0000930413-05-008266.txt : 20111205 0000930413-05-008266.hdr.sgml : 20111205 20051215162740 ACCESSION NUMBER: 0000930413-05-008266 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20051215 DATE AS OF CHANGE: 20051215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAZARD FUNDS INC CENTRAL INDEX KEY: 0000874964 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-40682 FILM NUMBER: 051266947 BUSINESS ADDRESS: STREET 1: STATE STREET BANK & TRUST CO STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 2126326000 MAIL ADDRESS: STREET 1: STATE STREET BANK & TRUST CO STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAZARD FUNDS INC CENTRAL INDEX KEY: 0000874964 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06312 FILM NUMBER: 051266948 BUSINESS ADDRESS: STREET 1: STATE STREET BANK & TRUST CO STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 2126326000 MAIL ADDRESS: STREET 1: STATE STREET BANK & TRUST CO STREET 2: PO BOX 9110 CITY: BOSTON STATE: MA ZIP: 02109 485APOS 1 c40137_485apos.txt Securities Act File No. 33-40682 Investment Company Act File No. 811-06312 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/ Post-Effective Amendment No. 37 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/ Amendment No. 37 /X/ (Check appropriate box or boxes) THE LAZARD FUNDS, INC. -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) (212) 632-6000 -------------------------------------------------------------------------------- (Registrant's Telephone Number, including Area Code) 30 Rockefeller Plaza, New York, New York 10112 -------------------------------------------------------------------------------- (Address of Principal Executive: Number, Street, City, State, Zip Code) Nathan A. Paul, Esq. 30 Rockefeller Plaza New York, New York 10112 (Name and Address of Agent for Services) copy to: Stuart H. Coleman, Esq. Janna Manes, Esq. Stroock & Stroock & Lavan LLP 180 Maiden Lane New York, New York 10038-4982 It is proposed that this filing will become effective (check appropriate box) immediately upon filing pursuant to paragraph (b) ----- on (DATE) pursuant to paragraph (b) ----- 60 days after filing pursuant to paragraph (a)(1) ----- on (DATE) pursuant to paragraph (a) (1) ----- X 75 days after filing pursuant to paragraph (a) (2) ----- on (DATE) pursuant to paragraph (a) (2) of Rule 485. ----- If appropriate, check the following box: this post-effective amendment designates a new effective date for a ----- previously filed post-effective amendment. Subject to Completion, December 15, 2005 Prospectus Lazard Funds Lazard U.S. Small Cap Equity Growth Portfolio ___________, 2006 ------------------ As with all mutual funds, the Securities and Exchange Commission has not approved or disapproved the shares described in this Prospectus or determined whether this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. [LAZARD LOGO] PRIVACY NOTICE REGARDING SHAREHOLDER FINANCIAL INFORMATION The Lazard Funds, Inc. (the "Fund") recognizes and appreciates the importance of respecting the privacy of our shareholders. Our shareholders' trust is our most important asset, and we are committed to safeguarding against the unauthorized use of, and access to, shareholder information. This Privacy Notice explains our current policies and practices with respect to non-public personal information of our prospective, current and former shareholders. In order to adequately service its shareholders, the Fund regularly collects certain non-public personal information about its shareholders. We limit the collection of information to the minimum amount required to deliver useful products and superior service to our shareholders, to comply with legal requirements and to support our business needs. We may collect non-public personal information about you from the following sources: o Information we receive from you on applications, questionnaires or other forms, including, but not limited to, your name, address, social security or other tax identification number, age, employment information, assets owned and income. o Information about your transactions with us, our affiliates or others, such as your account balance and holdings, payment history and transaction information. o Information we may receive from our due diligence, such as your creditworthiness and your credit history. o Information obtained from our communications and correspondence with you. The Fund does not disclose any non-public personal information about its shareholders or former shareholders to any third party, except as required by law. The Fund may, however, disclose such non-public personal information to its affiliates in order to provide products or services to you or to support our business needs. In order to maintain the confidentiality of such information, we restrict access to non-public information about our shareholders to those employees who need to know that information. We maintain physical, electronic and procedural safeguards to guard the non-public personal information of our shareholders and former shareholders. Please note that the Fund will treat your information as confidential, as described above. It is not necessary for you to respond to this notice or to separately request confidentiality. TABLE OF CONTENTS -------------------------------------------------------------------------------- PAGE -------------------------------------------- 1 OVERVIEW -------------------------------------------- -------------------------------------------- CAREFULLY REVIEW THIS IMPORTANT 2 INVESTMENT OBJECTIVE, STRATEGIES, SECTION FOR INFORMATION ON THE RISK/RETURN AND EXPENSES PORTFOLIO'S INVESTMENT OBJECTIVE, -------------------------------------------- STRATEGIES, RISKS, PAST PERFORMANCE AND FEES. 2 Lazard U.S. Small Cap Equity Growth Portfolio -------------------------------------------- REVIEW THIS SECTION FOR DETAILS ON 4 FUND MANAGEMENT THE PEOPLE AND ORGANIZATIONS WHO -------------------------------------------- OVERSEE THE PORTFOLIO. 4 Investment Manager 4 Principal Portfolio Managers 4 Administrator 4 Distributor 4 Custodian REVIEW THIS SECTION FOR DETAILS ON -------------------------------------------- HOW SHARES ARE VALUED, HOW TO 4 SHAREHOLDER INFORMATION PURCHASE, SELL AND EXCHANGE SHARES, -------------------------------------------- RELATED CHARGES AND PAYMENTS OF DIVIDENDS AND DISTRIBUTIONS. 4 General 5 How to Buy Shares 7 Distribution and Servicing Arrangements 7 How to Sell Shares 8 Investor Services 8 General Policies 8 Account Policies, Dividends and Taxes -------------------------------------------- 10 PERFORMANCE INFORMATION FOR RELATED ACCOUNTS -------------------------------------------- WHERE TO LEARN MORE ABOUT THE -------------------------------------------- PORTFOLIO. BACK COVER -------------------------------------------- -------------------------------------------------------------------------------- LAZARD ASSET MANAGEMENT LLC SERVES AS THE PORTFOLIO'S INVESTMENT MANAGER. -------------------------------------------------------------------------------- OVERVIEW ================================================================================ The Portfolios The Lazard Funds, Inc. (the "Fund") consists of twelve separate Portfolios, one of which is being offered through this Prospectus. Because you could lose money by investing in the Portfolio, be sure to read all risk disclosures carefully before investing. You should be aware that the Portfolio: o is not a bank deposit o is not guaranteed, endorsed or insured by any bank, financial institution or government entity, such as the Federal Deposit Insurance Corporation o is not guaranteed to achieve its stated goals The Portfolio offers Institutional Shares and Open Shares, which have different investment minimums and different expense ratios. INFORMATION ON THE PORTFOLIO'S RECENT STRATEGIES AND HOLDINGS WILL BE AVAILABLE IN ITS ANNUAL/SEMI-ANNUAL REPORT (SEE BACK COVER). Who May Want to Invest? The Portfolio invests primarily in equity securities, including common stocks, preferred stocks and convertible securities. The Portfolio's investment manager, Lazard Asset Management LLC (the "Investment Manager"), seeks to identify undervalued securities and focuses on individual stock selection rather than on general stock market trends. Consider investing in the Portfolio if you are: x pursuing a long-term goal such as retirement x looking to add an equity component to your investment portfolio x willing to accept the higher risks of investing in the stock market in exchange for potentially higher long-term returns The Portfolio may not be appropriate if you are: x pursuing a short-term goal or investing emergency reserves x uncomfortable with an investment that will fluctuate in value 1 INVESTMENT OBJECTIVE, STRATEGIES, RISK/RETURN AND EXPENSES ================================================================================ LAZARD U.S. SMALL CAP EQUITY GROWTH PORTFOLIO TICKER SYMBOL [ ] (Institutional) [ ] (Open) INVESTMENT OBJECTIVE The Portfolio seeks long-term capital appreciation. PRINCIPAL INVESTMENT STRATEGIES The Portfolio invests primarily in equity securities, principally common stocks, of small cap U.S. companies that the Investment Manager identifies using a relative growth strategy. The Investment Manager follows a bottom-up, fundamental approach to stock selection, seeking to invest in companies that exhibit substantial growth opportunities, strong business models, solid management teams and the potential for earnings surprises, which the Investment Manager believes may produce superior long-term results. Relative valuations determine the appropriate price to purchase or sell securities. The Fund emphasizes smaller companies positioned in new or emerging industries where the Investment Manager believes there is opportunity for significant growth. These companies may include relatively new or unseasoned companies in their early stage of development. In many instances, a company may be in an industry segment that is small but could become much larger as it matures, so that not only does the company have potential for growth but the market opportunity may be expanding as well. The Investment Manager considers "small cap companies" for the Portfolio to be those companies that, at the time of initial purchase by the Portfolio, have market capitalizations generally in the range of companies included in the Russell 2000(R) Growth Index. Under normal circumstances, the Portfolio invests at least 80% of its assets in equity securities of small cap U.S. companies. These securities generally have, in the Investment Manager's opinion, one or more of the following characteristics: o improving operating trends and profitability o superior earnings and sales growth opportunity o attractive relative valuation The Portfolio may invest up to 20% of its assets in equity securities of larger U.S. companies. The Portfolio may engage, to a limited extent, in various investment techniques, such as lending portfolio securities. Under adverse market conditions, the Portfolio could invest some or all of its assets in money market securities. The Portfolio might do this to seek to avoid or mitigate losses, but it may result in the Portfolio not achieving its investment objective. PRINCIPAL INVESTMENT RISKS While stocks have historically been a leading choice of long-term investors, they do fluctuate in price, often based on factors unrelated to the issuer's value. Small cap companies carry additional risks because their earnings tend to be less predictable, their share prices more volatile and their securities less liquid than larger, more established companies. In addition, small companies may lack the management experience, financial resources, product diversification and competitive strength of larger companies. Growth companies often have relatively higher price-to-earnings, price-to-book and price-to-sales ratios and may be more volatile than value stocks. The value of your investment in the Portfolio will fluctuate, which means you could lose money. The tendency of shares of smaller companies to trade less frequently than those of larger companies can have an adverse effect on the pricing of these securities and on the ability to sell these securities when the Investment Manager deems it appropriate. Because the Portfolio will invest in a smaller number of issuers than other, more diversified investment portfolios, the Portfolio's net asset value may be relatively more susceptible to adverse effects from any single corporate, economic, market, political or regulatory occurrence than if the Portfolio's investments consisted of a larger number of securities. The Portfolio may lend its portfolio securities to brokers, dealers and other financial institutions. When the Portfolio lends securities, there is a risk that the loaned securities may not be returned during normal settlement periods if the borrower defaults. PERFORMANCE BAR CHART AND TABLE Because the Portfolio had not commenced investment operations prior to the date of this Prospectus, no performance returns are presented in this part of the Prospectus. Annual performance returns provide some indication of the risks of investing in the Portfolio by showing changes in performance from year to year. Comparison of Portfolio performance to an appropriate index indicates how the Portfolio's average annual returns compare with those of a broad measure of market performance. 2 FEES AND EXPENSES As an investor, you pay certain fees and expenses in connection with buying and holding Portfolio shares. The accompanying table illustrates those fees and expenses. Keep in mind that the Portfolio has no sales charge (load). Shareholder transaction fees are paid from your account. Annual portfolio operating expenses are paid out of Portfolio assets and are reflected in the share price. INSTITUTIONAL OPEN SHARES SHARES -------------------------------------------------------------------------------- SHAREHOLDER TRANSACTION FEES Maximum Redemption Fee (as a % of amount redeemed) CHARGED ONLY WHEN SELLING OR EXCHANGING SHARES YOU HAVE OWNED FOR 30 DAYS OR LESS. 1.00% 1.00% -------------------------------------------------------------------------------- ANNUAL PORTFOLIO OPERATING EXPENSES -------------------------------------------------------------------------------- Management Fees % % -------------------------------------------------------------------------------- Distribution and Service (12b-1) Fees None .25% -------------------------------------------------------------------------------- Other Expenses* % % -------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses % % -------------------------------------------------------------------------------- Fee Waiver and Expense Reimbursement** % % -------------------------------------------------------------------------------- Net Expenses** % % -------------------------------------------------------------------------------- * "Other Expenses" are based on estimated amounts for the current fiscal year. ** Reflects a contractual obligation by the Investment Manager to waive its fee and, if necessary, to reimburse the Portfolio through December 31, 2006, to the extent Total Annual Portfolio Operating Expenses exceed [ ]% and [ ]% of the average daily net assets of the Portfolio's Institutional Shares and Open Shares, respectively. EXPENSE EXAMPLE Use the accompanying table to compare the Portfolio's fees and expenses with those of other funds. It illustrates the amount of fees and expenses you would pay, assuming the following: o $10,000 initial investment o 5% annual return each year o redemption at the end of each period o no changes in operating expenses, except for the first year of the periods reflected in the table, which is based on the net expenses pursuant to the contractual agreement. Because this example is hypothetical and for comparison only, your actual costs may be higher or lower. 1 3 LAZARD U.S. SMALL CAP EQUITY GROWTH PORTFOLIO YEAR YEARS INSTITUTIONAL SHARES $ $ -------------------------------------------------------------------------------- OPEN SHARES $ $ -------------------------------------------------------------------------------- 3 FUND MANAGEMENT ================================================================================ INVESTMENT MANAGER Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, New York 10112-6300, serves as the Investment Manager of the Portfolio. The Investment Manager provides day-to-day management of the Portfolio's investments and assists in the overall management of the Fund's affairs. The Investment Manager and its global affiliates provide investment management services to client discretionary accounts with assets totaling approximately $[ ] billion as of December 31, 2005. Its clients are both individuals and institutions, some of whose accounts have investment policies similar to those of the Portfolio. The Fund has agreed to pay the Investment Manager an investment management fee at an annual rate of [ ]% of the Portfolio's average daily net assets. The investment management fees are accrued daily and paid monthly. PRINCIPAL PORTFOLIO MANAGERS The Portfolio is managed on a team basis, with each team member involved at all levels of the investment process. Kip Knelman and James P. Tatera are jointly and primarily responsible for the day-to-day management of the assets of the Portfolio. Messrs. Knelman and Tatera joined the Investment Manager in February 2005 when the Investment Manager acquired substantially all of the assets of Knelman Asset Management Group, LLC ("Knelman"). BIOGRAPHICAL INFORMATION OF PRINCIPAL PORTFOLIO MANAGERS I.P. "KIP" KNELMAN. Mr. Knelman, a Director of the Investment Manager, is a portfolio manager on the U.S. Equity Growth and U.S. Small Cap Equity Growth teams. Prior to joining the Investment Manager, Mr. Knelman was Senior Managing Partner of Knelman. From 1979 to 1998, he held various positions at Investment Advisers, Inc, including President and Chief Executive Officer. Mr. Knelman has also served as a board member of Lloyd's Bank/TSB Asset Management Group and began his career in the investment field with Kidder, Peabody and Company. JAMES P. TATERA. Mr. Tatera, a Senior Vice President of the Investment Manager, is a portfolio manager on the U.S. Equity Growth and U.S. Small Cap Equity Growth teams. Prior to joining the Investment Manager, Mr. Tatera was a Managing Partner and Chief Investment Officer of Knelman. Prior to joining Knelman, Mr. Tatera was Senior Vice President and Chief Equity Officer of Advantus Capital Management. He is a Chartered Financial Analyst Charterholder. Additional information about the portfolio managers' compensation, other accounts managed by the portfolio managers and the portfolio managers' ownership of shares of the Portfolio is contained in the Fund's Statement of Additional Information ("SAI"). ADMINISTRATOR State Street Bank and Trust Company ("State Street"), located at 225 Franklin Street, Boston, Massachusetts 02110, serves as the Portfolio's administrator. DISTRIBUTOR Lazard Asset Management Securities LLC (the "Distributor") acts as distributor for the Fund's shares. CUSTODIAN State Street acts as custodian of the Portfolio's investments. State Street may enter into subcustodial arrangements on behalf of the Portfolio for the holding of foreign securities. SHAREHOLDER INFORMATION ================================================================================ GENERAL -------------------------------------------------------------------------------- Portfolio shares are sold and redeemed, without a sales charge, on a continuous basis at the net asset value per share ("NAV") next determined after an order in proper form is received by the Fund's Transfer Agent, Boston Financial Data Services, Inc., or another authorized entity. The Fund will determine the net asset value of Portfolio shares as of the close of regular session trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time). The New York Stock Exchange is closed on certain national holidays listed in the Fund's SAI. The Fund values equity securities for which market quotations are readily available at market value. Securities and other assets for which current market quotations are not readily available are valued at fair value as determined in good faith in accordance with procedures approved by the Board of Directors. If events materially affecting the value of securities occur between the close of the exchange or market on which the security is principally traded and the time when the Portfolio's NAV is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board of Directors. The effect of using fair value pricing is that the NAV of the Portfolio will reflect the affected securities' values as determined in the judgment of the Board of Directors or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from the most recent closing price of a security and from the prices used by other investment companies to calculate their portfolios' net asset values. Foreign securities may trade on days when the Portfolio is not open for business, thus affecting the value of the Portfolio's assets on days when Portfolio shareholders may not be able to buy or sell Portfolio shares. 4 FUND MANAGEMENT (CONCLUDED) -------------------------------------------------------------------------------- MINIMUM INVESTMENT All purchases made by check should be in U.S. Dollars and made payable to "The Lazard Funds, Inc." Third party checks will not be accepted. The Fund will not accept cash or cash equivalents (such as currency, money orders or travelers checks) for the purchase of Portfolio shares. Please note the following minimums in effect for initial investments: Institutional Shares $1,000,000 -------------------------------------------------------------- Open Shares $ 10,000 -------------------------------------------------------------- IRA Rollover/Transfer (Open Shares only) $ 10,000 There are no subsequent investment minimums. HOW TO BUY SHARES -------------------------------------------------------------------------------- THROUGH THE TRANSFER AGENT: Shareholders who do not execute trades through a brokerage account should submit their purchase requests to the Transfer Agent by telephone or mail, as follows: INITIAL PURCHASE BY MAIL ------- 1. Complete a Purchase Application. Indicate the services to be used. 2. Mail the Purchase Application and a check for $10,000 or more for Open Shares, or $1,000,000 or more for Institutional Shares, payable to "The Lazard Funds, Inc." to: The Lazard Funds, Inc. P.O. Box 8514 Boston, Massachusetts 02266-8514 Attention: (Name of Portfolio and Class of Shares) BY WIRE ------- 1. Call (800) 986-3455 toll-free from any state and provide the following: o the Portfolio and Class of shares to be invested in o name(s) in which shares are to be registered o address o social security or tax identification number o dividend payment election o amount to be wired o name of the wiring bank, and o name and telephone number of the person to be contacted in connection with the order. An account number will then be assigned. 2. Instruct the wiring bank to transmit the specified amount in federal funds, giving the wiring bank the account name(s) and assigned account number, to State Street: ABA #: 011000028 State Street Bank and Trust Company Boston, Massachusetts Custody and Shareholder Services Division DDA 9905-2375 Attention: (Name of Portfolio and Class of Shares) The Lazard Funds, Inc. Shareholder's Name and Account Number 3. Complete a Purchase Application. Indicate the services to be used. Mail the Purchase Application to the address set forth in Item 2 under "Initial Purchase--By Mail" above. ADDITIONAL PURCHASES BY MAIL ------- 1. Make a check payable to "The Lazard Funds, Inc." Write the shareholder's account number on the check. 2. Mail the check and the detachable stub from the Statement of Account (or a letter providing the account number) to the address set forth in Item 2 under "Initial Purchase--By Mail" above. BY WIRE ------- Instruct the wiring bank to transmit the specified amount in federal funds to State Street, as instructed in Item 2 under "Initial Purchase--By Wire" above. 5 SHAREHOLDER INFORMATION (CONTINUED) ================================================================================ THROUGH A LAZARD BROKERAGE ACCOUNT Shareholders who have a brokerage account with Lazard Capital Markets LLC ("Lazard") should contact their account representative for specific instructions on how to purchase Portfolio shares. PURCHASES THROUGH THE AUTOMATIC INVESTMENT PLAN (OPEN SHARES ONLY) Investors may participate in the Automatic Investment Plan by purchasing Open Shares of the Portfolio at regular intervals selected by the investor. The Automatic Investment Plan enables an investor to make regularly scheduled investments and may provide investors with a convenient way to invest for long-term financial goals. An account must be opened with a minimum investment of $10,000. To obtain an Automatic Investment Plan application, call the Fund at (800) 823-6300. INDIVIDUAL RETIREMENT ACCOUNTS (OPEN SHARES ONLY) The Fund may be used as an investment for IRAs. Completion of a Lazard Funds IRA application is required. For a Direct IRA Account (an account other than an IRA rollover) a $5 establishment fee and a $12 annual maintenance and custody fee is payable to State Street for each IRA Fund account; in addition, a $10 termination fee will be charged and paid to State Street when the account is closed. For more information on IRAs, call the Fund at (800) 823-6300. MARKET TIMING/EXCESSIVE TRADING The Portfolio is intended to be a long-term investment vehicle and is not designed to provide investors with a means of speculating on short-term market movements. Excessive trading, market timing or other abusive trading practices may disrupt investment management strategies and harm performance and may create increased transaction and administrative costs that must be borne by the Portfolio and its shareholders, including those not engaged in such activity. In addition, such activity may dilute the value of Portfolio shares held by long-term investors. The Fund's Board of Directors has approved policies and procedures with respect to frequent purchases and redemptions of Portfolio shares that are intended to discourage and prevent these practices, including regular monitoring of trading activity in Portfolio shares. The Fund will not knowingly accommodate excessive trading, market timing or other abusive trading practices. To discourage attempts to arbitrage pricing of international securities (among other reasons), the Board has adopted policies and procedures providing that if events materially affecting the value of securities occur between the close of the exchange or market on which the security is principally traded and the time when the Portfolio's NAV is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board. See "Shareholder Information--General." The Fund's and the Investment Manager's codes of ethics in respect of personal trading contain limitations on trading in Portfolio shares. The Portfolio reserves the right to refuse, with or without notice, any purchase or exchange request that could adversely affect the Portfolio, its operations or its shareholders, including those requests from any individual or group who, in the Fund's view, is likely to engage in excessive trading, market timing or other abusive trading practices, and where a particular account appears to be engaged in abusive trading practices, the Fund will seek to restrict future purchases of Portfolio shares by that account or may temporarily or permanently terminate the availability of the exchange privilege, or reject in whole or part any exchange request, with respect to such investor's account. Multiple accounts under common ownership or control may be considered one account for purposes of determining a pattern of excessive trading practices. An investor who makes more than six exchanges with the Portfolio during any twelve-month period, or who makes exchanges that appear to coincide with a market timing strategy, may be deemed to be engaged in excessive trading. The Portfolio deducts a 1.00% redemption fee on sales of shares owned for 30 days or less (not charged on shares acquired through reinvestment of dividends or distributions), except that no redemption fee will be charged with respect to shares purchased through certain omnibus account and other service arrangements established by certain brokers and other financial intermediaries and approved by the Distributor. See "Shareholder Information--How to Sell Shares--Redemption Fee" below. As described below, the Fund may take up to seven days to pay redemption proceeds. This may occur when, among other circumstances, the investor redeeming shares is engaged in excessive trading. The Fund's policy on abusive trading practices does not apply to automatic investment or automatic exchange privileges. All of the policies described in the first paragraph of this section apply uniformly to all Portfolio accounts. However, while the Fund and the Investment Manager will take reasonable steps to prevent trading practices deemed to be harmful to the Portfolio by monitoring Portfolio share trading activity, they may not be able to prevent or identify such trading. The Fund's ability to monitor, and impose restrictions on, trading conducted through certain financial intermediaries or omnibus accounts may be severely limited due to the lack of access by the Fund or its service providers to information about such trading activity. If the Fund is not able to prevent abusive trading practices, such trading may disrupt investment strategies, harm performance and increase costs to all Portfolio investors, including those not engaged in such activity. See the first paragraph in this section. 6 SHAREHOLDER INFORMATION (CONTINUED) ================================================================================ DISTRIBUTION AND SERVICING ARRANGEMENTS (OPEN SHARES ONLY) -------------------------------------------------------------------------------- The Fund has adopted a plan under rule 12b-1 that allows the Portfolio to pay the Distributor a fee, at the annual rate of .25% of the value of the average daily net assets of the Portfolio's Open Shares, for distribution and services provided to holders of Open Shares. Because these fees are paid out of the Portfolio's assets on an on-going basis, over time these recurring fees may cost shareholders more than paying other types of sales charges. Third parties may receive payments pursuant to the Fund's 12b-1 plan and/or from the Investment Manager or its affiliates in connection with their offering of Portfolio shares to their customers and/or for providing shareholder servicing, distribution or other services. The receipt of such payments could create an incentive for the third party to offer the Portfolio instead of other mutual funds where such payments are not received. Consult your financial representative or institution for further information. HOW TO SELL SHARES -------------------------------------------------------------------------------- GENERAL Checks for sale proceeds ordinarily will be mailed within seven days. Where the shares to be sold have been purchased by check or through the Automatic Investment Plan, the sale proceeds, net of applicable redemption fee, will be transmitted to you promptly upon bank clearance of your purchase check, which may take up to 15 calendar days. Redemption requests may also be satisfied, in whole or in part, through a redemption-in-kind (a payment in portfolio securities instead of cash). REDEMPTION FEE The Portfolio will impose a redemption fee equal to 1.00% of the NAV of Portfolio shares acquired by purchase or exchange and redeemed or exchanged within 30 days after such shares were acquired. This fee will be calculated based on the shares' NAV at redemption and deducted from the redemption proceeds. The fee will be retained by the Portfolio and used primarily to offset the transaction costs that short-term trading imposes on the Portfolio and its remaining shareholders. The redemption fee will not apply to shares acquired through the reinvestment of dividends or distributions. For purposes of calculating the 30-day holding period, the Fund will first redeem shares acquired through the reinvestment of dividends or distributions and then will employ the "first in, first out" method, which assumes that the shares redeemed or exchanged are the ones held the longest. In addition, no redemption fee will be charged on the redemption or exchange of shares purchased through certain omnibus account and other service arrangements established by certain brokers and other financial intermediaries and approved by the Distributor. The redemption fee may be waived, modified or terminated at any time, or from time to time. SELLING SHARES THROUGH THE TRANSFER AGENT: Shareholders who do not execute trades through a brokerage account should submit their sale requests to the Transfer Agent by telephone or mail, as follows: BY TELEPHONE: A shareholder may redeem shares by calling the Transfer Agent. To redeem shares by telephone, the shareholder must have properly completed and submitted to the Transfer Agent either a Purchase Application authorizing such redemption or a Telephone Redemption Authorization Form. To place a redemption request, or to have telephone redemption privileges added to your account, please call the Transfer Agent's toll-free number, (800) 986-3455. In order to confirm that telephone instructions for redemptions are genuine, the Fund has established reasonable procedures to be employed by the Fund and the Transfer Agent, including the requirement that a form of personal identification be provided. BY MAIL: 1. Write a letter of instruction to the Fund. Indicate the dollar amount or number of shares to be sold, the Portfolio and Class, the shareholder's account number, and social security or taxpayer identification number. 