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STATEMENT OF ADDITIONAL INFORMATION
THE 59 WALL STREET TAX FREE SHORT/INTERMEDIATE FIXED INCOME FUND
6 ST. JAMES AVENUE, BOSTON, MASSACHUSETTS 02116
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The 59 Wall Street Tax Free Short/Intermediate Fixed Income Fund (the
"Fund") is a separate portfolio of The 59 Wall Street Trust (the "Trust"), a
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The investment objective of the Fund is to
provide investors with as high a level of income exempt from federal income tax
as is consistent with minimizing price fluctuations in net asset value and
maintaining liquidity. The Fund invests primarily in high quality municipal
securities and the dollar-weighted average maturity of the Fund's portfolio does
not exceed three years. The Fund is an appropriate investment for investors
seeking tax free income returns greater than those provided by tax free money
market funds and who are able to accept fluctuations in the net asset value of
their investment. The Fund is designed to have lesser price fluctuations than
long term bond funds. There can be no assurance that the investment objective of
the Fund will be achieved.
Brown Brothers Harriman & Co. is the Fund's investment adviser (the
"Investment Adviser"). This Statement of Additional Information is not a
prospectus and should be read in conjunction with the Prospectus dated November
1, 1995, a copy of which may be obtained from the Trust at the address noted
above.
TABLE OF CONTENTS
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
Investment Objective and Policies 2 4-6
Investment Restrictions 2 7-8
Trustees and Officers 5 9
Investment Adviser 8 9-10
Administrator 9 10-11
Distributor 9 12
Net Asset Value 10 13
Computation of Performance 10 16-17
Federal Taxes 12 13-15
Massachusetts Trust 13 15-16
Portfolio Transactions 15 7
Bond, Note and Commercial Paper Ratings 15 5
Additional Information 17 16-17
Financial Statements 19 4
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS NOVEMBER 1, 1995.
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INVESTMENT OBJECTIVE AND POLICIES
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The following supplements the information contained in the Prospectus
concerning the investment objective, policies and techniques of the Fund.
LOANS OF PORTFOLIO SECURITIES. Securities of the Fund may be loaned if
such loans are secured continuously by cash or equivalent collateral or by an
irrevocable letter of credit in favor of the Fund at least equal at all times to
100% of the market value of the securities loaned plus accrued income. While
such securities are on loan, the borrower pays the Fund any income accruing
thereon, and cash collateral may be invested for the Fund, thereby earning
additional income. All or any portion of interest earned on invested collateral
may be paid to the borrower. Loans are subject to termination by the Trust in
the normal settlement time, currently three business days after notice, or by
the borrower on one day's notice. Borrowed securities are returned when the loan
is terminated. Any appreciation or depreciation in the market price of the
borrowed securities which occurs during the term of the loan inures to the Fund
and its shareholders. Reasonable finders' and custodial fees may be paid in
connection with a loan. In addition, all facts and circumstances, including the
creditworthiness of the borrowing financial institution, are considered before a
loan is made and no loan is made in excess of one year. There is the risk that a
borrowed security may not be returned to the Fund. Securities of the Fund are
not loaned to Brown Brothers Harriman & Co. or to any affiliate of the Trust or
Brown Brothers Harriman & Co.
INVESTMENT RESTRICTIONS
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The Fund is operated under the following investment restrictions which
are deemed fundamental policies and may be changed only with the approval of the
holders of a "majority of the Fund's outstanding voting securities as defined in
the 1940 Act" (see "Additional Information").
