1970s, the major industrial countries began to experience
severe inflation. The fixed exchange rates in place since the Bretton Woods
accords were replaced by floating exchange rates and the 1973 oil shock brought
financial instability to the international economy. At the same time Mexico
<PAGE>
embarked on an active and expansionary economic policy oriented towards
economic growth and more equitable income distribution. These goals were
promoted through Government spending and high tariffs and other barriers to
foreign competition and were largely funded by oil export revenues and greatly
increased external borrowings. The steep decline in oil prices in 1981 and
1982, together with high international interest rates and the credit markets'
unwillingness to refinance maturing external Mexican credits, led in 1982 to
record inflation, successive devaluations of the peso by almost 500% in total,
a public sector deficit of 16.9% of GDP and, in August 1982, a liquidity crisis
that precipitated subsequent restructurings of a large portion of the country's
external debt. See "The United Mexican States--External Debt Restructuring and
Debt and Debt Service Reduction Transactions" below.
In the decade that followed, Mexico consistently pursued far-reaching and
comprehensive adjustment policies designed to reform its economy and assure the
return to sound and sustained economic growth. These policies, set forth in the
National Development Plans of the De la Madrid (1983-1988) and Salinas (1989-
1994) administrations, have included prudent fiscal discipline, reduction in
Government subsidies, tax reform, limitation of Government investment to large
infrastructure projects, trade liberalization, opening of the economy to
foreign investment, reform of public sector prices to conform to market
conditions, deregulation and privatization of non-strategic public sector
enterprises, encouragement of increased domestic public and private savings and
of private sector co-investment with the Government and renegotiation of the
country's foreign debt. The Government's policies have been furthered by a
series of short-term programs, including the Programa Inmediato de Recuperacion
Economica (Immediate Program for Economic Recovery, or "PIRE"), the Programa de
Aliento y Crecimiento (Program to Encourage Growth, or "PAC") and by social
pacts, including the Pacto de Solidaridad Economica (Economic Solidarity Pact,
or "PSE"), the Pacto para la Estabilidad y Crecimiento Economico (Pact for
Stability and Economic Growth, or "PECE", covering the 1989-1992 period) and
the Pacto para la Estabilidad, la Competitividad y el Empleo (Pact for
Stability, Competitiveness and Employment, or "1992-93 PECE") covering the
period from October 20, 1992 to October 2, 1993 and the Pacto para le
Estabilidad, la Competitividad y el Empleo (Pact for Stability, Competitiveness
and Employment, or "1993-94 PECE" effective October 3, 1993 through
December 31, 1994), which contained a commitment by the Government to maintain
strict fiscal discipline and, under the PSE, PCE, the 1992-93 PECE and 1993-94
PECE, commitments by all sectors of the economy to restrain wage and price
increases. See "The United Mexican States--The Economy--Inflation" below.
The combination of restrictive fiscal and monetary policies, structural
reforms, price and wage agreements and restructuring of public foreign debt
have contributed to reducing inflation (measured by the NCPI) from 159.2% in
1987 and 51.7% in 1988 to 11.9% in 1992. Mexico's primary deficit (i.e., the
fiscal deficit excluding interest payments) of 7.3% of GDP in 1982 became a
primary surplus of 7.6% in 1990, moderated slightly to surpluses of 5.2% and
5.6% of GDP in 1991 and 1992, respectively, and is currently projected to be a
surplus of 4.0% of GDP for 1993. At the same time, total external public sector
debt has been reduced from $81.0 billion at year-end 1988 (47.7% of GDP) to
$75.755 billion at December 31, 1992 (23.2% of GDP) and stood at $79.382
billion at September 30, 1993 (21.8% of GDP). Annual interest payments on
external public debt as a percentage of merchandise exports (including in-bond
<PAGE>
industry) has declined during the same period from 22.3% in 1988 to 11.6% in
1992. Total public sector interest expenditure (internal and external) was 4.1%
of GDP for 1992 and has been forecast at only 3.1% of GDP for 1993. See "Public
Finance."
The Role of the Government in the Economy; Privatization. Since 1983, the
Government has sought as a matter of priority to sell to the private sector its
interest in all non-strategic commercial enterprises. In 1982, the Government
owned or controlled 1,155 public sector enterprises. By December 31, 1992, the
number of Government-owned businesses had been reduced to 217. In part as a
result of these privatizations, the share of Government expenditures in GDP
fell from 44.5% in 1982 to 25.8% in 1992. The importance of subsidies also
diminished significantly. Enterprises privatized include the two national
airlines, copper, iron and coal mines, hotels, Telefonos de Mexico (the
national domestic and long-distance telephony company, "Telmex"), the state-
owned steel industry and all eighteen state-owned commercial banks, including
the country's two largest commercial banks, Banco Nacional de Mexico, S.A.
("Banamex") and Bancomer, S.A. ("Bancomer").
The petroleum industry and the electrical power sector are the two most
important strategic sectors that are required by the Constitution to remain
under the control of the Government.
Gross Domestic Product. In 1986, partially as a result of Mexico's debt
crisis and the dramatic fall in oil prices, real GDP declined sharply by 3.8%.
Since then, however, growth has resumed at moderate rates. Real GDP grew 3.3%
in 1989, 4.4% in 1990, 3.6% in 1991, 2.6% in 1992 and 2.4%, on annualized
basis, in the first quarter of 1993.
Real GDP growth during the first nine months of 1993 was an estimated
0.5%, as compared with 2.9% during the first nine months of 1992. Electricity,
gas and water was the most dynamic sector of the economy during the first nine
months of 1993, recording real growth of 4.4%. Agricultural output is estimated
to have decreased by 1.2% during the first nine months, while industrial output
showed an estimated decrease by 0.3%.
Real GDP is currently projected to grow by 1.1% in 1993. A gradual decline
in Mexico's GDP growth during 1993 was a product of at least four important
factors. First, certain sectors of the economy have experienced a deceleration
in growth or even negative growth attributable to adjustments to structural
changes stemming from recent economic modernization and trade liberalization
policies. Second, the Government's anti-inflation policies, which include the
tightening of the money supply, have resulted in a deceleration of economic
growth. Third, Mexican financial institutions have tightened their credit
policies in reaction to more stringent reserve and capital adequacy
requirements. Finally, the deceleration of the Mexican economy is partly
attributable to the relatively slow rate of economic growth experienced by some
of Mexico's most important trading partners, including the United States.
The following table sets forth the composition of Mexico's GDP by economic
sector for the periods indicated:
<PAGE>
<TABLE>
<CAPTION>
Real GDP by Sector
1988 1989 1990 1991 1992
--------------- --------------- --------------- --------------- ---------------
(in millions of new pesos)<F1>
<S> <C> <C> <C> <C> <C>
Agriculture, livestock, fishing and
forestry<F2> . . . . . . . . . . . . . . . . Ps. 394.9 Ps. 386.0 Ps. 408.8 Ps. 412.7 Ps. 412.2
Mining, petroleum and gas . . . . . . . . . . . 184.1 182.9 188.0 189.5 192.0
Manufacturing . . . . . . . . . . . . . . . . . 1,059.0 1,135.1 1,203.9 1,252.3 1,274.6
Construction . . . . . . . . . . . . . . . . . 245.2 250.4 267.8 274.3 295.7
Electricity, gas and water . . . . . . . . . . 71.0 76.5 78.7 80.8 84.3
Transportation, storage and communication . . . 312.1 325.1 346.7 356.9 394.9
Commerce, hotels and restaurants . . . . . . . 1,254.8 1,302.1 1,355.1 1,413.6 1,459.8
Financial services, insurance, real estate,
community, social and personal services . . 1,430.1 1,458.5 1,496.4 1,552.4 1,582.9
Subtotal . . . . . . . . . . . . . . . . . . . 4,951.3 5,116.6 5,345.5 5,542.6 5,696.4
Less adjustment for banking service . . . . . . (67.6) (69.4) (74.0) (79.9) (83.5)
Total gross domestic product . . . . . . . . . Ps.4,883.7 Ps.5,047.2 Ps.5,271.5 Ps.5,462.7 Ps. 5,612.9
____________________
<FN>
Note: Totals may differ due to rounding.
<F1> Constant pesos with purchasing power at December 31, 1980, expressed in
new pesos.
<F2> The GDP figures relating to agricultural production during 1991 and 1992
set forth in this table and elsewhere in this Statement of Additional
Information are based on figures for the 1991 and 1992 "agricultural
years," with the exact definition of the "agricultural year" varying
from crop to crop based on the season during which it is grown. Calendar
year figures are used for the other components of GDP.
Source: INEGI.
</TABLE>
The following table sets forth the annual change in Mexico's real GDP by
sector for the periods indicated:
<PAGE>
<TABLE>
<CAPTION>
Real GDP Growth by Sector
1988 1989 1990 1991 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
GDP (constant 1980 prices) . . . . . . . . . . 1.2% 3.3% 4.4% 3.6% 2.6%
Agriculture, livestock, fishing and forestry . (3.8) (2.3) 5.9 1.0 (1.5)
Mining, petroleum and gas . . . . . . . . . . . 0.4 (0.6) 2.8 0.8 1.3
Manufacturing . . . . . . . . . . . . . . . . . 3.2 7.2 6.1 4.0 1.8
Construction . . . . . . . . . . . . . . . . . (0.4) 2.1 7.0 2.4 7.8
Electricity, gas and water . . . . . . . . . . 6.0 7.7 2.9 2.7 4.4
Transportation, storage and communications . . 2.3 4.1 6.7 5.8 7.6
Commerce, hotels and restaurants . . . . . . . 1.7 3.8 4.1 4.3 3.3
Financial services, Insurance, real estate
and community, social and personal
services . . . . . . . . . . . . . . . . . . 0.9 2.0 2.6 3.7 1.9
____________________
<FN>
Source: INEGI.
</TABLE>
Inflation. Between 1977 and 1981, the expansion of public sector
expenditures contributed to an average annual inflation rate (measured by the
NCPI) of 22.5% for the period, compared to average annual rates of 2.7% between
1960 and 1971 and 16.7% between 1972 and 1976.
In the 1980s, the Government's debt service burden and large devaluations
of the peso added further inflationary pressures. The NCPI rose 105.7% in 1986,
and another 159.2% in 1987. In December 1987, the Government reached an
agreement with labor and business representatives, the PSE, to curb the
economy's inflationary pressures by freezing wages and prices. The PSE included
the implementation of restrictive fiscal and monetary policies, the elimination
of certain trade barriers and the reduction of import tariffs. After
substantial increases in public sector prices and utility rates, price controls
were introduced. These policies contributed to lower consumer inflation rates
of 51.7% in 1988, 19.7% in 1989, 29.9% in 1990, 18.8% in 1991 and 11.9% in
1992. Inflation during the first ten months of 1993 was 6.7%, as compared with
9.5% during the comparable period of 1992.
In December 1988, the PSE was succeeded by the PECE. The PECE was extended
on five occasions.
On October 20, 1992, the PECE was succeeded by the 1992-93 PECE. The 1992-
93 PECE emphasized achieving higher productivity and competitiveness since
overall macro-economic conditions have improved. The 1992-93 PECE, which was
effective from October 20, 1992 through October 2, 1993, stressed fiscal
discipline and avoided severe price increases at year-end (which in turn would
affect inflation figures during the initial months of the following year) by
setting annual limits on price increases (no greater than one digit)
distributed monthly, in equal increments, throughout the year. The band
<PAGE>
established for the peso-dollar exchange rate was widened, with the upper limit
on the daily rate of devaluation of the Mexican peso increasing from 0.0002 new
pesos to 0.0004 new pesos and the lower limit remaining unchanged.
On October 3, 1993, the 1993-94 PECE went into effect. The purposes of the
1993-94 PECE, which is effective from October 3, 1993 through December 31,
1994, are essentially the same as those of its predecessor pacts. The
Government has promised to maintain fiscal discipline and a balanced budget and
Mexico's foreign exchange policy remains unchanged. The 1993-94 PECE sets an
inflation target of 5% for 1994. In recognition of the recent slowdown in
economic growth, the Government agreed in the 1993-94 PECE to propose to the
Congress certain changes to the tax laws designed to stimulate economic
activity. As the Mexican economy has stabilized, there has been a gradual
reduction in the number of goods and services whose prices are covered by the
PECE, the 1992-1993 PECE and the 1993-94 PECE. The Government is committed to
reversing the decline in real wages experienced in the last decade through
control of inflation, a controlled gradual upward adjustment of wages and a
reduction in income taxes for the lower income brackets.
The following table shows in percentage terms the changes in price indices
and the annual increase in the minimum wage for the periods indicated.
<TABLE>
<CAPTION>
Changes in Price Indices
National Producer National Consumer Increase in
Price Index Price Index Minimum Wage
-------------------- -------------------- --------------------
<S> <C> <C> <C>
1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.3% 51.7% 31.9%
1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.6 19.7 24.9
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.2 29.9 19.1
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0 18.8 12.0
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6 11.9 --
1993
January . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 1.3 8.1
February . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 0.8 --
March . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.6 --
April . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.6 --
May . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.6 --
June . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.6 --
July . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.5 --
August . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.5 --
September . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.7 --
October . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.4 --
November . . . . . . . . . . . . . . . . . . . . . . . . . . n.a. 0.4 --
____________________
<FN>
Source: Banco de Mexico.
</TABLE>
<PAGE>
Interest Rates. During the periods of highest inflation in the mid-1980s,
Mexico experienced extremely high interest rates. Following the signing of the
PSE in December 1987, domestic interest rates began to fall, although not as
rapidly as the rate of inflation. The interest rate on 28-day Cetes (Treasury
bills) declined from an average of approximately 157.1% per annum in January
1988 to approximately 41.3% per annum in August 1988. Subsequently, falling
commodity prices, a drop in Mexico's non-oil exports, increasing imports,
continued high debt service payments and a decline in international reserves,
combined with the Government's restrictive monetary policy, caused interest
rates to increase again. The rate on 28-day Cetes rose to 52.3% per annum in
December 1988, declined slightly during the first quarter of 1989 and peaked at
57.5% in June 1989.
The rate on 28-day Cetes fell to 34.6% at the end of July 1989 in response
to the announcement that Mexico had reached an agreement with its commercial
bank creditors on a financing package. In December of that year, however, the
rate on 28-day Cetes rose to 40.6%, reflecting a jump in inflation at year-end
and contraction of the money supply. Since then, interest rates have eased,
with the 28-day Cetes rate falling to an average of approximately 15.6% per
annum in 1992, although increasing in mid-1992 in response to Government anti-
inflation initiatives. For 1993, the interest rate on 28-day Cetes dropped from
16.7% to 10.7%. On January 5, 1994, the 28-day Cetes rate was 10.8% and the 91-
day Cetes rate was 10.7%.
In June 1993, a new decree applicable to Cetes was approved by the Mexican
Congress. This new decree provides, in part, that Cetes may have a maturity of
more than one year, paying periodic interest in the form of coupons. The
directive also clarifies the role of Banco de Mexico in its capacity as issuing
and paying agent in connection with the issuance of Cetes.
The following table sets forth the average interest rates per annum on 28-
day and 91-day Cetes and the costo porcentual promedio (the average weighted
cost of term deposits for commercial banks, or "CPP") for the periods
indicated.
<PAGE>
<TABLE>
<CAPTION>
Average Cetes and CPP Rates
28-Day 91-Day
Cetes Cetes CPP
-------------------- -------------------- --------------------
<S> <C> <C> <C>
1988:
Jan.-June . . . . . . . . . . . . . . . . . . . . . . . . 93.3% 87.1% 94.0%
July-Dec. . . . . . . . . . . . . . . . . . . . . . . . . 45.1 30.2 41.3
1989:
Jan.-June . . . . . . . . . . . . . . . . . . . . . . . . 51.1 51.1 48.9
July-Dec. . . . . . . . . . . . . . . . . . . . . . . . . 38.9 38.0 40.3
1990:
Jan.-June . . . . . . . . . . . . . . . . . . . . . . . . 41.2 40.7 43.2
July-Dec. . . . . . . . . . . . . . . . . . . . . . . . . 28.3 29.4 31.0
1991:
Jan.-June . . . . . . . . . . . . . . . . . . . . . . . . 21.2 21.7 24.3
July-Dec. . . . . . . . . . . . . . . . . . . . . . . . . 17.3 18.0 20.8
1992:
Jan.-June . . . . . . . . . . . . . . . . . . . . . . . . 13.8 13.8 16.9
July-Dec. . . . . . . . . . . . . . . . . . . . . . . . . 17.4 18.0 20.7
1993:
Jan.-June . . . . . . . . . . . . . . . . . . . . . . . . 16.4 17.3 20.9
____________________
<FN>
Source: Banco de Mexico.
</TABLE>
Direct Foreign Investment in Mexico. In recent years, Mexico has moved to
open its domestic markets to foreign investment. In 1973, the Ley para Promover
la Inversion Mexicana y Regular la Inversion Extranjera (Law to Promote Mexican
Investment and Regulate Foreign Investment, or "Investment Law") was enacted in
order to regulate, in a systematic fashion, direct foreign investment. The
Mexican Constitution and the Investment Law set forth those sectors of the
economy which are reserved to the Government or to Mexican investors. In May
1989, the Government issued new foreign investment regulations intended to
increase the volume and accelerate the flow of foreign investment. On December
28, 1993, a new law regulating foreign investment into Mexico, the Ley de
Inversion Extranjera, the Foreign Investment Law, became effective.
Pursuant to such law, foreign investors may hold majority interests in the
capital stock of Mexican companies without the approval of the Mexican foreign
investment authorities, provided that the relevant company does not engage in
certain restricted activities, (i) which may only be conducted by the Mexican
government or Mexican individuals and corporations with no foreign investment
or (ii) which are subject to certain specified limitations as to ownership by
foreign investors. Examples of such restricted activities include oil-related
activities, electricity-related activities, mail services, the issuance of
currency, certain transportation sectors, Mexican banks and broker-dealers,
<PAGE>
fishing and port administration. Foreign investors that own less than 49% of
the capital stock of a Mexican company, not engaged in any of the above-
specified activities, may exceed such ownership percentage without the approval
of the Mexican foreign investment authorities if the aggregate asset value of
such company does not exceed an amount to be determined annually by the Foreign
Investment Commission, which is currently 85 million new pesos. Mexican
companies may, however, continue to include restrictions on foreign ownership
in their by-laws, despite these recent changes in law.
Current Mexican foreign investment regulations provide a legal mechanism
through which non-Mexican nationals may invest in the equity securities of
Mexican companies notwithstanding the limitations described above. The
Government has established mechanisms through which non-Mexican nationals may
acquire beneficial ownership of shares of Mexican companies otherwise limited
to ownership by Mexican nationals, through special trust arrangements with
Mexican banks. The first such arrangement was established with Nacional
Financiera, S.N.C. ("Nafin"), the Mexican national development bank. Under that
arrangement, called a Master Trust, all shares of Mexican companies acquired
for the benefit of non-Mexican nationals through certificates of participation
are held in a series of special Indeval accounts in the name of Nafin as
trustee. Under the Master Trust arrangement, Nafin is the record owner of such
shares and must vote such shares in agreement with the votes cast by the
majority of the stockholders holding shares of the same class. Non-Mexican
national beneficiaries have only the right to receive dividends and other
distributions in respect of the shares underlying certificates of participation
and to dispose of such certificates.
Certain foreign investment regulations also contemplate that Mexican
companies may issue "neutral" shares, which have no voting rights and which may
be acquired freely by non-Mexican nationals.
During 1992, direct foreign investment in Mexico authorized by the
National Foreign Investment Commission (the "NFIC") totalled $3.6 billion.
During the first nine months of 1993, direct foreign investment authorized by
the NFIC totalled $3.5 billion. At September 30, 1993, total accumulated direct
foreign investment in Mexico, including new foreign investment projects
authorized by the NFIC, amounted to approximately $58.1 billion.
In 1992, foreign investment inflows to Mexico, as recorded in the balance
of payments, totaled $18.9 billion, of which $5.4 billion corresponded to
direct foreign investment and $13.6 billion to portfolio investment. In the
first six months of 1993, foreign inflows to Mexico, as recorded in the balance
of payments, totalled $10.5 billion, of which $2.7 billion corresponded to
direct foreign investment and $7.8 billion to portfolio investment. Over the
period from 1989 through September 30, 1993 foreign investment on the Mexican
Stock Exchange totalled $11.6 billion.
Public Finance
At the beginning of 1983, in the wake of the financial crises which began in
1982, the Mexican government began to reform Mexican public finance. The reform
consisted of a substantial reduction in the number of enterprises under public
sector control and increased fiscal discipline which resulted in a reduction in
<PAGE>
government expenditures. At the same time fiscal revenues have increased as a
result of tax reforms which broadened the tax base. The combined effect of
these policies has created a surplus in the primary fiscal balance, which is
measured as the difference between public sector revenues and expenditures
excluding interest payments. The primary fiscal balance which amounted to a
deficit equivalent to 8% of GDP in 1981, registered a surplus equal to 7.8% of
GDP in 1990 and 5.3% in 1991.
As a result of the fiscal policy implemented, the public sector deficit
was reduced from 16.0% of GDP in 1987 to 3.9% of GDP in 1990 and 1.5% in 1991
(exclusive of the revenues from the sale of Government owned enterprises). For
1992, preliminary figures indicate a surplus of 0.5% of GDP (exclusive of the
revenues from the sale of Government-owned enterprises).
The federal budget of the Mexican government consists of revenues and
expenditures of the federal government and of certain government agencies whose
particular budgets require specific legislative approval ("budget-controlled
agencies"). Among the most important budget-controlled agencies are Pemex,
Compania Nacional de Subsistencias Populares ("Conasupo"), Comision Federal de
Electricidad, Ferrocarriles Nacionales de Mexico and the social security and
social welfare agencies.
Federal Government Budget
The following table sets forth the actual and budgeted revenues and
expenditures of the Mexican federal government:
<PAGE>
<TABLE>
<CAPTION>
Revenues and Expenditures of the Mexican Federal Government<F1>
(in billions of pesos)
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec 31, Dec 31, Dec 31, Dec 31, Dec 31,
1988 1989 1990 1991 1992<F2>
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . 65,506 90,204 117,710 117,617 210,293
Pemex . . . . . . . . . . . . . . . . . . . 13,450 17,985 26,098 31,003 34,870
Other . . . . . . . . . . . . . . . . . . . 52,056 72,219 91,612 146,614 175,424
Taxes . . . . . . . . . . . . . . . . . . 47,307 60,287 79,107 102,042 123,650
Other Non-tax Revenues . . . . . . . . . . 4,749 11,333 12,505 44,572 51,773
Expenditures . . . . . . . . . . . . . . . . . 103,349 115,794 137,146 148,404 164,211
Current . . . . . . . . . . . . . . . . . . 98,777 107,470 118,668 126,140 140,684
Interest Payments . . . . . . . . . . . . 59,323 57,374 57,411 42,360 35,624
Transfers . . . . . . . . . . . . . . . . 11,065 12,699 13,649 20,543 25,509
Others . . . . . . . . . . . . . . . . . . 28,390 37,397 47,608 63,237 79,551
Capital . . . . . . . . . . . . . . . . . . 7,532 9,930 18,265 19,461 23,267
Adjustments . . . . . . . . . . . . . . . . . . (2,961) (1,606) 213 2,803 --
Budgetary surplus or (deficit) . . . . . . . . (37,843) (25,589) (19,435) 29,213 46,082
____________________
<FN>
<F1> Negative figures indicate a deficit
<F2> Secretaria de Hacienda y Credito Publico.
Note: Totals may differ due to rounding.
Source: Banco de Mexico
</TABLE>
Revenues of the Mexican federal government consist principally of income
taxes imposed on individuals and on businesses (including budget -- and
administratively-controlled agencies), value added tax, excise taxes, duties on
imports and exports and capital expenditures and include allocations to budget-
and administratively-controlled agencies.
The Federal Expenditure Budget for 1994 and the Federal Revenue Law for
1994 (collectively, the "1994 Budget") were presented to the Congress by
President Salinas on November 15, 1993 and published in the Official Daily of
the Federation on December 29 and December 30, 1993, respectively. The
principal objectives of the 1994 Budget are the consolidation of the progress
made in controlling inflation (including a goal of 5% inflation for 1994), the
promotion of economic recovery through steps to stimulate domestic supply, an
increase in the purchasing power of workers, especially those with the lowest
incomes, increases in the budget resources directed toward priority social
services and the continuation of structural reforms that encourage greater
efficiency of productive capacity in order to compete more successfully at the
international level. The 1994 Budget continues to stress the careful management
of public finance, macroeconomic stability, structural adjustment and
<PAGE>
modernization of the economy. The 1994 Budget projects a balanced budget (i.e.,
a financial balance of zero) for 1994 (without taking into account financial
intermediation).
The External Sector Of The Economy
Foreign Trade. The import substitution economic development model that
Mexico adopted in the 1940s to promote industrialization through protection of
local industries, and which in its latter stages was financed by the expansion
of oil exports and debt accumulation, gave way in the late 1980s to a more
outward-looking approach concentrating on export-led growth.
To foster non-oil exports, the Government has promoted a comprehensive set
of trade, fiscal, financial and promotional measures designed to create a
macroeconomic environment in which exports will be more competitive. The
Government's decision to join GATT in 1986 has resulted, among other things, in
an important reduction in the protection traditionally given to domestic
producers. Average tariff rates declined from 22.6% in 1986 to 13.1% in 1992. A
five-tier tariff structure was established at the end of 1987 with a maximum
rate of 20%. In December 1987, the surcharge of 5% on imports was abolished. By
1992, approximately 98% of tariff items and 86% of imports by value were exempt
from import permits and other non-tariff barriers. By reducing the cost of
imported goods, the opening of domestic markets to foreign products has also
complemented fiscal and monetary policies aimed at reducing domestic inflation.
In 1982, non-oil exports represented only 31.5% of Mexico's total exports.
As a result of the export promotion strategy referred to above, non-oil exports
have nearly quintupled since 1982, reaching $37.9 billion (or 82.0% of total
exports including in-bond industries) in 1992. During the period from 1988
through 1992, non-oil exports, including the net sales of the in-bond industry,
grew at an average annual rate of 12.1%.
In recent years, the composition of Mexico's non-oil exports has also
changed. In 1992, $35.4 billion (or 93.5%) of Mexico's non-oil exports were
represented by manufactured goods compared with $5.8 billion (or 77.1%) in
1982. During the same period, exports of transport vehicles, equipment,
machinery and metallic goods increased from approximately 27% of total
manufactured exports (excluding in-bond industry) in 1982 to 56% in 1992.
From 1983 to 1987, imports of goods were generally depressed, primarily as
a result of the general contraction of the Mexican economy. The growth of
exports and the reduction of imports resulted in trade surpluses that averaged
$9.0 billion per year during the period, and were largely used to finance net
transfers to Mexico's external creditors. However, since 1988 imports have
increased dramatically, reflecting increased demand resulting from a resumption
of growth in the Mexican economy, the modernization of Mexico's industrial
facilities and the decrease in tariffs that accompanied Mexico's entry into
GATT.
Mexico reported a deficit in its trade balance (exclusive of in-bond
industry) of approximately $4.43 billion in 1990, $11.33 billion in 1991 and
$20.68 billion in 1992. Including revenue from in-bond industries, the trade
deficit reached $15.9 billion during 1992, as compared with a trade deficit of
$7.3 billion during 1991. This deterioration in Mexico's trade balance was
<PAGE>
largely due to the strong growth of imports in response to trade liberalization
and the reduced levels of oil prices in 1991.