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the account, all must sign. 3. If shares to be sold have a value of $50,000 or more, the signature(s) must be guaranteed by a domestic bank, savings and loan institution, domestic credit union, member bank of the Federal Reserve System, broker-dealer, registered securities association or clearing agency, or other participant in a signature guarantee program. SIGNATURE GUARANTEES BY A NOTARY PUBLIC ARE NOT ACCEPTABLE. Further documentation may be requested to evidence the authority of the person or entity making the redemption request. In addition, all redemption requests that include instructions for redemption proceeds to be sent somewhere other than the address on file must be signature guaranteed. 4. Mail the letter to the Transfer Agent at the following address: The Lazard Funds, Inc. P.O. Box 8514 Boston, Massachusetts 02266-8514 Attention: (Name of Portfolio and Class of Shares) THROUGH A LAZARD BROKERAGE ACCOUNT: Shareholders who have a brokerage account with Lazard should contact their account representative for specific instructions on how to sell Portfolio shares. 7 SHAREHOLDER INFORMATION (CONTINUED) ================================================================================ INVESTOR SERVICES -------------------------------------------------------------------------------- AUTOMATIC REINVESTMENT PLAN allows your dividends and capital gain distributions to be reinvested in additional shares of the Portfolio or another Portfolio of the Fund. AUTOMATIC INVESTMENTS allows you to purchase Open Shares through automatic deductions from a designated bank account. EXCHANGE PRIVILEGE allows you to exchange shares of one Portfolio of the Fund that have been held for seven days or more for shares of the same Class of another Portfolio of the Fund in an identically registered account. Shares will be exchanged at the next determined NAV, subject to any applicable redemption fee. There is no other cost associated with this service. All exchanges are subject to the minimum initial investment requirements. A shareholder may exchange shares by writing or calling the Transfer Agent. To exchange shares by telephone, the shareholder must have properly completed and submitted to the Transfer Agent either a Purchase Application authorizing such exchanges or a signed letter requesting that the exchange privilege be added to the account. The Transfer Agent's toll-free number for exchanges is (800) 986-3455. In order to confirm that telephone instructions for exchanges are genuine, the Fund has established reasonable procedures to be employed by the Fund and the Transfer Agent, including the requirement that a form of personal identification be provided. The Fund reserves the right to limit the number of times shares may be exchanged between Portfolios of the Fund, to reject any telephone exchange order, or to otherwise modify or discontinue the exchange privilege at any time. If an exchange request is refused, the Fund will take no other action with respect to the shares until it receives further instructions from the investor. See "Shareholder Information--How to Buy Shares--Market Timing/Excessive Trading" for more information about restrictions on exchanges. GENERAL POLICIES -------------------------------------------------------------------------------- In addition to the policies described above, the Fund reserves the right to: o redeem an account, with notice, if the value of the account falls below $1,000 due to redemptions o convert Institutional Shares held by a shareholder whose account is less than $1,000,000 to Open Shares, upon written notice to the shareholder o suspend redemptions or postpone payments when the NYSE is closed for any reason other than its usual weekend or holiday closings or when trading is restricted by the Securities and Exchange Commission (the "SEC") o change or waive the required minimum investment amounts o delay sending out redemption proceeds for up to seven days (this usually applies to very large redemptions received without notice, excessive trading, or during unusual market conditions) o make a redemption-in-kind (a payment in portfolio securities instead of in cash) if it is determined that a redemption is too large and/or may cause harm to the Portfolio and its shareholders Also in addition to the policies described above, the Fund may refuse or restrict purchase or exchange requests for Portfolio shares by any person or group if, in the judgment of the Fund's management: o the Portfolio would be unable to invest the money effectively in accordance with its investment objective and policies or could otherwise be adversely affected o if the Portfolio receives or anticipates receiving simultaneous orders that may significantly affect the Portfolio (e.g., amounts equal to 1% or more of the Portfolio's total assets) ACCOUNT POLICIES, DIVIDENDS AND TAXES -------------------------------------------------------------------------------- ACCOUNT STATEMENTS You will receive quarterly statements detailing your account activity. All investors will also receive an annual statement detailing the tax characteristics of any dividends and distributions that you have received in your account. You will also receive confirmations after each trade executed in your account. To reduce expenses, only one copy of the most recent annual and semi-annual reports of the Fund may be mailed to your household, even if you have more than one account with the Fund. Call the Transfer Agent at the telephone number listed on the inside back cover if you need additional copies of annual or semi-annual reports or account information. DIVIDENDS AND DISTRIBUTIONS Income dividends are normally declared and paid annually, but may be declared and paid more frequently. Net capital gains, if any, are normally distributed annually but may be distributed more frequently. Capital gain distributions estimates may be available prior to payment and may be obtained by calling (800) 823-6300 or going to the Fund's website at www.LazardNet.com. Dividends and distributions of the Portfolio will be invested in additional shares of the same Class of the Portfolio at the NAV on the ex-dividend date, and credited to the shareholder's account on the payment date or, at 8 SHAREHOLDER INFORMATION (CONTINUED) ================================================================================ the shareholder's election, paid in cash. Each share Class of the Portfolio will generate a different dividend because each has different expenses. Dividend checks and account statements will be mailed approximately two business days after the payment date. TAX INFORMATION Please be aware that the following tax information is general and refers to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), which are in effect as of the date of this Prospectus. You should consult a tax adviser about the status of your distributions from the Portfolio. All dividends and short-term capital gains distributions are generally taxable to you as ordinary income, whether you receive the distribution in cash or reinvest it in additional shares. An exchange of the Portfolio's shares for shares of another Portfolio of the Fund will be treated as a sale of the Portfolio's shares, and any gain on the transaction may be subject to income taxes. Keep in mind that distributions may be taxable to you at different rates which depend on the length of time the Portfolio held the applicable investment, not the length of time that you held your Portfolio shares. The tax status of any distribution is the same regardless of how long you have been in the Portfolio and whether you reinvest your distributions or take them in cash. High portfolio turnover and more volatile markets can result in taxable distributions to shareholders, regardless of whether their shares increased in value. When you do sell your Portfolio shares, a taxable capital gain or loss may be realized, except for IRA or other tax-deferred accounts. Federal law requires the Portfolio to withhold taxes on distributions paid to shareholders who: o fail to provide a social security number or taxpayer identification number o fail to certify that their social security number or taxpayer identification number is correct o fail to certify that they are exempt from withholding 9 PERFORMANCE INFORMATION FOR RELATED ACCOUNTS ================================================================================ LAZARD U.S. SMALL CAP EQUITY GROWTH COMPOSITE THIS IS NOT THE PORTFOLIO'S PERFORMANCE Lazard U.S. Small Cap Equity Growth Portfolio had not commenced operations prior to the date of this Prospectus and, therefore, does not have its own performance record. However, the Portfolio's investment objective, policies and strategies are substantially similar to those used by the Investment Manager in advising certain discretionary accounts (the "Other Accounts"). The chart below shows the historical investment performance for a composite (the "U.S. Small Cap Equity Growth Composite") of the Other Accounts and for the Portfolio's benchmark index. The U.S. Small Cap Equity Growth Composite should not be interpreted as indicative of the Portfolio's future performance. Annual Total Returns for the Year Ended December 31, -------------------------------------------------------------------------------- 2003 2004 2005 -------------------------------------------------------------------------------- U.S. SMALL CAP EQUITY GROWTH COMPOSITE 51.5% 11.7% % -------------------------------------------------------------------------------- RUSSELL 2000(R) GROWTH INDEX* 48.5% 14.3% % -------------------------------------------------------------------------------- Average Annual Total Returns (for the periods ended December 31, 2005) -------------------------------------------------------------------------------- INCEPTION SINCE DATE ONE YEAR THREE YEARS INCEPTION -------------------------------------------------------------------------------- U.S. SMALL CAP EQUITY GROWTH COMPOSITE 1/1/03 % % % -------------------------------------------------------------------------------- RUSSELL 2000(R) GROWTH INDEX* N/A % % % -------------------------------------------------------------------------------- ---------- * The Russell 2000(R) Growth Index is an unmanaged index which measures the performance of those Russell 2000 companies (the 2,000 smallest companies in the Russell 3000 Index, which consists of the 3,000 largest U.S. companies by capitalization) with higher price-to-book ratios and higher forecasted growth values. Certain Other Accounts may not be subject to certain investment limitations, diversification requirements and other restrictions imposed by the Investment Company Act of 1940, as amended, and the Code which, if applicable, may have adversely affected the performance of the U.S. Small Cap Equity Growth Composite. The performance results of the U.S. Small Cap Equity Growth Composite reflect actual fees charged to the Other Accounts. They do not reflect the estimated fees and expenses to be incurred by the Portfolio, which, if reflected, would have reduced returns. Additionally, although it is anticipated that the Portfolio and the Other Accounts will hold similar securities, their investment results are expected to differ. In particular, differences in asset size and cash flows may result in different securities selections, differences in the relative weightings of securities or differences in the prices paid for particular portfolio holdings. The returns of the U.S. Small Cap Equity Growth Composite are dollar-weighted based upon beginning period market values. This calculation methodology differs from guidelines of the Securities and Exchange Commission for calculating performance of mutual funds. 10 For more information about the Portfolio, the following documents are available free upon request: ANNUAL AND SEMI-ANNUAL REPORTS (REPORTS): The Fund's annual and semi-annual reports to shareholders contain additional information on the Portfolio's investments. In the annual report, you will find a broad discussion of the market conditions and investments strategies that significantly affected the Portfolio's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed information about the Portfolio, including its operations and investment policies. It is incorporated by reference and is legally considered a part of this Prospectus. DISCLOSURE OF PORTFOLIO HOLDINGS The Portfolio will publicly disclose its portfolio holdings on a calendar quarter-end basis on its website accessible from http://www.lazardnet.com/lam/us/lazardfunds.shtml, approximately 14 days after such quarter end. The information will remain accessible until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information was current. A description of the Fund's policies and procedures with respect to the disclosure of the Portfolio's portfolio holdings is available in the Fund's SAI. -------------------------------------------------------------------------------- You can get a free copy of the Reports and the SAI at http://www.LazardNet.com, or request other information and discuss your questions about the Portfolio, by contacting the Fund at: The Lazard Funds, Inc. 30 Rockefeller Plaza New York, New York 10112-6300 Telephone: (800) 823-6300 http://www.LazardNet.com -------------------------------------------------------------------------------- You can review the Reports and the SAI at the Public Reference Room of the SEC in Washington, D.C. For information, call (202) 942-8090. You can get text-only copies: o After paying a duplicating fee, by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102, or by e-mail request to publicinfo@sec.gov. o Free from the SEC's Website at http://www.sec.gov. Investment Company Act file no. 811-06312 ================================================================================ INVESTMENT MANAGER Lazard Asset Management LLC 30 Rockefeller Plaza New York, New York 10112-6300 Telephone: (800) 823-6300 DISTRIBUTOR Lazard Asset Management Securities LLC 30 Rockefeller Plaza New York, New York 10112-6300 CUSTODIAN State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 TRANSFER AGENT AND DIVIDEND DISBURSING AGENT Boston Financial Data Services, Inc. P.O. Box 8514 Boston, Massachusetts 02266-8514 Telephone: (800) 986-3455 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM LEGAL COUNSEL Stroock & Stroock & Lavan LLP 180 Maiden Lane New York, New York 10038-4982 http://www.stroock.com (C) 2006 The Lazard Funds, Inc. and Lazard Asset Management Securities LLC No person has been authorized to give any information or to make any representations not contained in this Prospectus, and information or representations not contained herein must not be relied upon as having been authorized by the Fund or the Distributor. This Prospectus does not constitute an offer of any security other than the registered securities to which it relates or an offer to any person in any jurisdiction where such offer would be unlawful. [LOGO] [LAZARD The Lazard Funds, Inc. 30 Rockefeller Plaza Tel 800-823-6300 LOGO] New York, NY 10112-6300 www.LazardNet.com SUBJECT TO COMPLETION, DECEMBER 15, 2005 THE LAZARD FUNDS, INC. 30 Rockefeller Plaza New York, New York 10112-6300 (800) 823-6300 STATEMENT OF ADDITIONAL INFORMATION ____________, 2006 The Lazard Funds, Inc. (the "Fund") is a no-load, open-end management investment company known as a mutual fund. This Statement of Additional Information, which is not a prospectus, supplements and should be read in conjunction with the current Prospectuses of the Fund, dated September 30, 2005 for Lazard U.S. Equity Value Portfolio and Lazard International Strategic Equity Portfolio; __________, 2006 for Lazard U.S. Small Cap Equity Growth Portfolio; and May 1, 2005, for the other Portfolios, as each may be revised from time to time, relating to the following twelve portfolios (individually, a "Portfolio" and collectively, the "Portfolios"):
Lazard Equity Portfolio Lazard International Equity Portfolio Lazard U.S. Equity Value Portfolio Lazard International Equity Select Portfolio Lazard U.S. Strategic Equity Portfolio Lazard International Strategic Equity Portfolio Lazard Mid Cap Portfolio Lazard International Small Cap Portfolio Lazard Small Cap Portfolio Lazard Emerging Markets Portfolio Lazard U.S. Small Cap Equity Growth Portfolio Lazard High Yield Portfolio
SHARES OF LAZARD U.S. EQUITY VALUE PORTFOLIO ARE NOT CURRENTLY BEING OFFERED. Each Portfolio currently offers two classes of shares--Institutional Shares and Open Shares. Institutional Shares and Open Shares are identical, except as to minimum investment requirements and the services offered to and expenses borne by each Class. To obtain a copy of the Fund's Prospectuses, please write or call the Fund at the address and telephone number above. The Fund's most recent Annual Report and Semi-Annual Report to Shareholders are separate documents supplied with this Statement of Additional Information, and the financial statements, accompanying notes and report of independent registered public accounting firm appearing in the Annual Report are incorporated by reference into this Statement of Additional Information. ================================================================================ TABLE OF CONTENTS Page ============================================================================= Description of the Fund and Portfolios......................................1 Investment Restrictions....................................................20 Management.................................................................23 Determination of Net Asset Value...........................................37 Portfolio Transactions.....................................................38 How to Buy and How to Sell Shares..........................................42 Distribution and Servicing Plan (Open Shares Only).........................44 Dividends and Distributions................................................45 Taxation...................................................................45 Additional Information About the Fund and Portfolios.......................49 Counsel and Independent Registered Public Accounting Firm..................57 Appendix...................................................................58 DESCRIPTION OF THE FUND AND PORTFOLIOS The Fund is a Maryland corporation organized on May 17, 1991. Each Portfolio is a separate series of the Fund, an open-end management investment company, known as a mutual fund. Each Portfolio is a diversified investment company, which means that, with respect to 75% of its total assets, the Portfolio will not invest more than 5% of its total assets in the securities of any single issuer nor hold more than 10% of the outstanding voting securities of any single issuer. Lazard Asset Management LLC serves as the investment manager (the "Investment Manager") to each of the Portfolios. Lazard Asset Management Securities LLC (the "Distributor") is the distributor of each Portfolio's shares. CERTAIN PORTFOLIO SECURITIES The following information supplements and should be read in conjunction with the Fund's Prospectuses. DEPOSITARY RECEIPTS. (All Portfolios, except Small Cap Portfolio) Each Portfolio may invest in the securities of foreign issuers in the form of American Depositary Receipts and American Depositary Shares (collectively, "ADRs") and Global Depositary Receipts and Global Depositary Shares (collectively, "GDRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. GDRs are receipts issued outside the United States, typically by non-United States banks and trust companies, that evidence ownership of either foreign or domestic securities. Generally, ADRs in registered form are designed for use in the United States securities markets and GDRs in bearer form are designed for use outside the United States. These securities may be purchased through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary. A depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities, and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities. FOREIGN GOVERNMENT OBLIGATIONS; SECURITIES OF SUPRANATIONAL ENTITIES. (All Portfolios, except Small Cap Portfolio) Each Portfolio may invest in obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions, agencies or instrumentalities that are determined by the Investment Manager to be of comparable quality to the other obligations in which the Portfolio may invest. Such securities also include debt obligations of supranational entities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Coal and Steel Community, the Asian Development Bank and the InterAmerican Development Bank. FOREIGN SECURITIES. (All Portfolios, except Small Cap Portfolio) Each Portfolio may invest in non-U.S. securities as described in the Portfolio's Prospectus. FIXED-INCOME SECURITIES. (All Portfolios) Each fixed-income Portfolio may invest in fixed-income securities as described in the Prospectus. In addition, Equity, U.S. Equity Value and U.S. Strategic Equity Portfolios each may invest up to 20% of its assets in U.S. Government securities and investment grade debt obligations of U.S. corporations; Mid Cap, Small Cap and International Small Cap Portfolios may each invest up to 20% of its assets in investment grade debt securities; and International Equity, International Equity Select and International Strategic Equity Portfolios may each invest up to 20% of its assets in investment grade fixed-income securities and short-term money market instruments. CONVERTIBLE SECURITIES. (All Portfolios) Convertible securities may be converted at either a stated price or stated rate into underlying shares of common stock. Convertible securities have characteristics similar to both fixed-income and equity securities. 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. Although to a lesser extent than with fixed-income securities, 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 stock. 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. Convertible securities provide for a stable stream of income with generally higher yields than common stocks, but there can be no assurance of current income because the issuers of the convertible securities may default on their obligations. 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 offer lower interest or dividend yields than non-convertible securities of similar quality because of the potential for capital appreciation. WARRANTS. (All Portfolios) A warrant is a form of derivative that gives the holder the right to subscribe to a specified amount of the issuing corporation's capital stock at a set price for a specified period of time. A Portfolio may invest up to 5% of its total assets in warrants, except that this limitation does not apply to warrants purchased by the Portfolio that are sold in units with, or attached to, other securities. PARTICIPATION INTERESTS. (All Portfolios) Each Portfolio may purchase from financial institutions participation interests in securities in which the Portfolio may invest. Each Portfolio may invest in corporate obligations denominated in U.S. or (except Equity and Small Cap Portfolios) foreign currencies that are originated, negotiated and structured by a syndicate of 2 lenders ("Co-Lenders") consisting of commercial banks, thrift institutions, insurance companies, financial companies or other financial institutions one or more of which administers the security on behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell such securities to third parties called "Participants." Each Portfolio may invest in such securities either by participating as a Co-Lender at origination or by acquiring an interest in the security from a Co-Lender or a Participant (collectively, "participation interests"). Co-Lenders and Participants interposed between the Portfolio and the corporate borrower (the "Borrower"), together with Agent Banks, are referred to herein as "Intermediate Participants." Each Portfolio also may purchase a participation interest in a portion of the rights of an Intermediate Participant, which would not establish any direct relationship between the Fund, on behalf of the Portfolio, and the Borrower. A participation interest gives the Portfolio an undivided interest in the security in the proportion that the Portfolio's participation interest bears to the total principal amount of the security. These instruments may have fixed, floating or variable rates of interest with remaining maturities of 13 months or less. If the participation interest is unrated, or has been given a rating below that which is permissible for purchase by the Portfolio, the participation interest will be collateralized by U.S. Government securities, or, in the case of unrated participation interests, the Investment Manager must have determined that the instrument is of comparable quality to those instruments in which the Portfolio may invest. The Portfolio would be required to rely on the Intermediate Participant that sold the participation interest not only for the enforcement of the Portfolio's rights against the Borrower, but also for the receipt and processing of payments due to the Portfolio under the security. Because it may be necessary to assert through an Intermediate Participant such rights as may exist against the Borrower, if the Borrower fails to pay principal and interest when due the Portfolio may be subject to delays, expenses and risks that are greater than those that would be involved if the Portfolio were to enforce its rights directly against the Borrower. Moreover, under the terms of a participation interest, the Portfolio may be regarded as a creditor of the Intermediate Participant (rather than of the Borrower), so that the Portfolio also may be subject to the risk that the Intermediate Participant may become insolvent. Similar risks may arise with respect to the Agent Bank if, for example, assets held by the Agent Bank for the benefit of the Portfolio were determined by the appropriate regulatory authority or court to be subject to the claims of the Agent Bank's creditors. In such case, the Portfolio might incur certain costs and delays in realizing payment in connection with the participation interest or suffer a loss of principal and/or interest. Further, in the event of the bankruptcy or insolvency of the Borrower, the obligation of the Borrower to repay the loan may be subject to certain defenses that can be asserted by such Borrower as a result of improper conduct by the Agent Bank or Intermediate Participant. VARIABLE AND FLOATING RATE SECURITIES. (All Portfolios) Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as a change in the prime rate. Each Portfolio may invest in floating rate debt instruments ("floaters"). The interest rate on a floater is a variable rate which is tied to another interest rate, such as a money-market index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. Because of the interest rate reset feature, floaters provide the Portfolio with a certain degree of protection against rises in interest rates, although the Portfolio will participate in any declines in interest rates as well. Each Portfolio also may invest in inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed or inversely to a multiple of the applicable index. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality. 3 MUNICIPAL OBLIGATIONS. (High Yield Portfolio) Municipal obligations are debt obligations issued by states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, or multi-state agencies or authorities, to obtain funds for various public purposes, and include certain industrial development bonds issued by or on behalf of public authorities. Municipal obligations are classified as general obligation bonds, revenue bonds and notes. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable from the revenue derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source, but not from the general taxing power. Industrial development bonds, in most cases, are revenue bonds and generally do not carry the pledge of the credit of the issuing municipality, but generally are guaranteed by the corporate entity on whose behalf they are issued. Notes are short-term instruments which are obligations of the issuing municipalities or agencies and are sold in anticipation of a bond sale, collection of taxes or receipt of other revenues. Municipal obligations include municipal lease/purchase agreements which are similar to installment purchase contracts for property or equipment issued by municipalities. Municipal obligations bear fixed, floating or variable rates of interest which are determined in some instances by formulas under which the municipal obligation's interest rate will change directly or inversely to changes in interest rates or an index, or multiples thereof, in many cases subject to a maximum and minimum. Certain municipal obligations are subject to redemption at a date earlier than their stated maturity pursuant to call options, which may be separated from the related municipal obligations and purchased and sold separately. High Yield Portfolio also may acquire call options on specific municipal obligations. The Portfolio generally would purchase these call options to protect it from the issuer of the related municipal obligation redeeming, or other holder of the call option from calling away, the municipal obligation before maturity. While, in general, municipal obligations are tax exempt securities having relatively low yields as compared to taxable, non-municipal obligations of similar quality, certain municipal obligations are taxable obligations offering yields comparable to, and in some cases greater than, the yields available on other permissible Portfolio investments. Dividends received by shareholders on Portfolio shares which are attributable to interest income received by the Portfolio from municipal obligations generally will be subject to federal income tax. High Yield Portfolio may invest in municipal obligations, the ratings of which correspond with the ratings of other permissible Portfolio investments. The Portfolio currently intends to invest no more than 25% of its assets in municipal obligations. However, this percentage may be varied from time to time without shareholder approval. ZERO COUPON, PAY-IN-KIND AND STEP UP SECURITIES. (High Yield Portfolio) High Yield Portfolio may invest in zero coupon U.S. Treasury securities, which are Treasury Notes and Bonds that have been stripped of their unmatured interest coupons, the coupons themselves and receipts or certificates representing interests in such stripped debt obligations and coupons. Zero coupon securities also are issued by corporations and financial institutions which constitute a proportionate ownership of the issuer's pool of underlying U.S. Treasury securities. A zero coupon security pays no interest to its holder during its life and is sold at a discount to its face value at maturity. The Portfolio may invest in pay-in-kind bonds which are bonds which generally pay interest through the issuance of additional bonds. High Yield Portfolio also may purchase step up coupon bonds which are debt securities which typically do not pay interest for a specified period of time and then pay interest at a series of different rates. The market prices of these securities generally are more volatile and are likely to respond to a greater degree to changes in interest rates than the market prices of securities that pay interest periodically having similar maturities and credit qualities. In addition, unlike bonds that pay interest throughout the period to maturity, the Portfolio will realize no cash until the cash payment date unless a portion of such securities are sold and, if the issuer defaults, the Portfolio may obtain no return at all on its investment. Federal income tax law requires the holder of a zero coupon security or of certain pay-in-kind or step up bonds to accrue income 4 with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income taxes, High Yield Portfolio may be required to distribute such income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. MORTGAGE-RELATED SECURITIES. (High Yield Portfolio and, to a limited extent, Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap and U.S. Small Cap Equity Growth Portfolios) Mortgage-related securities are a form of derivative collateralized by pools of commercial or residential mortgages. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations. These securities may include complex instruments such as collateralized mortgage obligations and stripped mortgage-backed securities, mortgage pass-through securities, interests in real estate mortgage investment conduits ("REMICs"), adjustable rate mortgages, real estate investment trusts or other kinds of mortgage-backed securities, including those with fixed, floating and variable interest rates, those with interest rates based on multiples of changes in a specified index of interest rates and those with interest rates that change inversely to changes in interest rates, as well as those that do not bear interest. RESIDENTIAL MORTGAGE-RELATED SECURITIES. Each of these Portfolios may invest in mortgage-related securities representing participation interests in pools of one- to four-family residential mortgage loans issued by governmental agencies or instrumentalities, such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by private entities. Similar to commercial mortgage-related securities, residential mortgage-related securities have been issued using a variety of structures, including multi-class structures featuring senior and subordinated classes. Mortgage-related securities issued by GNMA include GNMA Mortgage Pass-Through Certificates (also know as "Ginnie Maes") which are guaranteed as to the timely payment of principal and interest by GNMA and such guarantee is backed by the full faith and credit of the United States. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. Mortgage-related securities issued by FNMA include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are solely the obligations of FNMA and are not backed by or entitled to the full faith and credit of the United States. Fannie Maes are guaranteed as to timely payment of principal and interest by FNMA. Mortgage-related securities issued by FHLMC include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs"). Freddie Macs are not guaranteed by the United States or by any Federal Home Loan Bank and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. COMMERCIAL MORTGAGE-RELATED SECURITIES. Each of these Portfolios may invest in commercial mortgage-related securities which generally are multi-class debt or pass-through certificates secured by mortgage loans on commercial properties. Similar to residential mortgage-related securities, commercial mortgage-related securities have been issued using a variety of structures, including multi-class structures featuring senior and subordinated classes. These mortgage-related securities generally are constructed to provide protection to the senior classes investors against potential losses on the underlying mortgage loans. This protection is generally provided by having the holders of the subordinated class of securities 5 ("Subordinated Securities") take the first loss if there are defaults on the underlying commercial mortgage loans. Other protection, which may benefit all of the classes or particular classes, may include issuer guarantees, reserve funds, additional Subordinated Securities, cross-collateralization and over-collateralization. SUBORDINATED SECURITIES. Each of these Portfolios may invest in Subordinated Securities issued or sponsored by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Subordinated Securities have no governmental guarantee, and are subordinated in some manner as to the payment of principal and/or interest to the holders of more senior mortgage-related securities arising out of the same pool of mortgages. The holders of Subordinated Securities typically are compensated with a higher stated yield than are the holders of more senior mortgage-related securities. On the other hand, Subordinated Securities typically subject the holder to greater risk than senior mortgage-related securities and tend to be rated in a lower rating category, and frequently a substantially lower rating category, than the senior mortgage-related securities issued in respect of the same pool of mortgage. Subordinated Securities generally are likely to be more sensitive to changes in prepayment and interest rates and the market for such securities may be less liquid than is the case for traditional fixed-income securities and senior mortgage-related securities. COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND MULTI-CLASS PASS-THROUGH SECURITIES. Each of these Portfolios may invest in CMOs, which are multiclass bonds backed by pools of mortgage pass-through certificates or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie Mae or FHLMC pass-through certificates, (b) unsecuritized mortgage loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans' Affairs, (c) unsecuritized conventional mortgages, (d) other mortgage-related securities or (e) any combination thereof. Each class of CMOs, often referred to as a "tranche," is issued at a specific coupon rate and has a stated maturity or final distribution date. Principal prepayments on collateral underlying a CMO may cause it to be retired substantially earlier than the stated maturities or final distribution dates. The principal and interest on the underlying mortgages may be allocated among the several classes of a series of a CMO in many ways. One or more tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index, such as the London Interbank Offered Rate ("LIBOR") (or sometimes more than one index). These floating rate CMOs typically are issued with lifetime caps on the coupon rate thereon. Each of these Portfolios also may invest in inverse floating rate CMOs. Inverse floating rate CMOs constitute a tranche of a CMO with a coupon rate that moves in the reverse direction to an applicable index such as the LIBOR. Accordingly, the coupon rate thereon will increase as interest rates decrease. Inverse floating rate CMOs are typically more volatile than fixed or floating rate tranches of CMOs. High Yield Portfolio may invest, to a limited extent, in residual interests in real estate mortgage investment conduits ("REMICs"). See "Taxation." Many inverse floating rate CMOs have coupons that move inversely to a multiple of the applicable indexes. The coupon varying inversely to a multiple of an applicable index creates a leverage factor. Inverse floaters based on multiples of a stated index are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and loss of principal. The markets for inverse floating rate CMOs with highly leveraged characteristics may at times be very thin. Each Portfolio's ability to dispose of its positions in such securities will depend on the degree of liquidity in the markets for such securities. It is impossible to predict the amount of trading interest that may exist in such securities, and therefore the future degree of liquidity. STRIPPED MORTGAGE-BACKED SECURITIES. Each of these Portfolios also may invest in stripped mortgage-backed securities which are created by segregating the cash flows from underlying mortgage 6 loans or mortgage securities to create two or more new securities, each with a specified percentage of the underlying security's principal or interest payments. Mortgage securities may be partially stripped so that each investor class received some interest and some principal. When securities are completely stripped, however, all of the interest is distributed to holders of one type of security, known as an interest-only security, or IO, and all of the principal is distributed to holders of another type of security known as a principal-only security, or PO. Strips can be created in a pass-through structure or as tranches of a CMO. The yields to maturity on IOs and POs are very sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Portfolio may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal, the yield on POs could be materially and adversely affected. PRIVATE ENTITY SECURITIES. Each of these Portfolios may invest in mortgage-related securities issued by commercial banks, savings and loan institutions, mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Timely payment of principal and interest on mortgage-related securities backed by pools created by non-governmental issuers often is supported partially by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or mortgage poolers can meet their obligations under the policies, so that if the issuers default on their obligations the holders of the security could sustain a loss. No insurance or guarantee covers the Portfolio or the price of the Portfolio's shares. Mortgage-related securities issued by non-governmental issuers generally offer a higher rate of interest than government-agency and government-related securities because there are no direct or indirect government guarantees of payment. CMO RESIDUALS. CMO Residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. The cash flow generated by the mortgage assets underlying series of CMOs is applied first to make required payments of principal of and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO Residual represents dividend or interest income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMOs, prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to maturity on CMO Residuals is extremely sensitive to prepayments on the related underlying mortgage assets in the same manner as an IO class of stripped mortgage-back securities. See "Stripped Mortgage-Backed Securities" above. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to the level of the index upon which interest rate adjustments are based. As described above with respect to stripped mortgage-back securities, in certain circumstances, the Portfolio may fail to fully recoup its initial investment in a CMO Residual. CMO Residuals generally are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. CMO Residuals may not have the liquidity of other more established securities trading in other markets. Transactions in CMO Residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, 7 whether or not registered under the Securities Act of 1933, as amended (the "Securities Act"), CMO Residuals may be subject to certain restrictions of transferability. Ownership of certain CMO Residuals imposes liability for certain of the expenses of the related CMO issuer on the purchaser. The Investment Manager will not purchase any CMO Residual that imposes such liability on the Portfolio. OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities in which a Portfolio may invest include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing. REAL ESTATE INVESTMENT TRUSTS. (All Portfolios) Each of these Portfolios may invest in Real Estate Investment Trusts ("REITs"). A REIT is a corporation, or a business trust that would otherwise be taxed as a corporation, which meets the definitional requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The Code permits a qualifying REIT to deduct dividends paid, thereby effectively eliminating corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things, invest substantially all of its assets in interests in real estate (including mortgages and other REITs) or cash and government securities, derive most of its income from rents from real property or interest on loans secured by mortgages on real property, and distribute to shareholders annually a substantial portion of its otherwise taxable income. REITs are characterized as equity REITs, mortgage REITs and hybrid REITs. Equity REITs, which may include operating or finance companies, own real estate directly and the value of, and income earned by, the REITs depends upon the income of the underlying properties and the rental income they earn. Equity REITs also can realize capital gains (or losses) by selling properties that have appreciated (or depreciated) in value. Mortgage REITs can make construction, development or long-term mortgage loans and are sensitive to the credit quality of the borrower. Mortgage REITs derive their income from interest payments on such loans. Hybrid REITs combine the characteristics of both equity and mortgage REITs, generally by holding both ownership interests and mortgage interests in real estate. The values of securities issued by REITs are affected by tax and regulatory requirements and by perceptions of management skill. They also are subject to heavy cash flow dependency, defaults by borrowers or tenants, self-liquidation and the possibility of failing to qualify for tax-free status under the Code or to maintain exemption from the Investment Company Act of 1940, as amended (the "1940 Act"). ASSET-BACKED SECURITIES. (High Yield Portfolio) Asset-backed securities are a form of derivative. The securitization techniques used for asset-backed securities are similar to those used for mortgage-related securities. These securities include debt securities and securities with debt-like characteristics. The collateral for these securities has included credit card and automobile receivables, home equity loans, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. The Portfolio may invest in these and other types of asset-backed securities that may be developed in the future. Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may provide the Portfolio with a less effective security interest in the related collateral than do mortgage-backed securities. Therefore, there is the possibility that recoveries on the underlying collateral may not, in some cases, be available to support payments on these securities. 8 Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most organizations that issue asset-backed securities relating to motor vehicle installment purchase obligations perfect their interests in their respective obligations only by filing a financing statement and by having the servicer of the obligations, which is usually the originator, take custody thereof. In such circumstances, if the servicer were to sell the same obligations to another party, in violation of its duty not to so do, there is a risk that such party could acquire an interest in the obligations superior to that of the holders of the securities. Also, although most such obligations grant a security interest in the motor vehicle being financed, in most states the security interest in a motor vehicle must be noted on the certificate of title to perfect such security interest against competing claims of other parties. Due to the large number of vehicles involved, however, the certificate of title to each vehicle financed, pursuant to the obligations underlying the securities, usually is not amended to reflect the assignment of the seller's security interest for the benefit of the holders of the securities. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on those securities. In addition, various state and federal laws give the motor vehicle owner the right to assert against the holder of the owner's obligation certain defenses such owner would have against the seller of the motor vehicle. The assertion of such defenses could reduce payments on the related securities. INVESTMENT COMPANIES. (All Portfolios) Each of U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios may invest, to the extent permitted under the 1940 Act, in securities issued by investment companies which principally invest in securities of the type in which the Portfolio invests. Under the 1940 Act, a Portfolio's investment in such securities, subject to certain exceptions, currently is limited to (i) 3% of the total voting stock of any one investment company, (ii) 5% of the Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Equity, Small Cap and International Equity Portfolios may not purchase securities of other investment companies except in connection with a merger, consolidation, acquisition or reorganization, and may purchase securities of any one closed-end fund in an amount up to 5% of the Portfolio's total assets and may purchase securities of closed-end funds in the aggregate in an amount of up to 10% of the Portfolio's total assets. Investments in the securities of investment companies may involve duplication of advisory fees and certain other expenses. ILLIQUID SECURITIES. (All Portfolios) Each Portfolio may invest up to 10% (15% in the case of U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios) of the value of its net assets (total assets, in the case of Equity Portfolio) in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. These securities may include securities that are not readily marketable, such as securities that are subject to legal or contractual restrictions on resale (such as private placements and certain restricted securities), repurchase agreements providing for settlement in more than seven days after notice, certain mortgage-related securities, and certain privately negotiated, non-exchange traded options and securities used to cover such options. As to these securities, a Portfolio is subject to the risk that should the Portfolio desire to sell them when a ready buyer is not available at a price that is deemed to be representative of their value, the value of the Portfolio's net assets could be adversely affected. MONEY MARKET INSTRUMENTS; TEMPORARY DEFENSIVE POSITIONS. (All Portfolios) When the Investment Manager determines that adverse market conditions exist, a Portfolio may adopt a temporary defensive position and invest some or all of its assets in money market instruments, including U.S. Government securities, repurchase agreements, bank obligations and commercial paper and other short-term 9 obligations ("Money Market Instruments"). For Emerging Markets Portfolio, when the Investment Manager believes it is warranted for defensive purposes, the Portfolio may invest without limitation in high quality fixed-income securities or equity securities of U.S. companies. Each Portfolio also may purchase Money Market Instruments when it has cash reserves or in anticipation of taking a market position. INVESTMENT TECHNIQUES The following information supplements and should be read in conjunction with the Fund's Prospectuses. BORROWING MONEY. (All Portfolios) Each Portfolio may borrow to the extent permitted under the 1940 Act, which permits an investment company to borrow in an amount up to 33-1/3% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (including the amount borrowed) at the time the borrowing is made. While such borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not make any additional investments. Money borrowed will be subject to interest costs. In addition, Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios may each borrow for investment purposes to the extent permitted under the 1940 Act. See "Leverage" below. LEVERAGE. (All Portfolios, except Small Cap and International Equity Portfolios) Leveraging (buying securities using borrowed money) exaggerates the effect on net asset value of any increase or decrease in the market value of the Portfolio's investment. Money borrowed for leveraging is limited to 33-1/3% of the value of the Portfolio's total assets. Interest costs may or may not be recovered by appreciation of the securities purchased; in certain cases, interest costs may exceed the return received on the securities purchased. For borrowings for investment purposes, the 1940 Act requires the Portfolio to maintain continuous asset coverage (total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the required coverage should decline as a result of market fluctuations or other reasons, the Portfolio may be required to sell some of its portfolio holdings within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. The Portfolio also may be required to maintain minimum average balances in connection with such borrowing or pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. Each Portfolio may enter into reverse repurchase agreements with banks, brokers or dealers. This form of borrowing involves the transfer by the Portfolio of an underlying debt instrument in return for cash proceeds based on a percentage of the value of the security. The Portfolio retains the right to receive interest and principal payments on the security. As a result of these transactions, the Portfolio is exposed to greater potential fluctuation in the value of its assets and its net asset value per share. At an agreed upon future date, the Portfolio repurchases the security at principal plus accrued interest. To the extent a Portfolio enters into a reverse repurchase agreement, the Portfolio will maintain in a segregated custodial account permissible liquid assets at least equal to the aggregate amount of its reverse repurchase obligations, plus accrued interest, in certain cases, in accordance with releases promulgated by the Securities and Exchange Commission (the "Commission"). The Commission views reverse repurchase transactions as collateralized borrowing by a Portfolio. Except for these transactions, each Portfolio's borrowings generally will be unsecured. 10 LENDING PORTFOLIO SECURITIES. (All Portfolios) Each Portfolio may lend securities from its portfolio to brokers, dealers and other financial institutions needing to borrow securities to complete certain transactions. In connection with such loans, the Portfolio remains the owner of the loaned securities and continues to be entitled to payments in amounts equal to the interest, dividends or other distributions payable on the loaned securities. The Portfolio also has the right to terminate a loan at any time. The Portfolio may call the loan to vote proxies if a material issue affecting the Portfolio's investment is to be voted upon. Loans of portfolio securities may not exceed 33-1/3% of the value of the Portfolio's total assets. The Portfolio will receive collateral consisting of cash, U.S. Government securities or irrevocable letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. If the collateral consists of a letter of credit or securities, the borrower will pay the Portfolio a loan premium fee. If the collateral consists of cash, the Portfolio will reinvest the cash and pay the borrower a pre-negotiated fee or "rebate" from any return earned on the investment. Should the borrower of the securities fail financially, the Portfolio may experience delays in recovering the loaned securities or exercising its rights in the collateral. Loans are made only to borrowers that are deemed by the Investment Manager to be of good financial standing. In a loan transaction, the Portfolio will also bear the risk of any decline in value of securities acquired with cash collateral. DERIVATIVES. (All Portfolios) Each Portfolio may invest in, or enter into, derivatives, such as options, futures contracts, options on futures contracts and swap agreements, for a variety of reasons, including to hedge certain market risks, to provide a substitute for purchasing or selling particular securities or to increase potential income gain. Derivatives may provide a cheaper, quicker or more specifically focused way for the Portfolio to invest than "traditional" securities would. Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular derivative and the portfolio as a whole. Derivatives permit a Portfolio to increase or decrease the level of risk, or change the character of the risk, to which its portfolio is exposed in much the same way as the Portfolio can increase or decrease the level of risk, or change the character of the risk, of its portfolio by making investments in specific securities. However, derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in derivatives could have a large potential impact on a Portfolio's performance. If a Portfolio invests in derivatives at inopportune times or judges market conditions incorrectly, such investments may lower the Portfolio's return or result in a loss. A Portfolio also could experience losses if its derivatives were poorly correlated with its other investments, or if the Portfolio were unable to liquidate its position because of an illiquid secondary market. The market for many derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for derivatives. The Fund will not be 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")). In addition, the Fund has claimed an exclusion from the definition of commodity pool operator and, therefore, is not subject to registration or regulation as a pool operator under the Commodity Exchange Act. Derivatives may be purchased on established exchanges or through privately negotiated transactions referred to as over-the-counter derivatives. Exchange-traded derivatives generally are guaranteed by the clearing agency which is the issuer or counterparty to such derivatives. This guarantee usually is supported by a daily variation margin system operated by the clearing agency in order to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty 11 credit risk associated with derivatives purchased on an exchange. In contrast, no clearing agency guarantees over-the-counter derivatives. Therefore, each party to an over-the-counter derivative bears the risk that the counterparty will default. Accordingly, the Investment Manager will consider the creditworthiness of counterparties to over-the-counter derivatives in the same manner as it would review the credit quality of a security to be purchased by the Portfolio. Over-the-counter derivatives are less liquid than exchange-traded derivatives since the other party to the transaction may be the only investor with sufficient understanding of the derivative to be interested in bidding for it. Successful use of derivatives by a Portfolio also is subject to the Investment Manager's ability to predict correctly movements in the direction of the relevant market and to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if a Portfolio uses futures to hedge against the possibility of a decline in the market value of securities held in its portfolio and the prices of such securities instead increase, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because it will have offsetting losses in its futures positions. Furthermore, if in such circumstances the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. The Portfolio may have to sell such securities at a time when it may be disadvantageous to do so. Pursuant to regulations and/or published positions of the Commission, a Portfolio may be required to segregate permissible liquid assets to cover its obligations relating to its transactions in derivatives. To maintain this required cover, the Portfolio may have to sell securities at disadvantageous prices or times since it may not be possible to liquidate a derivative position at a reasonable price. The segregation of such assets will have the effect of limiting the Portfolio's ability to otherwise invest those assets. FUTURES TRANSACTIONS--IN GENERAL. (All Portfolios, except Equity, Small Cap and International Equity Portfolios) Each Portfolio may enter into futures contracts in U.S. domestic markets, or on exchanges located outside the United States. Foreign markets may offer advantages such as trading opportunities or arbitrage possibilities not available in the United States. Foreign markets, however, may have greater risk potential than domestic markets. For example, some foreign exchanges are principal markets so that no common clearing facility exists and an investor may look only to the broker for performance of the contract. In addition, any profits a Portfolio might realize in trading could be eliminated by adverse changes in the currency exchange rate, or the Portfolio could incur losses as a result of those changes. Transactions on foreign exchanges may include both commodities which are traded on domestic exchanges and those which are not. Unlike trading on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the CFTC. Engaging in these transactions involves risk of loss to the Portfolio which could adversely affect the value of the Portfolio's net assets. Although each of these Portfolios intends to purchase or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting the Portfolio to substantial losses. 12 SPECIFIC FUTURES TRANSACTIONS. U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap and Emerging Markets Portfolios may purchase and sell stock index futures contracts. A stock index future obligates the Portfolio to pay or receive an amount of cash equal to a fixed dollar amount specified in the futures contract multiplied by the difference between the settlement price of the contract on the contract's last trading day and the value of the index based on the stock prices of the securities that comprise it at the opening of trading in such securities on the next business day. U.S. Equity Value, U.S. Strategic Equity, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios may purchase and sell interest rate futures contracts. An interest rate future obligates the Portfolio to purchase or sell an amount of a specific debt security at a future date at a specific price. Each Portfolio, except Equity, Small Cap and International Equity Portfolios, may buy and sell foreign currency futures. A currency future obligates the Portfolio to purchase or sell an amount of a specific currency at a future date at a specific price. OPTIONS--IN GENERAL. (All Portfolios, except Equity and Small Cap Portfolios) Each Portfolio may buy and sell (write) covered call and put options. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security or securities at the exercise price at any time during the option period, or at a specific date. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security or securities at the exercise price at any time during the option period, or at a specific date. A covered call option written by a Portfolio is a call option with respect to which the Portfolio owns the underlying security or otherwise covers the transaction by segregating permissible liquid assets. A put option written by a Portfolio is covered when, among other things, the Portfolio segregates permissible liquid assets having a value equal to or greater than the exercise price of the option to fulfill the obligation undertaken. The principal reason for writing covered call and put options is to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. A Portfolio receives a premium from writing covered call or put options which it retains whether or not the option is exercised. There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times have rendered certain of the clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that may otherwise interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If, as a covered call option writer, a Portfolio is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it otherwise covers its position. SPECIFIC OPTIONS TRANSACTIONS. Each of these Portfolios may buy and sell call and put options in respect of specific securities (or groups or "baskets" of specific securities) or indices listed on national securities exchanges or traded in the over-the-counter market. An option on an index is similar to an option in respect of specific securities, except that settlement does not occur by delivery of the securities comprising the index. Instead, the option holder receives an amount of cash if the closing level of the 13 index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. Thus, the effectiveness of purchasing or writing index options will depend upon price movements in the level of the index rather than the price of a particular security. Each of these Portfolios, except International Equity Portfolio, may buy and sell call and put options on foreign currency. These options convey the right to buy or sell the underlying currency at a price which is expected to be lower or higher than the spot price of the currency at the time the option is exercised or expires. Each of these Portfolios may purchase cash-settled options on interest rate swaps (except International Equity Portfolio), interest rate swaps denominated in foreign currency, and equity index swaps (except in the case of International Equity Portfolio) in pursuit of its investment objective. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest (for example, an exchange of floating-rate payments for fixed-rate payments) denominated in U.S. dollars or foreign currency. Equity index swaps involve the exchange by the Portfolio with another party of cash flows based upon the performance of an index or a portion of an index of securities which usually includes dividends. A cash-settled option on a swap gives the purchaser the right, but not the obligation, in return for the premium paid, to receive an amount of cash equal to the value of the underlying swap as of the exercise date. These options typically are purchased in privately negotiated transactions from financial institutions, including securities brokerage firms. Successful use by a Portfolio of options will be subject to the Investment Manager's ability to predict correctly movements in the prices of individual stocks, the stock market generally, foreign currencies or interest rates. To the extent the Investment Manager's predictions are incorrect, the Portfolio may incur losses. SWAP AGREEMENTS. To the extent consistent with the Portfolio's investment objective and management policies as set forth herein, each Portfolio may enter into equity, interest rate, index, total return and currency rate swap agreements. These transactions are entered into in an attempt to obtain a particular return when it is considered desirable to do so, possibly at a lower cost to the Portfolio than if the Portfolio had invested directly in the asset that yielded the desired return. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than a year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or "swapped" between the parties are generally calculated with respect to a "notional amount," I.E., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent interest rates exceed a specified rate or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent interest rates fall below a specified level or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. Most swap agreements entered into by a Portfolio would calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Portfolio's current obligations (or rights) under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The risk of loss with respect to swaps is limited to the net amount of payments that the Portfolio is contractually obligated to make. If the other party to a swap defaults, the Portfolio's risk of loss consists of the net amount of payments that the Portfolio contractually is entitled to receive. 14 FUTURE DEVELOPMENTS. A Portfolio may take advantage of opportunities in options and futures contracts and options on futures contracts and any other derivatives which are not presently contemplated for use by the Portfolio or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Portfolio's investment objective and legally permissible for the Portfolio. Before entering into such transactions or making any such investment, the Portfolio will provide appropriate disclosure in its Prospectus or this Statement of Additional Information. FOREIGN CURRENCY TRANSACTIONS. (All Portfolios, except Equity and Small Cap Portfolios) Foreign currency transactions may be entered into for a variety of purposes, including: to fix in U.S. dollars, between trade and settlement date, the value of a security the Portfolio has agreed to buy or sell; to hedge the U.S. dollar value of securities the Portfolio already owns, particularly if it expects a decrease in the value of the currency in which the foreign security is denominated; or to gain exposure to the foreign currency in an attempt to realize gains. Foreign currency transactions may involve, for example, the Portfolio's purchase of foreign currencies for U.S. dollars or the maintenance of short positions in foreign currencies. A short position would involve the Portfolio agreeing to exchange an amount of a currency it did not currently own for another currency at a future date in anticipation of a decline in the value of the currency sold relative to the currency the Portfolio contracted to receive. The Portfolio's success in these transactions will depend principally on the Investment Manager's ability to predict accurately the future exchange rates between foreign currencies and the U.S. dollar. SHORT-SELLING. (U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Strategic Equity and High Yield Portfolios) Each of these Portfolios may engage in short sales of securities. In these transactions, the Portfolio sells a security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio is obligated to replace the security borrowed by purchasing it subsequently at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio, which would result in a loss or gain, respectively. The Portfolio also may make short sales "against the box," in which the Portfolio enters into a short sale of a security it owns. Securities will not be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net assets. A Portfolio may not make a short-sale which results in the Portfolio having sold short in the aggregate more than 5% of the outstanding securities of any class of issuer. Until the Portfolio closes its short position or replaces the borrowed security, it will: (a) segregate permissible liquid assets in an amount that, together with the amount deposited as collateral, always equals the current value of the security sold short; or (b) otherwise cover its short position. FORWARD COMMITMENTS. (All Portfolios) A Portfolio may purchase or sell securities on a forward commitment, when-issued or delayed delivery basis, which means that delivery and payment take place a number of days after the date of the commitment to purchase or sell. The payment obligation and the interest rate receivable on a forward commitment, when-issued or delayed-delivery security are fixed when the Portfolio enters into the commitment, but the Portfolio does not make a payment until it receives delivery from the counterparty. The Portfolio will segregate permissible liquid assets at least equal at all times to the amount of the Portfolio's purchase commitments. The Portfolio intends to engage in forward commitments to increase the Portfolio's financial exposure to the types of securities in which it invests, which will increase the Portfolio's exposure to changes in interest rates and will increase the 15 volatility of its returns. If the Portfolio is fully or almost fully invested when forward commitment purchases are outstanding, such purchases may result in a form of leverage. At no time will the Portfolio have more than 33-1/3% of its total assets committed to purchase securities on a forward commitment basis. Securities purchased on a forward commitment, when-issued or delayed-delivery basis are subject to changes in value (generally changing in the same way, I.E., appreciating when interest rates decline and depreciating when interest rates rise) based upon the public's perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates. Securities purchased on a forward commitment, when-issued or delayed-delivery basis may expose a Portfolio to risks because they may experience such fluctuations prior to their actual delivery. Purchasing securities on a forward commitment, when-issued or delayed-delivery basis can involve the additional risk that the yield available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. Purchasing securities on a forward commitment, when-issued or delayed-delivery basis when the Portfolio is fully or almost fully invested may result in greater potential fluctuation in the value of the Portfolio's net assets and its net asset value per share. CERTAIN INVESTMENT CONSIDERATIONS AND RISKS EQUITY SECURITIES. (All Portfolios) Equity securities, including common stock, preferred stock, convertible securities and warrants, fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and such fluctuations can be pronounced. Changes in the value of a Portfolio's investments will result in changes in the value of its shares and thus the Portfolio's total return to investors. INITIAL PUBLIC OFFERINGS. (All Portfolios, except High Yield Portfolio) Each of these Portfolios may purchase securities of companies in initial public offerings ("IPOs") or shortly thereafter. An IPO is a corporation's first offering of stock to the public. Shares are given a market value reflecting expectations for the corporation's future growth. Special rules of the National Association of Securities Dealers, Inc. (the "NASD") apply to the distribution of IPOs. Corporations offering stock in IPOs generally have limited operating histories and may involve greater investment risk. The prices of these companies' securities may be very volatile, rising and falling rapidly, sometimes based solely on investor perceptions rather than economic reasons. IPO securities will be sold when the Investment Manager believes the price has reached full value. IPO securities may be sold by a Portfolio on the same day the Portfolio receives an allocation. SMALLER COMPANY SECURITIES. (U.S. Equity Value, U.S. Strategic Equity, Small Cap, U.S. Small Cap Equity Growth, International Strategic Equity, International Small Cap and Emerging Markets Portfolios) Each of these Portfolios may purchase securities of smaller capitalization companies, the prices of which may be subject to more abrupt or erratic market movements than securities of larger, more established companies, because securities of smaller companies typically are traded in lower volume and the issuers typically are subject to greater changes in earnings and prospects. Smaller capitalization companies often have limited product lines, markets or financial resources. They may be dependent on management for one or a few key persons, and can be more susceptible to losses and the risk of bankruptcy. In addition, securities of the small capitalization sector may be thinly traded (and therefore may have to be sold at a discount from current market prices or sold in small lots over an extended period of time), may be followed by fewer investment research analysts and may pose a greater chance of loss than investments in securities of larger capitalization companies. 16 FIXED-INCOME SECURITIES. (All Portfolios) Even though interest-bearing securities are investments which promise a stable stream of income, the prices of such securities generally are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. Certain portfolio securities, such as those with interest rates that fluctuate directly or indirectly based on multiples of a stated index, are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and possibly loss of principal. The values of fixed-income securities also may be affected by changes in the credit rating or financial condition of the issuer. Certain securities, such as those rated below investment grade by Standard & Poor's Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's" and together with S&P, the "Rating Agencies"), may be subject to such risk with respect to the issuing entity and to greater market fluctuations than certain lower yielding, higher rated fixed-income securities. Once the rating of a portfolio security has been changed, the Portfolio will consider all circumstances deemed relevant in determining whether to continue to hold the security. MORTGAGE-RELATED SECURITIES. (High Yield Portfolio and, to a limited extent, Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap and U.S. Small Cap Equity Growth Portfolios) Mortgage-related securities are complex derivative instruments, subject to both credit and prepayment risk, and may be more volatile and less liquid, and more difficult to price accurately, than more traditional debt securities. Although certain mortgage-related securities are guaranteed by a third party (such as a U.S. Government agency or instrumentality with respect to government-related mortgage-backed securities) or otherwise similarly secured, the market value of the security, which may fluctuate, is not secured. Mortgage-related securities generally are subject to credit risks associated with the performance of the underlying mortgage properties and to prepayment risk. In certain instances, the credit risk associated with mortgage-related securities can be reduced by third party guarantees or other forms of credit support. Improved credit risk does not reduce prepayment risk which is unrelated to the rating assigned to the mortgage-related security. Prepayment risk can lead to fluctuations in value of the mortgage-related security which may be pronounced. If a mortgage-related security is purchased at a premium, all or part of the premium may be lost if the market value of the security declines, whether resulting from changes in interest rates or prepayments on the underlying mortgage collateral. Certain mortgage-related securities, such as inverse floating rate collateralized mortgage obligations, have coupons that move inversely to a multiple of a specific index which may result in increased price volatility. As with other interest-bearing securities, the prices of certain mortgage-related securities are inversely affected by changes in interest rates. However, although the value of a mortgage-related security may decline when interest rates rise, the converse is not necessarily true, since during periods of declining interest rates the mortgages underlying the security are more likely to be prepaid. For this and other reasons, a mortgage-related security's stated maturity may be shortened by unscheduled prepayments on the underlying mortgages, and, therefore, it is not possible to predict accurately the security's return to the Portfolio. Moreover, with respect to certain stripped mortgage-backed securities, if the underlying mortgage securities experience greater than anticipated prepayments of principal, the Portfolio may fail to fully recoup its initial investment even if the securities are rated in the highest rating category by a nationally recognized statistical rating organization. During periods of rapidly rising interest rates, prepayments of mortgage-related securities may occur at slower than expected rates. Slower prepayments effectively may lengthen a mortgage-related security's expected maturity, which generally would cause the value of such security to fluctuate more widely in response to changes in interest rates. Were the prepayments on the Portfolio's mortgage-related securities to decrease broadly, the Portfolio's effective duration, and thus sensitivity to interest rate fluctuations, would increase. Commercial real property loans, however, often contain provisions that substantially reduce the likelihood 17 that such securities will be prepaid. The provisions generally impose significant prepayment penalties on loans and in some cases there may be prohibitions on principal prepayments for several years following origination. FOREIGN SECURITIES. (All Portfolios, except Small Cap Portfolio) Foreign securities markets generally are not as developed or efficient as those in the United States. Securities of some foreign issuers, including depositary receipts, foreign government obligations and securities of supranational entities, are less liquid and more volatile than securities of comparable U.S. issuers. Similarly, volume and liquidity in most foreign securities markets are less than in the United States and, at times, volatility of price can be greater than in the United States. Because evidences of ownership of such securities usually are held outside the United States, a Portfolio will be subject to additional risks which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions, which might adversely affect or restrict the payment of principal and interest on the foreign securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Moreover, foreign securities held by a Portfolio may trade on days when the Portfolio does not calculate its net asset value and thus affect the Portfolio's net asset value on days when investors have no access to the Portfolio. With respect to International Equity, International Strategic Equity, Emerging Markets and High Yield Portfolios, developing countries have economic structures that generally are less diverse and mature, and political systems that are less stable, than those of developed countries. The markets of developing countries may be more volatile than the markets of more mature economies; however, such markets may provide higher rates of return to investors. Many developing countries providing investment opportunities for these Portfolios have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have adverse effects on the economies and securities markets of certain of these countries. The Portfolios consider emerging market countries to include all countries represented by the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index. As of May 2005, the MSCI EM Index included the following countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. Because foreign securities often are purchased with and payable in currencies of foreign countries, the value of these assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and exchange control regulations. FOREIGN CURRENCY TRANSACTIONS. (All Portfolios, except Equity and Small Cap Portfolios) Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or perceived changes in interest rates and other complex factors, as seen from an international perspective. Currency exchange rates also can be affected unpredictably by intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the United States or abroad. LOWER RATED SECURITIES. (High Yield Portfolio) High Yield Portfolio invests at least 80% of its assets in higher yielding (and, therefore, higher risk) debt securities rated as low as the lowest rating assigned by a Rating Agency (commonly known as junk bonds). 18 Bond prices are inversely related to interest rate changes; however, bond price volatility also may be inversely related to coupon. Accordingly, below investment grade securities may be relatively less sensitive to interest rate changes than higher quality securities of comparable maturity, because of their higher coupon. This higher coupon is what the investor receives in return for bearing greater credit risk. The higher credit risk associated with below investment grade securities potentially can have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity, and will be a substantial factor in the Portfolio's relative share price volatility. The ratings of the Rating Agencies represent their opinions as to the quality of the obligations which they undertake to rate. Although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risk of these securities. See "Appendix" for a general description of the Rating Agencies' ratings. The Portfolio will rely on the judgment, analysis and experience of the Investment Manager in evaluating the creditworthiness of an issuer. Companies that issue certain of these securities often are highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with higher rated securities and will fluctuate over time. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of these securities may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be affected adversely by specific corporate developments, forecasts, or the unavailability of additional financing. The risk of loss because of default by the issuer is significantly greater for the holders of these securities because such securities generally are unsecured and often are subordinated to other creditors of the issuer. Because there is no established retail secondary market for many of these securities, the Portfolio anticipates that such securities could be sold only to a limited number of dealers or institutional investors. To the extent a secondary trading market for these securities does exist, it generally is not as liquid as the secondary market for higher rated securities. The lack of a liquid secondary market may have an adverse impact on market price and yield and the Portfolio's ability to dispose of particular issues when necessary to meet the Portfolio's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. The lack of a liquid secondary market for certain securities also may make it more difficult for the Portfolio to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value and could result in the Portfolio selling such securities at lower prices than those used in calculating the Portfolio's net asset value. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of these securities. In such cases, judgment may play a greater role in valuation because less reliable, objective data may be available. These securities may be particularly susceptible to economic downturns. An economic recession could adversely affect the ability of the issuers of lower rated bonds to repay principal and pay interest thereon and increase the incidence of default for such securities. It is likely that an economic recession could disrupt severely the market for such securities and may have an adverse impact on their value. High Yield Portfolio may acquire these securities during an initial offering. Such securities may involve special risks because they are new issues. The Portfolio does not have an arrangement with any persons concerning the acquisition of such securities, and the Investment Manager will review carefully the credit and other characteristics pertinent to such new issues. The credit risk factors pertaining to lower rated securities also apply to lower rated zero coupon, pay-in-kind and step up securities. In addition to the risks associated with the credit rating of the issuers, the market prices of these securities may be very volatile during the period no interest is paid. 19 SIMULTANEOUS INVESTMENTS. (All Portfolios) Investment decisions for each Portfolio are made independently from those of the other Portfolios and other accounts managed by the Investment Manager. If, however, such other Portfolios or accounts desire to invest in, or dispose of, the same securities as the Portfolio, available investments or opportunities for sales will be allocated equitably to each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by a Portfolio or the price paid or received by a Portfolio. DISCLOSURE OF PORTFOLIO HOLDINGS It is the policy of the Fund to protect the confidentiality of the Portfolios' holdings and prevent the selective disclosure of non-public information about such holdings. The Fund will publicly disclose the Portfolios' holdings on a calendar quarter-end basis on its website accessible from http://www.lazardnet.com/lam/us/lazardfunds/shtml, approximately 14 days after such quarter end. The information will remain accessible until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information was current. In order to avoid conflicts of interest between the Fund, on the one hand, and the Investment Manager or any affiliated person of the Fund or the Investment Manager, on the other (1) disclosure of portfolio holdings information is made only when such disclosure is in the best interest of Portfolio shareholders and the Fund has a legitimate business purpose for doing so and (2) none of the Fund or the Investment Manager or their affiliates may receive any compensation in connection with an arrangement to make portfolio holdings information available. In accordance with the foregoing, the Fund provides portfolio holdings information to service providers who provide necessary or beneficial services when such service providers need access to this information in the performance of their services and are subject to duties of confidentiality (1) imposed by law, including a duty not to trade on non-public information, and/or (2) pursuant to an agreement that confidential information is not to be disclosed or used (including trading on such information) other than as required by law. From time to time, the Fund will communicate with these service providers to confirm that they understand the Fund's policies and procedures regarding such disclosure. Such service providers currently include the Fund's investment adviser, administrator, custodian, auditors and legal counsel and each of their respective affiliates and advisors, as well as Institutional Shareholder Services, Inc., Lipper Inc. ("Lipper"), Morningstar, Inc., Bloomberg, Russell/Mellon Analytical Services, LLC, Canterbury Consulting Incorporated and Thomson Vestek, Inc. Service providers receive holdings information at a frequency appropriate to their services, which may be as frequently as daily. Certain other service providers may be provided with portfolio holdings information on a quarterly basis, but in no event will such information be provided until after its posting on the Fund's website. Disclosure of portfolio holdings information may be authorized only by the Fund's Chief Compliance Officer or the General Counsel of the Investment Manager, each of whom evaluates such disclosure in light of the best interests of Portfolio shareholders and any potential conflicts of interest. The service providers that receive portfolio holdings information from the Fund as described above, and any additions to this list of service providers, are reported to the Fund's Board of Directors for its review. Any exceptions to the Fund's portfolio holdings disclosure policy are reported to the Board of Directors. INVESTMENT RESTRICTIONS Each Portfolio's investment objective is a fundamental policy, which cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Portfolio's outstanding voting shares. In addition, each Portfolio (except as noted) has adopted investment restrictions numbered 20 1 through 10 as fundamental policies. However, the amendment of these restrictions to add an additional Portfolio, which amendment does not substantively affect the restrictions with respect to an existing Portfolio, will not require approval as described in the first sentence. Investment restrictions numbered 11 through 16 are not fundamental policies and may be changed, as to a Portfolio, by vote of a majority of the Fund's Board of Directors at any time. Under normal circumstances, each of the following Portfolios will invest at least 80% of its net assets, plus any borrowings for investment purposes, as follows (or other investments with similar economic characteristics): (i) Equity, International Equity, International Equity Select and International Strategic Equity Portfolios--equity securities; (ii) U.S. Equity Value and U.S. Strategic Equity--equity securities of U.S. companies; (iii) Mid Cap Portfolio--equity securities of medium-size companies; (iv) Small Cap and International Small Cap Portfolios--equity securities of small cap companies; (v) U.S. Small Cap Equity Growth Portfolio--equity securities of small cap U.S. companies; (vi) Emerging Markets Portfolio--equity securities of companies whose principal business activities are located in emerging market countries; and (vii) High Yield Portfolio--bonds and other fixed-income securities rated, at the time of purchase, below investment grade by S&P or Moody's and as low as the lowest rating assigned by S&P or Moody's, or the unrated equivalent as determined by the Investment Manager. Each of these Portfolios has adopted a policy to provide its shareholders with at least 60 days' prior notice of any change with respect to its 80% policy. None of the Portfolios may: 1. issue senior securities, borrow money or pledge or mortgage its assets, except that (A) each Portfolio may borrow from banks for temporary purposes, including the meeting of redemption requests which might require the untimely disposition of securities, as described in the Prospectus, (B) each of U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios also may borrow money to the extent permitted under the 1940 Act; provided, however, that the Portfolio will not make new investments to the extent borrowings exceed 5% of its total assets, except for borrowings covered within the interpretations of Sections 18(f) of the 1940 Act, and (C) Equity Portfolio may additionally utilize leverage as described in the Prospectus. For purposes of this investment restriction, a Portfolio's entry into options, forward contracts, futures contracts, including those related to indexes, shall not constitute borrowing; 2. make loans, except loans of portfolio securities not having a value in excess of 33-1/3% of a Portfolio's total assets and except that each Portfolio may purchase debt obligations in accordance with its investment objectives and policies; 3. for all Portfolios except U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, invest in illiquid securities as defined in "Investment Objectives and Management Policies--Illiquid Securities" if immediately after such investment more than 10% of the value of the Portfolio's net assets, or, in the case of Equity Portfolio, more than 10% of the value of that Portfolio's total assets, taken at market value, would be invested in such securities; 4. for Equity, Small Cap and International Equity Portfolios, (A) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization; and (B) Equity, Small Cap and International Equity Portfolios may purchase securities in an amount up to 5% of the value of the Portfolio's total assets in any one closed-end 21 fund and may purchase in the aggregate securities of closed-end funds in an amount of up to 10% of the value of the Portfolio's total assets; 5. purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Portfolio's investments in that industry would exceed 25% of the current value of such Portfolio's total assets, provided that there is no limitation with respect to investments in obligations of the U.S. Government, its agencies or instrumentalities; 6. (A) purchase or sell real estate or real estate limited partnerships, except that a Portfolio may purchase and sell securities of companies which deal in real estate or interests therein and U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios also may purchase and sell securities that are secured by real estate; (B) purchase or sell commodities or commodity contracts (except that U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios may purchase and sell swaps, options, forward contracts, futures contracts, including those relating to indices, and options on futures contracts or indices, and U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity, International Equity Select, International Strategic Equity and High Yield Portfolios may purchase or sell foreign currency forward exchange contracts; and (C) for all Portfolios except Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, invest in interests in or leases relating to oil, gas, or other mineral exploration or development programs; 7. purchase securities on margin (except for short-term credits necessary for the clearance of transactions) or, except for U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, make short sales of securities; 8. underwrite securities of other issuers, except to the extent that the purchase of municipal obligations or other permitted investments directly from the issuer thereof or from an underwriter for an issuer and the later disposition of such securities in accordance with the Portfolio's investment program may be deemed to be an underwriting; 9. for Equity, Small Cap and International Equity Portfolios, make investments for the purpose of exercising control or management; 10. for Equity Portfolio, purchase restricted securities, which are securities that must be registered under the Securities Act before they may be offered or sold to the public, except that Equity Portfolio may invest up to 5% of the value of its total assets, taken at cost, in such securities; * * * 11. for U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios, pledge, hypothecate, mortgage or otherwise encumber its assets other than to secure permitted borrowings; 22 12. for U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, invest in illiquid securities as defined in "Investment Objectives and Management Policies--Illiquid Securities" if immediately after such investment more than 15% of the value of the Portfolio's net assets would be invested in such securities; 13. for U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity, International Small Cap, Emerging Markets and High Yield Portfolios, purchase securities of other investment companies, except to the extent permitted under the 1940 Act; 14. for Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, U.S. Small Cap Equity Growth, International Equity Select, International Strategic Equity and High Yield Portfolios, invest in interests in or leases relating to oil, gas, or other mineral exploration or development programs; 15. for International Equity Select Portfolio, make short sales of securities; or 16. for International Small Cap and Emerging Markets Portfolios, make investments for the purpose of exercising control or management. * * * If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such restriction. With respect to Investment Restriction No. 1, however, if borrowings exceed 33-1/3% of the value of a Portfolio's total assets as a result of a change in values or assets, the Portfolio must take steps to reduce such borrowings at least to the extent of such excess within three business days. MANAGEMENT The Fund's Board of Directors is responsible for the management and supervision of each Portfolio and approves all significant agreements with those companies that furnish services to the Portfolios. These companies are as follows: Lazard Asset Management LLC................. Investment Manager Lazard Asset Management Securities LLC...... Distributor Boston Financial Data Services, Inc......... Transfer Agent and Dividend Disbursing Agent State Street Bank and Trust Company......... Custodian The Directors and officers of the Fund, together with information as to their principal occupations during at least the last five years, are shown below.