Except that the Trust may invest all of the Fund's assets in an
open-end investment company with substantially the same investment objective,
policies and restrictions as the Fund, the Trust, with respect to the Fund, may
not:
(1) borrow money or mortgage or hypothecate its assets, except that in
an amount not to exceed 1/3 of the current value of its net assets, it may
borrow money as a temporary measure for extraordinary or emergency purposes and
enter into repurchase agreements, and except that it may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings (it is
intended that money will be borrowed only from banks and only either to
accommodate requests for the redemption of Fund shares while effecting an
orderly liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security transaction
or other similar situations), provided that collateral arrangements with respect
to options and futures, including deposits of initial deposit and variation
margin, are not considered a pledge of assets for purposes of this restriction
and except that assets may be pledged to secure letters of credit solely for the
purpose of
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participating in a captive insurance company sponsored by the Investment Company
Institute; for additional related restrictions, see clause (i) under the caption
"State and Federal Restrictions" hereafter;
(2) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of
purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures or the purchase, ownership,
holding, sale or writing of options;
(3) underwrite securities issued by other persons except insofar as it
may technically be deemed an underwriter under the Securities Act of 1933 in
selling a portfolio security;
(4) make loans to other persons except (a) through the lending of its
portfolio securities and provided that any such loans not exceed 30% of its
total assets (taken at market value), (b) through the use of repurchase
agreements or the purchase of short-term obligations and provided that not more
than 10% of its total assets are invested in repurchase agreements maturing in
more than seven days, or (c) by purchasing, subject to the limitation in
paragraph 6 below, a portion of an issue of debt securities of types commonly
distributed privately to financial institutions, for which purposes the purchase
of a portion of an issue of debt securities which are part of an issue to the
public shall not be considered the making of a loan;
(5) knowingly invest in securities which are subject to legal or
contractual restrictions on resale (other than repurchase agreements maturing in
not more than seven days) if, as a result thereof, more than 10% of its total
assets (taken at market value) would be so invested (including repurchase
agreements maturing in more than seven days);
(6) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
(except futures and options contracts) in the ordinary course of business (the
freedom of action to hold and to sell real estate acquired as a result of the
ownership of securities is reserved);
(7) make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue and equal in amount
to, the securities sold short, and unless not more than 10% of its net assets
(taken at market value) is represented by such securities, or securities
convertible into or exchangeable for such securities, at any one time (it is the
present intention of management to make such sales only for the purpose of
deferring realization of gain or loss for federal income tax purposes; such
sales would not be made of securities subject to outstanding options);
(8) concentrate its investments in securities of issuers in any
particular industry, but if it is deemed appropriate for the achievement of its
investment
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objective, up to 25% of its assets, at market value at the time of each
investment, may be invested in securities of issuers in any one industry, except
that positions in futures or option contracts shall not be subject to this
restriction (industrial development and pollution control bonds are grouped into
industries based upon the business in which the issuer of such obligations is
engaged);
(9) issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements with
respect to options and futures, including deposits of initial deposit and
variation margin, are not considered to be the issuance of a senior security for
purposes of this restriction;
(10) invest more than 5% of its total assets in the securities or
obligations of any one issuer (other than obligations issued by the U.S.
Government, its agencies or instrumentalities); provided, however, that up to
25% of its total assets may be invested without regard to this restriction (for
the purpose of this restriction, it will regard each state and each political
subdivision, agency or instrumentality of such state and each multi-state agency
of which such state is a member and each public authority which issues
industrial development bonds on behalf of a private entity as a separate
issuer); or
(11) purchase more than 10% of all outstanding debt obligations of any
one issuer (other than obligations issued by the U.S. Government, its agencies
or instrumentalities).
As an operating policy, the Fund has no current intention to engage in
options or futures transactions or to lend portfolio securities.
STATE AND FEDERAL RESTRICTIONS. In order to comply with certain state
and federal statutes and policies the Fund may not as a matter of operating
policy (except that the Trust may invest all of the Fund's assets in an open-end
investment company with substantially the same investment objective, policies
and restrictions as the Fund): (i) borrow money for any purpose in excess of 10%
of its total assets (taken at cost) (moreover, securities are not purchased for
the Fund's portfolio at any time at which the amount of its borrowings exceed 5%
of the Fund's total assets (taken at market value)), (ii) pledge, mortgage or
hypothecate for any purpose in excess of 10% of its net assets (taken at market
value), provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation margin, are not
considered a pledge of assets for purposes of this restriction, (iii) sell any
security which it does not own unless by virtue of its ownership of other
securities it has at the time of sale a right to obtain securities, without
payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is made
upon the same conditions, (iv) invest for the purpose of exercising control or
management, (v) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that securities of any investment
company are not purchased if such purchase at the time thereof would cause more
than 10% of
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its total assets (taken at the greater of cost or market value) to be invested
in the securities of such issuers or would cause more than 3% of the outstanding
voting securities of any such issuer to be held, (vi) invest more than 10% of
its net assets (taken at the greater of cost or market value) in securities that
are not readily marketable, (vii) purchase securities of any issuer if such
purchase at the time thereof would cause it to hold more than 10% of any class
of securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class, except that futures and option contracts are not
subject to this restriction, (viii) invest more than 5% of its assets in taxable
securities of issuers which, including predecessors, have a record of less than
three years of continuous operation (this restriction shall not apply to any
obligations of the U.S. Government, its agencies or instrumentalities), or (ix)
purchase or retain in its portfolio any securities issued by an issuer any of
whose officers, directors, trustees or security holders is an officer or Trustee
of the Trust, or is an officer or partner of the Investment Adviser, if after
the purchase of the securities of such issuer, one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both, all taken
at market value, of such issuer, and such persons owning more than 1/2 of 1% of
such shares or securities together own beneficially more than 5% of such shares
or securities, or both, all taken at market value. These policies are not
fundamental and may be changed without shareholder approval in response to
changes in the various state and federal requirements.
PERCENTAGE AND RATING RESTRICTIONS. If a percentage or rating
restriction on investment or utilization of assets set forth above or referred
to in the Prospectus is adhered to at the time an investment is made or assets
are so utilized, a later change in percentage resulting from changes in the
value of the portfolio securities or a later change in the rating of a portfolio
security is not considered a violation of policy.