The value of imports (including in-bond industry) increased by 24.3%
between 1991 and 1992, exceeding $62 billion in 1992, 87.5% of which
represented purchases of intermediate and capital goods. The three categories
of merchandise imports--imports of capital goods, intermediate goods and
consumer goods--increased in 1992 by 34.6%, 20.5% and 32.7%, respectively, over
1991 levels. Exports grew to $46.2 billion in 1992, as compared with $42.7
billion in 1991. Petroleum exports increased by 1.7% during 1992 and non-
petroleum exports increased by 9.8%. Manufactured goods registered the largest
gain in exports, increasing by 12.1% over their level in 1991. Import growth
during 1992 was driven by the private sector, whose imports grew by 25.1%;
public sector imports increased by an estimated 12.6%. Private sector imports
accounted for 94.7% of total imports during the year, and public sector imports
for the remainder.
On December 17, 1992, the NAFTA was signed by the respective Presidents of
Mexico and the United States and by the Prime Minister of Canada. The
parliament of Canada has passed legislation approving the NAFTA, and in the
United States, the House of Representatives and the Senate passed legislation
approving and implementing the NAFTA on November 17, 1993 and November 20,
1993, respectively. The Mexican Senate (the only chamber of the Mexican
legislative branch required to do so) ratified the NAFTA on November 22, 1993.
The NAFTA went into effect on January 1, 1994.
Although not part of the formal text of the NAFTA, the United States,
Canada and Mexico have also negotiated and announced agreement on supplemental
accords to the NAFTA on labor and environmental issues, as well as separate
understandings on import surges, emergency action provisions under the NAFTA
and the funding of environmental infrastructure projects in the U.S.-Mexico
border region. In addition, different combinations of the three countries have
also reached understandings, or have agreed to pursue further discussions, on
various specific issues.
The NAFTA, removes most customs duties imposed on goods traded among the
three countries; remove or relax many investment restrictions, including
restrictions on foreign investment in banking, insurance and other financial
service activities; liberalize trade in services; provide for protection of
intellectual property rights; provide a specialized means for settlement of,
and remedies for, trade disputes arising under the NAFTA; promote trilateral,
regional and multilateral cooperation; and result in new laws and regulations
to further these goals. Certain provisions of the NAFTA would be phased in over
a period of years. It is expected that the NAFTA will provide permanent access
of Mexican exports to U.S. and Canadian markets. In addition, increased foreign
investment in Mexico should result as restrictions on foreign ownership are
eliminated over time. As a result of these two factors, the NAFTA is
anticipated to have a favorable effect on employment, wages and economic growth
in Mexico. On the other hand, Mexican producers and service providers will be
subject to increased foreign competition as tariffs on certain imported goods
and protection of certain industries from foreign competition are gradually
reduced. This increased competition, the effects of which have already been
felt in many segments of the Mexican economy after Mexico's entry into GATT in
<PAGE>
1986, is likely to result in changes in the composition of Mexican economic
activity.
Mexico signed a free trade agreement with Chile on September 22, 1991 and
negotiations of similar agreements are under way with Colombia, Venezuela and
Bolivia. On August 20, 1992, Mexico signed a framework free trade agreement
with Costa Rica, El Salvador, Honduras, Guatemala and Nicaragua as a step
towards establishing a free-trade area by the end of 1997. Mexico has also
taken important steps to increase its trading relations with Europe and the
Pacific rim countries. For example, on February 18, 1992, Mexico and France
signed a Framework Agreement for Cooperation that aims to encourage bilateral
cooperation through increased trade and investment.
The new Ley de Comercio Exterior ("Foreign Trade Law") was approved by the
Mexican Congress on July 13, 1993 to replace and consolidate certain earlier
statutes addressing the same topics and to clarify the division of
responsibilities between the customs authorities and the foreign trade
authorities. The Foreign Trade Law grants broad powers to the President to
establish import and export duties and other restrictions. It also empowers the
Ministry of Commerce and Industrial Development to resolve trade-related
disputes and establish procedures for the imposition of countervailing duties.
It creates a new agency, the Foreign Trade Commission, within the Ministry of
Commerce and Industrial Development to administer such procedures. In addition,
the Foreign Trade Law specifically defines and regulates unfair trade
practices, bringing Mexico's regulatory framework more into line with current
international practices and standards. The Foreign Trade Law was drafted in
response to the increasing importance of international trade in the Mexican
economy and the increasing number of international trade agreements to which
Mexico has become a party. See "The United Mexican States--The External Sector
of the Economy--Foreign Trade."
Balance of International Payments. From 1983 to 1985 and in 1987, the
current account of the balance of payments was in a surplus position, with
surpluses of $5.4 billion in 1983, $3.8 billion in 1984, $0.4 billion in 1985
and $3.8 billion in 1987. The current account deficit observed in 1986 ($1.8
billion) was due to a sharp fall in oil prices, which more than halved oil
exports from $14.6 billion in 1985 to $6.1 billion in 1986. In 1988, 1989 and
1990, the current account showed deficits of $2.9 billion, $6.1 billion and
$7.1 billion, respectively, due primarily to the increase in private sector
imports and the Government's trade liberalization policies. Mexico recorded
current account deficits of $13.8 billion in 1991 and $22.8 billion in 1992,
again due to a surge in imports resulting from the country's economic recovery
and lower tariffs. Notwithstanding the increase in the current account deficit,
international reserves continued to grow due to a sustained inflow of capital
from abroad resulting from direct foreign investment and investment in the
Mexican securities market.
Although the current account deficit has risen in the 1988-1992 period,
much of the increase in Mexico's imports is attributable to the expansion of
Mexican industry associated with increased investment, especially direct
foreign investment. See "The United Mexican States--The External Sector of the
Economy--Direct Investment in Mexico." In 1992, 87.5% of Mexico's imports were
intermediate and capital goods. This linkage between the current account and
<PAGE>
private sector investment makes it less likely that Mexico's foreign exchange
reserves would fall sharply should capital inflows decline, because lower
capital inflows for investment should lead eventually to reduced levels of
imports associated with such investment.
The capital account, including errors and omissions, registered a surplus
of $24.0 billion during 1992, as compared with a surplus of $21.9 billion
during 1991. The capital account included $5.4 billion of direct investment in
1992.
The following table sets forth Mexico's balance of payments for the
periods indicated:
Balance of Payments
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992
-------------- -------------- -------------- -------------- --------------
(in millions of dollars)
<S> <C> <C> <C> <C> <C>
I. Current Account<F1> . . . . . . . . . . . . $(2,922) $(6,085) $(7,114) $(13,789) $(22,809)
II. Capital Account . . . . . . . . . . . . . . (1,163) 3,176 8,164 24,134 25,955
III. Change in gross international reserves . . (7,127) 272 3,414 7,822 1,161
____________________
<FN>
Note: Totals may differ due to rounding.
<F1> Current account figures are calculated according to a methodology
developed to conform to new international standards under which
merchandise exports and merchandise imports include in-bond industry,
while in previous years net in-bond industry was included as a separate
line item.
Source: Banco de Mexico.
</TABLE>
Exchange Controls and Foreign Exchange Rates. From late 1982 until
November 10, 1991, Mexico maintained a dual foreign exchange rate system, with
a "controlled" rate and a "free market" rate. The controlled exchange rate
applied to certain imports and exports of goods, advances and payments of
registered foreign debt, funds used in connection with the in-bond industry and
payments of royalties and technical assistance under registered agreements. The
free market rate was applicable to all other transactions.
The dual system assisted in controlling the value of the peso, especially
in 1983 and 1985. In later years, the difference between the two rates was not
significant. The average differential between the rates was 1.7% in 1988, 1.2%
in 1989, 1.1% in 1990 and 0.3% at November 10, 1991. Mexico repealed its
exchange control rules effective November 11, 1991 and now maintains only a
free, or market, exchange rate.
<PAGE>
Under both the PSE and its successors, the PECE, the 1992-93 PECE and the
1993-94 PECE, the Government implemented a schedule of gradual devaluation of
the peso and the new peso. Under the PSE, a fixed exchange rate was maintained
from February to December 1988. Under the PECE, the intended annual rate of
devaluation was gradually lowered from 16.7% in 1989 to 11.4 in 1990, 4.5% in
1991 and 2.9% in 1992. Since October 1992, under the 1992-93 PECE and the 1993-
94 PECE, the peso/dollar exchange rate has been allowed to fluctuate within a
band that widens daily. The ceiling of the band, which is the maximum selling
rate, depreciates at a daily rate of 0.0004 new pesos (equal to approximately
4.5% per year), while the floor of the band, i.e., the minimum buying rate,
remains fixed. Banco de Mexico has agreed to intervene in the foreign exchange
market to the extent that the peso/dollar exchange rate reaches either the
floor or the ceiling of the band. By late 1993, the difference between both
intervention points will reach 9.1%.
The following table sets forth, for the dates and periods indicated, the
end-of-period and average free market rates and controlled rates for the
purchase of dollars, expressed in new pesos per dollar:
Exchange Rates
<TABLE>
<CAPTION>
Free Market Rate Controlled Rate
-------------------------------------- --------------------------------------
End of End of
Period Average<F1> Period Average<F1>
------------------ ------------------ ------------------ ------------------
Year
<S> <C> <C> <C> <C>
1988 . . . . . . . . . . . . . . . . . . . . . . 2.298 2.290 2.257 2.250
1989 . . . . . . . . . . . . . . . . . . . . . . 2.681 2.483 2.637 2.453
1990 . . . . . . . . . . . . . . . . . . . . . . 2.943 2.838 2.939 2.807
1991<F2> . . . . . . . . . . . . . . . . . . . . 3.075 3.016 3.065 3.007
1992 . . . . . . . . . . . . . . . . . . . . . . 3.119 3.094 -- --
1993<F3> . . . . . . . . . . . . . . . . . . . . 3.179 3.149 -- --
____________________
<FN>
<F1> Annual average of the daily rates published by Banco de Mexico.
<F2> Controlled Rate figures for 1991 are for the period January through
November 10, 1991.
<F3> As of October 31 and average for January-October.
Source: Banco de Mexico.
</TABLE>
External Debt. The following table sets forth a summary of the external
public debt of Mexico, which includes the external debt of the Government, the
budget-controlled agencies and the administratively-controlled agencies and a
breakdown of such debt by currency.
<PAGE>
Summary of External Public Debt<F1>
By Type
<TABLE>
<CAPTION>
Long-Term Long-Term
Direct Debt Debt of Other
of the Budget- Long-Term Total Total Total Long-
Federal Controlled Public Long-Term Short-Term and Short-
Government Agencies Debt<F2> Debt Debt Term Debt
------------------ ----------------- ---------------- ------------- ------------- -------------
(in millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
December 31,
1988 . . . . . . . $30,961 $26,944 $22,318 $80,223 $ 780 $81,003
1989 . . . . . . . 31,377 15,927 28,131 75,435 625 76,059
1990 . . . . . . . 47,983<F3> 7,180<F3> 21,451<F3> 76,614 1,156 77,770
1991 . . . . . . . 48,778 7,011 22,472 78,261 1,727 79,988
1992 . . . . . . . 41,281 7,485 23,523 72,289 3,466 75,755
September 30, 1993 41,037 7,457 26,647 75,141 4,241 79,382
</TABLE>
<PAGE>
By Currency<F4>
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------------------------------------------------------------------------ -----------------
1988 1989 1990 1991 1992 1993
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
(in (in (in (in (in (in
millions millions millions millions millions millions
of US$) (%) of US$) (%) of US$) (%) of US$) (%) of US$) (%) of US$) (%)
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Dollars . . $62,236 76.8% $57,511 75.6% $64,464 82.9% $64,044 80.1% $61,117 80.7% $64,287 81.0%
Japanese
Yen . . . . 7,926 9.8 7,227 9.5 3,672 5.0 5,895 7.4 5,904 7.8 7,016 8.8
Deutsche
Marks . . . 2,772 3.4 2,965 3.9 2,874 3.7 3,177 4.0 2,971 3.9 2,682 3.4
Pounds
Sterling . 2,642 3.3 2,443 3.2 1,106 1.4 1,092 1.4 838 1.1 712 0.9
French
Francs . . 1,984 2.4 2,293 3.0 2,843 3.7 2,974 3.7 2,537 3.4 2,414 3.0
Swiss
Francs . . 797 1.0 762 1.0 505 0.6 576 0.7 312 0.4 323 0.4
Others . . 2,643 3.3 2,858 3.8 2,107 2.7 2,230 2.8 2,077 2.7 1,948 2.5
Total . . . $81,003 100.0% $76,059 100.0% $77,770 100.0% $79,938 100.0% $75,755 100.0% $79,382 100.0%
____________________
<FN>
Note: Totals may differ due to rounding.
<F1> External debt denominated in foreign currencies other than dollars has
been converted into dollars at exchange rates as of each of the dates
indicated. External public debt does not include repurchase obligations
of Banco de Mexico with the IMF, which totalled the equivalent of $5,270
billion at September 30, 1993, using an exchange rate of SDR1 = $1.4184,
or loans from the Commodity Credit Corporation to private sector Mexican
banks. External debt in this Prospectus is presented on a "gross" basis,
and includes external obligations of the public sector at their full
outstanding face or principal amount. For certain informational and
statistical purposes, Mexico sometimes reports its external public
sector debt on a "net" or "economic" basis, which is calculated as the
gross debt net of certain financial assets held abroad. These financial
assets include the value of principal and interest collateral on
restructured debt (see "External Debt Restructuring and Debt and Debt
Service Reduction Transactions" below) and Mexican public sector
external debt that is held by public sector entities but that has not
been cancelled.
<PAGE>
<F2> Including development banks and other administratively-controlled
agencies whose finances are consolidated with the Government.
<F3> In March 1990, $42.817 billion of long-term external public debt was
exchanged for $35,697 billion of direct debt of the Government (Discount
Bonds and Par Bonds), as part of the 1989-92 financing Package for
Mexico.
<F4> Adjusted to reflect the effect of currency swaps.
Source: Ministry of Finance and Public Credit.
</TABLE>
The total external debt of the public sector consists of the external
portion of the long-term indebtedness incurred directly by the Government, the
external long-term indebtedness incurred by budget-controlled agencies and the
external long-term indebtedness incurred directly or guaranteed by
administratively-controlled agencies (including but not limited to national
development banks), and the short-term debt of the public sector. Private
sector debt guaranteed by the Government is not included unless and until the
Government is called upon to make payment under its guaranty. For purposes of
this Statement of Additional Information, long-term debt includes all debt with
maturities of one year or more from the date of issue.
During the period from 1988 to 1990, much of Mexico's bank credits were
transformed into bonds through two debt exchange transactions. See "The United
Mexican States--External Debt Restructuring and Debt and Debt Service Reduction
Transactions" below. At December 31, 1992, commercial banks held approximately
14.2% of Mexico's total public sector external debt (excluding bonds issued in
debt exchange transactions), multilateral and bilateral creditors (excluding
the IMF) held 39.8%, bondholders (including commercial banks holding bonds
issued in debt exchange transactions) held 45.7% and private placement
investors and suppliers held the remainder.
Mexico's public sector external debt totalled $75.8 billion at December
31, 1992 as compared to $80.0 billion at the end of 1991. After taking into
account new borrowings by the public sector and scheduled amortizations of
external debt, total public sector external debt amounted to $79.4 billion at
September 30, 1993. The bulk of the public sector external debt is long-term--
$78.3 billion at December 31, 1991, $72.3 billion at December 31, 1992 and
$75.1 billion at September 30, 1993. New external borrowings by the public
sector in 1992 and 1993 originated mainly from multilateral and bilateral
sources and new issuances in the international capital markets.
In 1992, $7.181 billion of public sector external debt was cancelled by
the Government, a 9% reduction from its balance of $79.988 billion on December
31, 1991. See "The United Mexican States--External Debt Restructuring and Debt
and Debt Service Reduction Transactions" below.
In each of 1987, 1988 and 1989, interest payments on total external public
sector debt absorbed, on average, approximately 74.1% of the Government's total
current account receipts. In 1990, interest payments on external public sector
debt accounted for only 50.3% of such receipts as a result of interest savings
following implementation of the 1989-92 Financing Package for Mexico and rising
foreign exchange receipts. In 1991, interest payments on external public sector
debt accounted for 65.1% of the Government's total current account receipts,
<PAGE>
mainly as a result of lower foreign exchange receipts. In 1992, interest
payments on external public sector debt accounted for 50.7% of such receipts.
See "The United Mexican States--External Debt and Debt Service Reduction
Transactions" and "The United Mexican States--The External Sector of the
Economy--Balance of International Payments."
External Debt Restructuring and Debt and Debt Service Reduction
Transactions. In August 1982, Mexico requested and received from its major
commercial bank creditors a 90-day rollover of principal payments on most
public sector external debt. No such request was made to bondholders or
multilateral financial institutions (primarily the World Bank, the IMF and
the IDB) and no restructuring of bond debt or of debt owed to multilateral
institutions has taken place since then.
Over the five years following 1982, Mexico and its commercial bank
creditors concluded three separate debt restructuring and new money exercises.
In 1983, 1985 and 1987, Mexico and the banks agreed to extend the maturities of
agreed-upon portions of the outstanding public sector external debt and, in
some cases, to alter the interest rates and currencies applicable to the
restructured debt. In connection with each restructuring exercise (and with the
1989-92 Financing Package referred to below), Mexico requested and received 90-
day rollovers of maturing principal payments pending finalization of
documentation for the respective restructurings. During this period, Mexico
also entered into agreements with the Paris Club to reschedule payments on
loans made or guaranteed by official, bilateral creditors to the Mexican public
sector and received support (in the form of structural adjustment and project
loans from the World Bank and the IDB and standby facilities, extended fund
arrangements and contingency facilities with the IMF) from its multilateral
creditors.
The 1989-92 Financing Package for Mexico, implemented in March 1990, was
intended to reduce the principal amount of, and the debt service burden
associated with, Mexico's commercial bank debt, and to secure sufficient future
financing to allow Mexico to resume sustained economic growth. The Financing
Package offered commercial banks options for debt reduction, interest reduction
and new money. Under the interest reduction option, existing indebtedness was
exchanged for 30-year bonds ("Par Bonds") that, in the case of bonds
denominated in dollars, bear interest at the fixed rate of 6.25% per annum.
Under the principal reduction option, existing indebtedness was exchanged for
30-year bonds ("Discount Bonds") having a principal amount equal to 65% of the
principal amount of such existing indebtedness and an interest rate of LIBOR
plus 13/16% per annum. Under the new money option, certain banks committed to
provide Mexico with new money (through a combination of bonds, traditional bank
credits and bank credits prepayable to fund trade credits or public sector
loans) over three years in an aggregate amount equal to 25% of their holdings
of then existing indebtedness.
<PAGE>
PERFORMANCE DATA
From time to time, the Fund may quote total return in advertisements or in
reports and other communications to shareholders and compare its total return
to that of other funds or accounts with similar objectives and to relevant
indices.
Average Annual Total Return
The Fund's "average annual total return" figures, as described in the
Prospectus, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1+T)n = ERV
Where: P=a hypothetical initial payment of $1,000.
T=average annual total return
n=number of years
ERV = Ending Redeemable Value of a hypothetical
$1,000 investment made at the beginning of
a 1-, 5-, or 10-year period at the end of
the 1-, 5-, or 10-year period (or
fractional portion thereof), assuming
reinvestment of all dividends and
distributions.
The Fund's total return figures calculated in accordance with the above
formula will assume that the maximum applicable CDSC has been deducted from the
hypothetical $1,000 initial investment.
Aggregate Total Return
The Fund's "aggregate total return" figures, as described in the
Prospectus, represent the cumulative change in the value of an investment in
Fund shares for the specified period and are computed by the following formula:
ERV-P
AGGREGATE TOTAL RETURN = -----
P
Where:P=a hypothetical initial investment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5-,
or 10-year period at the end of the 1-, 5-, or
10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and
distributions.
<PAGE>
The Fund's performance will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in
the future. Because performance will vary, it may not provide a basis for
comparing an investment in Fund shares with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other mutual funds should give
consideration to the nature, quality and maturity of the respective investment
companies' portfolio securities and market conditions.
ADDITIONAL INFORMATION CONCERNING FUND SHARES
As used in this Statement of Additional Information and the Prospectus, a
"majority of the outstanding shares" of the Fund means the lesser of (1) 67% of
the Fund's shares represented at a meeting at which the holders of more than
50% of the outstanding shares of the Fund are present in person or by proxy, or
(2) more than 50% of the outstanding shares of the Fund.
The By-Laws of the Company provide that the Company shall not be required
to hold an annual meeting of shareholders in any year in which the election of
directors to the Company's Board of Directors is not required to be acted upon
under the 1940 Act. The law under certain circumstances provides shareholders
with the right to call for a meeting of shareholders to consider the removal of
one or more directors. To the extent required by law, the Company will assist
in shareholder communication in such matters.
Each share of the Fund is entitled to such dividends and distributions out
of the assets belonging to the Fund as are declared in the discretion of the
Company's Board of Directors. In determining the Fund's net asset value, assets
belonging to the Fund are credited with a proportionate share of any general
assets of the Company not belonging to a particular fund of the Company and are
charged with the direct liabilities in respect of the Fund and with a share of
the general liabilities of the Company which are normally allocated in
proportion to the relative net asset values of the respective funds of the
Company at the time of allocation.
In the event of the liquidation or dissolution of the Company, shares of
the Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the Fund, of any general assets not attributable to a
fund of the Company, that are available for distribution. Shareholders are not
entitled to any preemptive rights.
Subject to the provisions of the Company's Charter, determinations by the
Board of Directors as to the direct and allocable liabilities and the allocable
portion of any general assets of the Company, with respect to the Fund are
conclusive.
<PAGE>
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), 425 Lexington Avenue, New York, New York 10017, serves as
counsel to the Company.
AUDITORS
Ernst & Young acts as the Fund's independent auditors and has offices at
200 Clarendon Street, Boston, Massachusetts 02116-5072.
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's and S&P with respect to bonds
and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality
and carry the smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated "A" possess many favorable investment qualities
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance and other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
<PAGE>
Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
Standard & Poor's Corporate Bond Ratings
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and
pay interest.
AA -- Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.
A -- Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to repay principal and pay
interest for bonds in this category than for higher rated categories.
BB-B-CCC-CC-C -- Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI -- Bonds rated "CI" are income bonds on which no interest is being
paid.
D -- Bonds rated "D" are in default. The "D" category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired unless S&P believes that such
payments will be made during such grace period. The "D" rating is also used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
<PAGE>
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1 -- Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Prime-3 -- Issuers (or related supporting institutions) rated "Prime-3"
have an acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime -- Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
Standard & Poor's Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated "B" are regarded as having only speculative capacity for
timely payment.
<PAGE>
C -- This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D -- Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 14, 1994
Lehman Latin America Dollar Income Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
Statement of Additional Information ________________, 1994
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus for the Lehman Latin America Dollar Income
Portfolio (the "Fund"), dated _______________, 1994, as amended or supplemented
from time to time, and is incorporated by reference in its entirety into the
Prospectus. The Fund is a non-diversified portfolio of Lehman Brothers Funds,
Inc. (the "Company"), an open-end, management investment company. Because this
Statement of Additional Information is not itself a prospectus, no investment
in shares of the Fund should be made solely upon the information contained
herein. Copies of the Prospectus may be obtained by calling 800-451-2010.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
TABLE OF CONTENTS
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . .
Additional Purchase and Redemption Information . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . .
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Fund Shares . . . . . . . . . . . . . .
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Ratings . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
As stated in the Prospectus, the investment objective of the Fund is to seek a
high level of total return, consisting of income and capital appreciation. The
following policies supplement the description of the Fund's investment
objectives and policies in the Prospectus.
Portfolio Transactions
Subject to the general control of the Company's Board of Directors, Lehman
Brothers Global Asset Management Limited ("LBGAM"), the Fund's investment
adviser, is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Fund. Certain Latin
American securities exchanges provide for fixed rates of commission on exchange
transactions. Transactions on United States and certain other foreign stock
exchanges involve the payment of negotiated brokerage commissions, which may
vary among different brokers. The cost of securities purchased from
underwriters include an underwriter's commission or concession, and the prices
at which securities are purchased from and sold to dealers in the U.S. and
[some] foreign over-the-counter markets include an undisclosed dealer spread.
In making portfolio investments, LBGAM seeks to obtain the best net price and
the most favorable execution of orders. To the extent that the execution and
price offered by more than one broker or dealer are comparable, LBGAM may, in
its discretion, effect transactions in portfolio securities with brokers or
dealers who provide the Company with research advice or other services.
Research advice and other services furnished by brokers through whom the Fund
effects securities transactions may be used by LBGAM in servicing accounts in
addition to the Fund, and not all such services will necessarily benefit the
Fund.
With respect to over-the-counter transactions, the Fund, where possible,
will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere.
Investment decisions for the Fund are made independently from those for
the other investment company portfolios or accounts advised by LBGAM. Such
other portfolios may also invest in the same securities as the Fund. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other portfolios, transactions are averaged as to price, and
available investments allocated as to amount, in a manner which LBGAM believes
to be equitable to each portfolio, including the Fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtainable for the Fund. To the extent
permitted by law, LBGAM may aggregate the securities to be sold or purchased
for the Fund with those to be sold or purchased for such other portfolios in
order to obtain best execution.
The Fund will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with Lehman Brothers Inc. ("Lehman Brothers"), LBGAM or
<PAGE>
any affiliated person (as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of either of them, except to the extent
permitted by the Securities and Exchange Commission (the "SEC"). However,
pursuant to an exemption granted by the SEC, the Fund may engage in
transactions involving certain money market instruments with Lehman Brothers
and certain of its affiliates acting as principal. The Fund will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which Lehman Brothers or any affiliate thereof is a member, except
to the extent permitted by the SEC. Under certain circumstances, the Fund may
be at a disadvantage because of these limitations in comparison with other
investment company portfolios which have a similar investment objective but are
not subject to such limitations.
It is anticipated that the Fund's annual portfolio turnover rate generally
will not exceed 200%. This rate is calculated by dividing the lesser of sales
or purchases of portfolio securities for any given year by the average monthly
value of the Fund's portfolio securities for that year. For purposes of this
calculation, no regard is given to securities having a maturity or expiration
date at the time of acquisition of one year or less. Portfolio turnover
directly affects the amount of transaction costs that are borne by the Fund. In
addition, the sale of securities held by the Fund for not more than one year
will give rise to short-term capital gain or loss for U.S. federal income tax
purposes. The U.S. federal income tax requirement that the Fund derive less
than 30% of its gross income from the sale or other disposition of stock or
securities held less than three months may limit the Fund's ability to dispose
of its securities. See "Additional Information Concerning Taxes."
Additional Information on Portfolio Instruments and Certain Investment
Practices
U.S. Government Obligations. Examples of the types of U.S. government
securities that may be held by the Fund include, in addition to U.S. Treasury
Bills, the obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, Federal Financing Bank, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal Farm Credit Banks, Maritime Administration,
Resolution Trust Corporation, Tennessee Valley Authority, U.S. Postal Service
and Washington D.C. Armory Board.
Bank Obligations. Bank obligations include negotiable certificates of
deposit, bankers' acceptances, fixed time deposits and deposit notes. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either interest-
bearing or purchased on a discount basis. A bankers' acceptance is a short-term
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction. The borrower is liable for payment as is
the bank, which unconditionally guarantees to pay the draft at its face amount
on the maturity date. Fixed time deposits are obligations of branches of United
States banks or foreign banks which are payable at a stated maturity dated and
bear a fixed rate of interest. Although fixed time deposits do not have a
<PAGE>
market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party. Fixed time deposits
subject to withdrawal penalties and with respect to which a Fund cannot realize
the proceeds thereon within seven days are deemed "illiquid" for the purposes
of the seventh investment limitation set forth under "Investment Objective and
Policies--Investment Limitations" below. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.