NAME (AGE) POSITION(S) WITH THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND ADDRESS(1) (SINCE) AND TERM(2) OTHER DIRECTORSHIPS HELD =================================================================================================================== NON-INTERESTED DIRECTORS: John J. Burke (77) Director Lawyer and Private Investor; Director, Lazard (May 1991) Alternative Strategies Fund, LLC; Director, Pacific Steel & Recycling; Director, Sletten Construction Company; Trustee Emeritus, The University of Montana Foundation
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NAME (AGE) POSITION(S) WITH THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND ADDRESS(1) (SINCE) AND TERM(2) OTHER DIRECTORSHIPS HELD =================================================================================================================== Kenneth S. Davidson (60) Director President, Davidson Capital Management (August 1995) Corporation; Trustee, The Juilliard School; Chairman of the Board, Bridgehampton Chamber Music Festival; Trustee, American Friends of the National Gallery/London William Katz (50) Director Retired President and Chief Executive Officer, (April 1997) BBDO New York, an advertising agency; Retired Director, BBDO Worldwide Lester Z. Lieberman (75) Director Private Investor; Chairman, Healthcare (October 1991) Foundation of New Jersey; Director, Cives Steel Co.; Director, Northside Power Transmission Co.; Advisory Trustee, New Jersey Medical School; Director, Public Health Research Institute; Trustee Emeritus, Clarkson University; Council of Trustees, New Jersey Performing Arts Center Richard Reiss, Jr. (61) Director Chairman, Georgica Advisors LLC, an investment (May 1991) manager; Director, Lazard Alternative Strategies Fund, LLC; Director, O'Charley's, Inc., a restaurant chain Robert M. Solmson (57) Director Director, Lazard Alternative Strategies Fund, (September 2004) LLC; Director, Colonial Williamsburg Co.; Former Chief Executive Officer and Chairman, RFS Hotel Investors, Inc.; Former Director, Morgan Keegan, Inc.; Former Director, Independent Bank, Memphis INTERESTED DIRECTORS(3) Charles Carroll (44) Chief Executive Officer, Deputy Chairman and Head of Global Marketing of President and Director the Investment Manager (June 2004) Ashish Bhutani (45) Director Chief Executive Officer of the Investment Manager; (July 2005) from 2001 to December 2002, Co-Chief Executive Officer North America of Dresdner Kleinwort Wasserstein and member of its Global Corporate and Markets Board and the Global Executive Committee; from 1995 to 2001, Chief Executive Officer of Wasserstein Perella Securities; and from 1989 to 2001, Deputy Chairman of Wasserstein Perella Group
24
NAME (AGE) POSITION(S) WITH THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND ADDRESS(1) (SINCE) AND TERM(2) OTHER DIRECTORSHIPS HELD =================================================================================================================== OFFICERS: Nathan A. Paul (32) Vice President and Secretary Managing Director and General Counsel of the (April 2002) Investment Manager Brian D. Simon (43) Assistant Secretary Director of Legal Affairs of the Investment (November 2002) Manager; from July 1999 to October 2002, Vice President, Law & Regulations at J. & W. Seligman & Co. Stephen St. Clair (47) Treasurer Vice President of the Investment Manager (May 2003) John Blevins (40) Chief Compliance Officer Senior Vice President and Chief Compliance (September 2004) Officer of the Investment Manager David A. Kurzweil (31) Assistant Secretary Vice President of the Investment Manager; (April 2005) Associate at Kirkpatrick & Lockhart LLP, a law firm, from August 1999 to January 2003 Cesar A. Trelles (30) Assistant Treasurer Fund Administration Manager of the Investment (December 2004) Manager; Manager for Mutual Fund Finance Group at UBS Global Asset Management, from August 1998 to August 2004 ---------------------------------------------------------------------------------------------------------------------
(1) The address of each Director and officer is Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, New York 10112. (2) Each Director also serves as a Director of Lazard Retirement Series, Inc. ("LRS"), an open-end registered management investment company (comprised of ten portfolios), and Lazard Global Total Return and Income Fund, Inc. and Lazard World Dividend & Income Fund, Inc., closed-end registered management investment companies (collectively with the Fund, the "Lazard Funds," in total comprised of 24 investment portfolios). Each Director serves an indefinite term, until his successor is elected, and each Director serves in the same capacity for LRS. (3) Messrs. Bhutani and Carroll are "interested persons" (as defined in the 1940 Act) of the Fund because of their position with the Investment Manager. (4) Each officer serves for an indefinite term, until his successor is elected and qualified. Each officer serves in the same capacity for the other Lazard Funds. The Fund has standing audit and nominating committees, each comprised of its Directors who are not "interested persons" of the Fund, as defined in the 1940 Act ("Independent Directors"). The function of the audit committee is to (1) oversee the Fund's accounting and financial reporting processes and the audits of the Fund's financial statements, (2) assist in Board oversight of the quality and integrity of the Fund's financial statements and the Fund's compliance with legal and regulatory requirements relating to accounting, financial reporting, internal control over financial reporting and independent audits, (3) approve engagement of the independent registered public accounting firm and review and evaluate the qualifications, independence and performance of the independent registered public accounting firm and (4) act as a liaison between the Fund's independent registered public accounting firm and the Board. 25 Nominations may be submitted only by a shareholder or group of shareholders that, individually or as a group, has beneficially owned the lesser of (a) 1% of the Fund's outstanding shares or (b) $500,000 of the Fund's shares for at least one year prior to the date such shareholder or group submits a candidate for nomination. Not more than one nominee for Director may be submitted by such a shareholder or group each calendar year. In evaluating potential nominees, including any nominees recommended by shareholders, the nominating committee takes into consideration the factors listed in the nominating committee charter, including character and integrity, business and professional experience, and whether the committee believes that the person has the ability to apply sound and independent business judgment and would act in the interest of the Fund and its shareholders. A nomination submission must include all information relating to the recommended nominee that is required to be disclosed in solicitations or proxy statements for the election of Directors, as well as information sufficient to evaluate the factors listed above. Nomination submissions must be accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders, and such additional information must be provided regarding the recommended nominee as reasonably requested by the nominating committee. The audit committee met [____] times and the nominating committee meet [____] during the fiscal year ended December 31, 2005. The table below indicates the dollar range of each Director's ownership of Portfolio shares and aggregate holdings of all of the Lazard Funds, in each case as of December 31, 2005.
Ashish John J. Charles Kenneth S. William Lester Z. Richard Robert M. Portfolio Bhutani Burke Carroll Davidson Katz Lieberman Reiss, Jr. Solmson ======================================================================================================================= Equity Portfolio None Over None None None None None None $100,000 U.S. Equity Value None None None None None None None None Portfolio U.S. Strategic Equity None None None None None None None None Portfolio Mid Cap Portfolio None Over $50,001- None None None None None $100,000 100,000 Small Cap Portfolio None Over $50,001- None None None None None $100,000 100,000 U.S. Small Cap Equity None None None None None None None None Growth Portfolio International None $1- None None None None None None Equity Portfolio $10,000 International Equity None $10,001- None None None None None None Select Portfolio $50,000 International Strategic None None None None None None None None Equity Portfolio International Small None $50,001- None None None None None None Cap Portfolio $100,000 Emerging Markets None None Over None None None None None Portfolio $100,000 High Yield Portfolio None None Over None None None None None $100,000 Aggregate Holdings of None Over Over None None None None None all Lazard Funds $100,000 $100,000
26 As of December 31, 2005, none of the Directors or his immediate family members owned securities of the Investment Manager or the Distributor or any person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with the Investment Manager or the Distributor. Each Director who is not an employee or an affiliated person of the Investment Manager is paid an annual aggregate fee of $50,000, plus $2,500 per meeting attended in person ($1,000 per meeting attended by telephone), for the Fund and the other Lazard Funds, and is reimbursed for travel and other out-of-pocket expenses for attending Board and committee meetings. No additional compensation is provided in respect of committee meetings held in conjunction with a meeting of the Board of Directors. Compensation is divided among the Lazard Funds based on relative net assets. The Directors do not receive benefits from the Fund pursuant to any pension, retirement or similar arrangement. In addition, the Chairman of the Audit Committees for the Lazard Funds also receives an annual fee of $5,000. The aggregate amount of compensation paid to each Director for the year ended December 31, 2005, was as follows: TOTAL COMPENSATION FROM AGGREGATE COMPENSATION THE FUND AND DIRECTOR FROM THE FUND THE LAZARD FUNDS ================================================================================ Ashish Bhutani* N/A N/A John J. Burke $ $ Charles Carroll N/A N/A Kenneth S. Davidson Norman Eig** N/A N/A William Katz Lester Z. Lieberman Richard Reiss, Jr. Robert M. Solmson -------------------------------------------------------------------------------- * Mr. Bhutani became a Director in July 2005. ** Mr. Eig resigned as a Director in October 2005. The Fund does not compensate officers or Directors who are employees or affiliated persons of the Investment Manager. As of February 1, 2006, the Fund's officers and Directors, as a group, owned less than 1% of the shares of each Portfolio. PORTFOLIO MANAGERS TEAM MANAGEMENT. Portfolio managers at the Investment Manager manage multiple accounts for a diverse client base, including private clients, institutions and investment funds. The Investment Manager manages all portfolios on a team basis. The team is involved at all levels of the investment process. This team approach allows for every portfolio manager to benefit from his/her peers, and for clients to receive the firm's best thinking, not that of a single portfolio manager. The Investment Manager manages all like investment mandates against a model portfolio. Specific client objectives, guidelines or limitations then are applied against the model, and any necessary adjustments are made. MATERIAL CONFLICTS RELATED TO MANAGEMENT OF SIMILAR ACCOUNTS. Although the potential for conflicts of interest exist when an investment adviser and portfolio managers manage other accounts that invest in securities in which a Portfolio may invest or that may pursue a strategy similar to one of the 27 Portfolio's component strategies (collectively, "Similar Accounts"), the Investment Manager has procedures in place that are designed to ensure that all accounts are treated fairly and that the Portfolio is not disadvantaged, including procedures regarding trade allocations and "conflicting trades" (E.G., long and short positions in the same security, as described below). In addition, each Portfolio, as a series of a registered investment company, is subject to different regulations than certain of the Similar Accounts, and, consequently, may not be permitted to engage in all the investment techniques or transactions, or to engage in such techniques or transactions to the same degree, as the Similar Accounts. Potential conflicts of interest may arise because of the Investment Manager's management of a Portfolio and Similar Accounts. For example, conflicts of interest may arise with both the aggregation and allocation of securities transactions and allocation of limited investment opportunities, as the Investment Manager may be perceived as causing accounts it manages to participate in an offering to increase the Investment Manager's overall allocation of securities in that offering, or to increase the Investment Manager's ability to participate in future offerings by the same underwriter or issuer. Allocations of bunched trades, particularly trade orders that were only partially filled due to limited availability, and allocation of investment opportunities generally, could raise a potential conflict of interest, as the Investment Manager may have an incentive to allocate securities that are expected to increase in value to preferred accounts. Initial public offerings, in particular, are frequently of very limited availability. Additionally, portfolio managers may be perceived to have a conflict of interest because of the large number of Similar Accounts, in addition to the Portfolios, that they are managing on behalf of the Investment Manager. In addition, the Investment Manager could be viewed as having a conflict of interest to the extent that the Investment Manager and/or portfolio managers have a materially larger investment in a Similar Account than their investment in a Portfolio. Although the Investment Manager does not track each individual portfolio manager's time dedicated to each account, the Investment Manager periodically reviews each portfolio manager's overall responsibilities to ensure that he or she is able to allocate the necessary time and resources to effectively manage a Portfolio. A potential conflict of interest may be perceived to arise if transactions in one account closely follow related transactions in a different account, such as when a purchase increases the value of securities previously purchased by the other account, or when a sale in one account lowers the sale price received in a sale by a second account. Although none of the Portfolios' portfolio managers manage any accounts with respect to which the advisory fee is based on the performance of the account, other portfolio managers employed by the Investment Manager manage hedge funds that are subject to performance/incentive fees. Certain hedge funds managed by the Investment Manager may also be permitted to sell securities short. However, the Investment Manager currently does not have any portfolio managers that manage both hedge funds that engage in short sales and long-only accounts, including open-end and closed-end registered investment companies. When the Investment Manager engages in short sales of securities of the type in which a Portfolio invests, the Investment Manager could be seen as harming the performance of the Portfolio for the benefit of the account engaging in short sales if the short sales cause the market value of the securities to fall. As described above, the Investment Manager has procedures in place to address these conflicts. OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS. The chart below includes information regarding the members of the portfolio management teams responsible for managing the Portfolios. Specifically, it shows the number of other portfolios and assets managed by management teams of which each Portfolio's portfolio manager is a member. Regardless of the number of accounts, the portfolio management team still manages each account based on a model portfolio as described above. 28
REGISTERED INVESTMENT OTHER POOLED INVESTMENT OTHER ACCOUNTS PORTFOLIO MANAGER COMPANIES ($*)# VEHICLES ($*)# ($*)# ================================================================================================================== Michael Bennett 19 (5.6 billion) 3 (22.2 million) 1,227 (28.3 billion)+ Christopher Blake 5 (2.0 billion) 2 (61.1 million) 46 (1.3 billion)+ Steven Blitz 2 (143.2 million) 1 (29.7 million) 606 (5.1 billion) Gabrielle M. Boyle 18 (5.6 billion) 13 (992.9 million) 1,499 (30.1 billion)+ Gary Buesser 5 (2.0 billion) 2 (61.1 million) 42 (996.8 million)+ J. William Charlton 1 (104.0 million) 2 (9.6 million) 16 (538.4 million) James M. Donald 5 (1.27 billion) 3 (825.3 million) 18 (86.1 million) Thomas M. Dzwil 1 (104.0 million) 2 (9.6 million) 16 (538.4 million) Robert A. Failla** 6 (3.1 billion) 2 (53.5 million) 90 (1.1 billion)+ Michael G. Fry** 11 (4.3 billion) 3 (127 million) 1212 (20.2 billion)+ I.P. Knelman Andrew D. Lacey 13 (4.62 billion) 13 (590.5 million) 1,305 (17.1 billion)+ Mark Little 6 (1.84 billion) 2 (114.2 million) 43 (4.95 billion)+ Patrick M. Mullin 5 (2.1 billion) 0 51( 1.3 billion) Brian Pessin 4 (896.3 million) 3 (385.4 million) 32 (1.2 billion) Michael Powers 19 (5.6 billion) 6 (38.7 million) 1,428 (18.9 billion)+ John R. Reinsberg 20 (5.9 billion) 16 (2.0 billion) 1,225 (27.6 billion)+ Nicholas Sordoni 1 (136.9 million) 2 (35.0 million) 31 (1.9 billion) James P. Tatera J. Richard Tutino 3 (142.5 million) 3 (20.2 million) 944 (6.9 billion)+ -------------------------------------------------------------------------------------------------------------------
* Total assets in accounts as of December 31, 2005. ** Total assets in accounts as of October 31, 2005. # None of the portfolio managers manage any accounts with respect to which the advisory fee is based on the performance of the account. + Includes an aggregation of Similar Accounts within managed account programs where the third party program sponsor is responsible for applying specific client objectives, guidelines and limitations against the model portfolio managed by the portfolio management team. COMPENSATION FOR PORTFOLIO MANAGERS. The Investment Manager's portfolio managers are generally responsible for managing multiple types of accounts that may, or may not, invest in securities in which the Fund may invest or pursue a strategy similar to a Portfolio's strategies. Portfolio managers responsible for managing the Portfolios may also manage sub-advised registered investment companies, collective investment trusts, unregistered funds and/or other pooled investment vehicles, separate accounts, separately managed account programs (often referred to as "wrap accounts") and model portfolios. The Investment Manager compensates portfolio managers by a competitive salary and bonus structure, which is determined both quantitatively and qualitatively. Salary and bonus are paid in cash. Portfolio managers are compensated on the performance of the aggregate group of portfolios managed by the teams of which they are a member rather than for a specific fund or account. Various factors are considered in the determination of a portfolio manager's compensation. All of the portfolios managed by a portfolio manager are comprehensively evaluated to determine his or her positive and consistent performance contribution over time. Further factors include the amount of assets in the portfolios as well as qualitative aspects that reinforce the Investment Manager's investment philosophy. Total compensation is generally not fixed, but rather is based on the following factors: (i) leadership, teamwork and commitment, (ii) maintenance of current knowledge and opinions on 29 companies owned in the portfolio; (iii) generation and development of new investment ideas, including the quality of security analysis and identification of appreciation catalysts; (iv) ability and willingness to develop and share ideas on a team basis; and (v) the performance results of the portfolios managed by the investment teams of which the portfolio manager is a member. Variable bonus is based on the portfolio manager's quantitative performance as measured by his or her ability to make investment decisions that contribute to the pre-tax absolute and relative returns of the accounts managed by the teams of which the portfolio manager is a member, by comparison of each account to a predetermined benchmark (as set forth in the prospectus or other governing document) over the current fiscal year and the longer-term performance (3-, 5- or 10-year, if applicable) of such account, as well as performance of the account relative to peers. The variable bonus for each Portfolio's portfolio management team in respect of its management of the Portfolio is determined by reference to the corresponding indices listed below. The portfolio manager's bonus also can be influenced by subjective measurement of the manager's ability to help others make investment decisions. PORTFOLIO INDEX --------- ----- Equity Portfolio S&P 500(R) Index U.S. Equity Value Portfolio Russell 1000(R) Value Index U.S. Strategic Equity Portfolio S&P 500 Index Mid Cap Portfolio Russell Midcap(R) Index Small Cap Portfolio Russell 2000(R) Index U.S. Small Cap Equity Growth Portfolio Russell 2000(R) Growth Index International Equity Portfolio Morgan Stanley Capital International (MSCI(R)) Europe, Australasia and Far East (EAFE(R)) Index International Equity Select Portfolio MSCI EAFE Index International Strategic Equity Portfolio MSCI EAFE Index International Small Cap Portfolio MSCI EAFE Small Cap Index Emerging Markets Portfolio MSCI EM Index High Yield Portfolio Merrill Lynch High Yield Master II(R) Index Portfolio managers also have an interest in the Lazard Asset Management LLC Equity Plan, an equity based incentive program for the Investment Manager. The plan offers permanent equity in the Investment Manager to a significant number of its professionals, including portfolio managers, as determined by the Board of Managers of the Investment Manager from time to time. This plan gives certain employees of the Investment Manager a permanent equity interest in the Investment Manager and an opportunity to participate in the future growth of the Investment Manager. OWNERSHIP OF SECURITIES. As of December 31, 2005, the portfolio managers owned the following shares of the Portfolios managed by them: PORTFOLIO/PORTFOLIO MANAGER NUMBER OF SHARES --------------------------- ---------------- EQUITY PORTFOLIO ---------------- Andrew D. Lacey [None] J. Richard Tutino [$50,001-$100,000] U.S. EQUITY VALUE PORTFOLIO --------------------------- Andrew D. Lacey [None] Nicholas Sordoni [None] J. Richard Tutino [None] 30 PORTFOLIO/PORTFOLIO MANAGER NUMBER OF SHARES --------------------------- ---------------- U.S. STRATEGIC EQUITY PORTFOLIO ------------------------------- Christopher H. Blake [None] Gary Buesser [None] Robert A. Failla [None] Andrew D. Lacey [None] J. Richard Tutino [None] MID CAP PORTFOLIO ----------------- Christopher H. Blake [$50,001-$100,000] Gary Buesser [$1-$10,000] Robert A. Failla [None] Andrew D. Lacey [$10,001-$50,000] SMALL CAP PORTFOLIO ------------------- Andrew D. Lacey [None] Patrick M. Mullin [$100,001-$500,000] U.S. SMALL CAP EQUITY GROWTH PORTFOLIO -------------------------------------- I.P. Knelman [None] James P. Tatera [None] INTERNATIONAL EQUITY PORTFOLIO ------------------------------ Michael A. Bennett [$100,001-$500,000] Gabrielle M. Boyle [None] Michael G. Fry [None] Michael Powers [$50,001-$100,000] John R. Reinsberg [$100,001-$500,000] INTERNATIONAL EQUITY SELECT PORTFOLIO ------------------------------------- Michael A. Bennett [$100,001-$500,000] Gabrielle M. Boyle [None] Michael G. Fry [None] Michael Powers [$50,001-$100,000] John R. Reinsberg [None] INTERNATIONAL STRATEGIC EQUITY PORTFOLIO ---------------------------------------- Mark Little [None] Brian Pessin [None] John R. Reinsberg [None] INTERNATIONAL SMALL CAP PORTFOLIO --------------------------------- Brian Pessin [None] John R. Reinsberg [$100,001-$500,000] EMERGING MARKETS PORTFOLIO -------------------------- James M. Donald [$100,001-$500,000] John R. Reinsberg [$100,001-$500,000] HIGH YIELD PORTFOLIO -------------------- Steven Blitz [None] J. William Charlton [None] Thomas M. Dzwil [None] 31 INVESTMENT MANAGER AND INVESTMENT MANAGEMENT AGREEMENTS The Investment Manager, located at 30 Rockefeller Plaza, New York, NY 10112-6300, has entered into investment management agreements (each, the "Management Agreement") with the Fund on behalf of the Portfolios. Pursuant to each Management Agreement, the Investment Manager regularly provides each Portfolio with investment research, advice and supervision and furnishes continuously an investment program for each Portfolio consistent with its investment objective and policies, including the purchase, retention and disposition of securities. The Investment Manager, a wholly-owned subsidiary of Lazard, is registered as an investment adviser with the Commission. The Investment Manager provides day-to-day management of the Portfolios' investments and assists in the overall management of the Fund's affairs. The Investment Manager and its global affiliates provide investment management services to client discretionary accounts with assets as of December 31, 2005 totaling approximately $[__] billion. Its clients are both individuals and institutions, some of whose accounts have investment policies similar to those of several of the Portfolios. The Fund, the Investment Manager and the Distributor each have adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act that permits its personnel, subject to such Code of Ethics, to invest in securities, including securities that may be purchased or held by a Portfolio. The Codes of Ethics restrict the personal securities transactions of employees and require portfolio managers and other investment personnel to comply with the preclearance and disclosure procedures. The primary purpose of the Codes of Ethics is to ensure that personal trading by employees does not disadvantage any Portfolio. Under the terms of each Management Agreement, the Investment Manager will pay the compensation of all personnel of the Fund, except the fees of Directors of the Fund who are not employees or affiliated persons of the Investment Manager. The Investment Manager will make available to the Portfolios such of the Investment Manager's members, officers and employees as are reasonably necessary for the operations of each Portfolio, or as may be duly elected officers or directors of the Fund. Under each Management Agreement, the Investment Manager also pays each Portfolio's office rent and provides investment advisory research and statistical facilities and all clerical services relating to research, statistical and investment work. The Investment Manager, including its employees who serve the Portfolios, may render investment advice, management and other services to other clients. As compensation for its services, the Fund has agreed to pay the Investment Manager an investment management fee, accrued daily and payable monthly, at the annual rates set forth below as a percentage of the average daily net asset value of the relevant Portfolio: PORTFOLIO MANAGEMENT FEE RATE ======================================= ============================= Equity Portfolio .75% U.S. Equity Value .75 U.S. Strategic Equity .85 Mid Cap Portfolio .75 Small Cap Portfolio .75 U.S. Small Cap Equity Growth Portfolio [___] International Equity Portfolio .75 International Equity Select Portfolio .85 International Strategic Equity Portfolio .75 International Small Cap Portfolio .75 Emerging Markets Portfolio 1.00 High Yield Portfolio .55 32 For the fiscal year ending December 31, 2006, the Investment Manager has agreed to waive its management fees or otherwise bear the expenses of the following Portfolios to the extent the aggregate expenses of a Portfolio exceed the percentage of the value of the Portfolio's average daily net assets set forth opposite the Portfolio's name: MAXIMUM TOTAL PORTFOLIO OPERATING EXPENSES PORTFOLIO INSTITUTIONAL SHARES OPEN SHARES ====================================== ==================== =========== U.S. Strategic Equity Portfolio 1.25 1.55 Mid Cap Portfolio 1.05 1.35 U.S. Small Cap Equity Growth Portfolio [__] [__] International Equity Select Portfolio 1.15 1.45 International Small Cap Portfolio N/A 1.43 Emerging Markets Portfolio N/A 1.60 High Yield Portfolio .55 .85 For the fiscal years ended December 31, 2003, 2004 and 2005, the management fees payable by each Portfolio, the amounts waived, and reimbursements, by the Investment Manager and the net fees paid to the Investment Manager were as follows:
FEE PAYABLE FOR FISCAL FEE PAYABLE FOR FISCAL FEE PAYABLE FOR FISCAL YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, PORTFOLIO 2003 2004 2005 ========= ======================= ======================= ======================= Equity Portfolio $ 941,684 $ 976,108 $ U.S. Strategic Equity Portfolio N/A 11 Mid Cap Portfolio 311,728 508,038 Small Cap Portfolio 3,396,183 3,748,542 International Equity Portfolio 14,884,759 13,758,692 International Equity Select Portfolio 162,118 138,775 International Small Cap Portfolio 4,184,211 5,276,124 Emerging Markets Portfolio 4,288,630 6,701,0378 High Yield Portfolio 850,907 550,455 REDUCTION IN REDUCTION IN REDUCTION IN FEE FOR FISCAL FEE FOR FISCAL FEE FOR FISCAL YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, PORTFOLIO 2003 2004 2005 ========= ======================= ======================= ======================= $ - $ $ Equity Portfolio - U.S. Strategic Equity Portfolio N/A 8,822 Mid Cap Portfolio 114,824 59,910 Small Cap Portfolio - - International Equity Portfolio - - International Equity Select Portfolio 154,963 162,004 International Small Cap Portfolio 3,065 - Emerging Markets Portfolio 19,230 23,400 High Yield Portfolio 286,919 357,923
33
NET FEE PAID FOR FISCAL NET FEE PAID FOR FISCAL NET FEE PAID FOR FISCAL YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, PORTFOLIO 2003 2004 2005 ========= ======================= ======================= ======================= Equity Portfolio $ 941,684 $ 976,108 $ U.S. Strategic Equity Portfolio N/A (8,811) Mid Cap Portfolio 196,904 448,128 Small Cap Portfolio 3,396,183 3,748,542 International Equity Portfolio 14,884,759 13,758,692 International Equity Select Portfolio 7,155 (23,229) International Small Cap Portfolio 4,181,146 5,276,124 Emerging Markets Portfolio 4,269,400 6,677,638 High Yield Portfolio 563,988 192,532
Each Management Agreement provides that the relevant Portfolio pays all of its expenses that are not specifically assumed by the Investment Manager. Expenses attributable to each Portfolio will be charged against the assets of that Portfolio. Other expenses of the Fund will be allocated among the Portfolios in a manner which may, but need not, be proportionate in relation to the net assets of each Portfolio. Expenses payable by each of the Portfolios include, but are not limited to, brokerage and other expenses of executing portfolio transactions; legal, auditing or accounting expenses; trade association dues; taxes or governmental fees; the fees and expenses of any person providing administrative services to the Fund; the fees and expenses of the custodian and transfer agent of the Fund; clerical expenses of issue, redemption or repurchase of shares of the Portfolio; the expenses and fees for registering and qualifying securities for sale; the fees of Directors of the Fund who are not employees or affiliated persons of the Investment Manager or its affiliates; travel expenses of all Directors, officers and employees; insurance premiums; and the cost of preparing and distributing reports and notices to shareholders. In addition, Open Shares of each Portfolio are subject to an annual distribution and servicing fee. See "Distribution and Servicing Plan." As to each Portfolio, each Management Agreement is subject to annual approval by (i) the Fund's Board of Directors or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the relevant Portfolio, provided that in either event the continuance also is approved by a majority of the Independent Directors of the Fund or the Investment Manager, by vote cast in person at a meeting called for the purpose of voting on such approval. As to each Portfolio, each Management Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board of Directors or by vote of the holders of a majority of the shares of such Portfolio, or, upon not less than 90 days' notice, by the Investment Manager. Each Management Agreement will terminate automatically, as to the relevant Portfolio, in the event of its assignment (as defined in the 1940 Act). Each Management Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence on the part of the Investment Manager, or of reckless disregard of its obligations thereunder, the Investment Manager shall not be liable for any action or failure to act in accordance with its duties thereunder. BOARD APPROVAL OF MANAGEMENT AGREEMENTS. (Lazard U.S. Equity Value, Lazard U.S. Small Cap Equity Growth and Lazard International Strategic Equity Portfolios only) In considering the approval of the Management Agreements, the Directors discussed the nature, extent and quality of the services proposed to be provided to each Portfolio pursuant to the relevant Management Agreement. The Directors considered the various services proposed to be provided by the Investment Manager to each Portfolio and considered the Investment Manager's research and portfolio management capabilities and that the Investment Manager also would provide oversight of day-to-day operations of the Fund and the 34 Portfolios, including fund accounting and administration and assistance in meeting legal and regulatory requirements. The Directors also considered the Investment Manager's extensive administrative, accounting and compliance infrastructure. The Directors reviewed and placed significant emphasis on the proposed advisory fees and projected expense ratios for each Portfolio, including comparative information prepared by Lipper. As the Portfolios had not commenced investment operations, historical performance information was not available for the Directors' consideration. The Directors reviewed the Investment Manager's composite investment performance for other similar funds and accounts advised by the Investment Manager, compared with appropriate benchmarks/indices for each of the Portfolios. The Directors considered comparison groups composed solely of funds sub-advised by the Investment Manager in the same Lipper category as each Portfolio, as well as the Investment Manager's separately managed accounts with similar investment objectives, policies and strategies (for each Portfolio, collectively with such funds sub-advised by the Investment Manager, "Similar Accounts"). For each Portfolio, the Directors discussed the proposed fee to be paid to the Investment Manager compared to the fee paid to the Investment Manager by Similar Accounts. For each Portfolio the Directors reviewed the nature of the Similar Accounts and the differences, from the Investment Manager's perspective, in management of the different types of Similar Accounts as compared to the proposed management of the Portfolio. The Directors considered the relevance of the fee information provided for Similar Accounts managed by the Investment Manager to evaluate the appropriateness and reasonableness of each Portfolio's proposed advisory fees. The Directors concluded that each Portfolio's proposed fee under the relevant Management Agreement was reasonable in light of the mix of services proposed to be provided by the Investment Manager and comparative performance and advisory fee and expense information. The Directors evaluated the costs of the services to be provided and potential profits to be realized and benefits derived or to be derived by the Investment Manager and its affiliates from the relationship with the Fund. The Board recognized that economies of scale may be realized as the assets of the Portfolios increase and the Investment Manager realizes profitability and that, to the extent in the future it were to be determined that material economies of scale had not been shared with the Portfolios, the Board would seek to have those economies of scale shared with the Portfolios. The Board considered these conclusions and determinations and, without any one factor being dispositive, the Board determined that approval of the Management Agreements was in the best interests of the Portfolios and their shareholders. The Independent Directors were assisted in their review by independent legal counsel and met with counsel in executive session separate from the Investment Manager. PROXY VOTING The Fund has delegated voting of proxies in respect of portfolio holdings to the Investment Manager, to vote the Fund's proxies in accordance with the Investment Manager's proxy voting policy and guidelines (the "Voting Guidelines") that provide as follows: o The Investment Manager votes proxies in the best interests of its clients. o Unless the Investment Manager's Proxy Committee otherwise determines, the Investment Manager votes proxies in a manner consistent with the Voting Guidelines. 35 o To avoid conflicts of interest, the Investment Manager votes proxies where a material conflict has been deemed to exist in accordance with specific proxy voting guidelines regarding various standard proxy proposals ("Approved Guidelines") or, if the Approved Guideline is to vote case-by-case, in accordance with the recommendation of an independent source. o The Investment Manager also may determine not to vote proxies in respect of securities of any issuer if it determines that it would be in the client's overall best interests not to vote. The Voting Guidelines address how it will vote proxies on particular types of matters such as the election for directors, adoption of option plans and anti-takeover proposals. For example, the Investment Manager generally will: o vote as recommended by management in routine election or re-election of directors; o favor programs intended to reward management and employees for positive, long-term performance, evaluating whether the Investment Manager believes, under the circumstances, that the level of compensation is appropriate or excessive; and o vote against anti-takeover measures, such as adopting supermajority voting requirements, shareholder rights plans and fair price provisions. The Fund's proxy voting record for the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 823-6300 or (2) on the SEC's website at http://www.sec.gov. Information as of June 30 each year will generally be available by the following August 31. ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT The Fund has entered into an administrative agreement with State Street Bank and Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts 02110, to provide certain administrative services to the Portfolios. Each Portfolio bears the cost of such services at a fixed annual rate of $37,500, plus $7,500 per additional class, and 0.02% of average daily net assets up to $1 billion and 0.01% of average daily net assets over $1 billion. State Street also acts as the Fund's custodian. As the Fund's custodian, State Street, among other things, maintains a custody account or accounts in the name of each Portfolio; receives and delivers all assets for each Portfolio upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions on account of the assets of each Portfolio and disburses the Portfolio's assets in payment of its expenses. The custodian does not determine the investment policies of any Portfolio or decide which securities any Portfolio will buy or sell. Boston Financial Data Services, Inc. ("BFDS") is the Fund's transfer and dividend disbursing agent. Under a transfer agency agreement with the Fund, BFDS arranges for the maintenance of shareholder account records for each Portfolio, the handling of certain communications between shareholders and the Fund and the payment of dividends and distributions payable by the Fund. For these services, BFDS receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the Fund during the month and is reimbursed for certain out-of-pocket expenses. 36 DISTRIBUTOR Lazard Asset Management Securities LLC serves as the distributor of each Portfolio's shares and conducts a continuous offering pursuant to a "best efforts" arrangement. As the distributor, it accepts purchase and redemption orders for Portfolio shares. In addition, the distribution agreement obligates the Distributor to pay certain expenses in connection with the offering of Portfolio shares. After the prospectus and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor also will pay for the printing and distribution of copies thereof used in connection with the offering to prospective investors. DETERMINATION OF NET ASSET VALUE Net asset value per share for each Class of each Portfolio is determined by State Street for the Fund on each day the New York Stock Exchange (the "NYSE") is open for business. The NYSE is ordinarily closed on the following national holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value per share is determined by dividing the value of the total assets of the Portfolio represented by such Class, less all liabilities, by the total number of Portfolio shares of such Class outstanding. Market values for securities listed on the NYSE, NASDAQ national market or other U.S. exchanges or markets are generally based on the last reported sales price on the principal exchange or market on which the security is traded, generally as of the close of regular trading on the NYSE (normally 4:00 p.m. Eastern time) on each valuation date; securities not traded on the valuation date are valued at the closing bid price. The Fund values NASDAQ-traded securities at the NASDAQ Official Closing Price, which may not be the last reported sales price in certain instances. Options on stock and stock indices traded on national securities exchanges are valued as of the close of options trading on such exchanges (which is normally 4:10 p.m., Eastern time). Any securities not listed, for which current over-the-counter market quotations or bids are readily available, are valued at the last quoted bid price or, if available, the mean of two such prices. Securities listed on foreign exchanges are valued at the last reported sales price except as described below; securities not traded on the valuation date are valued at the last quoted bid price. Bonds and other fixed-income securities that are not exchange-traded are valued on the basis of prices provided by pricing services which are based primarily on institutional trading in similar groups of securities, or by using brokers' quotations. Mortgage-backed securities issued by certain government-related organizations are valued using pricing services or brokers' quotations based on a matrix system which considers such factors as other security prices, yields and maturities. Debt securities maturing in 60 days or less are valued at amortized cost, except where to do so would not accurately reflect their fair value, in which case such securities are valued at fair value as determined under the supervision of the Board of Directors. Calculation of a Portfolio's net asset value may not take place contemporaneously with the determination of the prices of portfolio assets used in such calculation. Trading on Europe, Latin and South America and Far East securities exchanges and in over-the-counter markets ordinarily is completed well before the close of business on each business day in New York (I.E., a day on which the NYSE is open). In addition, European or Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York and on which the net asset value of a Portfolio is calculated. If events materially affecting the value of securities occur between the close of the exchange or market on which the security is principally traded and the time when a Portfolio's net asset 37 value is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board of Directors. Fair valuing of foreign securities may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant ADRs or futures contracts. The effect of using fair value pricing is that the net asset value of a Portfolio will reflect the affected securities' values as determined in the judgment of the Board of Directors or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from the most recent closing price of a security and from the prices used by other investment companies to calculate their portfolios' net asset values. Foreign securities may trade on days when a Portfolio is not open for business, thus affecting the value of the Portfolio's assets on days when Portfolio shareholders may not be able to buy or sell Portfolio shares. Securities and other assets for which current market quotations are not readily available are valued at fair value as determined in good faith in accordance with procedures approved by the Board of Directors. Under these procedures, in the event that the Investment Manager determines that a significant event has occurred after the close of a market on which a foreign security is traded but before the close of regular trading on the NYSE, such that current market quotations for a security or securities are not readily available, the Valuation Committee of the Investment Manager will evaluate a variety of factors to determine the fair value of the affected securities. These factors include, but are not limited to, the type of security, the value of comparable securities, observations from financial institutions and relevant news events. Input from the Investment Manager's analysts also will be considered. PORTFOLIO TRANSACTIONS GENERAL Subject to the supervision of the Board of Directors, the Investment Manager is primarily responsible for the investment decisions and the placing of portfolio transactions for each Portfolio. In arranging for the Portfolios' securities transactions, the Investment Manager is primarily concerned with seeking best execution, which is considered to be the most favorable combination of price and quantity that can be traded at a point in time given, among other factors, the liquidity, market conditions, and required urgency of execution. In choosing broker-dealers, the Investment Manager considers all relevant factors, including but not limited to: the ability of a broker-dealer to provide a prompt and efficient agency execution; the ability and willingness of a broker-dealer to facilitate the transactions by acting as principal and going at risk for its own accounts; the ability of a broker-dealer to provide accurate and timely settlement of the transaction; the Investment Manager's knowledge of the negotiated commission rates currently available and other current transactions costs; the clearance and settlement capabilities of the broker; the Investment Manager's knowledge of the financial condition of the broker or dealer selected; and any other matter relevant to the selection of a broker-dealer. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. To the extent consistent with applicable provisions of the 1940 Act and the rules adopted by the Commission thereunder, the Fund's Board of Directors has determined that securities transactions for a Portfolio may be executed through the Distributor if, in the judgment of the Investment Manager, the use 38 of the Distributor is likely to result in price and execution at least as favorable as those of other qualified brokers or dealers, and if, in the transaction, the Distributor charges the Portfolio a rate consistent with that charged to comparable unaffiliated customers in similar transactions. Purchase and sale orders for securities held by a Portfolio may be combined with those for other Portfolios in the interest of the most favorable net results for all. In some cases, this policy may adversely affect the price paid or received by an account, or the size of the position obtained or liquidated. When the Investment Manager determines that a particular security should be bought for or sold by more than one Portfolio, the Investment Manager undertakes to allocate those transactions between the participants equitably. IPO ALLOCATIONS. (All Portfolios, except High Yield Portfolio) Under the Investment Manager's trade allocation procedures applicable to domestic and foreign initial and secondary public offerings and Rule 144A transactions (collectively herein "IPO"), the number of shares allocated to any or all of the Portfolios and other accounts managed by the Investment Manager will be determined based on various factors, including the extent to which an account is considered relatively underweighted in a security, the extent to which an account has previously received an allocation of IPO securities, the extent to which the size of an allocation of IPO securities would represent a meaningful position for such account and any other factors that may be lawfully considered in allocating IPO shares among accounts. It is often difficult for the Investment Manager to obtain a sufficient number of IPO shares to provide a full allocation to each account. The Investment Manager's allocation procedures are designed to allocate IPO securities in a fair and equitable manner. The Portfolios listed below held securities of their regular brokers or dealers during the fiscal year ended December 31, 2005:
VALUE ON DECEMBER 31, 2005 PORTFOLIO BROKER/DEALER (IN $000S) ===================================== ===================================== ============================= [Equity Portfolio State Street Bank & Trust Company $ Citigroup, Inc. Merrill Lynch & Co., Inc. Morgan Stanley U.S. Strategic Equity Portfolio State Street Bank & Trust Company Mid Cap Portfolio State Street Bank & Trust Company Small Cap Portfolio State Street Bank & Trust Company International Equity Portfolio State Street Bank & Trust Company Credit Suisse Group International Equity Select Portfolio State Street Bank & Trust Company Credit Suisse Group UBS AG International Small Cap Portfolio State Street Bank & Trust Company Emerging Markets Portfolio State Street Bank & Trust Company High Yield Portfolio State Street Bank & Trust Company]
39 RESEARCH AND STATISTICAL INFORMATION Consistent with the requirements of best execution, brokerage commissions on a Portfolio's transactions may be paid to brokers in recognition of investment research and information furnished as well as for brokerage and execution services provided by such brokers. The Investment Manager may in its discretion cause accounts to pay such broker-dealers a commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer adequately qualified to effect such transaction would have charged for effecting that transaction. This may be done where the Investment Manager has determined in good faith that such commission is reasonable in relation to the value of the brokerage and/or research to that particular transaction or to the Investment Manager's overall responsibilities with respect to the accounts as to which it exercises investment discretion. The Investment Manager receives a wide range of research (including proprietary research) and brokerage services from brokers. These services include information on the economy, industries, groups of securities, and individual companies; statistical information; technical market action, pricing and appraisal services; portfolio management computer services (including trading and settlement systems); risk management analysis; and performance analysis. Broker-dealers may also supply market quotations to the Fund's custodian for valuation purposes. Any research received in respect of a Portfolio's brokerage commission may be useful to the Portfolio, but also may be useful in the management of the account of another client of the Investment Manager. Similarly, the research received for the commissions of such other client may be useful for the Portfolio. BROKERAGE COMMISSIONS In connection with its portfolio securities transactions for the fiscal years ended December 31, 2003, 2004 and 2005, each Portfolio indicated below paid brokerage commissions as follows: YEAR ENDED DECEMBER 31, 2003