TRUSTEES AND OFFICERS
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The Trustees and executive officers of the Trust, their principal
occupation during the past five years (although their titles may have varied
during the period) and business addresses are:
TRUSTEES OF THE TRUST
J.V. SHIELDS, JR.* -- Chairman of the Board and Trustee; Director of
The 59 Wall Street Fund, Inc. (since September 1990); Managing Director,
Chairman and Chief Executive Officer of Shields & Company; Chairman and Chief
Executive Officer of Capital Management Associates, Inc.; and Director of
Flowers Industries, Inc.(1) His business address is Shields & Company, 71
Broadway, New York, NY 10006.
EUGENE P. BEARD** -- Trustee; Director of The 59 Wall Street Fund, Inc.
(since April 1993); and Executive Vice President -- Finance and Operations of
The Interpublic Group of Companies. His business address is The Interpublic
Group of Companies, Inc., 1271 Avenue of the Americas, New York, NY 10020.
DAVID P. FELDMAN** -- Trustee; Director of The 59 Wall Street Fund,
Inc. (since September 1990); Corporate Vice President--Investment Management of
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American Telephone and Telegraph Co., Inc.; Director of Dreyfus Mutual
Funds, Equity Fund of Latin America (since prior to April 1990), New World
Balanced Fund (since prior to May 1990), India Magnum Fund (since prior to
September 1990), and U.S. Prime Properties Inc. (since February 1990); and
Trustee of Corporate Property Investors. His business address is American
Telephone and Telegraph Co., Inc., One Oak Way, Room 2EA 176, Berkeley Heights,
NJ 07922.
ALAN G. LOWY** -- Trustee; Private investor; Director of The 59 Wall
Street Fund, Inc. (since April 1993); and Secretary of the Los Angeles County
Board of Investments (prior to March 1995). His business address is 4111 Clear
Valley Drive, Encino, CA 91436.
ARTHUR D. MILTENBERGER** -- Trustee; Director of The 59 Wall Street
Fund, Inc. (since February 1992); Vice President and Chief Financial Officer of
Richard K. Mellon and Sons; Treasurer of the Richard King Mellon Foundation;
Director of Enterprise Corporation (prior to 1992), Vought Aircraft Corporation
(prior to September 1994), Caterair International (prior to April 1994),
Computer Renaissance, Inc. (prior to March 1990), and I&M Orchards, Inc. (prior
to 1991); and Member of the Valuation Committee of T. Rowe Price Threshold Fund,
L.P. (prior to 1992), Advisory Committee of the Carlyle Group and Pittsburgh
Seed Fund and the Valuation Committee of Morgenthaler Venture Funds(2). His
business address is Richard K. Mellon and Sons, P.O. Box RKM, Ligonier, PA
15658.
OFFICERS OF THE TRUST
PHILIP W. COOLIDGE -- President; Chief Executive Officer and President
of Signature Financial Group, Inc. ("SFG"), 59 Wall Street Distributors, Inc.
("59 Wall Street Distributors") (since June 1990) and 59 Wall Street
Administrators, Inc. ("59 Wall Street Administrators") (since June 1993).
JAMES E. HOOLAHAN -- Vice President; Senior Vice President of SFG
(since prior to December 1990).
THOMAS M. LENZ -- Secretary; Vice President and Associate General
Counsel of SFG (since prior to November 1990); and Assistant Secretary of 59
Wall Street Distributors (since May 1991) and 59 Wall Street Administrators
(since June 1993).
MOLLY S. MUGLER -- Assistant Secretary; Legal Counsel and Assistant
Secretary of SFG; and Assistant Secretary of 59 Wall Street Distributors (since
June 1990) and 59 Wall Street Administrators (since June 1993).
BARBARA M. O'DETTE -- Assistant Treasurer; Assistant Treasurer of SFG,
59 Wall Street Distributors (since June 1990) and 59 Wall Street Administrators
(since June 1993).
DAVID G. DANIELSON -- Assistant Treasurer; Assistant Manager of SFG
(since May 1991); and Graduate Student, Northeastern University (prior to March
1991).
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BRIAN J. HALL -- Assistant Treasurer; Fund Administrator of SFG (since
November 1991); and Senior State Regulation Administrator of The Boston Company
(prior to November 1991).
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* Mr. Shields is an "interested person" of the Trust because of his
affiliation with a registered broker-dealer.
** These Trustees are members of the Audit Committee.
(1) Shields & Company, Capital Management Associates, Inc. and Flowers
Industries, Inc., with which Mr. Shields is associated, are a registered
broker-dealer and a member of the New York Stock Exchange, a registered
investment adviser, and a diversified food company, respectively.
(2) Richard K. Mellon and Sons, Richard King Mellon Foundation, Enterprise
Corporation, Vought Aircraft Corporation, Caterair International, The
Carlyle Group and Morgenthaler Venture Funds, with which Mr. Miltenberger
is or has been associated, are a private foundation, a private foundation,
a business development firm, an aircraft manufacturer, an airline food
services company, a merchant bank, and a venture capital partnership,
respectively.