Banks may be subject to extensive governmental regulations that may
limit both the amounts and types of loans and other financial commitments that
may be made and the interest rates and fees that may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purposes of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations. Bank obligations may be general obligations of
the parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation. Investors should also be
aware that securities of foreign banks and foreign branches of U.S. banks may
involve investment risks in addition to those relating to domestic bank
obligations. Such risks include future political and economic developments, the
possible seizure or nationalization of foreign deposits, the possible adoption
of foreign governmental restrictions which might adversely affect the payment
of principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and foreign issuers generally are subject to different accounting,
auditing, reporting and record keeping standards than those applicable to U.S.
issuers.
Latin American Governmental Obligations. Agreements implemented under
the Brady Plan to date are designed to achieve debt and debt-service reduction
through specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for
bonds issued at 100% of face value of such debt which carry a below-market
stated rate of interest (generally known as par bonds), bonds issued at a
discount from the face value of such debt (generally known as discount bonds),
bonds bearing an interest rate which increases over time and bonds issued in
exchange for the advancement of new money by existing lenders. Discount bonds
issued to date under the framework of the Brady Plan have generally borne
interest computed semiannually at a rate equal to 13/16 of one percent above
the then current six month LIBOR rate. Regardless of the stated face amount and
stated interest rate of the various types of Brady Bonds, the Fund will
purchase Brady Bonds in secondary markets, as described below, in which the
price and yield to the investor reflect market conditions at the time of
purchase. Brady Bonds issued to date have traded at a deep discount from their
face value. Certain sovereign bonds are entitled to "value recovery payments"
in certain circumstances, which in effect constitute supplemental interest
payments but generally are not collateralized. Certain Brady Bonds have been
collateralized as to principal due at maturity (typically 15 to 30 years from
the date of issuance) by U.S. Treasury zero coupon bonds with a maturity equal
<PAGE>
to the final maturity of such Brady Bonds, although the collateral is not
available to investors until the final maturity of the Brady Bonds. Collateral
purchases are financed by the IMF, the World Bank and the debtor nations'
reserves. In addition, interest payments on certain types of Brady Bonds may be
collateralized by cash or high-grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. The Fund may
purchase Brady Bonds with no or limited collateralization, and will be relying
for payment of interest and (except in the case of principal collateralized
Brady Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories.
Convertible Securities. As fixed income securities, convertible
securities are investments that provide for a stable stream of income with
generally higher yields than common stocks. Of course, like all fixed income
securities, there can be no assurance of current income because the issuers of
the convertible securities may default on their obligations. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation. A convertible security, in addition to providing fixed
income, offers the potential for capital appreciation through the conversion
feature, which enables the holder to benefit from increases in the market price
of the underlying common stock. There can be no assurance of capital
appreciation, however, because securities prices fluctuate. Convertible
securities generally are subordinated to other similar but non-convertible
securities of the same issuer, although convertible bonds, as corporate debt
obligations, enjoy seniority in right of payment to all equity securities, and
convertible preferred stock is senior to common stock, of the same issuer.
Because of the subordination feature, however, convertible securities typically
have lower ratings than similar non-convertible securities.
Repurchase Agreements. The repurchase price under the repurchase
agreements described in the Prospectus generally equals the price paid by the
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
Company's custodian, sub-custodian or in the Federal Reserve/Treasury book-
entry system. Repurchase agreements are considered to be loans by the Fund
under the 1940 Act.
Reverse Repurchase Agreements. Whenever the Fund enters into reverse
repurchase agreements as described in the Prospectus, it will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained.
Loans of Portfolio Securities. The Fund has the ability to lend
securities from its portfolio to brokers, dealers and other financial
organizations. There is no investment restriction on the amount of securities
that may be loaned. The Fund may not lend its portfolio securities to Lehman
<PAGE>
Brothers or its affiliates without specific authorization from the SEC. Loans
of portfolio securities by the Fund will be collateralized by cash, letters of
credit or securities which are consistent with its permitted investments, which
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. From time to time, the Fund may
return a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party, which is
unaffiliated with the Fund or Lehman Brothers, and which is acting as a
"finder." With respect to loans by the Fund of its portfolio securities, the
Fund would continue to accrue interest on loaned securities and would also earn
income on loans. Any cash collateral received by the Fund in connection with
such loans would be invested in securities in which the Fund is permitted to
invest.
When-Issued Securities. As stated in the Prospectus, the Fund may
purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price). When the Fund agrees to purchase
when-issued securities, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. When the Fund engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous. The Fund does not intend to purchase when-
issued securities for speculative purposes but only in furtherance of its
investment objective. The Fund reserves the right to sell these securities
before the settlement date if it is deemed advisable.
Illiquid and Restricted Securities. The Fund may not invest more than
15% of its net assets in illiquid securities, including securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered
illiquid for purpose of this limitation.
The SEC has adopted Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"), which allows for a broader institutional trading
market for securities otherwise subject to restrictions on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. The Fund's investment adviser anticipates that the market
for certain restricted securities such as institutional commercial paper and
institutional municipal securities will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers.
<PAGE>
The Fund's investment adviser will monitor the liquidity of
restricted and other illiquid securities under the supervision of the Board of
Directors. In reaching liquidity decisions with respect to Rule 144A
securities, the Fund's investment adviser will consider, inter alia, the
following factors: (1) the unregistered nature of a Rule 144A security; (2)
the frequency of trades and quotes for a Rule 144A security; (3) the number of
dealers wishing to purchase or sell the Rule 144A security and the number of
other potential purchasers; (4) dealer undertakings to make a market in the
Rule 144A security; (5) the trading markets for the Rule 144A security; and (6)
the nature of the Rule 144A security and the nature of the marketplace trades
(e.g., the time needed to dispose of the Rule 144A security, the method of
soliciting offers and the mechanics of the transfer).
The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by nationally recognized rating
agencies for obligations that may be purchased by the Fund.
Additional Information Regarding Hedging and Other Strategic Transactions
As described in the Prospectus under "Investment Objective and Policies--Other
Investment Practices--Hedging and Other Strategic Transactions," the Fund is
authorized to use a variety of investment strategies to hedge various market
risks (such as interest rates and broad or specific market movements), to
manage the effective maturity or duration of debt instruments held by the Fund,
or, with respect to certain strategies, to seek to increase the Fund's income
or gain (such investment strategies and transactions are referred to herein as
"Hedging and Other Strategic Transactions").
A detailed discussion of Hedging and Other Strategic Transactions follows
below. Few of these strategies can practicably be used by the Fund at the
present time because the instruments needed to implement these strategies are
not generally available and such instruments may not become available for
extensive use in the future. Techniques and instruments may change, however,
over time as new instruments and strategies are developed or regulatory changes
occur. In addition, the Fund's ability to pursue certain of these strategies
may be limited by the Commodity Exchange Act, as amended, applicable rules and
regulations of the Commodity Futures Trading Commission ("CFTC") thereunder and
the federal income tax requirements applicable to regulated investment
companies which are not operated as commodity pools. See "Taxes" in the
Prospectus.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Hedging and Other
Strategic Transactions involving options require segregation of Fund assets in
special accounts, as described below under "Investment Objective and Policies--
Additional Information Regarding Hedging and Other Strategic Transactions--Use
of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, index or other instrument at the exercise price. The Fund's purchase
<PAGE>
of a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
the Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. The Fund's purchase of a call option on a security, financial
futures contract, index or other instrument might be intended to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
the instrument. An "American" style put or call option may be exercised at any
time during the option period, whereas a "European" style put or call option
may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance
of the obligations of the parties to the options. The discussion below uses the
OCC as an example, but is also applicable to other similar financial
intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security, although in the future,
cash settlement may become available. Index options are cash settled for the
net amount, if any, by which the option is "in-the-money" (that is, the amount
by which the value of the underlying instrument exceeds, in the case of a call
option, or is less than, in the case of a put option, the exercise price of the
option) at the time the option is exercised. Frequently, rather than taking or
making delivery of the underlying instrument through the process of exercising
the option, listed options are closed by entering into offsetting purchase or
sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed
by an exchange, (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits, (4) interruption of the
normal operations of the OCC or an exchange, (5) inadequacy of the facilities
of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
<PAGE>
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-
listed options, which generally have standardized terms and performance
mechanics, all of the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guaranties and security, are
determined by negotiation of the parties. It is anticipated that any Portfolio
authorized to use OTC options will generally only enter into OTC options that
have cash settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, LBGAM must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
met. The Fund will enter into OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers," or broker-dealers, domestic or foreign banks, or other
financial institutions that LBGAM deems to be creditworthy. In the absence of a
change in the current position of the staff of the SEC, OTC options purchased
by the Fund and the amount of the Fund's obligation pursuant to an OTC option
sold by the Fund (the cost of the sell-back plus the in-the-money amount, if
any) or the value of the assets held to cover such options will be deemed
illiquid.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
The Fund may purchase and sell call options on securities that are traded
on U.S. and foreign securities exchanges and in the OTC markets, and on
securities indices, currencies and futures contracts. All calls sold by the
Fund must be "covered" (that is, the Fund must own the securities or futures
contract subject to the call), or must otherwise meet the asset segregation
requirements described below for so long as the call is outstanding. Even
though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund will expose the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the Fund to hold
a security or instrument that it might otherwise have sold.
The Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
<PAGE>
The Fund may purchase and sell put options on securities (whether or not
it holds the securities in its portfolio) and on securities indices, currencies
and futures contracts. The Fund will not sell put options if, as a result, more
than 50% of the Fund's assets would be required to be segregated to cover its
potential obligations under put options other than those with respect to
futures contracts. In selling put options, the Fund faces the risk that it may
be required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures Contracts and Options on Futures
Contracts. The Fund may trade financial futures contracts or purchase or sell
put and call options on those contracts as a hedge against anticipated interest
rate or market changes, and for risk management purposes, or the Fund may seek
to increase the Fund's income or gain. Futures contracts are generally bought
and sold on the commodities exchanges on which they are listed with payment of
initial and variation margin as described below. The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to certain instruments, the
net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract and obligates the seller to deliver that position.
The Fund's use of financial futures contracts and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC. Maintaining a futures
contract or selling an option on a futures contract will typically require the
Fund to deposit with a financial intermediary, as security for its obligations,
an amount of cash or other specified assets ("initial margin") that initially
is from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
The Fund will not enter into a futures contract or option thereon if,
immediately thereafter, the sum of the amount of its initial margin and
premiums required to maintain permissible non-bona fide hedging positions in
futures contracts and options thereon would exceed 5% of the current fair
market value of the Fund's net assets; however, in the case of an option that
is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The value of all futures contracts
sold by the Fund (adjusted for the historical volatility relationship between
the Fund and the contracts) will not exceed the total market value of the
Fund's securities. The segregation requirements with respect to futures
contracts and options thereon are described below under "Investment Objective
<PAGE>
and Policies--Additional Information Regarding Hedging and Other Strategic
Transactions--Use of Segregated and Other Special Accounts."
Options on Securities Indices and Other Financial Indices. The Fund may
purchase and sell call and put options on securities indices and other
financial indices. In so doing, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, options on indices settle by cash settlement; that is,
an option on an index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option (except if, in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments comprising the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.
Combined Transactions. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple interest rate transactions and any combination of futures, options and
interest rate transactions, instead of a single Hedging and Other Strategic
Transaction, as part of a single or combined strategy when, in the judgment of
LBGAM, it is in the best interests of the Fund to do so. A combined transaction
will usually contain elements of risk that are present in each of its component
transactions. Although combined transactions will normally be entered into by
the Fund based on LBGAM's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase the risks or
hinder achievement of the Fund management objective.
Swaps, Caps, Floors and Collars. The Fund may enter into interest rate
swaps, the purchase or sale of related caps, floors and collars and other
derivatives. The Fund will enter into these transactions primarily to seek to
preserve a return or spread on a particular investment or portion of its
portfolio, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing or selling
at a later date. The Fund will use these transactions for non-speculative
purposes and will not sell interest rate caps or floors if it does not own
securities or other instruments providing the income the Fund may be obligated
to pay. Interest rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified interest rate exceeds a predetermined rate. The
purchase of a floor entitles the purchaser to receive payments on a notional
<PAGE>
principal amount from the party selling the floor to the extent that a
specified interest rate falls below a predetermined rate. A collar is a
combination of a cap and a floor that preserves a certain return with a
predetermined range of interest rates.
The Fund will usually enter into swaps on a net basis, that is, the two
payments streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as these swaps,
caps, floors, collars and other similar derivatives are entered into for good
faith hedging or other non-speculative purposes, they do not constitute senior
securities under the Investment Company Act of 1940, as amended, and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. The
Fund will not enter into any swap, cap, floor, collar or other derivative
transaction unless LBGAM deems the Counterparty to be creditworthy. If a
Counterparty defaults, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.
The liquidity of swap agreements will be determined by LBGAM based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 10% restriction on investments in securities that are not
readily marketable.
The Fund will maintain cash and appropriate liquid assets (i.e., high
grade debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If the Fund enters into a swap agreement on
a net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If the
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Investment Objective and Policies--Additional
Information Regarding Hedging and Other Strategic Transactions--Use of
Segregated and Other Special Accounts" below.
Risk Factors. Hedging and Other Strategic Transactions have special risks
associated with them, including possible default by the Counterparty to the
transaction, illiquidity and, to the extent the LBGAM's view as to certain
market movements is incorrect, the risk that the use of the Hedging and Other
Strategic Transactions could result in losses greater than if they had not been
used. Use of put and call options could result in losses to the Fund, force the
sale or purchase of portfolio securities at inopportune times or for prices
<PAGE>
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause the Fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures
and options markets could be illiquid in some circumstances and certain over-
the-counter options could have no markets. As a result, in certain markets, the
Fund might not be able to close out a transaction without incurring substantial
losses. Although the Fund's use of futures and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time it will tend to limit any potential gain to
the Fund that might result from an increase in value of the position. Finally,
the daily variation margin requirements for futures contracts create a greater
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Hedging and Other Strategic Transactions
will reduce the Fund's net asset value, and possibly income, and the losses can
be greater than if Hedging and Other Strategic Transactions had not been used.
Risks of Hedging and Other Strategic Transactions Outside the United
States. When conducted outside the United States, Hedging and Other Strategic
Transactions may not be regulated as rigorously as in the United States, may
not involve a clearing mechanism and related guarantees, and will be subject to
the risk of governmental actions affecting trading in, or the prices of,
foreign securities, currencies and other instruments. The value of positions
taken as part of non-U.S. Hedging and Other Strategic Transactions also could
be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in the Fund's ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States, (4) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States and (5)
lower trading volume and liquidity.
Use of Segregated and Other Special Accounts. Use of many Hedging and
Other Strategic Transactions by the Fund will require, among other things, that
the Fund segregate cash, liquid high grade debt obligations or other assets
with its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security or financial instrument. In general, either the full amount of any
obligation by the Fund to pay or deliver securities or assets must be covered
at all times by the securities or instruments required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid high grade
debt obligations at least equal to the current amount of the obligation must be
segregated with the custodian or sub-custodian. The segregated assets cannot be
sold or transferred unless equivalent assets are substituted in their place or
it is no longer necessary to segregate them. A call option on securities
written by the Fund, for example, will require the Fund to hold the securities
<PAGE>
subject to the call (or securities convertible into the needed securities
without additional consideration) or to segregate liquid high grade debt
obligations sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by the
Fund will require the Fund to segregate liquid high grade debt obligations
equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when the Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid debt or equity securities or other acceptable
assets. The Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap
on a daily basis and will segregate with its custodian, or designated sub-
custodian, an amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Hedging and Other Strategic Transactions may be covered by means other
than those described above when consistent with applicable regulatory policies.
The Fund may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding
obligation in related options and Hedging and Other Strategic Transactions. The
Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contracts
or forward contract, the Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Hedging and Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
<PAGE>
Investment Limitations
The Prospectus summarizes certain investment limitations that may not be
changed without the affirmative vote of the holders of a majority of the Fund's
outstanding shares (as defined below under "Additional Information Concerning
Fund Shares"). Investment limitations numbered 1 through 6 may not be changed
without such vote of shareholders; investment limitations 7 through 11 may be
changed by a vote of the Company's Board of Directors at any time.
1. The Fund may not borrow money, except (a) from banks and in 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.
2. The Fund may not purchase any securities which would cause 25% or
more of the value of its total assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry; provided that there is
no limitation with respect to investments in U.S. government securities.
3. The Fund may not make loans, except that it may purchase or hold debt
instruments in accordance with its investment objectives and policies, and
may enter into repurchase agreements with respect to portfolio securities.
4. The Fund may not act as an underwriter of securities, except insofar
as it may be deemed an underwriter under applicable securities laws in
selling portfolio securities.
5. The Fund may not purchase or sell real estate or real estate limited
partnerships, provided that it may purchase securities of issuers which
invest in real estate or interests therein.
6. The Fund may not purchase or sell commodities contracts except in
connection with Hedging and Other Strategic Transactions, or invest in
oil, gas or mineral exploration or development programs or in mineral
leases.
7. The Fund may not knowingly invest more than 15% of the value of its
net assets in securities that may be illiquid because of legal or
contractual restrictions on resale or securities for which there are no
readily available market quotations.
8. The Fund may not purchase securities on margin, make short sales of
securities or maintain a short position, except that the Fund may make
short sales against the box and except in connection with Hedging and
Other Strategic Transactions.
9. The Fund may not write or sell puts, calls, straddles, spreads or
combinations thereof except in connection with Hedging and Other Strategic
Transactions.
<PAGE>
10. The Fund may not invest in securities if as a result the Fund would
then have more than 5% of its total assets in securities of companies
(including predecessors) with less than three years of continuous
operation, except that this restriction will not apply to U.S. government
securities.
11. The Fund may not purchase securities of other investment companies
except as permitted under the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization.
In order to permit the sale of Fund shares in certain states, the Fund may
make commitments more restrictive than the investment policies and limitations
above. Should the Fund determine that any such commitments are no longer in its
best interest, it will revoke the commitment by terminating sales of its shares
in the state involved.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem the Fund's shares is included in the
Prospectus. The issuance of shares is recorded on the Fund's books, and
certificates for Fund shares are issued upon request to the Fund's transfer
agent.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Fund may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.) The Fund is obligated to redeem
shares solely in cash up to $250,000 or 1% of the Fund's net asset value,
whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount will also be in cash unless the Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable. In such a case, the Fund may
make payment wholly or partly in readily marketable securities or other
property, valued in the same way as the Fund determines net asset value.
Redemption in kind is not as liquid as a cash redemption. Shareholders who
receive a redemption in kind may incur transaction costs, if they sell such
securities or property, and may receive less than the redemption value of such
securities or property upon sale, particularly where such securities are sold
prior to maturity.
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their Fund shares for shares of
certain other funds in the Lehman Brothers Group of Funds, as indicated in the
Prospectus, to the extent such shares are offered for sale in the shareholder's
state of residence. Exchanges of Fund shares for shares of the Lehman Brothers
<PAGE>
Daily Income Fund or the Lehman Brothers Municipal Income Fund can only be made
for CDSC Shares of such funds. There currently is no charge for this service,
and exchanges are made on the basis of relative net asset value per share at
the time of exchange. Shares of the Fund exchanged for shares of another fund
will be subject to the higher applicable CDSC of the two funds and, for
purposes of calculating CDSC rates, will be deemed to have been held since the
date the Fund shares being exchanged were purchased.
The exchange privilege enables shareholders of the Fund to acquire shares
in a fund with different investment objectives when they believe that a shift
between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is to be made. Prospectuses may be obtained from any Lehman Brothers
Investment Representative.
Exercise of the exchange privilege is treated as a sale and repurchase for
federal income tax purposes and, depending on the circumstances, a short- or
long-term capital gain or loss may be realized. The price of the shares of the
fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting
documents, Fund shares submitted for exchange are redeemed at the then-current
net asset value and, subject to any applicable CDSC, the proceeds immediately
invested in shares of the fund being acquired. Lehman Brothers reserves the
right to reject any exchange request. The exchange privilege may be modified or
terminated at any time after notice to shareholders.
VALUATION OF SHARES
The Prospectus discusses the time at which the net asset value of the Fund is
determined for purposes of sales and redemptions. The following is a
description of the procedures used by the Fund in valuing its assets.
Securities traded on an exchange will be valued on the basis of the last
sale price on the principal market on which such securities are traded, on the
date on which the valuation is made or, in the absence of sales in such market,
at the mean between the closing bid and asked prices. Over-the-counter
securities will be valued on the basis of the bid price at the close of
business on each day, or, if market quotations for those securities are not
readily available, at fair value, as determined in good faith by the Company's
Board of Directors. Securities which are traded both in the over-the-counter
market and on a stock exchange will be valued according to the broadest and
most representative market. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined
by the Company's Board of Directors. Amortized cost involves valuing an
instrument at its original cost to the Fund and thereafter assuming a constant
<PAGE>
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. All other
securities and other assets of the Fund will be valued at fair value as
determined in good faith by the Company's Board of Directors.
MANAGEMENT OF THE FUND
Directors and Officers
The Company's directors and executive officers, their addresses, principal
occupations during the past five years and other affiliations are as follows:
<TABLE>
<CAPTION>
Name and Address Position with the Company Principal Occupations During Past 5
Years and Other Affiliations
<S> <C> <C>
Steven Spiegel<F1> Chairman of the Board and Managing Director, Lehman Brothers Inc.;
World Financial Center Director President, Lehman Brothers Global Asset
New York, New York 10285 Management Inc.; formerly Chairman,
Lehman Brothers International (Europe).
Burt N. Dorsett<F2><F3> Director Managing Partner, Dorsett McCabe Capital
201 East 62nd Street Management, Inc.; Director, Research
New York, New York 10021 Corporation Technologies; formerly
President, Westinghouse Pension
Investments Corporation; formerly
Executive Vice President and Trustee,
College Retirement Equities Fund, Inc.;
formerly Investment Officer, University
of Rochester.
Kathleen C. Holmes<F2><F3> Director Managing Director, Wharton School
Wharton Financial Financial Institutions Center,
Institutions Center University of Pennsylvania; Senior
3620 Locust Walk Partner and Management Consultant,
3301 Steinberg Hall Furash & Company.
Dietrich Hall
Philadelphia, Pennsylvania 19104-6367
John N. Hatsopoulos<F2><F3> Director Executive Vice President and Chief
Thermo Electron Corp. Financial Officer, Thermo Electron Corp.
81 Wyman Street
Waltham, Massachusetts 02254
Clinton Kendrick President Chief Operating Officer, Lehman Brothers
World Financial Center Global Asset Management Inc.; formerly
New York, New York 10285 President and Chief Executive Officer,
Hyperion Capital Management; formerly
President and Director, Alliance Capital
Management.
<PAGE>
John M. Winters Vice President Senior Vice President, Lehman Brothers
World Financial Center Inc.
New York, New York 10285
Vincent Nave Treasurer and Chief Financial Officer Senior Vice President, The Boston
One Boston Place Financial Company Advisors, Inc. and Boston Safe
Boston, Massachusetts 02109 Deposit and Trust Company.
Francis J. McNamara, III Secretary Senior Vice President and General
One Boston Place Counsel, The Boston Company Advisors,
Boston, Massachusetts 02109 Inc.
____________________
<FN>
<F1> Director considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
<F2> Audit Committee Member.
<F3> Nominating Committee Member.
</TABLE>
Two directors of the Company, Messrs. Spiegel and Dorsett, serve as
directors or trustees of other investment companies for which Lehman Brothers,
LBGAM or one of their affiliates serves as distributor or investment adviser.
No employee of Lehman Brothers, LBGAM or The Boston Company Advisors, Inc.
("Boston Advisors") receives any compensation from the Company for acting as an
officer or director of the Company. The Company pays each director who is not a
director, officer or employee of Lehman Brothers, LBGAM or Boston Advisors or
any of their affiliates, a fee of $20,000 per annum plus $500 per meeting
attended and reimburses them for travel and out-of-pocket expenses.
By virtue of the responsibilities assumed by Lehman Brothers, LBGAM,
Boston Advisors and their affiliates under their respective agreements with the
Company, the Company itself requires no employees in addition to its officers.
Investment Adviser
LBGAM serves as investment adviser to the Fund pursuant to a written advisory
agreement approved by the Company's Board of Directors, including a majority of
the directors who are not "interested persons" (as defined in the 1940 Act) of
the Company or LBGAM, on ___________, 1994. The services provided by LBGAM
under its advisory agreement and the fees paid to LBGAM are described in the
Prospectus under "Management of the Fund." LBGAM bears all expenses in
connection with the performance of its services and pays the salaries of all
officers or employees who are employed by both it and the Company. Unless
sooner terminated, the advisory agreement will continue in effect until
______________, 1996 and from year to year thereafter if such continuance is
approved at least annually by the Company's Board of Directors or by a vote of
a majority (as defined under "Additional Information Concerning Fund Shares")
of the outstanding shares of the Fund and, in either case, by a majority of the
directors who are not parties to such agreement or "interested persons" of any
<PAGE>
party by votes cast in person at a meeting called for such purpose. The
advisory agreement is terminable by the Company or LBGAM on 60 days' written
notice, and will terminate immediately in the event of its assignment.
Administrator
As the Fund's administrator, Boston Advisors has agreed to provide the
following services: (i) assist generally in supervising the Fund's operations,
providing and supervising the operation of an automated data processing system
to process purchase and redemption orders, providing information concerning the
Fund to its shareholders of record, handling shareholder problems, supervising
the services of employees whose principal responsibility and function is to
preserve and strengthen shareholder relations; (ii) prepare reports to the
Fund's shareholders and prepare tax returns and reports to and filings with the
SEC; (iii) compute the net asset value per share of the Fund; (iv) provide the
services of certain persons who may be elected as directors or appointed as
officers of the Company by the Board of Directors; and (v) maintain the
registration or qualification of the Fund's shares for sale under state
securities laws.
Distributor
Lehman Brothers acts as distributor of the Fund's shares. The Fund's shares are
initially being offered during a subscription period, and will thereafter be
sold on a continuous basis by Lehman Brothers as agent, although Lehman
Brothers is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of the Fund (excluding preparation and printing
expenses necessary for the continued registration of the Fund's shares) and of
preparing, printing and distributing all sales literature.
During the initial subscription period for the Fund's shares, Lehman
Brothers forwards investors' funds for the purchase of shares on the fifth
business day following the termination of the subscription period, or on such
other day as may be agreed upon by the Fund and Lehman Brothers (the "Closing
Date"). Following the subscription period, Lehman Brothers forwards investors'
funds for the purchase of shares five business days after placement of purchase
orders (the "Settlement Date"). When payment is made by the investor before the
Closing Date or a Settlement Date, as the case may be, unless otherwise
directed by the investor, the funds will be held as a free credit balance in
the investor's brokerage account, and Lehman Brothers may benefit from the
temporary use of the funds. The investor may designate another use for the
funds prior to the Closing Date or Settlement Date, as the case may be, such as
an investment in a money market fund in the Lehman Brothers Group of Funds. If
the investor instructs Lehman Brothers to invest the funds in a money market
fund, the amount of the investment will be included as part of the average
daily net assets of both the Fund and the money market fund, and affiliates of
Lehman Brothers which serve the funds in an investment advisory capacity will
benefit from the fact that they are receiving fees from both such investment
companies for managing these assets computed on the basis of their average
daily net assets. The Company's Board of Directors has been advised of the
benefits to Lehman Brothers resulting from delayed settlement procedures and
<PAGE>
will take such benefits into consideration when reviewing the advisory and
distribution agreements for continuance.