PERCENTAGE OF TOTAL AMOUNT OF PERCENTAGE OF BROKERAGE BROKERAGE TOTAL BROKERAGE TRANSACTIONS TOTAL BROKERAGE COMMISSIONS PAID COMMISSIONS PAID EFFECTED THROUGH PORTFOLIO COMMISSIONS PAID TO LAZARD TO LAZARD LAZARD =================================== ================ ================ ================ =================== Equity Portfolio $ 183,371 $ - - - Mid Cap Portfolio 138,963 - - - Small Cap Portfolio 1,744,721 - - - International Equity Portfolio 2,792,928 - - - International Equity Select Portfolio 15,326 - - - International Small Cap Portfolio 501,595 - - - Emerging Markets Portfolio 704,188 3,515 0.50% 0.20%
40 YEAR ENDED DECEMBER 31, 2004
PERCENTAGE OF TOTAL AMOUNT OF PERCENTAGE OF BROKERAGE BROKERAGE TOTAL BROKERAGE TRANSACTIONS TOTAL BROKERAGE COMMISSIONS PAID COMMISSIONS PAID EFFECTED THROUGH PORTFOLIO COMMISSIONS PAID TO LAZARD TO LAZARD LAZARD =================================== ================ ================ ================ =================== Equity Portfolio $ 209,249 $- - - U.S. Strategic Equity Portfolio - - - - Mid Cap Portfolio 202,608 - - - Small Cap Portfolio 2,271,299 850 0.04% 0.07% International Equity Portfolio - - - - International Equity Select Portfolio - - - - International Small Cap Portfolio 946,205 386 0.04 0.04 Emerging Markets Portfolio 1,596,015 0.04 0.07
YEAR ENDED DECEMBER 31, 2005
PERCENTAGE OF TOTAL AMOUNT OF PERCENTAGE OF BROKERAGE BROKERAGE TOTAL BROKERAGE TRANSACTIONS TOTAL BROKERAGE COMMISSIONS PAID COMMISSIONS PAID EFFECTED THROUGH PORTFOLIO COMMISSIONS PAID TO LAZARD TO LAZARD LAZARD =================================== ================ ================ ================ =================== Equity Portfolio $ $ U.S. Strategic Equity Portfolio Mid Cap Portfolio Small Cap Portfolio % % International Equity Portfolio International Equity Select Portfolio International Small Cap Portfolio Emerging Markets Portfolio
The aggregate amount of transactions during the fiscal year ended December 31, 2005 in securities effected on an agency basis through a broker for, among other things, research services, and the commissions and concessions related to such transactions were as follows:
PORTFOLIO TRANSACTION AMOUNT COMMISSIONS AND CONCESSIONS ==================================== ================== =========================== Equity Portfolio $ $ Mid Cap Portfolio Small Cap Portfolio International Equity Portfolio International Equity Select Portfolio International Small Cap Portfolio Emerging Markets Portfolio
HOW TO BUY AND HOW TO SELL SHARES GENERAL. The minimum initial investment for each Portfolio is $10,000 for Open Shares, unless the investor is a client of a securities dealer or other institution which has made an aggregate minimum initial purchase for its clients of at least $10,000, and $1,000,000 for Institutional Shares. The minimum 41 investment requirements may be waived or lowered for investments effected through banks and other institutions that have entered into special arrangements with the Fund or the Distributor and for investments effected on a group basis by certain other entities and their employees, such as pursuant to a payroll deduction plan. The Fund reserves the right to change or waive the minimum initial, and subsequent, investment requirements at any time. Securities dealers and other institutions effecting transactions in Portfolio shares for the accounts of their clients may charge their clients direct fees in connection with such transactions. The Fund and the Distributor reserve the right to reject any purchase order. All funds will be invested in full and fractional shares. Stock certificates will not be issued. Each Portfolio may, in its discretion, accept securities in payment for shares of the Portfolio. Securities may be accepted in payment for shares only if the securities are, in the judgment of the Investment Manager, appropriate investments for the Portfolio. In addition, securities accepted in payment for Portfolio shares must: (i) meet the Portfolio's investment objective and policies; (ii) be acquired by the Portfolio for investment and not for resale; and (iii) be liquid securities with readily available market prices on the American Stock Exchange, the NYSE, The NASDAQ Stock Market, a recognized non-U.S. exchange or non-NASDAQ listing with at least two market makers. These securities are valued by the same method used to value the Portfolio's portfolio holdings. The contribution of securities to the Portfolio may be a taxable transaction to the shareholder. PURCHASES THROUGH THE TRANSFER AGENT. Orders for Portfolio shares will become effective at the net asset value per share next determined after receipt by the Transfer Agent or other agent of a check drawn on any member of the Federal Reserve System or after receipt by the Custodian or other agent of a bank wire or Federal Reserve Wire. Checks must be payable in United States dollars and will be accepted subject to collection at full face value. By investing in a Portfolio, a shareholder appoints the Transfer Agent, as agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional shares. PURCHASES THROUGH A LAZARD BROKERAGE ACCOUNT. Shares of all of the Portfolios are sold by the Distributor only to customers of the Distributor without a sales charge, on a continuous basis at the net asset value of the Portfolio next determined after receipt of a purchase order by the Distributor. Payments must be made to Lazard by the settlement date. Because the Distributor does not forward investors' funds until the business day on which the order is settled, it may benefit from temporary use of these funds. Please contact your Lazard account representative for specific instructions on how to purchase Portfolio shares through your Lazard brokerage account. SERVICE AGENTS. The Fund has authorized one or more brokers and other financial intermediaries ("Service Agents") to accept on its behalf purchase and redemption orders. Service Agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund's behalf. The Fund will be deemed to have received a purchase or redemption order when a Service Agent or, if applicable, a Service Agent's authorized designee, accepts the order. Customer orders will be priced at the respective Portfolio's net asset value next computed after such orders are accepted by a Service Agent or its authorized designee. Service Agents may charge their clients fees which would not apply to shares purchased through the Distributor. REDEMPTION FEE. Each Portfolio will impose a redemption fee equal to 1.00% of the net asset value of shares acquired by purchase or exchange and redeemed or exchanged within 30 days after such 42 shares were acquired. This fee will be calculated based on the shares' net asset value at redemption and deducted from the redemption proceeds. The fee will be retained by the Portfolio and used primarily to offset the transaction costs that short-term trading imposes on the Portfolio and its remaining shareholders. The redemption fee will not apply to shares acquired through the reinvestment of dividends or distributions. For purposes of calculating the 30-day holding period, the Fund will first redeem shares acquired through the reinvestment of dividends or distributions and then will employ the "first in, first out" method, which assumes that the shares redeemed or exchanged are the ones held the longest. In addition, no redemption fee will be charged on the redemption or exchange of shares purchased through certain omnibus account and other service arrangements established by Service Agents and approved by the Distributor. The redemption fee may be waived, modified or terminated at any time, or from time to time. REDEMPTION COMMITMENT. The Fund has committed to pay in cash all redemption requests by any shareholder of record, limited in amount during any 90-day period to the lesser of $250,000 or 1% of the value of a Portfolio's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the Commission. In the case of requests for redemption in excess of such amount, the Fund's Board of Directors reserves the right to make payments, in whole or in part in portfolio securities or other assets of the Portfolio in cases of emergency or at any time that the Investment Manager believes a cash distribution would impair the liquidity of the Portfolio to the detriment of the existing shareholders. In such event, the securities would be valued in the same manner as the Portfolio's investments are valued. If the recipient sold such securities, brokerage charges might be incurred. SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended, or the date of payment postponed: (a) during any period when the NYSE is closed (other than customary weekend and holiday closings); (b) when trading in the markets the Portfolio ordinarily utilizes is restricted, or when an emergency exists as determined by the Commission so that disposal of the Portfolio's investments or determination of its net asset value is not reasonably practicable; or (c) for such other periods as the Commission by order may permit to protect the Portfolio's shareholders. DISTRIBUTION AND SERVICING PLAN (OPEN SHARES ONLY) Open Shares are subject to a Distribution and Servicing Plan adopted by the Fund's Board of Directors pursuant to Rule 12b-1 (the "Rule") adopted by the Commission under the 1940 Act which 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. Pursuant to the Distribution and Servicing Plan, the Fund pays the Distributor for advertising, marketing and distributing each Portfolio's Open Shares, and for the provision of certain services to the holders of Open Shares, a fee at the annual rate of .25% of the average daily net assets of the Portfolio's Open Shares. The Distributor may make payments to Service Agents for providing these services. The services provided may include personal services relating to shareholder accounts, such as answering shareholder inquiries regarding the Fund and providing reports and other information, and services related to the maintenance of shareholder accounts. The fee payable for such services is intended to be a "service fee" as defined in Conduct Rules of the NASD. The Distributor may make payments to third parties in respect of these services. From time to time, the Distributor may defer or waive receipt of fees under the Distribution and Servicing Plan while retaining the ability to be paid by the Fund under the Distribution and Servicing Plan thereafter. The fees payable under the Distribution and Servicing Plan are payable without regard to actual expenses incurred. The Fund's Board of Directors believes there is a reasonable likelihood that the Distribution and Servicing Plan will benefit each Portfolio and holders of Open Shares. 43 A quarterly report of the amounts expended under the Distribution and Servicing Plan, and the purposes for which such expenditures were incurred, must be made to the Board of Directors for its review. The Distribution and Servicing Plan provides that it may not be amended to increase materially the costs which holders of Open Shares of a Portfolio may bear without such shareholders' approval and that other material amendments of the Distribution and Servicing Plan must be approved by the Board of Directors and by the Independent Directors of the Fund and have no direct or indirect financial interest in the operation of the Distribution and Servicing Plan or in any agreements entered into in connection with the Distribution and Servicing Plan, by vote cast in person at a meeting called for the purpose of considering such amendments. The Distribution and Servicing Plan is subject to annual approval by such vote cast in person at a meeting called for the purpose of voting on the Distribution and Servicing Plan. As to each Portfolio, the Distribution and Servicing Plan may be terminated at any time by vote of a majority of the Independent Directors and have no direct or indirect financial interest in the operation of the Distribution and Servicing Plan or in any agreements entered into in connection with the Distribution and Servicing Plan, or by vote of the holders of a majority of such Portfolio's Open Shares. For the fiscal year ended December 31, 2005, the Portfolios paid the Distributor the amounts set forth below with respect to their Open Shares under the Distribution and Servicing Plan: AMOUNT PAID UNDER DISTRIBUTION AND SERVICING PLAN FOR FISCAL YEAR PORTFOLIO ENDED DECEMBER 31, 2005 ==================================== =============================== Equity Portfolio $ Mid Cap Portfolio Small Cap Portfolio International Equity Portfolio International Equity Select Portfolio International Small Cap Portfolio Emerging Markets Portfolio High Yield Portfolio DIVIDENDS AND DISTRIBUTIONS The Fund intends to declare as a dividend on the outstanding shares of High Yield Portfolio substantially all of the Portfolio's net investment income at the close of each business day to shareholders of record as of the close of regular trading on the NYSE. Net investment income for a Saturday, Sunday or holiday will be included in the dividend declared on the previous business day. Dividends declared on the shares of High Yield Portfolio ordinarily will be paid on the last business day of each month. Shareholders who redeem all their shares of the Portfolio prior to a dividend payment date will receive, in addition to the redemption proceeds, any dividends that are declared but unpaid through the date of their redemption. Shareholders of the Portfolio who redeem only a portion of their shares will receive all dividends declared but unpaid on those shares on the next dividend payment date. Dividends from net investment income on Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap, U.S. Small Cap Equity Growth, International Equity, International Equity Select, International Strategic Equity, International Small Cap and Emerging Markets Portfolios generally will be declared and paid at least annually, and may be declared and paid more frequently. Dividends for each Class of a Portfolio will be calculated at the same time and in the same manner and will be of the same amount, except that certain expenses will be borne exclusively by one 44 Class and not by the other, such as fees payable under the Distribution and Servicing Plan. Open Shares will receive lower per share dividends than Institutional Shares because of the higher expenses borne by Open Shares. Investment income for a Portfolio includes, among other things, interest income, accretion of market and original issue discount and amortization of premium and, in the case of Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap, U.S. Small Cap Equity Growth, International Equity, International Equity Select, International Strategic Equity, International Small Cap and Emerging Markets Portfolios, would include dividends. With respect to all of the Portfolios, net realized capital gains, if any, will be distributed at least annually, and may be declared and paid more frequently. If a dividend check mailed to a shareholder who elected to receive dividends and/or capital gain distributions in cash is returned as undeliverable by the postal or other delivery service, such shareholder's distribution option automatically will be converted to all dividends and other distributions reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution or redemption checks. TAXATION Management believes that each Portfolio that had commenced investment operations as of the date of this Statement of Additional Information has qualified for the most recent fiscal year as a "regulated investment company" under Subchapter M of the Code. It is intended that each such Portfolio will continue to so qualify as a regulated investment company, if such qualification is in the best interests of its shareholders. Each Portfolio will be treated as a separate entity for tax purposes and thus the provisions of the Code applicable to regulated investment companies generally will be applied to each Portfolio separately, rather than to the Fund as a whole. As a regulated investment company, a Portfolio will pay no federal income tax on net investment income and net realized securities gains to the extent that such income and gains are distributed to shareholders in accordance with applicable provisions of the Code. To qualify as a regulated investment company, the Portfolio must distribute at least 90% of its net income (consisting of net investment income and net short-term capital gain) to its shareholders and meet certain asset diversification and other requirements. If the Portfolio did not qualify as a regulated investment company, it would be treated, for tax purposes, as an ordinary corporation subject to federal income tax. The term "regulated investment company" does not imply the supervision of management of investment practices or policies by any government agency. The initial assets of International Strategic Equity Portfolio consisted of an in kind contribution of securities on October 31, 2005 with an aggregate value on that date of $[____] million and having an aggregate tax basis for federal income tax purposes in the hands of the transferor of $[____] million. The Portfolio intends to treat the contribution as a tax free exchange for federal income tax purposes under Section 351 of the Code. As a result, the Portfolio's basis in the contributed securities is the same as the basis of the contributed securities in the hands of the transferor, and the Portfolio's holding period for the contributed securities includes the transferor's holding period of the securities. The excess of the aggregate value of the contributed securities on the date of contribution over their aggregate tax basis for federal income tax purposes represents potential gain to the Portfolio when such securities are sold, which gain would be distributed to Portfolio shareholders principally in the form of (long term) capital gain dividends. Any dividend or distribution paid shortly after an investor's purchase may have the effect of reducing the net asset value of the shares below the investor's cost of those shares. Such a dividend or distribution would be a return of investment in an economic sense, although taxable as stated in the 45 Prospectus. In addition, the Code provides that if a shareholder holds shares of a Portfolio for six months or less and has received a capital gain distribution with respect to such shares, any loss incurred on the sale of such shares will be treated as long-term capital loss to the extent of the capital gain distribution received. Corporate shareholders of Equity, U.S. Equity Value, U.S. Strategic Equity, Mid Cap, Small Cap and U.S. Small Cap Equity Growth Portfolios will be eligible for the dividends-received deduction on the dividends (excluding the net capital gain dividends) paid by the Portfolio, to the extent that the Portfolio's income is derived from certain dividends received from domestic corporations. A corporation's dividends-received deduction will be disallowed unless the corporation holds shares in the Portfolio for 46 days or more during the 90-day period commencing 45 days before the shares become ex-dividend. Furthermore, a corporation's dividends-received deduction will be disallowed to the extent a corporation's investment in shares of the Portfolio is financed with indebtedness. It is anticipated that distributions from the other Portfolios will not qualify for the dividends-received distribution. Each year the Fund will notify shareholders of the federal income tax status of distributions. High Yield Portfolio may invest in REMICs. Interests in REMICs are classified as either "regular" interests or "residual" interests. Under the Code, special rules apply with respect to the treatment of a portion of the Portfolio's income from REMIC residual interests. (Such portion is referred to herein as "Excess Inclusion Income.") Excess Inclusion Income generally cannot be offset by net operating losses and, in addition, constitutes unrelated business taxable income to entities which are subject to the unrelated business income tax. The Code provides that a portion of Excess Inclusion Income attributable to REMIC residual interests held by regulated investment companies such as the Portfolios shall, pursuant to regulations, be allocated to the shareholders of such regulated investment company in proportion to the dividends received by such shareholders. Accordingly, shareholders of High Yield Portfolio generally will not be able to use net operating losses to offset such Excess Inclusion Income. In addition, if a shareholder of one of the Portfolios is an entity subject to the unrelated business income tax (including a qualified pension plan, an IRA, a 401(k) plan, a Keogh plan, or another tax-exempt entity) and is allocated any amount of Excess Inclusion Income, such a shareholder may be required to file a return and pay a tax on such Excess Inclusion Income even though a shareholder might not have been required to pay such tax or file such return absent the receipt of such Excess Inclusion Income. The Investment Manager anticipates that only a small portion, if any, of the assets of High Yield Portfolio will be invested in REMIC residual interests. Accordingly, the amount of Excess Inclusion Income, if any, received by the Portfolio and allocated to its shareholders should be quite small. Shareholders that are subject to the unrelated business income tax should consult their own tax adviser regarding the treatment of their income derived from the Portfolio. Except as discussed above with respect to Excess Inclusion Income, a dividend or capital gains distribution with respect to shares held by a tax-deferred or qualified plan, such as an IRA, 403(b)(7) retirement plan or corporate pension or profit sharing plan, will not be taxable to the plan. Distributions from such plans will be taxable to individual participants under applicable tax rules without regard to the income earned by the qualified plan. Ordinarily, gains and losses realized from portfolio transactions will be treated as capital gains and losses. However, a portion of the gain or loss realized from the disposition of foreign currencies and non-U.S. dollar denominated securities (including debt instruments and certain futures or forward contracts and options) may be treated as ordinary income or loss. In addition, all or a portion of any gains realized from the sale or other disposition of certain market discount bonds will be treated as ordinary income. Finally, all or a portion of the gain realized from engaging in "conversion transactions" (generally including certain transactions designed to convert ordinary income into capital gain) may be treated as ordinary income. 46 Gain or loss, if any, realized by a Portfolio from certain financial futures or forward contracts and options transactions ("Section 1256 contracts") will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. Gain or loss will arise upon exercise or lapse of such Section 1256 contract as well as from closing transactions. In addition, any Section 1256 contracts remaining unexercised at the end of the Portfolio's taxable year will be treated as sold for its then fair market value, resulting in additional gain or loss to such Portfolio. Offsetting positions held by a Portfolio involving certain financial futures or forward contracts or options transactions with respect to actively traded personal property may be considered, for tax purposes, to constitute "straddles." To the extent the straddle rules apply to positions established by the Portfolio, losses realized by the Portfolio may be deferred to the extent of unrealized gain in the offsetting position. In addition, short-term capital loss on straddle positions may be recharacterized as long-term capital loss, and long-term capital gains on straddle positions may be treated as short-term capital gains or ordinary income. Certain of the straddle positions held by the Portfolio may constitute "mixed straddles." The Portfolio may make one or more elections with respect to the treatment of "mixed straddles," resulting in different tax consequences. In certain circumstances, the provisions governing the tax treatment of straddles override or modify certain of the provisions discussed above. If a Portfolio either (1) holds an appreciated financial position with respect to stock, certain debt obligations, or partnership interests ("appreciated financial position") and then enters into a short sale, futures or forward contract, or offsetting notional principal contract (collectively, a "Contract") with respect to the same or substantially identical property or (2) holds an appreciated financial position that is a Contract and then acquires property that is the same as, or substantially identical to, the underlying property, the Portfolio generally will be taxed as if the appreciated financial position were sold at its fair market value on the date the Portfolio enters into the financial position or acquires the property, respectively. If a Portfolio enters into certain derivatives (including forward contracts, long positions under notional principal contracts, and related puts and calls) with respect to equity interests in certain pass-thru entities (including other regulated investment companies, real estate investment trusts, partnerships, real estate mortgage investment conduits and certain trusts and foreign corporations), long-term capital gain with respect to the derivative may be recharacterized as ordinary income to the extent it exceeds the long-term capital gain that would have been realized had the interest in the pass-thru entity been held directly by the Portfolio during the term of the derivative contract. Any gain recharacterized as ordinary income will be treated as accruing at a constant rate over the term of the derivative contract and may be subject to an interest charge. The Treasury has authority to issue regulations expanding the application of these rules to derivatives with respect to debt instruments and/or stock in corporations that are not pass-through entities. Investment by a Portfolio in securities issued or acquired at a discount, or providing for deferred interest or for payment of interest in the form of additional obligations, could under special tax rules affect the amount, timing and character of distributions to shareholders by causing the Portfolio to recognize income prior to the receipt of cash payments. For example, the Portfolio could be required each year to accrue a portion of the discount (or deemed discount) at which the securities were issued and to distribute such income in order to maintain its qualification as a regulated investment company. In such case, the Portfolio may have to dispose of securities which it might otherwise have continued to hold in order to generate cash to satisfy the distribution requirements. 