Each Trustee and officer listed above holds the equivalent position with
The 59 Wall Street Fund, Inc. The address of each officer is 6 St. James Avenue,
Boston, Massachusetts 02116. Messrs. Coolidge, Hoolahan, Lenz, Danielson and
Hall and Mss. Mugler and O'Dette also hold similar positions with other
investment companies for which affiliates of 59 Wall Street Distributors serve
as the principal underwriter.
Except for Mr. Shields, no Trustee is an "interested person" of the
Trust as that term is defined in the 1940 Act.
The Trustees receive a base annual fee of $15,000 (except the Chairman who
receives a base annual fee of $20,000) which is paid jointly by all series of
the Trust and The 59 Wall Street Fund, Inc. and allocated among the series based
upon their respective net assets. In addition, each series which has commenced
operations pays an annual fee to each Trustee of $1,000. The aggregate
compensation to each Trustee from the Trust and the Fund Complex (the Fund
Complex consists of the Trust and The 59 Wall Street Fund, Inc. which currently
consists of six series) was less than $60,000.
By virtue of the responsibilities assumed by Brown Brothers Harriman & Co.
under the Investment Advisory Agreement and the Administration Agreement (see
"Investment Adviser" and "Administrator"), the Trust itself requires no
employees other than its officers, and none of its officers devote full time to
the affairs of the Trust or, other than the Chairman, receive any compensation
from the Fund.
As of September 30, 1995, the Trust's Trustees and officers as a group
beneficially owned less than 1% of the outstanding shares of the Trust. At the
close of business on that date, no person, to the knowledge of management, owned
beneficially more than 5% of the outstanding shares of the Fund. However, as of
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that date, Partners of Brown Brothers Harriman & Co. and their
immediate families owned 493,537 (10.64%) shares of the Fund. Brown Brothers
Harriman & Co. and its affiliates separately were able to direct the disposition
of an additional 797,412 (17.19%) shares of the Fund, as to which shares Brown
Brothers Harriman & Co. disclaims beneficial ownership.
INVESTMENT ADVISER
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Under its Investment Advisory Agreement with the Trust, subject to the
general supervision of the Trust's Trustees and in conformance with the stated
policies of the Fund, Brown Brothers Harriman & Co. provides investment advice
and portfolio management services to the Fund. In this regard, it is the
responsibility of Brown Brothers Harriman & Co. to make the day-to-day
investment decisions for the Fund, to place the purchase and sale orders for
portfolio transactions of the Fund and to manage, generally, the Fund's
investments.
The Investment Advisory Agreement between Brown Brothers Harriman & Co.
and the Trust is dated June 9, 1992, as amended and restated November 1, 1993
and remains in effect for two years from such date and thereafter, but only as
long as the agreement is specifically approved at least annually (i) by a vote
of the holders of a "majority of the Fund's outstanding voting securities as
defined in the 1940 Act" or by the Trust's Trustees, and (ii) by a vote of a
majority of the Trustees of the Trust who are not parties to the Investment
Advisory Agreement or "interested persons" (as defined in the 1940 Act) of the
Trust ("Independent Trustees"), cast in person at a meeting called for the
purpose of voting on such approval. The Investment Advisory Agreement was
approved last by the Independent Trustees on August 22, 1995. The Investment
Advisory Agreement terminates automatically if assigned and is terminable at any
time without penalty by a vote of a majority of the Trustees of the Trust or by
a vote of the holders of a "majority of the Fund's outstanding voting securities
as defined in the 1940 Act" on 60 days' written notice to Brown Brothers
Harriman & Co. and by Brown Brothers Harriman & Co. on 90 days' written notice
to the Trust (see "Additional Information").
The investment advisory fee paid to the Investment Adviser is calculated
daily and paid monthly at an annual rate equal to 0.35% of the Fund's average
daily net assets. Prior to November 1, 1993, the investment advisory fee was an
annual rate equal to 0.50% of the Fund's average daily net assets. For the
fiscal years ended June 30, 1995 and 1994 and the period July 23, 1992
(commencement of operations) to June 30, 1993, the Investment Adviser received
$207,074, $239,217 and $68,856, respectively for advisory services.
The Glass-Steagall Act prohibits certain financial institutions from
engaging in the business of underwriting, selling or distributing securities and
from sponsoring, organizing or controlling a registered open-end investment
company continuously engaged in the issuance of its shares, such as the Fund.