Rule 12b-1 (the "Rule") adopted by the SEC under the 1940 Act provides,
among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Company's Board of Directors has adopted a services and distribution
plan with respect to the Fund pursuant to Rule 12b-1 (the "Plan"). To
compensate Lehman Brothers for the services it provides and for the expense it
bears as distributor of the Fund's shares, the Board of Directors believes that
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
A quarterly report of the amounts expended with respect to the Fund under
the Plan, and the purposes for which such expenditures were incurred, must be
made to the Board of Directors for its review. In addition, the Plan provides
that it may not be amended with respect to the Fund to increase materially the
costs which may be borne for distribution pursuant to the Plan without the
approval of shareholders of the Fund, and that other material amendments of the
Plan must be approved by the Board of Directors, and by the Directors who are
neither "interested persons" (as defined in the 1940 Act) of the Company nor
have any direct or indirect financial interest in the operation of the Plan or
any related agreements, by vote cast in person at a meeting called for the
purpose of considering such amendments. The Plan and any related agreements are
subject to annual approval by such vote cast in person at a meeting called for
the purpose of voting on the Plan. The Plan may be terminated with respect to
the Fund at any time by vote of a majority of the Directors who are not
"interested persons" and have no direct or indirect financial interest in the
operation of the Plan or in any related agreement or by vote of a majority of
the shares of the Fund.
Custodian and Transfer Agent
Boston Safe Deposit and Trust Company ("Boston Safe"), a wholly owned
subsidiary of The Boston Company, Inc., is located at One Boston Place, Boston,
Massachusetts 02108, and serves as the Company's custodian pursuant to a
custody agreement. Under the custody agreement, Boston Safe holds the Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end market
value of securities held in custody and also receives securities transaction
charges, including out-of-pocket expenses. Boston Safe is authorized to
establish separate accounts for foreign securities owned by the Fund to be held
with foreign branches of other domestic banks as well as with certain foreign
banks and securities depositories. The assets of the Company are held under
bank custodianship in compliance with the 1940 Act.
The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation, is located at One Exchange Place, Boston, Massachusetts 02019, and
serves as the Company's transfer agent. Under the transfer agency agreement,
TSSG maintains the shareholder account records for the Company, handles certain
communications between shareholders and the Company and distributes dividends
and distributions payable by the Company and produces statements with respect
to account activity for the Company and its shareholders. For these services,
<PAGE>
TSSG receives a monthly fee computed on the basis of the number of shareholder
accounts that it maintains for the Company during the month and is reimbursed
for out-of-pocket expenses.
Expenses
The Fund's expenses include taxes, interest, fees and salaries of the Company's
trustees and officers who are not directors, officers or employees of the
Company'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 and of the transfer 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 that if, in any fiscal year, the expenses borne by the Fund exceed
the applicable expense limitations imposed by the securities regulations of any
state in which shares of the Fund are registered or qualified for sale to the
public, they will reimburse the Fund for any excess to the extent required by
such regulations in the same proportion that each of their fees bears to the
Fund's aggregate fees for investment advice and administrative services. Unless
otherwise required by law, such reimbursement would be accrued and paid on the
same basis that the advisory and administration fees are accrued and paid by
the Fund. To the Fund's knowledge, of the expense limitations in effect on the
date of this Statement of Additional Information, none is more restrictive than
two and one-half percent (2-1/2%) of the first $30 million of the Fund's
average annual net assets, two percent (2%) of the next $70 million of the
average annual net assets and one and one-half percent (1-1/2%) of the
remaining average annual net assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
As stated in the Prospectus, the Fund intends to qualify as a "regulated
investment company" under the Code. In order to so qualify under the Code for a
taxable year, the Fund must, among other things, (a) derive in each taxable
year at least 90% of its gross income from dividends, interest, payments with
respect to loans of securities, gains from the sale or other disposition of
stock or securities, or foreign currencies, or other income derived with
respect to its business of investing in such stock, securities or currencies
(including, but not limited to, gains from options, futures or forward
contracts); (b) derive in each taxable year less than 30% of its gross income
from the sale or other disposition of any of the following that are held for
less than three months (the "30% limitation"): (i) stock or securities,
<PAGE>
(ii) options, futures or forward contracts, or (iii) foreign currencies (or
foreign currency options, futures or forward contracts) that are not directly
related to its principal business of investing in stock or securities (or
options and futures with respect to stocks or securities); and (c) diversify
its holdings so that, at the end of each quarter of each taxable year, (i) at
least 50% of the value of the Fund's assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies,
and other securities which, with respect to any one issuer, do not represent
more than 5% of the value of the Fund's assets nor more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of the
Fund's assets is invested in the securities of any issuer (other than U.S.
Government securities or the securities of other regulated investment
companies). Legislation under consideration by the U.S. Congress would repeal
the 30% limitation described in (b) above. It is currently unclear whether the
legislation will become law and, if enacted, the form it will take.
If the Fund qualifies as a regulated investment company, 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. In addition, the Fund will be subject to a nondeductible
4% excise tax on the amount by which the aggregate income it distributes in any
calendar year is less than the sum of: (a) 98% of the Fund's ordinary income
for such calendar year; (b) 98% of the excess of capital gains over capital
losses for the one-year period ending on October 31 of each year; and (c) 100%
of the undistributed ordinary income and gains from prior years.
The Fund intends to distribute sufficient income so as to avoid both
corporate income tax and the excise tax.
The Fund will maintain accounts and calculate income by reference to the
U.S. dollar for U.S. federal income tax purposes. Investments generally will be
maintained and income therefrom calculated by reference to certain foreign
currencies and such calculations will not necessarily correspond to the Fund's
distributable income and capital gains for U.S. federal income tax purposes as
a result of fluctuations in currency exchange rates.
Furthermore, exchange control regulations may restrict the ability of the
Fund to repatriate investment income or the proceeds of sales of securities.
These restrictions and limitations may limit the Fund's ability to make
sufficient distributions to satisfy the 90% distribution requirement and avoid
the 4% excise tax.
The Fund intends to make investments which may, for federal income tax
purposes, constitute investments in shares of foreign corporations. If the Fund
purchases shares in certain foreign investment entities, called "passive
foreign investment companies" ("PFICs"), the Fund may be subject to U.S.
federal income tax on a portion of any "excess distribution" or gain from the
disposition of the shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either the Fund or its shareholders with respect to
<PAGE>
deferred taxes arising from the distributions or gains. If the Fund were to
invest in a PFIC and (if the Fund received the necessary information available
from the PFIC, which may be difficult to obtain) elected to treat the PFIC as a
"qualified electing fund" under the Code, in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and
calendar year distribution requirements described above.
Distributions to shareholders of designated by the Fund as "capital gains
dividends" will be taxable as long-term capital gains and will not be eligible
for the dividends received deduction. The current maximum federal income tax
rate imposed on individuals with respect to long-term capital gains is limited
to 28%, whereas the current maximum federal income tax rate imposed on
individuals with respect to ordinary income (and short-term capital gains,
which are taxed at the same rates as ordinary income) is 39.6%. With respect to
corporate taxpayers, long-term capital gains are currently taxed at the same
federal income tax rates as ordinary income and short-term capital gains.
As described in the Prospectus, the Fund expects to elect to "pass-
through" foreign taxes paid by the Fund to its shareholders. In general, a
shareholder may elect each year whether to claim deductions or credits for
foreign taxes. No deductions for foreign taxes may be claimed, however, by non-
corporate shareholders (including certain foreign shareholders as described
below) who do not itemize deductions. If a shareholder elects to credit foreign
taxes, the amount of credit that may be claimed in any year may not exceed the
same proportion of the U.S. tax against which such credit is taken that the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. If the
Fund makes this election, a shareholder will be treated as receiving foreign
source income in an amount equal to the sum of his proportionate share of
foreign taxes paid by the Fund and the portion of dividends paid by the Fund
representing income earned from foreign sources. This limitation must be
applied separately to certain categories of income and the related foreign
taxes.
Although the Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income tax, depending on
the extent of its activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting a business, the Fund may be
subject to the tax laws of such states or localities. In addition, in those
state and localities which have income tax laws, the treatment of the Fund and
its shareholders under such laws may differ from the treatment under federal
income tax laws. Shareholders are urged to consult their tax advisers
concerning the application of state and local taxes.
<PAGE>
PERFORMANCE DATA
From time to time, the Fund may quote total return in advertisements or in
reports and other communications to shareholders and compare its total return
to that of other funds or accounts with similar objectives and to relevant
indices.
Average Annual Total Return
The Fund's "average annual total return" figures, as described in the
Prospectus, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5-, or 10-
year period at the end of the 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The Fund's total return figures calculated in accordance with the above
formula will assume that the maximum applicable CDSC has been deducted from the
hypothetical $1,000 initial investment.
Aggregate Total Return
The Fund's "aggregate total return" figures, as described in the
Prospectus, represent the cumulative change in the value of an investment in
Fund shares for the specified period and are computed by the following formula:
ERV-P
AGGREGATE TOTAL RETURN = -----
P
Where: P = a hypothetical initial investment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5-, or 10-
year period at the end of the 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
Thirty Day Yield
The Fund may advertise its yield based on a 30-day (or one month) period,
computed by dividing the net investment income per share earned during the
<PAGE>
period by the maximum offering price per share on the last day of the period,
according to the following formula:
6
2[(a-b+1) -1]
YIELD = ---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last
day of the period
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation in the Fund's portfolio (assuming as month of 30 days) and
(3) computing the total of the interest earned on all debt obligations during
the 30-day or one month period. Any amounts representing CDSCs will not be
included among these expenses; however, the Fund will disclose the maximum CDSC
as well as any amount or specific rate of any nonrecurring account charges.
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price
calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield (whether or not
based on a 30-day period) will be given no greater prominence than the
information prescribed under SEC rules.
The Fund's performance will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in
the future. Because performance will vary, it may not provide a basis for
comparing an investment in Fund shares with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other mutual funds should give
<PAGE>
consideration to the nature, quality and maturity of the respective investment
companies' portfolio securities and market conditions.
ADDITIONAL INFORMATION CONCERNING FUND SHARES
As used in this Statement of Additional Information and the Prospectus, a
"majority of the outstanding shares" of the Fund means the lesser of (1) 67% of
the Fund's shares represented at a meeting at which the holders of more than
50% of the outstanding shares of the Fund are present in person or by proxy, or
(2) more than 50% of the outstanding shares of the Fund.
The By-Laws of the Company provide that the Company shall not be required
to hold an annual meeting of shareholders in any year in which the election of
directors to the Company's Board of Directors is not required to be acted upon
under the 1940 Act. The law under certain circumstances provides shareholders
with the right to call for a meeting of shareholders to consider the removal of
one or more directors. To the extent required by law, the Company will assist
in shareholder communication in such matters.
Each share of the Fund is entitled to such dividends and distributions out
of the assets belonging to the Fund as are declared in the discretion of the
Company's Board of Directors. In determining the Fund's net asset value, assets
belonging to the Fund are credited with a proportionate share of any general
assets of the Company not belonging to a particular fund of the Company and are
charged with the direct liabilities in respect of the Fund and with a share of
the general liabilities of the Company which are normally allocated in
proportion to the relative net asset values of the respective funds of the
Company at the time of allocation.
In the event of the liquidation or dissolution of the Company, shares of
the Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the Fund, of any general assets not attributable to a
fund of the Company, that are available for distribution. Shareholders are not
entitled to any preemptive rights.
Subject to the provisions of the Company's Charter, determinations by the
Board of Directors as to the direct and allocable liabilities and the allocable
portion of any general assets of the Company, with respect to the Fund are
conclusive.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), 425 Lexington Avenue, New York, New York 10017, serves as
counsel to the Company.
<PAGE>
AUDITORS
Ernst & Young acts as the Fund's independent auditors and has offices at
200 Clarendon Street, Boston, Massachusetts 02116-5072.
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's and S&P with respect to bonds
and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa -- Bonds which are rated "Aaa" are judged to be of the best quality
and carry the smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated "A" possess many favorable investment qualities
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated "B" generally lack characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance and other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated "Caa" are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
<PAGE>
Ca -- Bonds which are rated "Ca" represent obligations which are
speculative in high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
Standard & Poor's Corporate Bond Ratings
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and
pay interest.
AA -- Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.
A -- Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to repay principal and pay
interest for bonds in this category than for higher rated categories.
BB-B-CCC-CC-C -- Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI -- Bonds rated "CI" are income bonds on which no interest is being
paid.
D -- Bonds rated "D" are in default. The "D" category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired unless S&P believes that such
payments will be made during such grace period. The "D" rating is also used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
<PAGE>
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1 -- Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Prime-3 -- Issuers (or related supporting institutions) rated "Prime-3"
have an acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime -- Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
Standard & Poor's Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated "B" are regarded as having only speculative capacity for
timely payment.
<PAGE>
C -- This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D -- Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 14, 1994
Lehman Selected Growth Stock Portfolio
An Investment Portfolio of Lehman Brothers Funds, Inc.
Statement of Additional Information ________________, 1994
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus for the Lehman Selected Growth Stock Portfolio
(the "Fund"), dated _______________, 1994, as amended or supplemented from time
to time, and is incorporated by reference in its entirety into the Prospectus.
The Fund is a diversified portfolio of Lehman Brothers Funds, Inc. (the
"Company"), an open-end, management investment company. Because this Statement
of Additional Information is not itself a prospectus, no investment in shares
of the Fund should be made solely upon the information contained herein. Copies
of the Prospectus may be obtained by calling 800-451-2010. Capitalized terms
used but not defined herein have the same meanings as in the Prospectus.
TABLE OF CONTENTS
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . .
Additional Purchase and Redemption Information . . . . . . . . . . . . . .
Exchange Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Taxes . . . . . . . . . . . . . . . . . .
Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information Concerning Fund Shares . . . . . . . . . . . . . . .
Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
As stated in the Prospectus, the investment objective of the Fund is to seek
long-term capital appreciation. The following policies supplement the
description of the Fund's investment objective and policies in the Prospectus.
Portfolio Transactions
Subject to the general control of the Company's Board of Directors, Lehman
Brothers Global Asset Management Inc. ("LBGAM"), the Fund's investment adviser,
is responsible for, makes decisions with respect to, and places orders for all
purchases and sales of portfolio securities for the Fund. Transactions on
domestic stock exchanges involve the payment of negotiated brokerage
commissions, which may vary among different brokers. The cost of securities
purchased from underwriters include an underwriter's commission or concession,
and the prices at which securities are purchased from and sold to dealers in
the over-the-counter market include an undisclosed dealer spread. In making
portfolio investments, LBGAM seeks to obtain the best net price and the most
favorable execution of orders. To the extent that the execution and price
offered by more than one broker or dealer are comparable, LBGAM may, in its
discretion, effect transactions in portfolio securities with brokers or dealers
who provide the Company with research advice or other services. Research advice
and other services furnished by brokers through whom the Fund effects
securities transactions may be used by LBGAM in servicing accounts in addition
to the Fund, and not all such services will necessarily benefit the Fund.
With respect to over-the-counter transactions, the Fund, where possible,
will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere.
Investment decisions for the Fund are made independently from those for
the other investment company portfolios or accounts advised by LBGAM. Such
other portfolios may also invest in the same securities as the Fund. When
purchases or sales of the same security are made at substantially the same time
on behalf of such other portfolios, transactions are averaged as to price, and
available investments allocated as to amount, in a manner which LBGAM believes
to be equitable to each portfolio, including the Fund. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtainable for the Fund. To the extent
permitted by law, LBGAM may aggregate the securities to be sold or purchased
for the Fund with those to be sold or purchased for such other portfolios in
order to obtain best execution.
The Fund will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with Lehman Brothers Inc. ("Lehman Brothers"), LBGAM or
any affiliated person (as such term is defined in the Investment Company Act of
1940, as amended (the "1940 Act")) of either of them, except to the extent
permitted by the Securities and Exchange Commission (the "SEC"). However,
pursuant to an exemption granted by the SEC, the Fund may engage in
<PAGE>
transactions involving certain money market instruments with Lehman Brothers
and certain of its affiliates acting as principal. The Fund will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which Lehman Brothers or any affiliate thereof is a member, except
to the extent permitted by the SEC. Under certain circumstances, the Fund may
be at a disadvantage because of these limitations in comparison with other
investment company portfolios which have a similar investment objective but are
not subject to such limitations.
It is anticipated that the Fund's annual portfolio turnover rate generally
will not exceed 100%. This rate is calculated by dividing the lesser of sales
or purchases of portfolio securities for any given year by the average monthly
value of the Fund's portfolio securities for that year. For purposes of this
calculation, no regard is given to securities having a maturity or expiration
date at the time of acquisition of one year or less. Portfolio turnover
directly affects the amount of transaction costs that are borne by the Fund. In
addition, the sale of securities held by the Fund for not more than one year
will give rise to short-term capital gain or loss for federal income tax
purposes. The federal income tax requirement that the Fund derive less than 30%
of its gross income from the sale or other disposition of stock or securities
held less than three months may limit the Fund's ability to dispose of its
securities. See "Additional Information Concerning Taxes."
Additional Information on Portfolio Instruments and Certain Investment
Practices
U.S. Government Obligations. Examples of the types of U.S. government
securities that may be held by the Fund include, in addition to U.S. Treasury
Bills, the obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, Federal Financing Bank, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal Farm Credit Banks, Maritime Administration,
Resolution Trust Corporation, Tennessee Valley Authority, U.S. Postal Service
and Washington D.C. Armory Board.
Bank Obligations. Bank obligations include negotiable certificates of
deposit, bankers' acceptances, fixed time deposits and deposit notes. A
certificate of deposit is a short-term negotiable certificate issued by a
commercial bank against funds deposited in the bank and is either interest-
bearing or purchased on a discount basis. A bankers' acceptance is a short-term
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction. The borrower is liable for payment as is
the bank, which unconditionally guarantees to pay the draft at its face amount
on the maturity date. Fixed time deposits are obligations of branches of United
States banks or foreign banks which are payable at a stated maturity date and
bear a fixed rate of interest. Although fixed time deposits do not have a
market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party. Fixed time deposits
subject to withdrawal penalties and with respect to which a Fund cannot realize
the proceeds thereon within seven days are deemed "illiquid" for the purposes
<PAGE>
of the eighth investment limitation set forth under "Investment Objective and
Policies--Investment Limitations" below. Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically
have original maturities ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may
limit both the amounts and types of loans and other financial commitments that
may be made and the interest rates and fees that may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations. Bank obligations may be general obligations of
the parent bank or may be limited to the issuing branch by the terms of the
specific obligations or by government regulation. Investors should also be
aware that securities of foreign banks and foreign branches of U.S. banks may
involve investment risks in addition to those relating to domestic bank
obligations. Such risks include future political and economic developments, the
possible seizure or nationalization of foreign deposits, the possible adoption
of foreign governmental restrictions which might adversely affect the payment
of principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and foreign issuers generally are subject to different accounting,
auditing, reporting and record keeping standards than those applicable to U.S.
issuers.
Convertible Securities. As fixed income securities, convertible
securities are investments that provide for a stable stream of income with
generally higher yields than common stocks. Of course, like all fixed-income
securities, there can be no assurance of current income because the issuers of
the convertible securities may default on their obligations. Convertible
securities, however, generally offer lower interest or dividend yields than
non-convertible securities of similar quality because of the potential for
capital appreciation. A convertible security, in addition to providing fixed
income, offers the potential for capital appreciation through the conversion
feature, which enables the holder to benefit from increases in the market price
of the underlying common stock. There can be no assurance of capital
appreciation, however, because securities prices fluctuate. Convertible
securities generally are subordinated to other similar but non-convertible
securities of the same issuer, although convertible bonds, as corporate debt
obligations, enjoy seniority in right of payment to all equity securities, and
convertible preferred stock is senior to common stock, of the same issuer.
Because of the subordination feature, however, convertible securities typically
have lower ratings than similar non-convertible securities.
Repurchase Agreements. The repurchase price under the repurchase
agreements described in the Prospectus generally equals the price paid by the
Fund plus interest negotiated on the basis of current short-term rates (which
may be more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
Company's custodian, sub-custodian or in the Federal Reserve/Treasury book-
<PAGE>
entry system. Repurchase agreements are considered to be loans by the Fund
under the 1940 Act.
Reverse Repurchase Agreements. Whenever the Fund enters into reverse
repurchase agreements as described in the Prospectus, it will place in a
segregated custodian account liquid assets having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure such equivalent value is maintained.
Loans of Portfolio Securities. The Fund has the ability to lend
securities from its portfolio to brokers, dealers and other financial
organizations. There is no investment restriction on the amount of securities
that may be loaned. The Fund may not lend its portfolio securities to Lehman
Brothers or its affiliates without specific authorization from the SEC. Loans
of portfolio securities by the Fund will be collateralized by cash, letters of
credit or securities which are consistent with its permitted investments, which
will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. From time to time, the Fund may
return a part of the interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party, which is
unaffiliated with the Fund or Lehman Brothers, and which is acting as a
"finder." With respect to loans by the Fund of its portfolio securities, the
Fund would continue to accrue interest on loaned securities and would also earn
income on loans. Any cash collateral received by the Fund in connection with
such loans would be invested in securities in which the Fund is permitted to
invest.
When-Issued Securities. As stated in the Prospectus, the Fund may
purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price). When the Fund agrees to purchase
when-issued securities, the custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund may be required subsequently
to place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. When the Fund engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing an opportunity to obtain a
price considered to be advantageous. The Fund does not intend to purchase when-
issued securities for speculative purposes but only in furtherance of its
investment objective. The Fund reserves the right to sell these securities
before the settlement date if it is deemed advisable.
Illiquid and Restricted Securities. The Fund may not invest more than
15% of its net assets in illiquid securities, including securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered
illiquid for purpose of this limitation.
<PAGE>
The SEC has adopted Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"), which allows for a broader institutional trading
market for securities otherwise subject to restrictions on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. The Fund's investment adviser anticipates that the market
for certain restricted securities such as institutional commercial paper and
institutional municipal securities will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers.
The Fund's investment adviser will monitor the liquidity of
restricted and other illiquid securities under the supervision of the Board of
Directors. In reaching liquidity decisions with respect to Rule 144A
securities, the Fund's investment adviser will consider, inter alia, the
following factors: (1) the unregistered nature of a Rule 144A security; (2)
the frequency of trades and quotes for a Rule 144A security; (3) the number of
dealers wishing to purchase or sell the Rule 144A security and the number of
other potential purchasers; (4) dealer undertakings to make a market in the
Rule 144A security; (5) the trading markets for the Rule 144A security; and (6)
the nature of the Rule 144A security and the nature of the marketplace trades
(e.g., the time needed to dispose of the Rule 144A security, the method of
soliciting offers and the mechanics of the transfer).
The Appendix to this Statement of Additional Information contains a
description of the relevant rating symbols used by nationally recognized rating
agencies for obligations that may be purchased by the Fund.
Additional Information Regarding Hedging and Other Strategic Transactions
As described in the Prospectus under "Investment Objective and Policies--Other
Investment Practices--Hedging and Other Strategic Transactions," the Fund is
authorized to use a variety of investment strategies to hedge broad or specific
market movements or, with respect to certain strategies, to seek to increase
the Fund's income or gain (such investment strategies and transactions are
referred to herein as "Hedging and Other Strategic Transactions").
A detailed discussion of Hedging and Other Strategic Transactions follows
below. The Fund is not obligated, however, to pursue any of such strategies and
the Fund makes no representation as to the availability of these techniques at
this time or at any time in the future. In addition, the Fund's ability to
pursue certain of these strategies may be limited by the Commodity Exchange
Act, as amended, applicable rules and regulations of the Commodity Futures
Trading Commission ("CFTC") thereunder and the federal income tax requirements
applicable to regulated investment companies which are not operated as
commodity pools. See "Taxes" in the Prospectus.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Hedging and Other
<PAGE>
Strategic Transactions involving options require segregation of Fund assets in
special accounts, as described below under "Investment Objective and Policies--
Additional Information Regarding Hedging and Other Strategic Transactions--Use
of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, index or other instrument at the exercise price. The Fund's purchase
of a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
the Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. The Fund's purchase of a call option on a security, financial
futures contract, index or other instrument might be intended to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
the instrument. An "American" style put or call option may be exercised at any
time during the option period, whereas a "European" style put or call option
may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance
of the obligations of the parties to the options. The discussion below uses the
OCC as an example, but is also applicable to other similar financial
intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed
by an exchange, (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits, (4) interruption of the
normal operations of the OCC or an exchange, (5) inadequacy of the facilities
of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
<PAGE>
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-
listed options, which generally have standardized terms and performance
mechanics, all of the terms of an OTC option, including such terms as method of
settlement, term, exercise price, premium, guaranties and security, are
determined by negotiation of the parties. It is anticipated that the Fund will
only enter into OTC options that have cash settlement provisions, although it
will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty
function is involved in an OTC option. As a result, if a Counterparty fails to
make or take delivery of the security or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, LBGAM must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
met. The Fund will enter into OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers," or broker-dealers, domestic or foreign banks, or other
financial institutions that LBGAM deems to be creditworthy. In the absence of a
change in the current position of the staff of the SEC, OTC options purchased
by the Fund and the amount of the Fund's obligation pursuant to an OTC option
sold by the Fund (the cost of the sell-back plus the in-the-money amount, if
any) or the value of the assets held to cover such options will be deemed
illiquid.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
Fund gains.
The Fund may purchase and sell call options on securities that are traded
on U.S. securities exchanges and in the OTC markets, and on securities indices
and futures contracts. All calls sold by the Fund must be "covered" (that is,
the Fund must own the securities or futures contract subject to the call), or
must otherwise meet the asset segregation requirements described below for so
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund will expose
the Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
<PAGE>
instrument and may require the Fund to hold a security or instrument that it
might otherwise have sold.
The Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
The Fund may purchase and sell put options on securities (whether or not
it holds the securities in its portfolio) and on securities indices and futures
contracts. The Fund will not sell put options if, as a result, more than 50% of
the Fund's assets would be required to be segregated to cover its potential
obligations under put options other than those with respect to futures
contracts. In selling put options, the Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures Contracts and Options on Futures
Contracts. The Fund may trade financial futures contracts or purchase or sell
put and call options on those contracts as a hedge against anticipated market
changes, and for risk management purposes, or the Fund may seek to increase the
Fund's income or gain. Futures contracts are generally bought and sold on the
commodities exchanges on which they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to certain instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver that position.
The Fund's use of financial futures contracts and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC. Maintaining a futures
contract or selling an option on a futures contract will typically require the
Fund to deposit with a financial intermediary, as security for its obligations,
an amount of cash or other specified assets ("initial margin") that initially
is from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
The Fund will not enter into a futures contract or option thereon if,
immediately thereafter, the sum of the amount of its initial margin and
premiums required to maintain permissible non-bona fide hedging positions in
futures contracts and options thereon would exceed 5% of the current fair
<PAGE>
market value of the Fund's net assets; however, in the case of an option that
is in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The value of all futures contracts
sold by the Fund (adjusted for the historical volatility relationship between
the Fund and the contracts) will not exceed the total market value of the
Fund's securities. The segregation requirements with respect to futures
contracts and options thereon are described below under "Investment Objective
and Policies--Additional Information Regarding Hedging and Other Strategic
Transactions--Use of Segregated and Other Special Accounts."
Options on Securities Indices and Other Financial Indices. The Fund may
purchase and sell call and put options on securities indices and other
financial indices. In so doing, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, options on indices settle by cash settlement; that is,
an option on an index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option (except if, in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments comprising the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.
Combined Transactions. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, and any
combination of futures and options, instead of a single Hedging and Other
Strategic Transaction, as part of a single or combined strategy when, in the
judgment of LBGAM, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions will normally be
entered into by the Fund based on LBGAM's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase the
risks or hinder achievement of the Fund management objective.
Swaps, Caps, Floors and Collars. The Fund may enter into equity swaps, the
purchase or sale of related caps, floors and collars and other derivatives. The
Fund will enter into these transactions primarily to protect against any
increase in the price of securities the Fund anticipates purchasing or selling
at a later date. The Fund will use these transactions for non-speculative
purposes and will not sell caps or floors if it does not own securities or
other instruments providing the income the Fund may be obligated to pay. An
equity swap is an agreement to exchange cash flows on a notional principal
amount based on changes in the values of the reference indices. The purchase of
a cap entitles the purchaser to receive payments on a notional principal amount
<PAGE>
from the party selling the cap to the extent that a specified index rises above
a predetermined rate or amount. The purchase of a floor entitles the purchaser
to receive payments on a notional principal amount from the party selling the
floor to the extent that a specified index falls below a predetermined rate or
amount. A collar is a combination of a cap and a floor that preserves a certain
return with a predetermined range of values.