47 Certain Portfolios may invest in an entity that is classified as a "passive foreign investment company" ("PFIC") for federal income tax purposes, the operation of certain provisions of the Code applying to PFICs could result in the imposition of certain federal income taxes on the Portfolios. In addition, gain realized from the sale or other disposition of PFIC securities held beyond the end of the Portfolio's taxable year may be treated as ordinary income. Income received by a Portfolio from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine the effective rate of foreign tax in advance, since the amount of each Portfolio's assets to be invested in various countries is not known. If you are neither a resident nor a citizen of the United States, or if you are a foreign entity, the Portfolio's ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies; provided, however, that for taxable years of the Portfolio beginning after December 31, 2004, but not beginning after December 31, 2007, your interest-related dividends and short-term capital gain dividends from the Portfolio generally will not be subject to such U.S. withholding tax if the Fund receives prescribed certifications from you as to your non-U.S. status. If more than 50% of the value of a Portfolio's total assets at the close of its taxable year consists of the stock or securities of foreign corporations, the Portfolio may elect to "pass through" to its shareholders the amount of foreign income taxes paid by the Portfolio. Pursuant to such election, shareholders would be required: (i) to include in gross income, even though not actually received, their respective pro rata shares of the foreign taxes paid by the Portfolio; (ii) treat their income from the Portfolio as being from foreign sources to the extent that the Portfolio's income is from foreign sources; and (iii) either to deduct their pro rata share of foreign taxes in computing their taxable income, or to use it as a foreign tax credit against federal income (but not both). No deduction for foreign taxes could be claimed by a shareholder who does not itemize deductions. It is anticipated that each of International Equity, International Equity Select, International Strategic Equity, International Small Cap and Emerging Markets Portfolios, will be operated so as to meet the requirements of the Code to "pass through" to shareholders of the Portfolio credits for foreign taxes paid, although there can be no assurance that these requirements will be met. Each shareholder will be notified within 45 days after the close of each taxable year of the Portfolio whether the foreign taxes paid by the Portfolio will "pass through" for that year, and, if so, the amount of each shareholder's pro rata share of (i) the foreign taxes paid, and (ii) the Portfolio's gross income from foreign sources. Of course, shareholders who are not liable for federal income taxes, such as retirement plans qualified under Section 401 of the Code, will not be affected by any such "pass through" of foreign tax credits. The foregoing is only a general summary of some of the important federal income tax considerations generally affecting the Portfolios and their shareholders. No attempt is made to present a complete explanation of the federal tax treatment of the Portfolios' activities or to discuss state and local tax matters affecting the Portfolios. ADDITIONAL INFORMATION ABOUT THE FUND AND PORTFOLIOS As of February __, 2006, no person owned of record or was known by the Fund to own beneficially 5% or more of a class of the indicated Portfolio's outstanding voting securities except the following: 48 PERCENTAGE OF TOTAL INSTITUTIONAL NAME AND ADDRESS SHARES OUTSTANDING --------------- ------------------- EQUITY PORTFOLIO Citigroup Global Markets Inc. 388 Greenwich Street New York, NY 10013 % Lazard Capital Markets LLC Lazard Freres & Co. LLC Employees Savings Plan 30 Rockefeller Plaza New York, NY 10112 % Lazard Capital Markets LLC Lazard Freres & Co. LLC Employees Employee Pension Trust 30 Rockefeller Plaza New York, NY 10112 % Lazard Capital Markets LLC Iron Workers Local 40 361 & 417 Topping Out Fund Joint Board of Trustees 583 Route 32 Wallkill, NY 12589-2708 % Bank of America TTEE for the International Union Of Operating Engineers Local 57 Annuity P.O. Box 831575 Dallas, TX 75283-1575 % U.S. STRATEGIC EQUITY PORTFOLIO Lazard Capital Markets LLC Lazard Asset Management LLC 30 Rockefeller Plaza New York, NY 10112 % Lazard Capital Markets LLC Wendy W. Lacey 30 Rockefeller Plaza New York, NY 10112 % Lazard Capital Markets LLC Ellen Bernstein Fox 30 Rockefeller Plaza New York, NY 10112 % Lazard Capital Markets LLC Gerald B. Mazzari 30 Rockefeller Plaza New York, NY 10112 % 49 Lazard Capital Markets LLC Richard Fox 30 Rockefeller Plaza New York, NY 10112 % MID CAP PORTFOLIO Lazard Capital Markets LLC Sprinkler Industry 30 Rockefeller Plaza New York, NY 10112 % Suntrust Bank, Trustee Suntrust Bank Inc. 401k Plan P.O. Box 4655, Dept. 210 Atlanta, GA 30302 % Northern Trust Company, Trustee FBO Advocate-DV P.O. Box 92994 Chicago, IL 60675 % SMALL CAP PORTFOLIO National Financial Services Corp. FBO Our Customers 200 Liberty Street New York, NY 10281 % Lazard Capital Markets LLC Vermont Municipal Employees Retirement System 30 Rockefeller Plaza New York, NY 10112 % Lazard Capital Markets LLC Soft Drink Worker Union Local 812 188 Summerfield Street Scarsdale, NY 10583 % Citigroup Global Markets Inc. 388 Greenwich Street New York, NY 10013 % INTERNATIONAL EQUITY PORTFOLIO Savings Plan for the Employees and Partners of PriceWaterhouseCoopers LLP One Wall Street-12th Floor New York, NY 10286-0001 % 50 Citigroup Global Markets Inc. 388 Greenwich Street New York, NY 10013 % INTERNATIONAL EQUITY SELECT PORTFOLIO National Financial Services LLC 200 Liberty Street New York, NY 10281 % INTERNATIONAL SMALL CAP PORTFOLIO Lazard Asset Management LLC as Agent for Oregon Investment Council 30 Rockefeller Plaza New York, NY 10112 % State Street Bank, Trustee Mississippi Public Employees Retirement System 1 Enterprise Drive Quincy, MA 02171 % Northern Trust Company Custodian FBO Public School Teachers Pension Fund of Chicago P.O. Box 92956 Chicago, IL 60675 % American Airlines, Inc. Master Fixed Benefit Trust 4333 Amon Carter Blvd, #2450 Fort Worth, TX 76155-2664 % EMERGING MARKETS PORTFOLIO Lazard Asset Management LLC as Agent Oregon Investment Council 30 Rockefeller Plaza New York, NY 10112 % Savings Plan for Employees & Partners of PricewaterhouseCoopers LLP 1 Wall Street-12th Floor New York, NY 10286-0001 % Merrill Lynch For The Sole Benefit of Its Customers 4800 Deer Lake Dr. East 2nd Fl. Jacksonville, FL 32246-6484 % Northern Trust Company Custodian FBO Public School Teachers Pension Fund of Chicago P.O. Box 92956 Chicago, IL 60675 % 51 Retirement Benefit Accumulation Plan For Employees Of PricewaterhouseCoopers LLP Bank of New York Cust Attn: Y Smith 1 Wall Street Floor 12th New York, NY 10286-0001 % Lockheed Martin Corporation Master Retirement Trust Lockheed Martin Investment Management Co. 6750 Rockledge Drive, Suite 550 Bethesda, MD 20817 % HIGH YIELD PORTFOLIO Mac & Co. Mutual Funds Operations TC P.O. Box 3198 Pittsburgh, PA 15230-3198 % Lazard Capital Markets LLC Employee Security Fund of the Electrical Products Industry Pension Plan 30 Rockefeller Plaza New York, NY 10112 % North Dakota Board of University & School Lands P.O. Box 5523 Bismarck ND 58506-5523 % The Bernard Heller Foundation 1621 Bushgrove Court Westlake Village, CA 91361 % Pershing LLC P.O. Box 2052 Jersey City, NJ 07303 % 52 PERCENTAGE OF TOTAL OPEN SHARES NAME AND ADDRESS OUTSTANDING ---------------- ----------------- EQUITY PORTFOLIO Prudential Retirement Insurance & Annuity Co. 280 Trumbull Street Hartford, CT 06103 % Merrill Lynch, Pierce, Fenner & Smith Incorporated 4800 Deer Lake Drive East Jacksonville, FL 32246 % Smith Barney 401k Advisor Group Trust Smith Barney Corporate Trust Co. 2 Tower Center, P.O. Box 1063 East Brunswick, NJ 08816 % MID CAP PORTFOLIO Prudential Retirement Insurance & Annuity Co. 280 Trumbull Street Hartford, CT 06103 % Nationwide Trust Company, Custodian FBO IPO Portfolio Accounting P.O. Box 182029 Columbus, OH 43218-2029 % Wachovia Bank FBO Various Retirement Plans 1525 West WT Harris Blvd. Charlotte, NC 26288 % SMALL CAP PORTFOLIO Prudential Retirement Insurance & Annuity Co. 280 Trumbull Street Hartford, CT 06103 % Nationwide Life Insurance, QVPA c/o IPO Portfolio Account P.O. Box 182029 Columbus, OH 43218-2029 % Nationwide Life Ins NWVA C/O IPO Port Acct P.O. Box 182029 Columbus, OH 43218-2029 % ING Life Insurance and Annuity Company 151 Farmington Avenue Hartford, CT 06156 % 53 INTERNATIONAL EQUITY PORTFOLIO Prudential Retirement Insurance & Annuity Co. 280 Trumbull Street Hartford, CT 06103 % Charles Schwab & Co. Inc. Special Custody Account for the Benefit of its Customers 101 Montgomery Street San Francisco, CA 94104 % ING National Trust 151 Farmington Ave Hartford, CT 06156 % Smith Barney 401k Advisor Group Trust Smith Barney Corporate Trust Co. 2 Tower Center, P.O. Box 1063 East Brunswick, NJ 08816 % INTERNATIONAL EQUITY SELECT PORTFOLIO Charles Schwab & Co. Inc. Special Custody Account for the Benefit of its Customers 101 Montgomery St. San Francisco, CA 94104 % Turtle & Co. c/o State Street Bank & Trust P.O. Box 5489 Boston, MA 02206 % INTERNATIONAL SMALL CAP PORTFOLIO Charles Schwab & Co. Inc. Special Custody Account for the benefit of its Customers 101 Montgomery St. San Francisco, CA 94104 % EMERGING MARKETS PORTFOLIO Charles Schwab & Co., Inc. Special Custody Account for the Benefit of Customers 101 Montgomery Street San Francisco, CA 94104 % 54 National Investor Services Corp. FBO 097-50000-19 55 Water Street, 32nd Floor New York, NY 10041-3299 % HIGH YIELD PORTFOLIO NFS LLC FEBO John R. Gallegher III 488 Commonwealth Avenue Boston, MA 02215 % Lazard Capital Markets LLC OCF Foundation Inc. 30 Rockefeller Plaza New York, NY 10112 % State Street Bank & Trust Company Custodian for IRA for the benefit of Richard J. Urowsky 125 Broad Street New York, NY 10004 % Lehman Brothers, Inc. 70 Hudson Street, 7th Floor Jersey City, NJ 07302 % Lazard Capital Markets LLC Patricia N. McEntee 30 Rockefeller Plaza New York, NY 10112 % A shareholder who beneficially owns, directly or indirectly, more than 25% of the Fund's voting securities may be deemed a "control person" (as defined in the 1940 Act) of the Fund. Certain of the shareholders are investment management clients of the Investment Manager that have entered into agreements with the Investment Manager pursuant to which the Investment Manager has investment discretion and voting power over any assets held in the clients' accounts, including shares of the Portfolios. For purposes of the list above, the Fund considers the Investment Manager to be a beneficial owner of Portfolio shares held in management accounts on behalf of its investment management clients. Generally, all shares have equal voting rights and will be voted in the aggregate, and not by class, except where voting by Class is required by law or where the matter involved affects only one Class. As used in this Statement of Additional Information, the vote of a majority of the outstanding voting securities means, with respect to the Fund or a Portfolio, the vote of the lesser of (i) 67% of the shares represented at a meeting if the holders of more than 50% of the outstanding shares of the Fund or Portfolio, as the case may be, are present in person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund or Portfolio, as the case may be. Shareholders are entitled to one vote for each full share held, and fractional votes for fractional shares held. 55 Shareholders are not entitled to any preemptive, subscription or conversion rights and are freely transferable. All shares, when issued and paid for in accordance with the terms of the offering, will be fully paid and non-assessable by the Fund. Each share of the applicable Class of a Portfolio is entitled to such dividends and distributions out of the income earned on the assets belonging to that Portfolio as are declared in the discretion of the Fund's Board of Directors. In the event of the liquidation of a Portfolio, shares of each Class of the Portfolio are entitled to receive the assets attributable to such Class of that Portfolio that are available for distribution based upon the relative net assets of the applicable Class. Unless otherwise required by the 1940 Act, ordinarily it will not be necessary for the Fund to hold annual meetings of shareholders. As a result, shareholders may not consider each year the election of Directors or the appointment of independent auditors. However, the holders of at least 10% of the shares outstanding and entitled to vote may require the Fund to hold a special meeting of shareholders for purposes of removing a Director from office. Shareholders may remove a Director by the affirmative vote of two-thirds of the Fund's outstanding voting shares. In addition, the Board of Directors will call a meeting of shareholders for the purpose of electing Directors if, at any time, less than a majority of the Directors then holding office have been elected by shareholders. The Fund is a "series fund," which is a mutual fund divided into separate portfolios, each of which is treated as a separate entity for certain matters under the 1940 Act and for other purposes. A shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. For certain matters shareholders vote together as a group; as to others they vote separately by portfolio. To date, the Board of Directors has authorized the creation of twelve Portfolios of shares. All consideration received by the Fund for shares of one of the Portfolios, and all assets in which such consideration is invested, will belong to that Portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The income attributable to, and the expenses of, one Portfolio would be treated separately from those of the other Portfolios. The Fund has the ability to create, from time to time, new series without shareholder approval. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of each portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. The Rule exempts the selection of independent auditors and the election of Directors from the separate voting requirements of the rule. Each Portfolio will send annual and semi-annual financial statements to its shareholders. The Fund's Registration Statement, including the Prospectus, the Statement of Additional Information and the exhibits filed therewith, may be examined at the office of the Commission in Washington, D.C. Statements contained in the Prospectus or this Statement of Additional Information as to the content of any contract or other document referred to herein or in the Prospectus are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A special service is available to banks, brokers, investment advisers, trust companies and others who have a number of accounts in the Fund. In addition to the regular Statement of Account furnished to 56 the registered holder after each transaction, a monthly summary of accounts can be provided. The monthly summary will show for each account the account number, the month-end share balance and the dividends and distributions paid during the month. For information on the special monthly summary of accounts, contact the Fund. COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Legal matters in connection with the issuance of the shares of the Fund offered hereby have been passed upon by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038-4982. ___________________________, is the independent registered public accounting firm for the Fund. 57 APPENDIX Rating Categories Description of certain ratings assigned by S&P and Moody's: S&P LONG-TERM --------- AAA An obligation rated 'AAA' has the highest rating assigned by S&P. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. AA An obligation rated 'AA' differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. BB, B, CCC, CC, AND C Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. BB An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. CCC An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. 58 CC An obligation rated 'CC' is currently highly vulnerable to nonpayment. C A subordinated debt or preferred stock obligation rated 'C' is currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying. D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation 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 also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. r The symbol 'r' is attached to the ratings of instruments with significant noncredit risks. It highlights risks to principal or volatility of expected returns which are not addressed in the credit rating. Examples include: obligations linked or indexed to equities, currencies, or commodities; obligations exposed to severe prepayment risk--such as interest-only or principal-only mortgage securities; and obligations with unusually risky interest terms, such as inverse floaters. N.R. The designation 'N.R.' indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a matter of policy. Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign designation to show relative standing within the major rating categories. SHORT-TERM ---------- A-1 A short-term obligation rated 'A-1' is rated in the highest category by S&P. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are given a plus sign (+) designation. This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong. A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory. A-3 A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. 59 B A short-term obligation rated 'B' is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet is financial commitment on the obligation. C A short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. D A short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation 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 also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. MOODY'S LONG-TERM --------- Aaa Bonds rated 'Aaa' are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." 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 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 risk appear somewhat larger than the 'Aaa' securities. A Bonds rated 'A' possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. Baa Bonds 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. 60 Ba Bonds 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 rated 'B' generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds 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. Ca Bonds rated 'Ca' represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds 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. Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from 'Aa' through 'Caa.' The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. PRIME RATING SYSTEM (SHORT-TERM) -------------------------------- Issuers rated PRIME-1 (or supporting institutions) 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: o Leading market positions in well-established industries. o High rates of return on funds employed. o Conservative capitalization structure with moderate reliance on debt and ample asset protection. o Broad margins in earnings coverage of fixed financial charges and high internal cash generation. o Well-established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated PRIME-2 (or supporting institutions) 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, may be more subject to variation. 61 Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated PRIME-3 (or supporting institutions) 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 may require relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories. THE LAZARD FUNDS, INC. PART C. OTHER INFORMATION ITEM 23. EXHIBITS ------- -------- (a)(1) Articles of Incorporation, Articles of Amendment and Articles Supplementary(1), (2), (3), (7) and (8) (b) By-Laws(6) (d)(1) Investment Management Agreement(9) (d)(2) Investment Management Agreement, as revised(9) (e) Distribution Agreement, as revised(8) (g) Amended and Restated Custodian Contract(1) (h)(1) Revised Transfer Agency and Service Agreement(1) (h)(2) Amendment to Revised Transfer Agency and Service Agreement(1) (h)(3) Administration Agreement(4) (i) Opinion and Consent of Counsel(5) (j) Consent of Independent Registered Public Accounting Firm* (m)(1) Distribution and Servicing Plan, as revised(8) (m)(2) Form of Servicing Agreement(8) (n) Rule 18f-3 Plan, as revised(8) (p) Code of Ethics(8) OTHER EXHIBITS: (s) Power of Attorney of Board Members(1), (6) and (9) -------------------------------------------------------------------- * To be filed by amendment. 1. Incorporated by reference from Registrant's Post-Effective Amendment No. 28 filed with the Securities and Exchange Commission (the "SEC") on April 29, 2003. 2. Incorporated by reference from Registrant's Post-Effective Amendment No. 22 filed with the SEC on December 29, 2000. 3. Incorporated by reference from Registrant's Post-Effective Amendment No. 25 filed with the SEC on April 30, 2001. 4. Incorporated by reference from Registrant's Post-Effective Amendment No. 8 filed with the SEC on October 13, 1995. 5. Incorporated by reference from Registrant's Post-Effective Amendment No. 9 filed with the SEC on December 27, 1995. 6. Incorporated by reference from Registrant's Post-Effective Amendment No. 30 filed with the SEC on October 15, 2004. 7. Incorporated by reference from Registrant's Post-Effective Amendment No. 31 filed with the SEC on December 3, 2004. 8. Incorporated by reference from Registrant's Post-Effective Amendment No. 34 filed with the SEC on July 20, 2005. 9. Incorporated by reference from Registrant's Post-Effective Amendment No. 36 filed with the SEC on September 28, 2005. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. ------- ------------------------------------------------------------- None. ITEM 25. INDEMNIFICATION. ------- --------------- Reference is made to Article EIGHTH of Registrant's Articles of Incorporation filed as Exhibit (a) and to Section 2-418 of the Maryland General Corporation Law. The application of these provisions is limited by Article VIII of Registrant's By-Laws filed as Exhibit (b) and by the following undertaking set forth in the rules promulgated by the SEC: Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in such Act and is, therefore, unenforceable. In such event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of 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, 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 such Act and will be governed by the final adjudication of such issue. Reference also is made to the Investment Management Agreements and the Distribution Agreement filed as Exhibits (d) and (e), respectively. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS. ------- ----------------------------------------------------- The description of the Investment Manager under the Captions "Fund Management" in the Prospectus and "Management" in the Statement of Additional Information constituting Parts A and B, respectively, of this Registration Statement is incorporated by reference herein. Registrant is fulfilling the requirement of this Item 26 to provide a list of the officers and directors of Lazard Asset Management LLC, Registrant's investment adviser ("LAM"), together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by LAM or those of its officers and members during the past two years by incorporating by reference the information contained in the Form ADV filed with the SEC pursuant to the Investment Advisers Act of 1940, as amended, by LAM (SEC File No. 801-61701). ITEM 27. PRINCIPAL UNDERWRITERS. ------- ----------------------- (a) Lazard Asset Management Securities LLC, ("Lazard") currently serves as principal underwriter for the Registrant and Lazard Retirement Series, Inc. (b) Registrant is fulfilling the requirement of this Item 27 by incorporating by reference the information contained in the Form BD filed pursuant to the Securities Exchange Act of 1934, as amended by Lazard (SEC File No. 129119). (c) Not applicable. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS. -------- --------------------------------- The majority of the accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules thereunder are maintained as follows: journals, ledgers, securities records and other original records are maintained primarily at the offices of Registrant's custodian, State Street Bank and Trust Company. All other records so required to be maintained are maintained at the offices of LAM, 30 Rockefeller Plaza, New York, New York 10112. ITEM 29. MANAGEMENT SERVICES. ------- ------------------- Not applicable. ITEM 30. UNDERTAKINGS. ------- ------------ None. 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, and State of New York, on the 15th day of December, 2005. THE LAZARD FUNDS, INC. By: /s/ CHARLES CARROLL ---------------------------------------- Charles Carroll, Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
/s/ CHARLES CARROLL President and Director December 15, 2005 ---------------------------- Charles Carroll /s/ STEPHEN W. ST. CLAIR Treasurer and Chief Financial December 15, 2005 --------------------------- Officer Stephen W. St. Clair /s/ ASHISH BHUTANI* Director December 15, 2005 --------------------------- Ashish Bhutani /s/ JOHN J. BURKE* Director December 15, 2005 --------------------------- John J. Burke /s/ LESTER Z. LIEBERMAN* Director December 15, 2005 --------------------------- Lester Z. Lieberman /s/ RICHARD REISS, JR.* Director December 15, 2005 --------------------------- Richard Reiss, Jr. /s/ KENNETH S. DAVIDSON* Director December 15, 2005 --------------------------- Kenneth S. Davidson /s/ WILLIAM KATZ* Director December 15, 2005 --------------------------- William Katz /s/ ROBERT M. SOLMSON* Director December 15, 2005 --------------------------- Robert M. Solmson *By: /s/ NATHAN A. PAUL --------------------------- Attorney-in-fact, Nathan A. Paul