There is presently no controlling precedent prohibiting financial institutions
such as Brown Brothers Harriman & Co. from performing investment advisory,
administrative or shareholder servicing/eligible institution functions. If Brown
Brothers Harriman & Co. were to terminate its Investment Advisory Agreement with
the Fund or were prohibited from acting in such capacity, it is expected that
the Trustees would recommend to the shareholders that they approve a new
investment advisory
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agreement for the Fund with another qualified adviser. If Brown Brothers
Harriman & Co. were to terminate its Eligible Institution Agreement or
Administration Agreement with the Trust or were prohibited from acting in any
such capacity, its customers would be permitted to remain shareholders of the
Trust and alternative means for providing shareholder services or administrative
services, as the case may be, would be sought. In such event, although the
operation of the Trust might change, it is not expected that any shareholders
would suffer any adverse financial consequences. However, an alternative means
of providing shareholder services might afford less convenience to shareholders.
ADMINISTRATOR
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The Administration Agreement between the Trust and Brown Brothers Harriman
& Co. (dated November 1, 1993) will remain in effect for two years from such
date and thereafter, but only so long as such agreement is specifically approved
at least annually in the same manner as the Investment Advisory Agreement (see
"Investment Adviser"). The Independent Trustees last approved the Trust's
Administration Agreement on August 22, 1995. The agreement will terminate
automatically if assigned by either party thereto and is terminable at any time
without penalty by a vote of a majority of the Trustees of the Trust or by a
vote of the holders of a "majority of the Trust's outstanding voting securities
as defined in the 1940 Act" (see "Additional Information"). The Administration
Agreement is terminable by the Trust's Trustees or shareholders of the Trust on
60 days' written notice to Brown Brothers Harriman & Co. and by Brown Brothers
Harriman & Co. on 90 days' written notice to the Trust.
The administrative fee payable to Brown Brothers Harriman & Co. from the
Fund is calculated daily and payable monthly at an annual rate equal to 0.15% of
the Fund's average daily net assets. Prior to November 1, 1993, 59 Wall Street
Distributors served as administrator of the Trust and was paid at an annual rate
equal to 0.05% of the Fund's average daily net assets. During the fiscal year
ended June 30, 1995 and 1994 and the period July 23, 1992 (commencement of
operations) to June 30, 1993, the Fund paid administrative fees totalling
$88,746, $77,691 and $6,886, respectively.
DISTRIBUTOR
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The Distribution Agreement (dated August 31, 1990) between the Trust and
59 Wall Street Distributors remains in effect indefinitely, but only so long as
such agreement is specifically approved at least annually in the same manner as
the Investment Advisory Agreement (see "Investment Adviser"). The Distribution
Agreement was most recently approved by the Independent Trustees of the Trust on
February 22, 1995. The agreement terminates automatically if assigned by either
party thereto and is terminable with respect to the Fund at any time without
penalty by a vote of a majority of the Trustees of the Trust or by a vote of the
holders of a "majority of the Fund's outstanding voting securities as defined in
the 1940 Act" (see "Additional Information"). The Distribution Agreement is
terminable with respect to the Fund by the Trust's Trustees or shareholders of
the Fund on 60 days' written notice to 59 Wall Street Distributors. The
agreement is terminable by 59 Wall Street Distributors on 90 days' written
notice to the Trust.
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NET ASSET VALUE
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The net asset value of each of the Fund's shares is determined each day
the New York Stock Exchange is open for regular trading and New York banks are
open for business. (As of the date of this Statement of Additional Information,
such Exchange and banks are so open every weekday except for the following
holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Veterans Day, Thanksgiving Day and
Christmas.) This determination of net asset value of each share of the Fund is
made once during each such day as of the close of regular trading on such
Exchange by subtracting from the value of the Fund's total assets the amount of
its liabilities, and dividing the difference by the number of shares of the Fund
outstanding at the time the determination is made.
Bonds and other fixed income securities (other than short-term obligations
but including listed issues) are valued on the basis of valuations furnished by
a pricing service, use of which has been approved by the Board of Trustees. In
making such valuations, the pricing service utilizes both dealer-supplied
valuations and electronic data processing techniques which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon quoted
prices or exchange or over-the-counter prices, since such valuations are
believed to reflect more accurately the fair value of such securities.
Securities or other assets for which market quotations are not readily
available are valued at fair value in accordance with procedures established by
and under the general supervision and responsibility of the Trust's Trustees.
Such procedures include the use of indications as to values from dealers; and
general market conditions. Short-term investments which mature in 60 days or
less are valued at amortized cost if their original maturity was 60 days or
less, or by amortizing their value on the 61st day prior to maturity, if their
original maturity when acquired for the Fund was more than 60 days, unless this
is determined not to represent fair value by the Trustees.
COMPUTATION OF PERFORMANCE
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The average annual total rate of return of the Fund is calculated for any
period by (a) dividing (i) the sum of the aggregate net asset value per share on
the last day of the period of shares purchased with a $1,000 payment on the
first day of the period and the aggregate net asset value per share on the last
day of the period of shares purchasable with dividends and capital gains
distributions declared during such period with respect to shares purchased on
the first day of such period and with respect to shares purchased with such
dividends and capital gains distributions, by (ii) $1,000, (b) raising the
quotient to a power equal to 1 divided by the number of years in the period, and
(c) subtracting 1 from the result.