The Fund will usually enter into swaps on a net basis, that is, the two
payments streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as these swaps,
caps, floors, collars and other similar derivatives are entered into for good
faith hedging or other non-speculative purposes, they do not constitute senior
securities under the Investment Company Act of 1940, as amended, and, thus,
will not be treated as being subject to the Fund's borrowing restrictions. The
Fund will not enter into any swap, cap, floor, collar or other derivative
transaction unless LBGAM deems the Counterparty to be creditworthy. If a
Counterparty defaults, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, for that reason, they are
less liquid than swaps.
The liquidity of swap agreements will be determined by LBGAM based on
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 10% restriction on investments in securities that are not
readily marketable.
The Fund will maintain cash and appropriate liquid assets (i.e., high
grade debt securities) in a segregated custodial account to cover its current
obligations under swap agreements. If the Fund enters into a swap agreement on
a net basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If the
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Investment Objective and Policies--Additional
Information Regarding Hedging and Other Strategic Transactions--Use of
Segregated and Other Special Accounts" below.
Risk Factors. Hedging and Other Strategic Transactions have special risks
associated with them, including possible default by the Counterparty to the
transaction, illiquidity and, to the extent the LBGAM's view as to certain
market movements is incorrect, the risk that the use of the Hedging and Other
Strategic Transactions could result in losses greater than if they had not been
<PAGE>
used. Use of put and call options could result in losses to the Fund, force the
sale or purchase of portfolio securities at inopportune times or for prices
higher than (in the case of put options) or lower than (in the case of call
options) current market values, or cause the Fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of the
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures
and options markets could be illiquid in some circumstances and certain over-
the-counter options could have no markets. As a result, in certain markets, the
Fund might not be able to close out a transaction without incurring substantial
losses. Although the Fund's use of futures and options transactions for hedging
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time it will tend to limit any potential gain to
the Fund that might result from an increase in value of the position. Finally,
the daily variation margin requirements for futures contracts create a greater
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Hedging and Other Strategic Transactions
will reduce the Fund's net asset value, and possibly income, and the losses can
be greater than if Hedging and Other Strategic Transactions had not been used.
Use of Segregated and Other Special Accounts. Use of many Hedging and
Other Strategic Transactions by the Fund will require, among other things, that
the Fund segregate cash, liquid high grade debt obligations or other assets
with its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security or financial instrument. In general, either the full amount of any
obligation by the Fund to pay or deliver securities or assets must be covered
at all times by the securities or instruments required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid high grade
debt obligations at least equal to the current amount of the obligation must be
segregated with the custodian or sub-custodian. The segregated assets cannot be
sold or transferred unless equivalent assets are substituted in their place or
it is no longer necessary to segregate them. A call option on securities
written by the Fund, for example, will require the Fund to hold the securities
subject to the call (or securities convertible into the needed securities
without additional consideration) or to segregate liquid high grade debt
obligations sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by the
Fund will require the Fund to segregate liquid high grade debt obligations
equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
<PAGE>
be required to do so. As a result, when the Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by the Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid debt or equity securities or other acceptable
assets. The Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap
on a daily basis and will segregate with its custodian, or designated sub-
custodian, an amount of cash or liquid high grade debt obligations having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Fund's net obligation,
if any.
Hedging and Other Strategic Transactions may be covered by means other
than those described above when consistent with applicable regulatory policies.
The Fund may also enter into offsetting transactions so that its combined
position, coupled with any segregated assets, equals its net outstanding
obligation in related options and Hedging and Other Strategic Transactions. The
Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contracts
or forward contract, the Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Hedging and Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction, no segregation is required, but if it
terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
Investment Limitations
The Prospectus summarizes certain investment limitations that may not be
changed without the affirmative vote of the holders of a majority of the Fund's
outstanding shares (as defined below under "Additional Information Concerning
Fund Shares"). Investment limitations numbered 1 through 7 may not be changed
without such vote of shareholders; investment limitations 8 through 12 may be
changed by a vote of the Company's Board of Directors at any time.
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.
<PAGE>
2. The Fund may not borrow money, except (a) from banks and in 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 activities in the same industry; provided that there is
no limitation with respect to investments in U.S. government securities.
4. The Fund may not make loans, except that it may purchase or hold debt
instruments in accordance with its investment objectives and policies, and
may enter into repurchase agreements with respect to portfolio securities.
5. The Fund may not act as an underwriter of securities, except insofar
as it may be deemed an underwriter under applicable securities laws in
selling portfolio securities.
6. The Fund may not purchase or sell real estate or real estate limited
partnerships, provided that it may purchase securities of issuers which
invest in real estate or interests therein.
7. The Fund may not purchase or sell commodities contracts except in
connection with Hedging and Other Strategic Transactions, or invest in
oil, gas or mineral exploration or development programs or in mineral
leases.
8. The Fund may not knowingly invest more than 15% of the value of its
net assets in securities that may be illiquid because of legal or
contractual restrictions on resale or securities for which there are no
readily available market quotations.
9. The Fund may not purchase securities on margin, make short sales of
securities or maintain a short position, except that the Fund may make
short sales against the box and except in connection with Hedging and
Other Strategic Transactions.
10. The Fund may not write or sell puts, calls, straddles, spreads or
combinations thereof except in connection with Hedging and Other Strategic
Transactions.
11. The Fund may not invest in securities if as a result the Fund would
then have more than 5% of its total assets in securities of companies
(including predecessors) with less than three years of continuous
operation, except that this restriction will not apply to U.S. government
securities.
<PAGE>
12. The Fund may not purchase securities of other investment companies
except as permitted under the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization.
In order to permit the sale of Fund shares in certain states, the
Fund may make commitments more restrictive than the investment policies and
limitations above. Should the Fund determine that any such commitments are no
longer in its best interest, it will revoke the commitment by terminating sales
of its shares in the state involved.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem the Fund's shares is included in the
Prospectus. The issuance of shares is recorded on the Fund's books, and
certificates for Fund shares are issued upon request to the Fund's transfer
agent.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
New York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Fund may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.) The Fund is obligated to redeem
shares solely in cash up to $250,000 or 1% of the Fund's net asset value,
whichever is less, for any one shareholder within a 90-day period. Any
redemption beyond this amount will also be in cash unless the Board of
Directors determines that conditions exist which make payment of redemption
proceeds wholly in cash unwise or undesirable. In such a case, the Fund may
make payment wholly or partly in readily marketable securities or other
property, valued in the same way as the Fund determines net asset value.
Redemption in kind is not as liquid as a cash redemption. Shareholders who
receive a redemption in kind may incur transaction costs, if they sell such
securities or property, and may receive less than the redemption value of such
securities or property upon sale, particularly where such securities are sold
prior to maturity.
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their Fund shares for shares of
certain other funds in the Lehman Brothers Group of Funds, as indicated in the
Prospectus, to the extent such shares are offered for sale in the shareholder's
state of residence. Exchanges of Fund shares for shares of the Lehman Brothers
Daily Income Fund or the Lehman Brothers Municipal Income Fund can only be made
for CDSC Shares of such funds. There currently is no charge for this service,
and exchanges are made on the basis of relative net asset value per share at
the time of exchange. Shares of the Fund exchanged for shares of another fund
will be subject to the higher applicable CDSC of the two funds and, for
<PAGE>
purposes of calculating CDSC rates, will be deemed to have been held since the
date the Fund shares being exchanged were purchased.
The exchange privilege enables shareholders of the Fund to acquire shares
in a fund with different investment objectives when they believe that a shift
between funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the fund shares being
acquired may legally be sold. Prior to any exchange, the shareholder should
obtain and review a copy of the current prospectus of each fund into which an
exchange is to be made. Prospectuses may be obtained from any Lehman Brothers
Investment Representative.
Exercise of the exchange privilege is treated as a sale and repurchase for
federal income tax purposes and, depending on the circumstances, a short- or
long-term capital gain or loss may be realized. The price of the shares of the
fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting
documents, Fund shares submitted for exchange are redeemed at the then-current
net asset value and, subject to any applicable CDSC, the proceeds immediately
invested in shares of the fund being acquired. Lehman Brothers reserves the
right to reject any exchange request. The exchange privilege may be modified or
terminated at any time after notice to shareholders.
VALUATION OF SHARES
The Prospectus discusses the time at which the net asset value of the Fund is
determined for purposes of sales and redemptions. The following is a
description of the procedures used by the Fund in valuing its assets.
Securities traded on an exchange will be valued on the basis of the last
sale price on the principal market on which such securities are traded, on the
date on which the valuation is made or, in the absence of sales in such market,
at the mean between the closing bid and asked prices. Over-the-counter
securities will be valued on the basis of the bid price at the close of
business on each day, or, if market quotations for those securities are not
readily available, at fair value, as determined in good faith by the Company's
Board of Directors. Securities which are traded both in the over-the-counter
market and on a stock exchange will be valued according to the broadest and
most representative market. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined
by the Company's Board of Directors. Amortized cost involves valuing an
instrument at its original cost to the Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. All other
securities and other assets of the Fund will be valued at fair value as
determined in good faith by the Company's Board of Directors.
<PAGE>
MANAGEMENT OF THE FUND
Directors and Officers
The Company's directors and executive officers, their addresses, principal
occupations during the past five years and other affiliations are as follows:
<TABLE>
<CAPTION>
Name and Address Position with the Company Principal Occupations During Past 5
Years and Other Affiliations
<S> <C> <C>
Steven Spiegel<F1> Chairman of the Board and Managing Director, Lehman Brothers Inc.;
World Financial Center Director President, Lehman Brothers Global Asset
New York, New York 10285 Management Inc.; formerly Chairman,
Lehman Brothers International (Europe).
Burt N. Dorsett<F2><F3> Director Managing Partner, Dorsett McCabe Capital
201 East 62nd Street Management, Inc.; Director, Research
New York, New York 10021 Corporation Technologies; formerly
President, Westinghouse Pension
Investments Corporation; formerly
Executive Vice President and Trustee,
College Retirement Equities Fund, Inc.;
formerly Investment Officer, University
of Rochester.
Kathleen C. Holmes<F2><F3> Director Managing Director, Wharton School
Wharton Financial Financial Institutions Center,
Institutions Center University of Pennsylvania; Senior
3620 Locust Walk Partner and Management Consultant,
3301 Steinberg Hall Furash & Company.
Dietrich Hall
Philadelphia, Pennsylvania 19104-6367
John N. Hatsopoulos<F2><F3> Director Executive Vice President and Chief
Thermo Electron Corp. Financial Officer, Thermo Electron Corp.
81 Wyman Street
Waltham, Massachusetts 02254
Clinton Kendrick President Chief Operating Officer, Lehman Brothers
World Financial Center Global Asset Management Inc.; formerly
New York, New York 10285 President and Chief Executive Officer,
Hyperion Capital Management; formerly
President and Director, Alliance Capital
Management.
John M. Winters Vice President Senior Vice President, Lehman Brothers
World Financial Center Inc.
New York, New York 10285
<PAGE>
Vincent Nave Treasurer and Chief Financial Officer Senior Vice President, The Boston
One Boston Place Financial Company Advisors, Inc. and Boston Safe
Boston, Massachusetts 02109 Deposit and Trust Company.
Francis J. McNamara, III Secretary Senior Vice President and General
One Boston Place Counsel, The Boston Company Advisors,
Boston, Massachusetts 02109 Inc.
____________________
<FN>
<F1> Director considered by the Company to be an "interested person" of the
Company as defined in the 1940 Act.
<F2> Audit Committee Member.
<F3> Nominating Committee Member.
</TABLE>
Two directors of the Company, Messrs. Spiegel and Dorsett, serve as
directors or trustees of other investment companies for which Lehman Brothers,
LBGAM or one of their affiliates serves as distributor or investment adviser.
No employee of Lehman Brothers, LBGAM or The Boston Company Advisors, Inc.
("Boston Advisors") receives any compensation from the Company for acting as an
officer or director of the Company. The Company pays each director who is not a
director, officer or employee of Lehman Brothers, LBGAM or Boston Advisors or
any of their affiliates, a fee of $20,000 per annum plus $500 per meeting
attended and reimburses them for travel and out-of-pocket expenses.
By virtue of the responsibilities assumed by Lehman Brothers, LBGAM,
Boston Advisors and their affiliates under their respective agreements with the
Company, the Company itself requires no employees in addition to its officers.
Investment Adviser
LBGAM serves as investment adviser to the Fund pursuant to a written advisory
agreement approved by the Company's Board of Directors, including a majority of
the directors who are not "interested persons" (as defined in the 1940 Act) of
the Company or LBGAM, on ___________, 1994. The services provided by LBGAM
under its advisory agreement and the fees paid to LBGAM are described in the
Prospectus under "Management of the Fund." LBGAM bears all expenses in
connection with the performance of its services and pays the salaries of all
officers or employees who are employed by both it and the Company. Unless
sooner terminated, the advisory agreement will continue in effect until
______________, 1996 and from year to year thereafter if such continuance is
approved at least annually by the Company's Board of Directors or by a vote of
a majority (as defined under "Additional Information Concerning Fund Shares")
of the outstanding shares of the Fund and, in either case, by a majority of the
directors who are not parties to such agreement or "interested persons" of any
party by votes cast in person at a meeting called for such purpose. The
advisory agreement is terminable by the Company or LBGAM on 60 days' written
notice, and will terminate immediately in the event of its assignment.
<PAGE>
Administrator
As the Fund's administrator, Boston Advisors has agreed to provide the
following services: (i) assist generally in supervising the Fund's operations,
providing and supervising the operation of an automated data processing system
to process purchase and redemption orders, providing information concerning the
Fund to its shareholders of record, handling shareholder problems, supervising
the services of employees whose principal responsibility and function is to
preserve and strengthen shareholder relations; (ii) prepare reports to the
Fund's shareholders and prepare tax returns and reports to and filings with the
SEC; (iii) compute the net asset value per share of the Fund; (iv) provide the
services of certain persons who may be elected as directors or appointed as
officers of the Company by the Board of Directors; and (v) maintain the
registration or qualification of the Fund's shares for sale under state
securities laws.
Distributor
Lehman Brothers acts as distributor of the Fund's shares. The Fund's shares are
initially being offered during a subscription period, and will thereafter be
sold on a continuous basis by Lehman Brothers as agent, although Lehman
Brothers is not obliged to sell any particular amount of shares. The
distributor pays the cost of printing and distributing prospectuses to persons
who are not shareholders of the Fund (excluding preparation and printing
expenses necessary for the continued registration of the Fund's shares) and of
preparing, printing and distributing all sales literature.
During the initial subscription period for the Fund's shares, Lehman
Brothers forwards investors' funds for the purchase of shares on the fifth
business day following the termination of the subscription period, or on such
other day as may be agreed upon by the Fund and Lehman Brothers (the "Closing
Date"). Following the subscription period, Lehman Brothers forwards investors'
funds for the purchase of shares five business days after placement of purchase
orders (the "Settlement Date"). When payment is made by the investor before the
Closing Date or a Settlement Date, as the case may be, unless otherwise
directed by the investor, the funds will be held as a free credit balance in
the investor's brokerage account, and Lehman Brothers may benefit from the
temporary use of the funds. The investor may designate another use for the
funds prior to the Closing Date or Settlement Date, as the case may be, such as
an investment in a money market fund in the Lehman Brothers Group of Funds. If
the investor instructs Lehman Brothers to invest the funds in a money market
fund, the amount of the investment will be included as part of the average
daily net assets of both the Fund and the money market fund, and affiliates of
Lehman Brothers which serve the funds in an investment advisory capacity will
benefit from the fact that they are receiving fees from both such investment
companies for managing these assets computed on the basis of their average
daily net assets. The Company's Board of Directors has been advised of the
benefits to Lehman Brothers resulting from delayed settlement procedures and
will take such benefits into consideration when reviewing the advisory and
distribution agreements for continuance.
Rule 12b-1 (the "Rule") adopted by the SEC under the 1940 Act provides,
among other things, that an investment company may bear expenses of
<PAGE>
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Company's Board of Directors has adopted a services and distribution
plan with respect to the Fund pursuant to Rule 12b-1 (the "Plan"). To
compensate Lehman Brothers for the services it provides and for the expense it
bears as distributor of the Fund's shares, the Board of Directors believes that
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
A quarterly report of the amounts expended with respect to the Fund under
the Plan, and the purposes for which such expenditures were incurred, must be
made to the Board of Directors for its review. In addition, the Plan provides
that it may not be amended with respect to the Fund to increase materially the
costs which may be borne for distribution pursuant to the Plan without the
approval of shareholders of the Fund, and that other material amendments of the
Plan must be approved by the Board of Directors, and by the Directors who are
neither "interested persons" (as defined in the 1940 Act) of the Company nor
have any direct or indirect financial interest in the operation of the Plan or
any related agreements, by vote cast in person at a meeting called for the
purpose of considering such amendments. The Plan and any related agreements are
subject to annual approval by such vote cast in person at a meeting called for
the purpose of voting on the Plan. The Plan may be terminated with respect to
the Fund at any time by vote of a majority of the Directors who are not
"interested persons" and have no direct or indirect financial interest in the
operation of the Plan or in any related agreement or by vote of a majority of
the shares of the Fund.
Custodian and Transfer Agent
Boston Safe Deposit and Trust Company ("Boston Safe"), a wholly owned
subsidiary of The Boston Company, Inc., is located at One Boston Place, Boston,
Massachusetts 02108, and serves as the Company's custodian pursuant to a
custody agreement. Under the custody agreement, Boston Safe holds the Fund's
portfolio securities and keeps all necessary accounts and records. For its
services, Boston Safe receives a monthly fee based upon the month-end market
value of securities held in custody and also receives securities transaction
charges, including out-of-pocket expenses. The assets of the Company are held
under bank custodianship in compliance with the 1940 Act.
The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation, is located at One Exchange Place, Boston, Massachusetts 02019, and
serves as the Company's transfer agent. Under the transfer agency agreement,
TSSG maintains the shareholder account records for the Company, handles certain
communications between shareholders and the Company and distributes dividends
and distributions payable by the Company and produces statements with respect
to account activity for the Company and its shareholders. For these services,
TSSG receives a monthly fee computed on the basis of the number of shareholder
accounts that it maintains for the Company during the month and is reimbursed
for out-of-pocket expenses.
<PAGE>
Expenses
The Fund's expenses include taxes, interest, fees and salaries of the Company's
trustees and officers who are not directors, officers or employees of the
Company'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 and of the transfer 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 that if, in any fiscal year, the expenses borne by the Fund exceed
the applicable expense limitations imposed by the securities regulations of any
state in which shares of the Fund are registered or qualified for sale to the
public, they will reimburse the Fund for any excess to the extent required by
such regulations in the same proportion that each of their fees bears to the
Fund's aggregate fees for investment advice and administrative services. Unless
otherwise required by law, such reimbursement would be accrued and paid on the
same basis that the advisory and administration fees are accrued and paid by
the Fund. To the Fund's knowledge, of the expense limitations in effect on the
date of this Statement of Additional Information, none is more restrictive than
two and one-half percent (2-1/2%) of the first $30 million of the Fund's
average annual net assets, two percent (2%) of the next $70 million of the
average annual net assets and one and one-half percent (1-1/2%) of the
remaining average annual net assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally
affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders or possible legislative changes, and
the discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
As stated in the Prospectus, the Fund intends to qualify as a "regulated
investment company" under the Code. In order to so qualify under the Code for a
taxable year, the Fund must, among other things, (a) derive in each taxable
year at least 90% of its gross income from dividends, interest, payments with
respect to loans of securities, gains from the sale or other disposition of
stock or securities, or foreign currencies, or other income derived with
respect to its business of investing in such stock, securities or currencies
(including, but not limited to, gains from options, futures or forward
contracts); (b) derive in each taxable year less than 30% of its gross income
from the sale or other disposition of any of the following that are held for
less than three months (the "30% limitation"): (i) stock or securities,
(ii) options, futures or forward contracts, or (iii) foreign currencies (or
foreign currency options, futures or forward contracts) that are not directly
related to its principal business of investing in stock or securities (or
options and futures with respect to stocks or securities); and (c) diversify
its holdings so that, at the end of each quarter of each taxable year, (i) at
<PAGE>
least 50% of the value of the Fund's assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies,
and other securities which, with respect to any one issuer, do not represent
more than 5% of the value of the Fund's assets nor more than 10% of the voting
securities of such issuer, and (ii) not more than 25% of the value of the
Fund's assets is invested in the securities of any issuer (other than U.S.
Government securities or the securities of other regulated investment
companies). Legislation under consideration by the U.S. Congress would repeal
the 30% limitation described in (b) above. It is currently unclear whether the
legislation will become law and, if enacted, the form it will take.
If the Fund qualifies as a regulated investment company, 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. In addition, the Fund will be subject to a nondeductible
4% excise tax on the amount by which the aggregate income it distributes in any
calendar year is less than the sum of: (a) 98% of the Fund's ordinary income
for such calendar year; (b) 98% of the excess of capital gains over capital
losses for the one-year period ending on October 31 of each year; and (c) 100%
of the undistributed ordinary income and gains from prior years.
The Fund intends to distribute sufficient income so as to avoid both
corporate income tax and the excise tax.
Distributions to shareholders of designated by the Fund as "capital gains
dividends" will be taxable as long-term capital gains and will not be eligible
for the dividends received deduction. The current maximum federal income tax
rate imposed on individuals with respect to long-term capital gains is limited
to 28%, whereas the current maximum federal income tax rate imposed on
individuals with respect to ordinary income (and short-term capital gains,
which are taxed at the same rates as ordinary income) is 39.6%. With respect to
corporate taxpayers, long-term capital gains are currently taxed at the same
federal income tax rates as ordinary income and short-term capital gains.
Although the Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all federal income tax, depending on
the extent of its activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting a business, the Fund may be
subject to the tax laws of such states or localities. In addition, in those
state and localities which have income tax laws, the treatment of the Fund and
its shareholders under such laws may differ from the treatment under federal
income tax laws. Shareholders are urged to consult their tax advisors
concerning the application of state and local taxes.
<PAGE>
PERFORMANCE DATA
From time to time, the Fund may quote total return in advertisements or in
reports and other communications to shareholders and compare its total return
to that of other funds or accounts with similar objectives and to relevant
indices.
Average Annual Total Return
The Fund's "average annual total return" figures, as described in the
Prospectus, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5-, or 10-
year period at the end of the 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The Fund's total return figures calculated in accordance with the above
formula will assume that the maximum applicable CDSC has been deducted from the
hypothetical $1,000 initial investment.
Aggregate Total Return
The Fund's "aggregate total return" figures, as described in the
Prospectus, represent the cumulative change in the value of an investment in
Fund shares for the specified period and are computed by the following formula:
ERV-P
AGGREGATE TOTAL RETURN = -----
P
Where: P = a hypothetical initial investment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5-, or 10-
year period at the end of the 1-, 5-, or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The Fund's performance will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio and operating expenses.
<PAGE>
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in
the future. Because performance will vary, it may not provide a basis for
comparing an investment in Fund shares with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other mutual funds should give
consideration to the nature, quality and maturity of the respective investment
companies' portfolio securities and market conditions.
ADDITIONAL INFORMATION CONCERNING FUND SHARES
As used in this Statement of Additional Information and the Prospectus, a
"majority of the outstanding shares" of the Fund means the lesser of (1) 67% of
the Fund's shares represented at a meeting at which the holders of more than
50% of the outstanding shares of the Fund are present in person or by proxy, or
(2) more than 50% of the outstanding shares of the Fund.
The By-Laws of the Company provide that the Company shall not be required
to hold an annual meeting of shareholders in any year in which the election of
directors to the Company's Board of Directors is not required to be acted upon
under the 1940 Act. The law under certain circumstances provides shareholders
with the right to call for a meeting of shareholders to consider the removal of
one or more directors. To the extent required by law, the Company will assist
in shareholder communication in such matters.
Each share of the Fund is entitled to such dividends and distributions out
of the assets belonging to the Fund as are declared in the discretion of the
Company's Board of Directors. In determining the Fund's net asset value, assets
belonging to the Fund are credited with a proportionate share of any general
assets of the Company not belonging to a particular fund of the Company and are
charged with the direct liabilities in respect of the Fund and with a share of
the general liabilities of the Company which are normally allocated in
proportion to the relative net asset values of the respective funds of the
Company at the time of allocation.
In the event of the liquidation or dissolution of the Company, shares of
the Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the Fund, of any general assets not attributable to a
fund of the Company, that are available for distribution. Shareholders are not
entitled to any preemptive rights.
Subject to the provisions of the Company's Charter, determinations by the
Board of Directors as to the direct and allocable liabilities and the allocable
portion of any general assets of the Company, with respect to the Fund are
conclusive.
<PAGE>
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), 425 Lexington Avenue, New York, New York 10017, serves as
counsel to the Company.
AUDITORS
Ernst & Young acts as the Fund's independent auditors and has offices at
200 Clarendon Street, Boston, Massachusetts 02116-5072.
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's and S&P with respect to bonds
and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected
by a large or by an exceptionally stable margin, and principal is secure. While
the various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated "A" possess many favorable investment qualities
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
<PAGE>
Ca--Bonds which are rated "Ca" represent obligations which are speculative
in high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
Standard & Poor's Corporate Bond Ratings
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and
pay interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to repay principal and pay
interest for bonds in this category than for higher rated categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being paid.
D--Bonds rated "D" are in default. The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
<PAGE>
Moody's Investors Service's Commercial Paper Ratings
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations. "Prime-
1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Prime-3--Issuers (or related supporting institutions) rated "Prime-3" have
an acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated "Not Prime" do not fall within any of the Prime
rating categories.
Standard & Poor's Commercial Paper Ratings
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3--Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
<PAGE>
D--Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements Contained in Part B:
Report of Independent Accountants
Portfolio of Investments
Statement of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Financial Highlights
Statement of Assets and Liabilities at July 14, 1993
(b) Exhibits:
Exhibit
Number Description
1(a) -- Registrant's Amended Articles of Incorporation and Certificate
of Correction of Amended Articles of Incorporation.
1(b) -- Form of Registrant's Articles Supplementary.
2 -- Registrant's By-Laws are incorporated by reference to Exhibit 2
to Pre-Effective Amendment No. 1, filed July 22, 1993 ("Pre-
Effective Amendment No. 1") to the Registrant's Registration
Statement on Form N-1A, filed May 6, 1993, Registration Nos.
33-62312 and 811-7706 (the "Registration Statement").
3 -- Not Applicable.
4 -- Form of Stock Certificate for shares of Registrant's Capital
Stock is incorporated by reference to Exhibit 4 to Pre-
Effective Amendment No.1.
5(a) -- Form of Investment Advisory Agreements between Registrant and
Lehman Brothers Global Asset Management Inc. relating to Lehman
Brothers Daily Income Fund and Lehman Brothers Municipal Income
Fund are incorporated by reference to Exhibit 5 to Pre-
Effective Amendment No. 1.
5(b) -- Form of Investment Advisory Agreement between Registrant and
Lehman Brothers Global Asset Management Inc. relating to Lehman
Selected Growth Stock Portfolio.
5(c) -- Form of Investment Advisory Agreements between Registrant and
Lehman Brothers Global Asset Management Limited relating to
<PAGE>
Lehman Mexican Growth and Income Portfolio and Lehman Latin
America Dollar Income Portfolio.
5(d) -- Form of Research Services Agreements between Lehman Brothers
Inc. and Lehman Brothers Global Asset Management Limited.
6 -- Form of Distribution Agreement between Registrant and Lehman
Brothers Inc. is incorporated by reference to Exhibit 6 to Pre-
Effective Amendment No. 1.
7 -- Not Applicable.
8(a) -- Form of Custodian Agreement between Registrant and Boston Safe
Deposit and Trust Company is incorporated by reference to
Exhibit 8(a) to Pre-Effective Amendment No. 1.
8(b) -- Form of Administration Agreement between Registrant and The
Boston Company Advisors, Inc. is incorporated by reference to
Exhibit 8(b) to Pre-Effective Amendment No. 1.
9 -- Form of Transfer Agency Agreement between Registrant and The
Shareholder Services Group, Inc. is incorporated by reference
to Exhibit 9 to Pre-Effective Amendment No. 1.
10 -- Opinion and consent of Piper & Marbury.
11 -- Consent of independent auditors.
12 -- Not Applicable.
13(a) -- Form of Share Purchase Agreement between Registrant and Lehman
Brothers Inc. relating to Lehman Brothers Daily Income Fund and
Lehman Brothers Municipal Income Fund is incorporated by
reference to Exhibit 13 to Pre-Effective Amendment No. 1.
13(b) -- Form of Share Purchase Agreement between Registrant and Lehman
Brothers Inc. relating to Lehman Selected Growth Stock
Portfolio, Lehman Mexican Growth and Income Portfolio and
Lehman Latin America Dollar Income Portfolio.
14 -- Not Applicable.
15(a) -- Form of Plan of Distribution relating to Lehman Brothers Daily
Income Fund and Lehman Brothers Municipal Income Fund is
incorporated by reference to Exhibit 15 to Pre-Effective
Amendment No. 1.
15(b) -- Form of Services and Distribution Plan relating to Lehman
Selected Growth Stock Portfolio, Lehman Mexican Growth and
Income Portfolio and Lehman Latin America Dollar Income
Portfolio.
16 -- Not Applicable.
18(a) -- Powers of Attorney of Mr. Dorsett and Ms. Holmes are
incorporated by reference to Exhibit 18 to Pre-Effective
<PAGE>
Amendment No. 2, filed July 27, 1993 to the Registration
Statement.
18(b) -- Power of Attorney of Mr. Hatsopoulos is incorporated by
reference to Exhibit 18(b) to Post-Effective Amendment No. 1,
filed January 13, 1994 to the Registration Statement.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
Title of Class
Common Stock, par value
$.001 per share
Holders as of January 5, 1994
FUND
Lehman Brothers Daily Income Fund 52,266.00
(Class A)
Lehman Brothers Municipal Income Fund 3,201.00
(Class B)
Item 27. Indemnification.
Reference is made to Articles VII and VIII of Registrant's Amended
Articles of Incorporation filed as Exhibit 1 to the Registration Statement,
Article V of Registrant's By-Laws filed as Exhibit 2 to Pre-Effective Amendment
No. 1, and paragraph 4 of the Distribution Agreement filed as Exhibit 6 to this
Amendment to the Registration Statement.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant understands that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
Item 28. Business and other Connections of Investment Adviser.
Lehman Brothers Global Asset Management Inc. ("LBGAM Inc."), which serves
as investment adviser to Lehman Brothers Daily Income Fund, Lehman Brothers
Municipal Income Fund and Lehman Selected Growth Stock Portfolio, is a wholly
owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). All of the
issued and outstanding common stock of Holdings (representing 92% of the voting
stock) is held by American Express Company. LBGAM Inc. is an investment adviser
registered under the Investment Advisers Act of 1940 (the "Advisers Act") and
serves as investment counsel for individuals with substantial capital,
executors, trustees and institutions. It also serves as investment adviser or
sub-investment adviser to several investment companies.
<PAGE>
The list required by this Item 28 of officers and directors of LBGAM Inc.,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by LBGAM Inc. pursuant to the Advisers Act (SEC File No. 801-
42006).
Lehman Brothers Global Asset Management Limited ("LBGAM Ltd."), which
serves as investment adviser to Lehman Mexican Growth and Income Portfolio and
Lehman Latin America Dollar Income Portfolio, is an affiliate of Lehman
Brothers and is an indirect, wholly owned subsidiary of Holdings. LBGAM Ltd. is
an investment adviser registered under the Advisers Act and serves as
investment adviser or sub-investment adviser to several U.S.-registered and
offshore investment funds.
The list required by this Item 28 of officers and directors of LBGAM Ltd.,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV filed by LBGAM Ltd. pursuant to the Advisers Act (SEC File No. 801-
21068).
Item 29. Principal Underwriters.
(a) In addition to acting as distributor for the shares of Registrant's
funds, Lehman Brothers acts as distributor for Lehman Brothers Institutional
Funds Group Trust, Shearson Lehman USA High Yield Fund N.V., The Latin American
Bond Fund N.V., Mexican Short-Term Investment Portfolio N.V., Garzarelli Sector
Analysis Portfolio N.V., The Mexican Appreciation Fund N.V., The Mexico Premium
Income Portfolio N.V., Offshore Portfolios, International Currency Portfolios,
Shearson Lehman Brothers Series I Mortgage-Related Securities Portfolio N.V.,
TBC Enhanced Tactical Asset Allocation Portfolio N.V., U.S. Tactical Asset
Allocation Portfolio N.V., Short-Term World Income Portfolio (Cayman), TBC
Portfolio of Fixed-Income Securities, U.S. Tactical Asset Allocation Portfolio
(Cayman), Offshore Daily Dividend Fund N.V. and The Global Advisors Portfolio
N.V. [TBC-Please Update.]
(b) Lehman Brothers is a wholly owned subsidiary of Holdings. The
information required by this Item 29 with respect to each director, officer and
partner of Lehman Brothers is incorporated by reference to Schedule A of Form
BD filed by Lehman Brothers pursuant to the Securities Exchange Act of 1934
(SEC File No. 8-12324).
(c) Not applicable.
Item 30. Location of Accounts and Records.
(1) Lehman Brothers Funds, Inc.
One Exchange Place
Boston, Massachusetts 02109
(2) Lehman Brothers Global Asset Management Inc.
American Express Tower
World Financial Center
New York, New York 10285
<PAGE>
(3) Lehman Brothers Global Asset Management Limited
Two Broadgate
London EC2M 7HA
England
(4) The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
(5) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(6) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
The undersigned Registrant hereby undertakes to file a post-effective
amendment, using financial statements which need not be certified, within four
to six months from the date the Registrant commences selling shares of each of
Lehman Mexican Growth and Income Portfolio, Lehman Latin America Dollar Income
Portfolio and Lehman Selected Growth Stock Portfolio.
Registrant undertakes to call a meeting of its shareholders for the
purpose of voting upon the question of removal of a director or directors of
Registrant when requested in writing to do so by the holders of at least 10% of
Registrant's outstanding shares and, in connection with the meeting, to comply
with the provisions of Section 16(c) of the 1940 Act relating to communications
with the shareholders of certain common-law trusts.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
January 14, 1994.
LEHMAN BROTHERS FUNDS, INC.
(Registrant)
By /s/ Clint Kendrick
Clint Kendrick, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
person in the capacities and on the date indicated.
Signatures Title Date
/s/ Steven Spiegel Chairman of the Board January 14, 1994
Steven Spiegel and Director
/s/ Vincent Nave Treasurer and Chief January 14, 1994
Vincent Nave FinanciaL Officer
(principal financial
and Accounting officer)
* Director January 14, 1994
Burt N. Dorsett
* Director January 14, 1994
John N. Hatsopoulos
<PAGE>
* Director January 14, 1994
Kathleen C. Holmes
* By/s/ Steven Spiegel
Steven Spiegel
Attorney-in-fact
/s/ Clint Kendrick President January 14, 1994
Clint Kendrick (principal executive
officer)
<PAGE>
EXHIBIT 1(a)
AMENDED
ARTICLES OF INCORPORATION
of
LEHMAN BROTHERS FUNDS, INC.
ARTICLE I
Incorporator
The undersigned Jay M. Ptashek, whose post office address is c/o
Simpson Thacher and Bartlett, 425 Lexington Avenue, New York, N.Y. 10017-3909,
being at least 18 years of age, as an incorporator, hereby forms a corporation
under and by virtue of the laws of the State of Maryland.
ARTICLE II
Name
The name of the corporation is Lehman Brothers Funds, Inc. (the
"Corporation").
ARTICLE III
Corporate Purposes
The purpose for which the Corporation is formed is to engage in the
business of an investment company.
The Corporation may engage in any other business and shall have all
powers conferred upon corporations by the Maryland General Corporation Law now
or hereafter in force.
ARTICLE IV
Principal Office and Resident Agent
The post office address of the principal office of the Corporation in
Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202. The name of the resident agent of the Corporation in Maryland
is The Corporation Trust Incorporated, a Maryland corporation, and the post
office address of the resident agent is 32 South Street, Baltimore, Maryland
21202.
<PAGE>
ARTICLE V
Capital Stock
Section 1. Authorized Shares. The aggregate number of shares of
capital stock which the Corporation is authorized to issue is Ten Billion
(10,000,000,000). These shares shall have a par value of $.001 per share and
shall have an aggregate par value of Ten Million Dollars ($10,000,000). All of
such shares are initially classified as "Common Stock".
Subject to the following paragraph, the authorized shares are
classified as follows: Class A, 5,000,000,000 shares; and Class B,
5,000,000,000 shares.
The Board of Directors is authorized to classify or to reclassify,
from time to time, any unissued shares of stock of the Corporation, whether now
or hereafter authorized, by setting, changing or eliminating the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, and qualifications or terms and conditions of or rights to require
redemption of the stock. The authority to classify and reclassify the Common
Stock, or any class or portfolio thereof however designated, shall include the
authority to classify, reclassify, or divide a class or portfolio into one or
more sub-classes of such class or portfolio. All such sub-classes of a class
or portfolio shall represent the same interest in the Corporation and have the
same preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption as the other shares of Common Stock of that class or portfolio;
provided, however, that notwithstanding anything contained in the charter of
the Corporation, the Board of Directors may, without stockholder approval,
provide for the issuance of additional sub-classes of Common Stock of a
particular class or portfolio which shall have such preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption, including without
limitation such front-end sales loads, such 12b-1 service, administrative, or
distribution fees, such contingent deferred sales charges, such conversion
rights, and exchange privileges, as shall be determined by resolution of the
Board of Directors and shall be included in Articles Supplementary filed for
record with the State Department of Assessments and Taxation of Maryland prior
to the issuance of such shares.
The provisions of these Amended Articles of Incorporation, including
those in this Section shall apply to each class of stock unless otherwise
provided by the Board of Directors prior to issuance of any shares of that
class:
(a) As more fully set forth hereafter, the assets and liabilities
and the income and expenses of each class of the Corporation's stock shall
be determined separately and, accordingly, the net asset value, the
dividends payable to holders, and the amounts distributable in the event
of dissolution of the Corporation to holders, of shares of the
Corporation's stock may vary from class to class. Except for these
differences and certain other differences hereafter set forth, each class
of the Corporation's stock shall have the same preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of and rights to require
redemption.
<PAGE>
(b) All consideration received by the Corporation for the issue or
sale of shares of a class of the Corporation's stock, together with all
funds derived from any investment and reinvestment thereof, shall
irrevocably belong to that class for all purposes, subject only to the
rights of creditors, and shall be so recorded upon the books of account of
the Corporation. Such consideration and any funds derived from any
investment and reinvestment are herein referred to as "assets belonging
to" that class.
(c) The assets belonging to a class of the Corporation's stock shall
be charged with the liabilities of the Corporation with respect to that
class and with that class' share of the liabilities of the Corporation not
attributable to any particular class, in the latter case in the proportion
that the net asset value of that class (determined without regard to such
liabilities) bears to the net asset value of all classes of the
Corporation's stock (determined without regard to such liabilities). The
determination of the Board of Directors shall be conclusive as to the
allocation of liabilities, including accrued expenses and reserves, and
assets to a particular class or classes.
(d) Shares of each class of stock shall be entitled to such
dividends or distributions, in stock, property, cash or in any combination
thereof, as may be declared from time to time by the Board of Directors
with respect to such class. Dividends or distributions shall be paid on
shares of a class of stock only out of lawfully available assets belonging
to that class.
(e) On each matter submitted to a vote of the stockholders, each
holder of a share shall be entitled to one vote for each share standing in
his name on the books of the Corporation, irrespective of the class
thereof, and all shares of all classes shall vote as a single class
("Single Class Voting"); provided, however, that (a) as to any matter with
respect to which a separate vote of any class is required by the
Investment Company Act of 1940, as amended from time to time (the "1940
Act"), or by the Maryland General Corporation Law, such requirement as to
a separate vote by that class shall apply in lieu of Single Class Voting
as described above; (b) in the event that the separate vote requirements
referred to in (a) above apply with respect to one or more classes, then,
subject to (c) below, the shares of all other classes shall vote as a
single class and (c) as to any matter which does not affect the interest
of a particular class only the holders of shares of the one or more
affected classes shall be entitled to vote.
(f) In the event of the liquidation or dissolution of the
Corporation, the stockholders of a class of the Corporation's stock shall
be entitled to receive, as a class, out of the assets of the Corporation
available for distribution to stockholders, the assets belonging to that
class less the liabilities allocated to that class. The assets so
distributable to the stockholders of a class shall be distributed among
such stockholders in proportion to the number of shares of that class held
by them and recorded on the books of the Corporation. In the event that
there are any assets available for distribution that are not attributable
to any particular class of stock, such assets shall be allocated to all
classes in proportion to the net asset value of the respective classes and
distributed to the holders of stock of each class in proportion to the net
asset value of the shares of that class held by the respective holders.
The liquidation of a particular class may be accomplished, in whole or in
<PAGE>
part, by the transfer of assets of such class to another class or by the
exchange of shares of such class for the shares of another class.
Section 2. Fractional Shares. The Corporation may issue fractional
shares. Any fractional share of capital stock of the Corporation shall carry
proportionately all the rights of a whole share, excepting any right to receive
a certificate evidencing such fractional share, but including, without
limitation, the right to vote and the right to receive dividends.
Section 3. Quorum Requirements and Voting Rights. The presence in
person or by proxy of the holders of one-third of the shares of stock of the
Corporation entitled to vote (without regard to class) shall constitute a
quorum at any meeting of the stockholders, except with respect to any matter
which by law requires the approval of one or more classes of stock, in which
case the presence in person or by proxy of the holders of one-third of the
shares of stock of each class entitled to vote on the matter shall constitute a
quorum. Notwithstanding any provision of the laws of the State of Maryland
requiring any action to be taken or authorized by the affirmative vote of the
holders of more than a majority of the outstanding shares of capital stock of
the Corporation, that action shall, except to the extent otherwise required by
the 1940 Act, be effective and valid if taken or authorized by the affirmative
vote of the holders of the majority of the total number of votes entitled to be
cast thereon.
Section 4. No Preemptive Rights. No holder of shares of capital
stock of the Corporation shall, as such holder, have any right to purchase or
subscribe for any shares of the capital stock of the Corporation which the
Corporation may issue or sell (whether consisting of shares of capital stock
authorized by these Amended Articles of Incorporation, or shares of capital
stock of the Corporation acquired by it after the issue thereof, or other
shares) other than any right which the Board of Directors of the Corporation,
in its discretion, may determine.
Section 5. Redemption and Repurchase of Shares of Capital Stock.
(a) Circumstances Under Which Shares of Capital Stock May be
Redeemed or Repurchased. The Corporation shall under some circumstances
redeem, and may under other circumstances repurchase or redeem, shares of its
capital stock as follows:
(i) Each holder of shares of its capital stock shall be entitled at
the holder's option to require the Corporation to redeem all or any part
of the shares of its capital stock owned by that holder, upon request to
the Corporation or its designated agent in a form approved by the Board of
Directors by the Corporation, accompanied by surrender of the certificate
or certificates for those shares, if any, or any other evidence of
ownership specified by the Corporation's Board of Directors, at the net
asset value of those shares determined as provided in Section 6 of this
Article V, subject to and in accordance with the provisions of paragraph
(b) of this Section 5, less such redemption charge as shall be established
by the Board of Directors in accordance with the 1940 Act and any
applicable rules of the National Association of Securities Dealers, Inc.
and shall be disclosed in the Corporation's current prospectus applicable
to the shares. Notwithstanding the foregoing, the Board of Directors of
the Corporation may suspend the right of the holders of the capital stock
of the Corporation to require the Corporation to redeem such capital stock
when permitted or required to do so by applicable law.
<PAGE>
(ii) The Board of Directors of the Corporation may also, from time to
time in its discretion, authorize the Corporation to require the
redemption of all or any part of the outstanding shares of its capital
stock for the net asset value of those shares determined as provided in
Section 6 of this Article V, subject to and in accordance with the
provisions of paragraph (b) of this Section 5, upon the sending of written
or telegraphic notice of redemption to each holder whose shares are so
redeemed and upon such terms and conditions as the Board of Directors of
the Corporation shall deem advisable.
(iii) The Board of Directors of the Corporation may also, from time to
time in its discretion, authorize the Corporation to repurchase
outstanding shares of its capital stock, either directly or through an
agent, subject to and in accordance with the provisions of paragraph (b)
of this Section 5. The price to be paid by the Corporation upon any such
repurchase shall be determined, in the discretion of its Board of
Directors, in accordance with any applicable provision of the laws of the
State of Maryland and the 1940 Act or any rule or regulation thereunder,
including any rule or regulation made or adopted pursuant to Section 22 of
the 1940 Act by the Securities and Exchange Commission or any securities
association registered under the Securities Exchange Act of 1934.
(b) Procedure for Redemption and Repurchases of Shares of Capital
Stock. With respect to redemptions and repurchases of shares of capital stock
of the Corporation pursuant to paragraph (a) of this Section 5:
(i) The net asset value applicable to a redemption or repurchase
pursuant to paragraphs (a)(i) and (a)(ii) of this Section 5 shall be com-
puted as of the specific time or times during the day determined by the
Board of Directors of the Corporation.
(ii) Any certificates for shares of capital stock of the Corporation
to be redeemed or repurchased shall be surrendered in proper form for
transfer, together with any proof of the authenticity of signatures
required by the Board of Directors or transfer agent of the Corporation.
(iii) Payment of the redemption or repurchase price by the Corporation
or its designated agent shall be made within seven days after the time for
the determination of the redemption or repurchase price, but in no event
prior to delivery to the Corporation or its designated agent of the
certificate or certificates, if any, for the shares of capital stock
redeemed or repurchased or any other evidence of ownership specified by
the Corporation's Board of Directors. Payment of the redemption or
repurchase price may be postponed when permitted or required by applicable
law.
(iv) The right of a holder of shares of capital stock redeemed or
repurchased by the Corporation as provided in this Article V to receive
dividends thereon and all other rights of that holder with respect to
those shares shall forthwith cease and terminate at the time as of which
the redemption or repurchase price of those shares has been determined,
except the rights of that holder to receive (A) the redemption or
repurchase price of those shares from the Corporation or its designated
agent in cash, securities or other assets of the Corporation and (B) any
dividend or distribution to which that holder had become entitled as the
record holder of those shares on the record date for that dividend.
<PAGE>
Section 6. Determination of Net Asset Value. For purposes of this
Article V, the net asset value of shares of capital stock of the Corporation
shall be determined at such time or times on any day pursuant to the direction
of the Board of Directors and in accordance with the following provisions:
(a) The net asset value of each share of capital stock shall be the
quotient obtained by dividing the "net value of the assets" of the
Corporation (as defined below) by the total number of shares of capital
stock deemed to be outstanding at the time (including shares sold, whether
or not paid for and issued, and excluding shares redeemed or repurchased
on the basis of previously determined values, whether or not paid for,
received and held in treasury).
(b) The "net value of the assets" of the Corporation shall be the
"gross value of the assets" of the Corporation (as defined below) after
deducting the amount of all expenses incurred, accrued and unpaid,
reserves that may be set up to cover taxes and other liabilities and other
deductions.
(c) The "gross value of the assets" of the Corporation shall be the
amount of all cash and receivables and the market value of all securities
and other assets held by the Corporation at the time as of which the
determination is made. Securities held shall be valued in accordance with
methods approved by the Board of Directors and applicable statutes and
regulations.
(d) When the Corporation has more than one class of shares of its
capital stock outstanding having separate assets and liabilities, the net
asset value of shares of capital stock of the Corporation as provided for
in this Section 6 shall be determined as if each class of shares were the
Corporation as referred to in such computation, but with its assets
limited to the assets belonging to that class, its liabilities limited to
the liabilities belonging to that class and the total number of shares of
capital stock deemed to be outstanding limited to the outstanding shares
of that class.
Section 7. Determinations Made by the Board of Directors. Any
determination made in good faith by or pursuant to the direction of the Board
of Directors, as to the amount of the assets, debts, obligations or liabilities
of the Corporation, as to the amount of any reserves or charges set up and the
propriety thereof, as to the time of or purpose for creating such reserves or
charges, as to the use, alteration or cancellation of any reserves or charges
(whether or not any debt, obligation or liability for which such reserves or
charges shall have been created shall have been paid or discharged or shall be
then or thereafter required to be paid or discharged), as to the value of or
the method of valuing any investment or other asset owned or held by the
Corporation, as to the allocation of any asset or liability of the Corporation
to a particular class or classes of the Corporation's stock, as to the number
of shares of any class of stock outstanding, as to the estimated expense to the
Corporation in connection with purchases of its shares, as to the ability to
liquidate investments in orderly fashion, or as to any other matters relating
to the issue, sale, purchase or other acquisition or disposition of investments
or shares of the Corporation, shall be final and conclusive and shall be
binding upon the Corporation and all holders of its shares, past, present and
future, and shares of the Corporation are issued and sold on the condition and
understanding that any and all such determinations shall be binding as
aforesaid.
<PAGE>
Section 8. All Shares of Capital Stock Subject to Amended Articles
of Incorporation. All persons who shall acquire shares of capital stock of the
Corporation shall acquire those shares subject to the provisions of these
Amended Articles of Incorporation.
Section 9. Equality. All shares of each particular class shall
represent an equal proportionate interest in the assets belonging to that class
(subject to the liabilities of that class), and each share of any particular
class shall be equal to each other share of that class. The Board of Directors
may from time to time divide or combine the shares of any particular class into
a greater or lesser number of shares of that class without thereby changing the
proportionate interest in the assets belonging to that class or in any way
affecting the rights of holders of shares of any other class.
Section 10. Conversion or Exchange Rights. Subject to compliance
with the requirements of the 1940 Act, the Board of Directors shall have the
authority to provide that holders of shares of any class have the right to
convert or exchange said shares into shares of one or more other classes of
shares in accordance with such requirements and procedures as may be
established by the Board of Directors.
ARTICLE VI
Directors
Section 1. Initial Board of Directors. The number of Directors of
the Corporation shall initially be one. The name of the initial director is:
Steven Spiegel.
Section 2. Number of Directors. The number of Directors in office
may be changed from time to time in the manner specified in the By-Laws of the
Corporation, but this number shall never be less than the minimum number
required under the Maryland General Corporation Law.
Section 3. Certain Powers of Board of Directors. In addition to its
other powers explicitly or implicitly granted under these Amended Articles of
Incorporation, by law or otherwise, the Board of Directors of the Corporation
(a) is expressly authorized to make, alter, amend or repeal the By-Laws of the
Corporation, (b) may from time to time determine whether, to what extent, at
what times and places, and under what conditions and regulations the accounts
and books of the Corporation, or any of them, shall be open to the inspection
of the stockholders, and no stockholders shall have any right to inspect any
account, book or document of the Corporation except as conferred by statute or
as authorized by the Board of Directors of the Corporation, and (c) is
empowered, without stockholder approval, to increase or decrease the number of
shares of capital stock of any class that the Corporation has authority to
issue.
ARTICLE VII
LIABILITY AND INDEMNIFICATION
To the fullest extent that limitations on the liability of directors
and officers are permitted by the Maryland General Corporation Law, no director
or officer of the Corporation shall have any personal liability to the
<PAGE>
Corporation or its stockholders for monetary damages. This limitation on
liability applies to events occurring at the time a person serves as a director
or officer of the Corporation whether or not such person is a director or
officer at the time of any proceeding in which liability is asserted.
The Corporation shall indemnify and advance expenses to its currently
acting and its former directors to the fullest extent that indemnification of
directors is permitted by the Maryland General Corporation Law. The
Corporation shall indemnify and advance expenses to its officers to the same
extent as its directors and may do so to such further extent as is consistent
with law. The Board of Directors may by By-Law, resolution or agreement make
further provision for indemnification of directors, officers, employees and
agents to the fullest extent permitted by the Maryland General Corporation Law.
This indemnification applies to events occurring at the time a person serves as
a director or officer of the Corporation whether or not such person is a
director or officer at the time of any proceeding in which liability is
asserted.
No provision of these Amended Articles of Incorporation shall be
effective to protect or purport to protect any director or officer of the
Corporation against any liability to the Corporation or its security holders to
which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
References to the Maryland General Corporation Law in this Article
VII are to that law as from time to time amended. No amendment to the
Corporation's Amended Articles of Incorporation shall affect any right of any
person under this Article VII based on any event, omission or proceeding prior
to such amendment.
ARTICLE VIII
Amendments
The Corporation reserves the right from time to time to make any
amendment of these Amended Articles of Incorporation now or hereafter
authorized by law, including any amendment which alters the contract rights, as
expressly set forth in these Amended Articles of Incorporation, of any
outstanding capital stock.
ARTICLE IX
Perpetual Existence
The duration of the Corporation shall be perpetual.
<PAGE>
I have signed these AMENDED ARTICLES OF INCORPORATION on July 13,
1993 and acknowledge the same to be my act.
/s/ Jay M. Ptashek
Jay M. Ptashek
<PAGE>
CERTIFICATE OF CORRECTION
OF
AMENDED ARTICLES OF INCORPORATION
OF
LEHMAN BROTHERS FUNDS, INC.
Pursuant to the provisions of the Corporations and Associations Article of
the Annotated Code of Maryland, as amended, the undersigned hereby executes the
following Certificate of Correction:
FIRST: That Amended Articles of Incorporation were filed with the
Department of Assessments and Taxation of the State of Maryland on July 14,
1993 and that said Amended Articles of Incorporation require correction as
permitted by Section 1-207 of the Corporations and Associations Article of the
Annotated Code of Maryland.
SECOND: The inaccuracy or defect in said document to be corrected is that
Lehman Brothers Funds, Inc. (the "Corporation") did not have stock outstanding
or subscribed for but had held an organization meeting of the board of
directors prior to the amendment of the Corporation's charter and, accordingly,
the manner of approval was incorrectly stated.
THIRD: This Certificate of Correction hereby:
(i) changes the name of the charter document from Amended Articles
of Incorporation to Articles of Amendment and Restatement;
(ii) inserts the following language prior to ARTICLE I: "Lehman
Brothers Funds, Inc., a Maryland corporation having its principal
office in Baltimore City, Maryland (which is hereinafter called the
"Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended and restated
in its entirety as follows:"; and
(iii) inserts the following language, signatures and certificate
following ARTICLE IX and in lieu of the signature of the
Corporation's incorporator:
SECOND: The foregoing amendment and restatement of the charter of
the Corporation has been approved by a majority of the entire Board
of Directors and no stock was outstanding or subscribed for at the
time of approval.
THIRD: The amendment does not increase the authorized stock of the
Corporation.
<PAGE>
IN WITNESS WHEREOF, Lehman Brothers Funds, Inc. has caused these
Articles of Amendment and Restatement to be signed in its name and on its
behalf by its President and attested by its Secretary on July 14, 1993.
LEHMAN BROTHERS FUNDS, INC.