The total rate of return of the Fund for any specified period is
calculated by (a) dividing (i) the sum of the aggregate net asset value per
share on the last day of the period of shares purchased with a $1,000 payment on
the first day
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of the period and the aggregate net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains distributions
declared during such period with respect to shares purchased on the first day of
such period and with respect to shares purchased with such dividends and capital
gains distributions, by (ii) $1,000, and (b) subtracting 1 from the result.
The annualized total rate of return for the Fund for the fiscal year
ended June 30, 1995 and the period July 23, 1992 (commencement of operations) to
June 30, 1995 were 5.42% and 4.46%, respectively. The total rate of return
should not be considered a representation of the total rate of return of the
Fund in the future since the total rate of return is not fixed. Actual total
rates of return depend on changes in the market value of, and dividends and
interest received from, the investments held by the Fund and the Fund's expenses
during the period.
Total rate of return information may be useful for reviewing the
performance of the Fund and for providing a basis for comparison with other
investment alternatives. However, unlike bank deposits or other investments
which pay a fixed yield for a stated period of time, the Fund's total rate of
return fluctuates, and this should be considered when reviewing performance or
making comparisons.
Any "yield" quotation of the Fund consists of an annualized historical
yield, carried at least to the nearest hundredth of one percent, based on a
30-day or one-month period and is calculated by (a) raising to the sixth power
the sum of 1 plus the quotient obtained by dividing the Fund's net investment
income earned during the period by the product of the average daily number of
shares outstanding during the period that were entitled to receive dividends and
the maximum offering price per share on the last day of the period, (b)
subtracting 1 from the result, and (c) multiplying the result by 2.
Any tax equivalent yield quotation of the Fund is calculated as follows:
If the entire current yield quotation for such period is tax-exempt, the tax
equivalent yield is the current yield quotation divided by 1 minus a stated
income tax rate or rates. If a portion of the current yield quotation is not
tax-exempt, the tax equivalent yield is the sum of (a) that portion of the yield
which is tax-exempt divided by 1 minus a stated income tax rate or rates, and
(b) the portion of the yield which is not tax-exempt.
The 30-day yield and tax equivalent yield assuming a tax rate of 36% for
the period ended June 30, 1995 were 3.50% and 5.47%, respectively. The yield
should not be considered a representation of the yield of the Fund in the future
since the yield is not fixed. Actual yields depend on the type, quality and
maturities of the investments held for the Fund, changes in interest rates on
investments, and the Fund's expenses during the period.
Yield information may be useful for reviewing the performance of the Fund
and for providing a basis for comparison with other investment alternatives.
However, unlike bank deposits or other investments which pay a fixed yield for a
stated period of time, the Fund's yield does fluctuate, and this should be
considered when reviewing performance or making comparisons.
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FEDERAL TAXES
================================================================================
Each year, the Trust intends to continue to qualify the Fund and elect
that the Fund be treated as a separate "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Under Subchapter M of the Code the Fund is not subject to federal income taxes
on amounts distributed to shareholders.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) at least 90% of the Fund's annual gross income,
without offset for losses from the sale or other disposition of securities, be
derived from interest, payments with respect to securities loans, dividends and
gains from the sale or other disposition of securities or other income derived
with respect to its business of investing in such securities; (b) less than 30%
of the Fund's annual gross income be derived from gains (without offset for
losses) from the sale or other disposition of securities held for less than
three months; and (c) the holdings of the Fund be diversified so that, at the
end of each quarter of its fiscal year, (i) at least 50% of the market value of
the Fund's assets be represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the Fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund's assets be invested
in the securities of any one issuer (other than U.S. Government securities). In
addition, in order not to be subject to federal income tax, at least 90% of the
Fund's net investment income and net short-term capital gains earned in each
year must be distributed to the Fund's shareholders.
RETURN OF CAPITAL. If the net asset value of shares is reduced below a
shareholder's cost as a result of a dividend or capital gains distribution from
the Fund, such dividend or capital gains distribution would be taxable even
though it represents a return of invested capital.
REDEMPTION OF SHARES. Any gain or loss realized on the redemption of Fund
shares by a shareholder who is not a dealer in securities is treated as
long-term capital gain or loss if the shares have been held for more than one
year, and otherwise as short-term capital gain or loss. However, any loss
realized by a shareholder upon the redemption of Fund shares held one year or
less is treated as a long-term capital loss to the extent of any long-term
capital gains distributions received by the shareholder with respect to such
shares. Additionally, any loss realized on a redemption or exchange of Fund
shares is disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before such disposition, such as pursuant to
reinvestment of a dividend or capital gains distribution in Fund shares.
OTHER TAXES. The Fund may be subject to state or local taxes in
jurisdictions in which it is deemed to be doing business. In addition, the
treatment of the Fund and its shareholders in those states which have income tax
laws might differ from treatment under the federal income tax laws. Shareholders
should consult their own tax advisors with respect to any state or local taxes.