By:_________________________
Steven Spiegel
President
Attest:
_____________________________
Peter A. Kennedy
Secretary
THE UNDERSIGNED, President of Lehman Brothers Funds, Inc., who
executed on behalf of said Corporation the forgoing Articles of
Amendment and Restatement of which this certificate is made a part,
hereby acknowledges, in the name and on behalf of said Corporation,
the foregoing Articles of Amendment and Restatement to be the
corporate act of said Corporation and further certifies that, to the
best of his knowledge, information and belief, the matters and facts
set forth therein with respect to the authorization and approval
thereof are true in all material respects, under the penalties of
perjury.
_________________________
Steven Spiegel
President
IN WITNESS WHEREOF, LEHMAN BROTHERS FUNDS, INC. has caused this
Certificate of Correction to be signed in its name and on its behalf by its
Chairman and witnessed by its Assistant Secretary on September __, 1993.
WITNESS: LEHMAN BROTHERS FUNDS, INC.
_____________________________ _____________________________
Mary E. Moran Steven Spiegel
Assistant Secretary Chairman
THE UNDERSIGNED, Chairman of LEHMAN BROTHERS FUNDS, INC., who
executed on behalf of the Corporation the foregoing Certificate of Correction
of which this certificate is made a part, hereby acknowledges in the name and
<PAGE>
on behalf of said Corporation the foregoing Certificate of Correction to be the
corporate act of said Corporation and hereby certifies that to the best of his
knowledge, information, and belief the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
_____________________________
Steven Spiegel, Chairman
<PAGE>
EXHIBIT 1(b)
LEHMAN BROTHERS FUNDS, INC.
ARTICLES SUPPLEMENTARY
Lehman Brothers Funds, Inc., a Maryland corporation having its
principal office in Baltimore City, Maryland (the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority of the Board of Directors to
classify and reclassify unissued shares of capital stock of the Corporation,
the Board of Directors has:
(a) duly divided and reclassified shares of the
authorized and unissued shares of Class A Common Stock of the
Corporation, par value $.001 per share, into the "Lehman Brothers
Daily Income Fund" class and has provided for the issuance of such
class;
(b) duly divided and reclassified shares of the
authorized and unissued shares of Class B Common Stock of the
Corporation, par value $.001 per share, into the "Lehman Brothers
Municipal Income Fund" class and has provided for the issuance of
such class;
(c) duly divided and reclassified shares of the
authorized and unissued shares of Class A Common Stock of the
Corporation, par value $.001 per share, into the "Lehman Mexican
Growth and Income Portfolio" class and has provided for the issuance
of such class;
(d) duly divided and reclassified shares of the
authorized and unissued shares of Class A Common Stock of the
Corporation, par value $.001 per share, into the "Lehman Latin
America Dollar Income Portfolio" class and has provided for the
issuance of such class; and
(e) duly divided and reclassified shares of the
authorized and unissued shares of Class B Common Stock of the
Corporation, par value $.001 per share, into the "Lehman Selected
Growth Stock Portfolio" class and has provided for the issuance of
such class.
Any class of Common Stock shall be referred to herein individually as
a "Class" and collectively, together with any further classes from time to time
established, as "Classes."
SECOND: (a) Of the authorized shares of Common Stock, 5,000,000,000
shares were initially classified as Class A Common Stock. All shares with the
designation "Class A Common Stock" or "Lehman Brothers Daily Income Fund" class
of shares shall for all purposes be treated as a single class of capital stock
of the Corporation, and each such share however designated shall have the
identical relative preferences, conversion and other rights, voting powers,
<PAGE>
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption, and the identical ownership in the investment
portfolio and any other assets belonging to the class, as each other shares.
For convenience of reference, each outstanding share of the Class A Common
Stock may be referred to in prospectuses, financial statements, periodic
reports, and other publications of the Corporation with the designation "Lehman
Brothers Daily Income Fund" class of shares. For all purposes, the Class A
Common Stock and the "Lehman Brothers Daily Income Fund" class of shares shall
vote together as a single class whenever a single class vote is required under
the Corporation's charter.
(b) Of the authorized shares of Common Stock, 5,000,000,000 shares
were initially classified as Class B Common Stock. All shares with the
designation "Class B Common Stock" or "Lehman Brothers Municipal Income Fund"
class of shares shall for all purposes be treated as a single class of capital
stock of the Corporation, and each such share however designated shall have the
identical relative preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption, and the identical ownership in the investment
portfolio and any other assets belonging to the class, as each other shares.
For convenience of reference, each outstanding share of the Class B Common
Stock may be referred to in prospectuses, financial statements, periodic
reports, and other publications of the Corporation with the designation "Lehman
Brothers Municipal Income Fund" class of shares. For all purposes, the Class B
Common Stock and the "Lehman Brothers Municipal Income Fund" class of shares
shall vote together as a single class whenever a single class vote is required
under the Corporation's charter.
THIRD: The shares of the Lehman Brothers Daily Income Fund Class,
the Lehman Brothers Municipal Income Fund Class, the Lehman Mexican Growth and
Income Portfolio Class, the Lehman Latin America Dollar Income Portfolio Class
and the Lehman Selected Growth Stock Portfolio Class, as so divided and
reclassified by the Corporation's Board of Directors, shall have the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption set forth in the Corporation's Charter and shall be subject to all
provisions of the Corporation's Charter relating to shares of Class A and Class
B Common Stock, respectively, and to stock of the Corporation generally, except
as otherwise set forth in these Articles Supplementary.
FOURTH: (a) The Lehman Brothers Daily Income Fund Class (including
the Class A Common Stock) shall have two sub-classes of shares, which shall be
designated the "Lehman Brothers Daily Income Fund Select" sub-class,
consisting, until further changed, of shares, and the "Lehman Brothers
Daily Income Fund CDSC" sub-class, consisting, until further changed, of
shares. For convenience of reference, each outstanding share of the Class A
Common Stock shall be referred to in prospectuses, financial statements,
periodic reports, and other publications of the Corporation with the
designation "Lehman Brothers Daily Income Fund Select" sub-class of shares or
such other name as the Corporation's Board of Directors shall select.
(b) The Lehman Brothers Municipal Income Fund Class (including
the Class B Common Stock) shall have two sub-classes of shares, which shall be
designated the "Lehman Brothers Municipal Income Fund Select" sub-class,
consisting, until further changed, of shares, and the "Lehman Brothers
Municipal Income Fund CDSC" sub-class, consisting, until further changed, of
shares. For convenience of reference, each outstanding share of the
<PAGE>
Class B Common Stock shall be referred to in prospectuses, financial
statements, periodic reports, and other publications of the Corporation with
the designation "Lehman Brothers Municipal Income Fund Select" sub-class of
shares or such other name as the Corporation's Board of Directors shall select.
(c) Any sub-class of any Class of Common Stock shall be
referred to herein individually as a "Sub-Class" and collectively, together
with any further sub-classes from time to time established, as "Sub-Classes."
(d) All Sub-Classes of a particular Class of Common Stock of
the Corporation shall represent the same interest in the Corporation and have
identical voting, dividend, liquidation, and other rights, terms and conditions
with any other shares of Common Stock of that Class; provided, however, that
notwithstanding anything in the Corporation's Charter to the contrary, shares
of the Lehman Brothers Daily Income Fund CDSC Sub-Class and the Lehman Brothers
Municipal Income Fund CDSC Sub-Class shall have such additional rights, terms
and conditions as are provided in section FIFTH below; and provided further,
however, that notwithstanding anything in the Corporation's Charter to the
contrary:
(i) Expenses related solely to a particular Sub-Class of a
Class (including, without limitation, distribution expenses under a
Rule 12b-1 plan and administrative expenses under an administration
or service agreement, plan or other arrangement, however designated)
shall be borne by that Sub-Class and shall be appropriately reflected
(in the manner determined by the Board of Directors) in the net asset
value, dividends, distribution and liquidation rights of the shares
of that Sub-Class.
(ii) As to any matter with respect to which a separate vote of
any Sub-Class of a Class is required by the Investment Company Act of
1940 (the "Investment Company Act") or by the Maryland General
Corporation Law (including, without limitation, approval of any plan,
agreement or other arrangement referred to in subsection (1) above),
such requirement as to a separate vote by that Sub-Class shall apply
in lieu of Single Class Voting (as defined in the Corporation's
Charter), and if permitted by the Investment Company Act or the
Maryland General Corporation Law, the Sub-Classes of more than one
Class shall vote together as a single class on any such matter which
shall have the same effect on each such Sub-Class. As to any matter
which does not affect the interest of a particular Sub-Class of a
Class, only the holders of shares of the affected Sub-Class of that
Class shall be entitled to vote.
FIFTH: The shares of the Lehman Brothers Daily Income Fund CDSC
Sub-Class, the Lehman Brothers Municipal Income Fund CDSC Sub-Class, the Lehman
Mexican Growth and Income Portfolio Class, the Lehman Latin America Dollar
Income Portfolio Class and the Lehman Selected Growth Stock Portfolio Class
shall have the following additional rights, terms and conditions:
(1) Each such Class or Sub-Class shall be subject to such
contingent deferred sales charges as may be established by resolution
of the Board of Directors from time to time in accordance with the
Investment Company Act and applicable rules and regulations of the
National Association of Securities Dealers, Inc.
<PAGE>
(2) Each such Class or Sub-Class shall have an exchange
privilege, at such times and upon such terms and conditions as may be
established by resolution of the Board of Directors from time to
time, permitting exchange of shares of one of such Classes or Sub-
Classes for shares of another of such Classes or Sub-Classes.
SIXTH: The shares aforesaid have been duly classified or
reclassified by the Board of Directors pursuant to the authority and power
contained in the Corporation's Charter.
SEVENTH: These Articles Supplementary do not increase the authorized
stock of the Corporation.
<PAGE>
IN WITNESS WHEREOF, LEHMAN BROTHERS FUNDS, INC. has caused these
presents to be signed in its name and on its behalf by its President and
witnessed by its Secretary on January , 1994.
WITNESS: LEHMAN BROTHERS FUNDS, INC.
Francis J. McNamara, III, Clinton Kendrick, President
Secretary
THE UNDERSIGNED, Clinton Kendrick, President of LEHMAN BROTHERS
FUNDS, INC., who executed on behalf of the Corporation the foregoing Articles
Supplementary of which this certificate is made a part, hereby acknowledges in
the name and on behalf of said Corporation the foregoing Articles Supplementary
to be the corporate act of said Corporation and hereby certifies that to the
best of his knowledge, information and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
<PAGE>
EXHIBIT 5(b)
LEHMAN BROTHERS FUND, INC.
Lehman Selected Growth Stock Portfolio
FORM OF
INVESTMENT ADVISORY AGREEMENT
_____________, 1994
Lehman Brothers Global Asset Management Inc.
3 World Financial Center
New York, New York 10285
Ladies and Gentlemen:
Lehman Brothers Funds, Inc. (the "Company"), a corporation organized
under the laws of the State of Maryland, confirms its agreement with Lehman
Brothers Global Asset Management Inc. (the "Advisor") regarding investment
advisory services to be provided by the Advisor to Lehman Brothers Selected
Growth Stock Portfolio (the "Fund"), a portfolio of the Company. The Advisor
agrees to provide services upon the following terms and conditions:
1. Investment Description; Appointment.
The Company anticipates that the Fund will employ its capital by
investing and reinvesting in investments of the kind and in accordance with the
limitations specified in the Company's Articles of Incorporation dated May 5,
1993, as amended from time to time (the "Articles of Incorporation"), in the
prospectus (the "Prospectus") and the statement of additional information (the
"Statement") describing the Fund filed with the Securities and Exchange
Commission as part of the Company's Registration Statement on Form N-1A, as
amended from time to time, and in the manner and to the extent as may from time
to time be approved by the Board of Directors of the Company. Copies of the
Prospectus, the Statement and the Articles of Incorporation have been or will
be submitted to the Advisor. The Company desires to employ and appoints the
Advisor to act as the Fund's investment adviser. The Advisor accepts the
appointment and agrees to furnish the services for the compensation set forth
below.
2. Services as Investment Advisor.
Subject to the supervision and direction of the Board of Directors of
the Company, the Advisor has general responsibility for the investment advisory
services provided to the Fund and will exercise this responsibility in
accordance with the Articles of Incorporation, the Investment Company Act of
1940 and the Investment Advisers Act of 1940, as the same may from time to time
be amended, and with the Fund's investment objective and policies as stated in
the Prospectus and Statement relating to the Fund as from time to time in
effect. In connection therewith, the Advisor will, among other things, (a)
manage the Fund's portfolio in accordance with the Fund's investment objective
and policies as stated in the Prospectus and the Statement, (b) make investment
decisions for the Fund; (c) place orders to purchase and sell securities on
behalf of the Fund; (d) employ professional portfolio managers and securities
<PAGE>
analysts who provide research services to the Fund; (e) participate in the
formulation of the Fund's investment policies, (f) analyze economic trends
affecting the Fund; and (g) monitor the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Act of 1934) that
are provided to the Fund and may be considered in selecting brokers or dealers
to execute particular transactions. In providing those services, the Advisor
will conduct a continual program of investment, evaluation and, if appropriate,
sale and reinvestment of the Fund's assets. In addition, the Advisor will
furnish the Fund with whatever statistical information the Fund may reasonably
request with respect to the instruments that the Fund may hold or contemplate
purchasing.
3. Information Provided to the Company.
The Advisor will keep the Company informed of developments materially
affecting the Fund, and will, on its own initiative, furnish the Company from
time to time with whatever information the Advisor believes is appropriate for
this purpose.
4. Standard of Care.
The Advisor will exercise its best judgment in rendering the services
described in paragraph 2 of this Agreement. The Advisor will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, except that
nothing in this Agreement may be deemed to protect or purport to protect the
Advisor against any liability to the Company or to shareholders of the Fund to
which the Advisor would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
by reason of the Advisor's reckless disregard of its obligations and duties
under this Agreement.
5. Compensation.
In consideration of the services rendered pursuant to this Agreement,
the Company will pay the Advisor on the first business day of each month a fee
for the previous month at the annual rate of 0.75% of the value of the Fund's
average daily net assets. The fee for the period from the date the Fund
commences its investment operations to the end of the month during which the
Fund commences its investment operations will be prorated according to the
proportion that the period bears to the full monthly period. Upon any
termination of this Agreement before the end of a month, the fee for such part
of that month will be prorated according to the proportion that the period
bears to the full monthly period and will be payable upon the date of
termination of this Agreement. For the purpose of determining fees payable to
the Advisor, the value of the Fund's net assets will be computed at the times
and in the manner specified in the Prospectus and/or the Statement.
6. Expenses.
The Advisor will bear all expenses in connection with the performance
of its services under this Agreement. The Company will be responsible for all
of the Fund's other expenses and liabilities, including but not limited to:
costs incurred in connection with the Company's organization; investment
advisory, sub-investment advisory and administration fees; fees for necessary
professional and brokerage services; fees for any pricing service; the costs of
<PAGE>
regulatory compliance; the costs associated with maintaining the Company's
legal existence; and the costs of corresponding with shareholders of the Fund.
7. Reduction of Fee.
If in any fiscal year of the Fund, the aggregate expenses of the Fund
(including fees pursuant to this Agreement, but excluding interest, taxes,
brokerage fees and, if permitted by the relevant state securities commissions,
extraordinary expenses or other expenses) exceed the expense limitation of any
state having jurisdiction over the Fund, the Advisor will reduce its fee to the
Fund for that excess expense, to the extent required by state law. A fee
reduction pursuant to this paragraph 7, if any, will be estimated, reconciled
and paid on a monthly basis.
8. Services to Other Companies or Accounts.
(a) The Company understands that the Advisor now acts, will continue
to act and may act in the future as investment adviser to fiduciary and other
managed accounts, and may act in the future as investment adviser to other
investment companies, and the Company has no objection to the Advisor so
acting, provided that whenever the Fund and one or more fiduciary and other
managed accounts or other investment companies advised by the Advisor have
available funds for investment, investments suitable and appropriate for each
will be allocated in accordance with a formula believed by the Advisor to be
equitable to each. The Company recognizes that in some cases this procedure
may adversely affect the price paid or received by the Fund or the size of the
position obtained or disposed of by the Fund.
(b) The Company understands that the persons employed by the Advisor
to assist in the performance of the Advisor's duties under this Agreement will
not devote their full time to such service and nothing contained in this
Agreement will be deemed to limit or restrict the right of the Advisor or any
affiliate of the Advisor to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
9. Term of Agreement.
(a) This Agreement will become effective as of the date the Fund
commences its investment operations and will continue for an initial two-year
term and will continue thereafter so long as the continuance is specifically
approved at least annually by (i) the Board of Directors of the Company or (ii)
a vote of a "majority" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a majority of the
Directors who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on the approved.
(b) This Agreement is terminable, without penalty, on 60 days'
written notice, by the Board of Directors of the Company or by vote of holders
of a majority of the Fund's outstanding voting securities, or upon 60 days'
written notice, by the Advisor.
(c) This Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
<PAGE>
10. Representation by the Company.
The Company represents that a copy of the Articles of Incorporation
is on file with the Secretary of the State of Maryland.
11. Limitation of Liability.
The execution and delivery of this Agreement have been authorized by
the Board of Directors of the Company. No series of the Company, including the
Fund, will be liable for any claims against any other series.
12. Governing Law.
This agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the State of New York.
13. Other.
Upon expiration or earlier termination of this Agreement, the Company
shall, if reference to "Lehman" is made in the corporate name of the Company or
in the name of the Fund and if the Advisor requests in writing, as promptly as
practicable change its corporate name and the name of the Fund so as to
eliminate all reference to "Lehman", and thereafter the Company and the Fund
shall cease transacting business in any corporate name using the word "Lehman"
or containing any other reference to the advisor or "Lehman." The foregoing
rights of the Advisor and the obligations of the Company shall not deprive the
Advisor, or any affiliate thereof which has "Lehman" in its name, of, but shall
be in addition to, any other rights or remedies to which the Advisor and any
such affiliate may be entitled in law or equity by reason of any breach of this
Agreement by the Company, and the failure and omission of the Advisor to
request a change of the Company's or the Fund's name or a cessation of the use
of the name of "Lehman" as described in this paragraph 10 shall not under any
circumstances be deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any subsequent breach.
<PAGE>
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
LEHMAN BROTHERS FUNDS, INC.
By:___________________________
Name:
Title:
Accepted:
LEHMAN BROTHERS GLOBAL
ASSET MANAGEMENT INC.
By:__________________________
Name:
Title:
<PAGE>
EXHIBIT 5(c)
LEHMAN BROTHERS FUNDS, INC.
Lehman Mexican Growth and Income Portfolio
FORM OF
INVESTMENT ADVISORY AGREEMENT
, 1994
Lehman Brothers Global Asset Management Limited
Two Broadgate, 7th Floor
London EC2M 7HA, U.K.
Ladies and Gentlemen:
Lehman Brothers Funds, Inc. (the "Company"), a corporation organized
under the laws of the State of Maryland, confirms its agreement with Lehman
Brothers Global Asset Management Limited (the "Advisor") regarding investment
advisory services to be provided by the Advisor to Lehman Mexican Growth and
Income Portfolio (the "Fund"), a portfolio of the Company. The Advisor agrees
to provide services upon the following terms and conditions:
1. Investment Description, Appointment.
The Company anticipates that the Fund will employ its capital by
investing and reinvesting in investments of the kind and in accordance with the
limitations specified in the Company's Articles of Incorporation dated May 5,
1993, as amended from time to time (the "Articles of Incorporation"), in the
prospectus (the "Prospectus") and the statement of additional information (the
"Statement") describing the Fund filed with the Securities and Exchange
Commission as part of the Company's Registration Statement on Form N-1A, as
amended from time to time, and in the manner and to the extent as may from time
to time be approved by the Board of Directors of the Company. Copies of the
Prospectus, the Statement and the Articles of Incorporation have been or will
be submitted to the Advisor. The Company desires to employ and appoints the
Advisor to act as the Fund's investment adviser. The Advisor accepts the
appointment and agrees to furnish the services for the compensation set forth
below.
2. Services as Investment Advisor.
Subject to the supervision and direction of the Board of Directors of
the Company, the Advisor has general responsibility for the investment advisory
services provided to the Fund and will exercise this responsibility in
accordance with the Articles of Incorporation, the Investment Company Act of
1940 and the Investment Advisers Act of 1940, as the same may from time to time
be amended, and with the Fund's investment objective and policies as stated in
the Prospectus and Statement relating to the Fund as from time to time in
effect. In connection therewith, the Advisor will, among other things, (a)
manage the Fund's portfolio in accordance with the Fund's investment objective
and policies as stated in the Prospectus and the Statement; (b) make investment
decisions for the Fund; (c) place orders to purchase and sell securities on
<PAGE>
behalf of the Fund; (d) employ professional portfolio managers and securities
analysts who provide research services to the Fund; (e) participate in the
formulation of the Fund's investment policies; (f) analyze economic trends
affecting the Fund; and (g) monitor the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Act of 1934) that
are provided to the Fund and may be considered in selecting brokers or dealers
to execute particular transactions. In providing those services, the Advisor
will conduct a continual program of investment, evaluation and, if appropriate,
sale and reinvestment of the Fund's assets. In addition, the Advisor will
furnish the Fund with whatever statistical information the Fund may reasonably
request with respect to the instruments that the Fund may hold or contemplate
purchasing.
3. Information Provided to the Company.
The Advisor will keep the Company informed of developments materially
affecting the Fund, and will, on its own initiative, furnish the Company from
time to time with whatever information the Advisor believes is appropriate for
this purpose.
4. Standard of Care.
The Advisor will exercise its best judgment in rendering the services
described in paragraph 2 of this Agreement. The Advisor will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, except that
nothing in this Agreement may be deemed to protect or purport to protect the
Advisor against any liability to the Company or to shareholders of the Fund to
which the Advisor would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
by reason of the Advisor's reckless disregard of its obligations and duties
under this Agreement.
5. Compensation.
In consideration of the services rendered pursuant to this Agreement,
the Company will pay the Advisor on the first business day of each month a fee
for the previous month at the annual rate of 0.75% of the value of the Fund's
average daily net assets. The fee for the period from the date the Fund
commences its investment operations to the end of the month during which the
Fund commences its investment operations will be prorated according to the
proportion that the period bears to the full monthly period. Upon any
termination of this Agreement before the end of a month, the fee for such part
of that month will be prorated according to the proportion that the period
bears to the full monthly period and will be payable upon the date of
termination of this Agreement. For the purpose of determining fees payable to
the Advisor, the value of the Fund's net assets will be computed at the times
and in the manner specified in the Prospectus and/or the Statement.
6. Expenses.
The Advisor will bear all expenses in connection with the performance
of its services under this Agreement. The Company will be responsible for all
of the Fund's other expenses and liabilities, including but not limited to:
costs incurred in connection with the Company's organization; investment
advisory, sub-investment advisory and administration fees, fees for necessary
professional and brokerage services; fees for any pricing service; the costs of
<PAGE>
regulatory compliance; the costs associated with maintaining the Company's
legal existence; and the costs of corresponding with shareholders of the Fund.
7. Reduction of Fee.
If in any fiscal year of the Fund, the aggregate expenses of the Fund
(including fees pursuant to this Agreement, but excluding interest, taxes,
brokerage fees and, if permitted by the relevant state securities commissions,
extraordinary expenses or other expenses) exceed the expense limitation of any
state having jurisdiction over the Fund, the Advisor will reduce its fee to the
Fund for that excess expense, to the extent required by state law. A fee
reduction pursuant to this paragraph 7, if any, will be estimated, reconciled
and paid on a monthly basis.
8. Services to Other Companies or Accounts.
(a) The Company understands that the Advisor now acts, will continue
to act and may act in the future as investment adviser to fiduciary and other
managed accounts, and may act in the future as investment adviser to other
investment companies, and the Company has no objection to the Advisor so
acting, provided that whenever the Fund and one or more fiduciary and other
managed accounts or other investment companies advised by the Advisor have
available funds for investment, investments suitable and appropriate for each
will be allocated in accordance with a formula believed by the Advisor to be
equitable to each. The Company recognizes that in some cases this procedure
may adversely affect the price paid or received by the Fund or the size of the
position obtained or disposed of by the Fund.
(b) The Company understands that the persons employed by the Advisor
to assist in the performance of the Advisor's duties under this Agreement will
not devote their full time to such service and nothing contained in this
Agreement will be deemed to limit or restrict the right of the Advisor or any
affiliate of the Advisor to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
9. Term of Agreement.
(a) This Agreement will become effective as of the date the Fund
commences its investment operations and will continue for an initial two-year
term and will continue thereafter so long as the continuance is specifically
approved at least annually by (i) the Board of Directors of the Company or (ii)
a vote of a "majority" (as defined in the Investment Company Act of 1940, as
amended (the " 1940 Act")) of the Fund's outstanding voting securities,
provided that in either event the continuance is also approved by a majority of
the Directors who are not "interested persons" (as defined in the 1940 Act) of
any party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on the approval.
(b) This Agreement is terminable, without penalty, on 60 days'
written notice, by the Board of Directors of the Company or by vote of holders
of a majority of the Fund's outstanding voting securities, or upon 60 days'
written notice, by the Advisor.
(c) This Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
<PAGE>
10. Representation by the Company.
The Company represents that a copy of the Articles of Incorporation
are on file with the Secretary of the State of Maryland.
11. Limitation of Liability.
The execution and delivery of this Agreement have been authorized by
the Board of Directors of the Company. No series of the Company, including the
Fund, will be liable for any claims against any other series.
12. Governing Law.
This agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the State of New York.
13. Other.
Upon expiration or earlier termination of this Agreement, the Company
shall, if reference to "Lehman" is made in the corporate name of the Company or
in the name of the Fund and if the Advisor requests in writing, as promptly as
practicable change its corporate name and the name of the Fund so as to
eliminate all reference to "Lehman", and thereafter the Company and the Fund
shall cease transacting business in any corporate name using the word "Lehman"
or containing any other reference to the Advisor or "Lehman." The foregoing
rights of the Advisor and the obligations of the Company shall not deprive the
Advisor, or any affiliate thereof which has "Lehman" in its name, of, but shall
be in addition to, any other rights or remedies to which the Advisor and any
such affiliate may be entitled in law or equity by reason of any breach of this
Agreement by the Company, and the failure and omission of the Advisor to
request a change of the Company's or the Fund's name or a cessation of the use
of the name of "Lehman" as described in this paragraph 10 shall not under any
circumstances be deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any subsequent breach.
<PAGE>
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
LEHMAN BROTHERS FUNDS, INC.
By:
Name:
Title:
Accepted:
LEHMAN BROTHERS GLOBAL
ASSET MANAGEMENT LIMITED
By:
Name:
Title:
<PAGE>
EXHIBIT 5(c)
LEHMAN BROTHERS FUNDS, INC.
Lehman Latin America Dollar Income Portfolio
FORM OF
INVESTMENT ADVISORY AGREEMENT
__________, 1994
Lehman Brothers Global Asset Management
Limited
Two Broadgate, 7th Floor
London EC2M 7HA, U.K.
Ladies and Gentlemen:
Lehman Brothers Funds, Inc. (the "Company"), a corporation organized
under the laws of the State of Maryland, confirms its agreement with Lehman
Brothers Global Asset Management Limited (the "Advisor") regarding investment
advisory services to be provided by the Advisor to Lehman Latin America Dollar
Income Portfolio (the "Fund"), a portfolio of the Company. The Advisor agrees
to provide services upon the following terms and conditions:
1. Investment Description; Appointment.
The Company anticipates that the Fund will employ its capital by
investing and reinvesting in investments of the kind and in accordance with the
limitations specified in the Company's Articles of Incorporation dated May 5,
1993, as amended from time to time (the "Articles of Incorporation"), in the
prospectus (the "Prospectus") and the statement of additional information (the
"Statement") describing the Fund filed with the Securities and Exchange
Commission as part of the Company's Registration Statement on Form N-1A, as
amended from time to time, and in the manner and to the extent as may from time
to time be approved by the Board of Directors of the Company. Copies of the
Prospectus, the Statement and the Articles of Incorporation have been or will
be submitted to the Advisor. The Company desires to employ and appoints the
Advisor to act as the Fund's investment adviser. The Advisor accepts the
appointment and agrees to furnish the services for the compensation set forth
below.
2. Services as Investment Advisor.
Subject to the supervision and direction of the Board of Directors of
the Company, the Advisor has general responsibility for the investment advisory
services provided to the Fund and will exercise this responsibility in
accordance with the Articles of Incorporation, the Investment Company Act of
1940 and the Investment Advisers Act of 1940, as the same may from time to time
be amended, and with the Fund's investment objective and policies as stated in
the Prospectus and Statement relating to the Fund as from time to time in
effect. In connection therewith, the Advisor will, among other things, (a)
<PAGE>
manage the Fund's portfolio in accordance with the Fund's investment objective
and policies as stated in the Prospectus and the Statement; (b) make investment
decisions for the Fund; (c) place orders to purchase and sell securities on
behalf of the Fund; (d) employ professional portfolio managers and securities
analysts who provide research services to the Fund; (e) participate in the
formulation of the Fund's investment policies; (f) analyze economic trends
affecting the Fund; and (g) monitor the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Act of 1934) that
are provided to the Fund and may be considered in selecting brokers or dealers
to execute particular transactions. In providing those services, the Advisor
will conduct a continual program of investment, evaluation and, if appropriate,
sale and reinvestment of the Fund's assets. In addition, the Advisor will
furnish the Fund with whatever statistical information the Fund may reasonably
request with respect to the instruments that the Fund may hold or contemplate
purchasing.
3. Information Provided to the Company.
The Advisor will keep the Company informed of developments materially
affecting the Fund, and will, on its own initiative, furnish the Company from
time to time with whatever information the Advisor believes is appropriate for
this purpose.
4. Standard of Care.
The Advisor will exercise its best judgment in rendering the services
described in paragraph 2 of this Agreement. The Advisor will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, except that
nothing in this Agreement may be deemed to protect or purport to protect the
Advisor against any liability to the Company or to shareholders of the Fund to
which the Advisor would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
by reason of the Advisor's reckless disregard of its obligations and duties
under this Agreement.
5. Compensation.
In consideration of the services rendered pursuant to this
Agreement, the Company will pay the Advisor on the first business day of each
month a fee for the previous month at the annual rate of 0.75% of the value of
the Fund's average daily net assets. The fee for the period from the date the
Fund commences its investment operations to the end of the month during which
the Fund commences its investment operations will be prorated according to the
proportion that the period bears to the full monthly period. Upon any
termination of this Agreement before the end of a month, the fee for such part
of that month will be prorated according to the proportion that the period
bears to the full monthly period and will be payable upon the date of
termination of this Agreement. For the purpose of determining fees payable to
the Advisor, the value of the Fund's net assets will be computed at the times
and in the manner specified in the Prospectus and/or the Statement.
6. Expenses.
The Advisor will bear all expenses in connection with the performance
of its services under this Agreement. The Company will be responsible for all
of the Fund's other expenses and liabilities, including but not limited to:
<PAGE>
costs incurred in connection with the Company's organization; investment
advisory, sub-investment advisory and administration fees; fees for necessary
professional and brokerage services; fees for any pricing service; the costs of
regulatory compliance; the costs associated with maintaining the Company's
legal existence; and the costs of corresponding with shareholders of the Fund.
7. Reduction of Fee.
If in any fiscal year of the Fund, the aggregate expenses of the Fund
(including fees pursuant to this Agreement, but excluding interest, taxes,
brokerage fees and, if permitted by the relevant state securities commissions,
extraordinary expenses or other expenses) exceed the expense limitation of any
state having jurisdiction over the Fund, the Advisor will reduce its fee to the
Fund for that excess expense, to the extent required by state law. A fee
reduction pursuant to this paragraph 7, if any, will be estimated, reconciled
and paid on a monthly basis.
8. Services to Other Companies or Accounts.
(a) The Company understands that the Advisor now acts, will continue
to act and may act in the future as investment adviser to fiduciary and other
managed accounts, and may act in the future as investment adviser to other
investment companies, and the Company has no objection to the Advisor so
acting, provided that whenever the Fund and one or more fiduciary and other
managed accounts or other investment companies advised by the Advisor have
available funds for investment, investments suitable and appropriate for each
will be allocated in accordance with a formula believed by the Advisor to be
equitable to each. The Company recognizes that in some cases this procedure
may adversely affect the price paid or received by the Fund or the size of the
position obtained or disposed of by the Fund.
(b) The Company understands that the persons employed by the Advisor
to assist in the performance of the Advisor's duties under this Agreement will
not devote their full time to such service and nothing contained in this
Agreement will be deemed to limit or restrict the right of the Advisor or any
affiliate of the Advisor to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
9. Term of Agreement.
(a) This Agreement will become effective as of the date the Fund
commences its investment operations and will continue for an initial two-year
term and will continue thereafter so long as the continuance is specifically
approved at least annually by (i) the Board of Directors of the Company or (ii)
a vote of a "majority" (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a majority of the
Directors who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on the approval.
(b) This Agreement is terminable, without penalty, on 60 days'
written notice, by the Board of Directors of the Company or by vote of holders
of a majority of the Fund's outstanding voting securities, or upon 60 days'
written notice, by the Advisor.
<PAGE>
(c) This Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
10. Representation by the Company.
The Company represents that a copy of the Articles of Incorporation
are on file with the Secretary of the State of Maryland.
11. Limitation of Liability.
The execution and delivery of this Agreement have been authorized by
the Board of Directors of the Company. No series of the Company, including the
Fund, will be liable for any claims against any other series.
12. Governing Law.
This agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the State of New York.
13. Other.
Upon expiration or earlier termination of this Agreement, the Company
shall, if reference to "Lehman" is made in the corporate name of the Company or
in the name of the Fund and if the Advisor requests in writing, as promptly as
practicable change its corporate name and the name of the Fund so as to
eliminate all reference to "Lehman", and thereafter the Company and the Fund
shall cease transacting business in any corporate name using the word "Lehman"
or containing any other reference to the Advisor or "Lehman." The foregoing
rights of the Advisor and the obligations of the Company shall not deprive the
Advisor, or any affiliate thereof which has "Lehman" in its name, of, but shall
be in addition to, any other rights or remedies to which the Advisor and any
such affiliate may be entitled in law or equity by reason of any breach of this
Agreement by the Company, and the failure and omission of the Advisor to
request a change of the Company's or the Fund's name or a cessation of the use
of the name of "Lehman" as described in this paragraph 10 shall not under any
circumstances be deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any subsequent breach.
<PAGE>
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
LEHMAN BROTHERS FUNDS, INC.
By:___________________________
Name:
Title:
Accepted:
LEHMAN BROTHERS GLOBAL ASSET
MANAGEMENT LIMITED
By:__________________________
Name:
Title:
<PAGE>
EXHIBIT 5(d)
LEHMAN BROTHERS INC.
American Express Tower
World Financial Center
New York, New York 10285
RESEARCH SERVICES AGREEMENT
Lehman Mexican Growth and Income Portfolio
___________, 1994
Lehman Brothers Global Asset Management Limited
Two Broadgate
London EC2M 7HA
England
Ladies and Gentlemen:
Lehman Brothers Inc., a Delaware corporation ("Lehman"), hereby
confirms its agreement with Lehman Brothers Global Asset Management Limited, a
United Kingdom company ("LBGAM"), regarding certain research services to be
furnished by Lehman to LBGAM in connection with LBGAM acting as investment
adviser to the Lehman Mexican Growth and Income Portfolio (the "Fund"), an
investment portfolio of Lehman Brothers Funds, Inc. (the "Company"). Lehman
agrees to provide services to LBGAM upon the following terms and conditions:
1. Investment Description.
LBGAM anticipates that the Fund will employ is capital by investing
and reinvesting in investments of the kind and in accordance with the
limitations specified in the Company's Articles of Incorporation dated May 5,
1993, as amended from time to time (the "Articles of Incorporation"), in the
prospectus (the "Prospectus") and the statement of additional information (the
"Statement") describing the Fund filed with the Securities and Exchange
Commission as part of the Company's Registration Statement on Form N-1A, as
amended from time to time, and in the manner and to the extent as may from time
to time be approved by the Board of Directors of the Company. Copies of the
Prospectus, the Statement and the Articles of Incorporation have been or will
be submitted to Lehman.
2. Research and Analytic Services.
(a) Lehman will establish a committee of research analysts (the
"Advisory Committee"), comprised of such employees of Lehman as Lehman shall
from time to time designate, to consult periodically with LBGAM with respect to
the management of the Fund. The Advisory Committee will consult with LBGAM
with respect to economic, political and market trends and developments
affecting Mexico, and may also consult with respect to particular investments.
<PAGE>
(b) Lehman will make available to LBGAM, upon LBGAM's request, such
research reports prepared by Lehman employees as Lehman shall make generally
available to its institutional clients with respect to (i) economic, political
and market trends and developments affecting Mexico and (ii) investments in
securities of Mexican issuers.
3. Standard of Care.
Lehman will not be liable for any error of judgment or mistake of law
or for any loss suffered by LBGAM or the Fund in connection with the matters to
which this Agreement relates, except that nothing in this Agreement may be
deemed to protect or purport to protect Lehman against any liability to LBGAM,
the Company or to shareholders of the Fund to which Lehman would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or by reason of the Lehman's reckless
disregard of its obligations and duties under this Agreement.
4. Compensation.
Lehman will receive no compensation pursuant to this Agreement for
the services which it performs hereunder. It is noted that Lehman and its
affiliates may receive compensation and other benefits for other services they
provide to the Fund, the Company or LGBAM.
5. Expenses.
Lehman will bear all expenses in connection with the performance of
its services under this Agreement. The Fund will bear all expenses incurred in
connection with its operation, and LBGAM will bear all expenses in connection
with its acting as investment adviser to the Fund.
6. Services to Other Clients or Accounts.
(a) LBGAM understands that Lehman now provides, and will continue to
provide in the future, research and analytic services to other clients or
accounts, including other investment companies, and nothing contained in this
Agreement shall be construed as limiting in any way Lehman's ability to
continue to provide such services to other clients or accounts, including other
investment companies.
(b) LBGAM understands that the persons employed by Lehman to assist
in the performance of Lehman's duties under this Agreement, including without
limitation the members of the Advisory Committee, will not devote their full
time to such service and nothing contained in this Agreement will be deemed to
limit or restrict the right of the Lehman or any affiliate or employee of
Lehman to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
7. Term of Agreement.
(a) This Agreement will become effective as of the earliest date
that the Fund commences its investment operations and will continue for an
initial two-year term and will continue thereafter so long as the continuance
is specifically approved at least annually by (i) the Board of Directors of the
Company or (ii) a vote of a "majority" (as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")) of the Fund's outstanding voting
securities, provided that in either event the continuance is also approved by a
<PAGE>
majority of the Board of Directors who are not "interested persons" (as defined
in the 1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on the approval.
(b) This Agreement is terminable, without penalty, (i) on 60 days'
written notice to LBGAM and Lehman, by the Board of Directors of the Company or
by vote of holders of a majority of the Fund's outstanding voting securities,
or (ii) on 90 days' written notice to the Company and the other party hereto,
by LBGAM or Lehman.
(c) This Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
8. Governing Law.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
LEHMAN BROTHERS INC.
By:_______________________________
Name:
Title:
Accepted:
LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED
By:____________________________
Name:
Title:
<PAGE>
EXHIBIT 5(d)
LEHMAN BROTHERS INC.
American Express Tower
World Financial Center
New York, New York 10285
RESEARCH SERVICES AGREEMENT
Lehman Latin America Dollar Income Portfolio
___________, 1994
Lehman Brothers Global Asset Management Limited
Two Broadgate
London EC2M 7HA
England
Ladies and Gentlemen:
Lehman Brothers Inc., a Delaware corporation ("Lehman"), hereby
confirms its agreement with Lehman Brothers Global Asset Management Limited, a
United Kingdom company ("LBGAM"), regarding certain research services to be
furnished by Lehman to LBGAM in connection with LBGAM acting as investment
adviser to the Lehman Latin America Dollar Income Portfolio (the "Fund"), an
investment portfolio of Lehman Brothers Funds, Inc. (the "Company"). Lehman
agrees to provide services to LBGAM upon the following terms and conditions:
1. Investment Description.
LBGAM anticipates that the Fund will employ is capital by investing
and reinvesting in investments of the kind and in accordance with the
limitations specified in the Company's Articles of Incorporation dated May 5,
1993, as amended from time to time (the "Articles of Incorporation"), in the
prospectus (the "Prospectus") and the statement of additional information (the
"Statement") describing the Fund filed with the Securities and Exchange
Commission as part of the Company's Registration Statement on Form N-1A, as
amended from time to time, and in the manner and to the extent as may from time
to time be approved by the Board of Directors of the Company. Copies of the
Prospectus, the Statement and the Articles of Incorporation have been or will
be submitted to Lehman.
2. Research and Analytic Services.
(a) Lehman will establish a committee of research analysts (the
"Advisory Committee"), comprised of such employees of Lehman as Lehman shall
from time to time designate, to consult periodically with LBGAM with respect to
the management of the Fund. The Advisory Committee will consult with LBGAM
with respect to economic, political and market trends and developments
affecting Latin America, and may also consult with respect to particular
investments.
<PAGE>
(b) Lehman will make available to LBGAM, upon LBGAM's request, such
research reports prepared by Lehman employees as Lehman shall make generally
available to its institutional clients with respect to (i) economic, political
and market trends and developments affecting Latin America and (ii) investments
in securities of Latin American issuers.
3. Standard of Care.
Lehman will not be liable for any error of judgment or mistake of law
or for any loss suffered by LBGAM or the Fund in connection with the matters to
which this Agreement relates, except that nothing in this Agreement may be
deemed to protect or purport to protect Lehman against any liability to LBGAM,
the Company or to shareholders of the Fund to which Lehman would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or by reason of the Lehman's reckless
disregard of its obligations and duties under this Agreement.
4. Compensation.
Lehman will receive no compensation pursuant to this Agreement for
the services which it performs hereunder. It is noted that Lehman and its
affiliates may receive compensation and other benefits for other services they
provide to the Fund, the Company or LGBAM.
5. Expenses.
Lehman will bear all expenses in connection with the performance of
its services under this Agreement. The Fund will bear all expenses incurred in
connection with its operation, and LBGAM will bear all expenses in connection
with its acting as investment adviser to the Fund.
6. Services to Other Clients or Accounts.
(a) LBGAM understands that Lehman now provides, and will continue to
provide in the future, research and analytic services to other clients or
accounts, including other investment companies, and nothing contained in this
Agreement shall be construed as limiting in any way Lehman's ability to
continue to provide such services to other clients or accounts, including other
investment companies.
(b) LBGAM understands that the persons employed by Lehman to assist
in the performance of Lehman's duties under this Agreement, including without
limitation the members of the Advisory Committee, will not devote their full
time to such service and nothing contained in this Agreement will be deemed to
limit or restrict the right of the Lehman or any affiliate or employee of
Lehman to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
7. Term of Agreement.
(a) This Agreement will become effective as of the earliest date
that the Fund commences its investment operations and will continue for an
initial two-year term and will continue thereafter so long as the continuance
is specifically approved at least annually by (i) the Board of Directors of the
Company or (ii) a vote of a "majority" (as defined in the Investment Company
Act of 1940, as amended (the "1940 Act")) of the Fund's outstanding voting
securities, provided that in either event the continuance is also approved by a
<PAGE>
majority of the Board of Directors who are not "interested persons" (as defined
in the 1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on the approval.
(b) This Agreement is terminable, without penalty, (i) on 60 days'
written notice to LBGAM and Lehman, by the Board of Directors of the Company or
by vote of holders of a majority of the Fund's outstanding voting securities,
or (ii) on 90 days' written notice to the Company and the other party hereto,
by LBGAM or Lehman.
(c) This Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
8. Governing Law.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
LEHMAN BROTHERS INC.
By:_______________________________
Name:
Title:
Accepted:
LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED
By:____________________________
Name:
Title:
<PAGE>
Exhibit 11
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Auditors"
in the Statement of Additional Information and to the use of our report dated
July 15, 1993 with respect to the statement of assets and liabilities of Lehman
Brothers Daily Income Fund and Lehman Brothers Municipal Income Fund
(Portfolios of Lehman Brothers Funds, Inc.) included in Post-Effective
Amendment No. 2 to the Registration Statement Number 33-62312 on Form N-1A of
Lehman Brothers, Inc.
/s/ERNST & YOUNG
ERNST & YOUNG
Boston, Massachusetts
January 13, 1994
<PAGE>
EXHIBIT 13(b)
LEHMAN BROTHERS FUNDS, INC.
FORM OF
PURCHASE AGREEMENT
Lehman Brothers Funds, Inc. (the "Company"), a Maryland corporation,
and Lehman Brothers Inc. (the "Distributor"), hereby agree as follows:
1. The Company hereby offers the Distributor and the Distributor
hereby purchases 1 share of each of the Company's Lehman Brothers Daily Income
Fund CDSC Shares, Lehman Brothers Municipal Income Fund CDSC Shares, each with
par value of $.001 per share (the "New Classes"), Lehman Latin America Dollar
Income Portfolio, Lehman Mexican Growth and Income Portfolio and Lehman
Selected Growth Stock Portfolio, each with par value of $.001 per share (the
"Portfolios"), for a total of 5 shares (the "Shares"). Each Share of the New
Classes is purchased at the price of $1.00 per share, and each Share of the
Portfolios is purchased at the price of $10.00 per share. The Shares are the
"initial shares" of the Portfolios or New Classes, as the case may be. The
Distributor hereby acknowledges receipt of a purchase confirmation reflecting
the purchase of 5 Shares, and the Company hereby acknowledges receipt from the
Distributor of funds in the amount of $32.00 in full payment for the Shares.
2. The Distributor represents and warrants to the Company that the
Shares are being acquired for investment purposes and not for the purpose of
distribution.
3. The Distributor agrees that if it or any direct or indirect
transferee of the Shares redeems the Shares prior to the fifth anniversary of
the date that the Company begins its investment activities, the Distributor
will pay to the Company an amount equal to the number resulting from
multiplying the Company's total unamortized organizational expenses by a
fraction, the numerator of which is equal to the number of Shares redeemed by
the Distributor or such transferee and the denominator of which is equal to the
number of Shares outstanding as of the date of such redemption, as long as the
administrative position of the staff of the Securities and Exchange Commission
requires such reimbursement.
4. The Company represents that a copy of its Amended Articles of
Incorporation is on file in the Office of the Secretary of the State of
Maryland.
5. This Agreement has been executed on behalf of the Company by the
undersigned officer of the Company in his capacity as an officer of the
Company. The obligations of this Agreement shall be binding only upon the
assets and property of each individual Portfolio and not upon the assets and
property of any other portfolio of the Company and shall not be binding upon
any Director, officer or shareholder of a Portfolio or the Company
individually.
6. This agreement shall be governed by, and construed and
interpreted in accordance with, the law of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the ____ day of January, 1994
LEHMAN BROTHERS FUNDS, INC.
Attest:
By:
Name:
Title:
Attest: LEHMAN BROTHERS INC.
By:
Name:
Title:
<PAGE>
EXHIBIT 10
[Letterhead of Piper & Marbury]
January 10, 1994
Lehman Brothers Funds, Inc.
200 Vesey Street
New York, New York 10285
Ladies and Gentlemen:
As special Maryland counsel to Lehman Brothers Funds, Inc., a
Maryland corporation (the "Corporation"), in connection with the registration
under the Securities Act of 1933, as amended, of up to the 10,000,000,000
shares of Common Stock of the Corporation (the "Shares") authorized by its
charter, we have examined the Amended Articles of Incorporation of the
Corporation filed with the Maryland State Department of Assessments and
Taxation (the "SDAT") on July 14, 1993, the Certificate of Correction filed
with the SDAT on October 6, 1993, the By-Laws of the Corporation, minutes of
the proceedings of the Corporation's Board of Directors authorizing the
organization of the Corporation and the issuance of its outstanding capital
stock and the corporate action proposed to be taken by the Board of Directors
of the Corporation classifying and reclassifying the Shares and authorizing
their issuance and the filing with the SDAT of Articles Supplementary
reflecting such classification and reclassification. We have additionally
examined the Certificate of Corporate Officer dated the date hereof (the
"Certificate"). In rendering our opinion, we are relying on the Certificate
and have made no independent investigation or inquiries as to the matters set
forth therein.
Based on our examination, we advise you that in our opinion the Shares to be
issued by the Corporation have been duly and validly authorized and upon (i)
final action by the Board of Directors of the Corporation classifying and
reclassifying the Shares and authorizing their issuance, (ii) the execution and
filing and acceptance for record by the SDAT of Articles Supplementary
classifying and reclassifying the Shares and (iii) their issuance upon the
terms set forth in the Registration Statement on Form N-1A of the Corporation
filed with the Securities and Exchange Commission (the "Commission"), will be
legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the Prospectus. In giving our consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section
7 of the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Piper & Marbury
<PAGE>
EXHIBIT 15(b)
LEHMAN BROTHERS FUNDS, INC.
SERVICES AND DISTRIBUTION PLAN
This Services and Distribution Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act") by Lehman Brothers Funds, Inc., a corporation
organized under the laws of the State of Maryland (the "Company"), with respect
to those classes (each, a "Class") of its investment portfolios (each, a
"Fund") listed in Appendix A, as amended from time to time, subject to the
following terms and conditions:
Section 1. Annual Fees.
(a) Service Fee. Each Fund will pay to the distributor of its
shares, Lehman Brothers Incorporated, a corporation organized under the laws of
the State of Delaware (the "Distributor"), on behalf of each Class of such
Fund, a service fee under the Plan at the annual rate of .25% of the average
daily net assets of such Fund attributable to each such Class (the "Service
Fee").
(b) Distribution Fee. In addition to the Service Fee, each Fund
will pay to the Distributor, on behalf of each Class of such Fund, a
distribution fee under the Plan at the annual rate set forth opposite the name
of such Class on Appendix A hereto of the average daily net assets of such Fund
attributable to each such Class (the "Distribution Fee").
(c) Payment of Fees. The Service Fee and Distribution Fee will be
calculated daily and paid monthly by each Fund with respect to each Class at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan.
(a) The Distribution Fee with respect to a Fund may be used by the
Distributor to cover advertising, marketing and distribution expenses intended
to result in the sale of the Fund's shares, including, without limitation,
compensation for the Distributor's initial expense of paying its investment
representatives or introducing brokers a commission upon the sale of the Fund's
shares and accruals for interest on the amount of the foregoing expenses that
exceed the Distribution Fee and, if applicable, the contingent deferred sales
charge received by the Distributor. In addition, the Service Fee with respect
to a Fund may be used by the Distributor primarily to pay its financial
consultants or introducing brokers for servicing shareholder accounts,
including a continuing fee to each such financial consultant or introducing
broker, which fee shall begin to accrue immediately after the sale of such
shares.
(b) The amount of the Distribution Fee and Service Fee payable by
any Fund under Section 1 hereof is not related directly to expenses incurred by
the Distributor and this Section 2 does not obligate a Fund to reimburse the
Distributor for such expenses. The Distribution Fee and Service Fee set forth
in Section 1 will be paid by a Fund to the Distributor unless and until the
Plan is terminated or not renewed with respect to a Fund or Class thereof, any
<PAGE>
Class thereof, any distribution or service expenses incurred by the Distributor
on behalf of a Fund in excess of payments of the Distribution and Service Fees
specified in Section 1 hereof which the Distributor has accrued through the
termination date are the sole responsibility and liability of the Distributor
and not an obligation of a Fund.
Section 3. Approval of Shareholders.
The Plan will not take effect with respect to a particular Class of a
Fund, and no fee will be payable in accordance with Section 1 of the Plan,
until the Plan has been approved by a vote of at least a majority of the
outstanding voting securities of such Class.
Section 4. Approval of Directors.
Neither the Plan nor any related agreements will take effect with
respect to a Fund until approved by a majority vote of both (a) the full Board
of Directors of the Company and (b) those Directors who are not interested
persons of the Company and who have no direct or indirect financial interest in
the operation of the Plan or in any agreements related to it (the "Independent
Directors"), cast in person at a meeting called for the purpose of voting on
the Plan and the related agreements.
Section 5. Continuation of the Plan.
The Plan will continue in effect from year to year with respect to
each Class of a Fund, so long as its continuance is specifically approved
annually by vote of the Company's Board of Directors in the manner described in
Section 4 above.
Section 6. Termination.
The Plan may be terminated with respect to a Class of a Fund at any
time, without the payment of any penalty, by the vote of majority of the
outstanding voting securities (as so defined) of such Class of such Fund or by
a vote of a majority of the Independent Directors, in any such event on sixty
days' written notice to the Distributor. The Plan may remain in effect with
respect to a particular Class of a Fund even if the Plan has been terminated in
accordance with this Section 6 with respect to any other Class of the Fund or
of any other Fund.
Section 7. Amendments.
The Plan may not be amended with respect to a Class of a Fund so as
to increase materially the amounts of the fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of such Class of such Fund. No
material amendment to the Plan may be made unless approved by the Company's
Board of Directors in the manner described in Section 4 above.
Section 8. Selection of Certain Directors.
While the Plan is in effect, the selection and nomination of the
Company's Directors who are not interested persons of the Company will be
committed to the discretion of the Directors then in office who are not
interested persons of the Company.
<PAGE>
Section 9. Written Reports.
In each year during which the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by a Fund with
respect to a Class pursuant to the Plan or any related agreement will prepare
and furnish to the Company's Board of Directors and the Board will review, at
least quarterly, written reports, complying with the requirements of the Rule,
which set out the amounts expended under the Plan and the purposes for which
those expenditures were made.
Section 10. Preservation of Materials.
The Company will preserve copies of the Plan, any agreement relating
to the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act and the rules and regulations under the
1940 Act, subject to any exemption that may be granted to the Company under the
1940 Act by the Securities and Exchange Commission.
Section 12. Filing of Articles of Incorporation.
The Company represents that a copy of its Amended Articles of
Incorporation as amended from time to time (the "Articles of Incorporation"),
is on file with the Secretary of the State of Maryland.
Section 13. Limitation of Liability.
The obligations of the Company under this Plan will not be binding
upon any of the Directors of the Company, shareholders of the Funds, nominees,
officers, employees or agents, whether past, present or future, of the Company,
individually, but are binding only upon the assets and property of the Funds,
as provided in the Articles of Incorporation. The execution and delivery of
this plan have been authorized by the Directors of the Company, and signed by
an authorized officer of the Company, acting as such, and neither the
authorization by the Directors nor the execution and delivery by the officer
will be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but will bind only the property of the
Funds as provided in the Articles of Incorporation. No fund will be liable for
any claims against any other Fund.
Section 14. Dates.
The Plan has been executed by the Company with respect to each Fund
as of ______, 1994 and will become effective with respect to each Class of a
Fund upon the date such Fund first commences its investment operations.
<PAGE>
Section 15. Governing Law.
This Agreement shall be governed by, and construed and interpreted in
accordance with, the law of the State of New York.
LEHMAN BROTHERS FUNDS, INC.
By:
Name:
Title: President
<PAGE>
APPENDIX A
Distribution Fee
(expressed as an annual
rate of the average
daily net assets of the
Fund attributable to
Name of Fund Name of Class that Class)
Lehman Mexican Growth (The only existing .75%
and Income Portfolio class)
Lehman Latin America (The only existing .50%
Dollar Income class)
Portfolio
Lehman Selected Growth (The only existing .75%
Stock Portfolio class)
<PAGE>