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<PAGE>
MASSACHUSETTS TRUST
================================================================================
The Trust's Declaration of Trust permits the Trust's Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial interest
and to divide or combine the shares into a greater or lesser number of shares
without thereby changing the proportionate beneficial interests in the Trust.
Each Fund share represents an equal proportionate interest in the Fund with each
other share. Upon liquidation or dissolution of the Fund, the Fund's
shareholders are entitled to share pro rata in the Fund's net assets available
for distribution to its shareholders. Shares of each series participate equally
in the earnings, dividends and assets of the particular series. Shares of each
series are entitled to vote separately to approve advisory agreements or changes
in investment policy, but shares of all series vote together in the election or
selection of Trustees, principal underwriters and auditors for the Trust. Upon
liquidation or dissolution of the Trust, the shareholders of each series are
entitled to share pro rata in the net assets of their respective series
available for distribution to shareholders. The Trust reserves the right to
create and issue additional series of shares. The Trust currently consists of
three series.
Shareholders are entitled to one vote for each share held on matters on
which they are entitled to vote. Shareholders in the Trust do not have
cumulative voting rights, and shareholders owning more than 50% of the
outstanding shares of the Trust may elect all of the Trustees of the Trust if
they choose to do so and in such event the other shareholders in the Trust would
not be able to elect any Trustee. The Trust is not required and has no current
intention to hold meetings of shareholders annually but the Trust will hold
special meetings of shareholders when in the judgment of the Trust's Trustees it
is necessary or desirable to submit matters for a shareholder vote. Shareholders
have under certain circumstances (E.G., upon application and submission of
certain specified documents to the Trustees by a specified number of
shareholders) the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Shareholders also have the right to remove one or more Trustees
without a meeting by a declaration in writing by a specified number of
shareholders. No material amendment may be made to the Trust's Declaration of
Trust without the affirmative vote of the holders of a majority of its
outstanding shares. Shares have no preference, pre-emptive, conversion or
similar rights. Shares, when issued, are fully paid and non-assessable, except
as set forth below. The Trust may enter into a merger or consolidation, or sell
all or substantially all of its assets, if approved by the vote of the holders
of two-thirds of its outstanding shares, except that if the Trustees of the
Trust recommend such sale of assets, the approval by vote of the holders of a
majority of the Trust's outstanding shares will be sufficient. The Trust may
also be terminated upon liquidation and distribution of its assets, if approved
by the vote of the holders of two-thirds of its outstanding shares.
Stock certificates are not issued by the Trust.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
13
<PAGE>
and provides for indemnification and reimbursement of expenses out of Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust shall maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities.
Thus, the risk of a shareholder's incurring financial loss because of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of the
Trust and that the Trustees are not liable for any action or failure to act, but
nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of wilful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
The Trust may, in the future, seek to achieve the Fund's investment
objective by investing all of the Fund's investable assets in a no-load,
diversified, open-end management investment company having substantially the
same investment objective as those applicable to the Fund. In such event, the
Fund would no longer directly require investment advisory services and therefore
would pay no investment advisory fees. Further, the administrative services fee
paid from the Fund would be reduced. At a shareholder's meeting held on
September 23, 1993, the Fund's shareholders approved changes to the investment
restrictions of the Fund to authorize such an investment. Such an investment
would be made only if the Trustees believe that the aggregate per share expenses
of the Fund and such other investment company would be less than or
approximately equal to the expenses which the Fund would incur if the Trust were
to continue to retain the services of an investment adviser for the Fund and the
assets of the Fund were to continue to be invested directly in portfolio
securities.
It is expected that the investment in another investment company will have
no preference, preemptive, conversion or similar rights, and will be fully paid
and non-assessable. It is expected that the investment company will not be
required to hold annual meetings of investors, but will hold special meetings of
investors when, in the judgment of its trustees, it is necessary or desirable to
submit matters for an investor vote. It is expected that each investor will be
entitled to a vote in proportion to the share of its investment in such
investment company. Except as described below, whenever the Trust is requested
to vote on matters pertaining to the investment company, the Trust would hold a
meeting of the Fund's shareholders and would cast its votes on each matter at a
meeting of investors in the investment company proportionately as instructed by
the Fund's shareholders.
However, subject to applicable statutory and regulatory requirements, the
Trust would not request a vote of the Fund's shareholders with respect to (a)
any proposal relating to the investment company in which the Fund's assets were
invested, which proposal, if made with respect to the Fund, would not require
the vote of the shareholders of the Fund, or (b) any proposal with respect to
the investment company that is identical, in all material respects, to a
proposal that has previously been approved by shareholders of the Fund.
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<PAGE>
PORTFOLIO TRANSACTIONS
================================================================================
Fixed-income securities are generally traded at a net price with dealers
acting as principal for their own account without a stated commission. The price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid. Purchases and sales of securities on a stock exchange, while infrequent,
are effected through brokers who charge a commission for their services. From
time to time certificates of deposit may be purchased through intermediaries who
may charge a commission for their services.
On those occasions when Brown Brothers Harriman & Co. deems the purchase
or sale of a security to be in the best interests of the Fund as well as other
customers, Brown Brothers Harriman & Co., to the extent permitted by applicable
laws and regulations, may, but is not obligated to, aggregate the securities to
be sold or purchased for the Fund with those to be sold or purchased for other
customers in order to obtain best execution, including lower brokerage
commissions, if appropriate. In such event, allocation of the securities so
purchased or sold as well as any expenses incurred in the transaction are made
by Brown Brothers Harriman & Co. in the manner it considers to be most equitable
and consistent with its fiduciary obligations to its customers, including the
Fund. In some instances, this procedure might adversely affect the Fund.
BOND, NOTE AND COMMERCIAL PAPER RATINGS
================================================================================
Bond Ratings
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
Aaa, Aa and A - Tax-exempt bonds rated Aaa are judged to be of the "best
quality". The rating of Aa is assigned to bonds that are of "high quality by all
standards", but long-term risks appear somewhat larger than Aaa rated bonds. The
Aaa and Aa rated bonds are generally known as "high grade bonds". The foregoing
ratings for tax-exempt bonds are sometimes presented in parentheses preceded
with a "con" indicating that the bonds are rated conditionally. Issues rated Aaa
or Aa may be further modified by the numbers 1, 2 or 3 (3 being the highest) to
show relative strength within the rating category. Bonds for which the security
depends upon the completion of some act or upon the fulfillment of some
condition are rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals that begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Such parenthetical
rating denotes the probable credit stature upon completion of construction or
elimination of the basis of the condition. Bonds rated A are considered as upper
medium grade obligations. Principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future.
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<PAGE>
STANDARD & POOR'S CORPORATION ("S&P")
AAA, AA and A - The AAA rating is the highest rating assigned to debt
obligations and indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA are considered "high grade", are only slightly less
marked than those of AAA ratings and have the second strongest capacity for
payment of debt service. Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat susceptible to adverse effects or
changes in circumstances and economic conditions. Bonds rated AA or A may be
modified with a plus (+) or a minus (-) sign to show relative strength within
the rating category. The foregoing ratings are sometimes followed by a "p"
indicating that the rating is provisional. A provisional rating assumes the
successful completion of the project financed by the bonds being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. Although a
provisional rating addresses credit quality subsequent to completion of the
project, it makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
FITCH INVESTORS SERVICE ("FITCH")
AAA, AA and A - Bonds rated AAA are considered to be investment grade and
of the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of good quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds with higher
ratings.
Tax-Exempt Note and Variable Rate Investment Ratings
Moody's - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow of funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, through not as large as MIG-1.
S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal and interest.
Fitch - F-1+, F-1 and F-2. Notes assigned F-1+ are regarded as having the
strongest degree of assurance for timely payment. An F-1 rating reflects an
assurance of timely payment only slightly less in degree than an F-1+ rating.
Notes assigned F-2 have a satisfactory degree of assurance for timely payment,
but margins of protection are not as great as for issues rated F-1+ and F-1. The
symbol LOC may follow a note rating which indicates that a letter of credit
issued by a commercial bank is attached to the note.
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<PAGE>
Tax-Exempt and Corporate Commercial Paper Ratings
Moody's - Commercial Paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1 indicates highest quality repayment capacity of
rated issue.
S&P - Commercial Paper ratings are a current assessment of the likelihood
of timely payment of debts having an original maturity of no more than 365 days.
Issues rated A-1 have the greatest capacity for timely payment. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
Fitch - Commercial Paper ratings reflect current appraisal of the degree
of assurance of timely payment. F-1+ issues are regarded as having the strongest
degree of assurance for timely payment. An F-1 rating reflects an assurance of
timely payment only slightly less in degree than an F-1+ rating. The symbol LOC
may follow either category and indicates that a letter of credit issued by a
commercial bank is attached to the commercial paper.
Other Considerations
The ratings of S&P, Moody's and Fitch represent their respective opinions
of the quality of the municipal securities they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, municipal securities with the same maturity, coupon and
rating may have different yields and municipal securities of the same maturity
and coupon with different ratings may have the same yield.
Among the factors considered by Moody's in assigning bond, note and
commercial paper ratings are the following: (i) evaluation of the management of
the issuer; (ii) economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain areas;
(iii) evaluation of the issuer's products in relation to competition and
customer acceptance; (iv) liquidity; (v) amount and quality of long-term debt;
(vi) trend of earnings over a period of 10 years; (vii) financial strength of a
parent company and the relationships which exist with the issuer; and (viii)
recognition by management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such obligations.
Among the factors considered by S&P in assigning bond, note and commercial
paper ratings are the following: (i) trend of earnings and cash flow with
allowances made for unusual circumstances, (ii) stability of the issuer's
industry, (iii) the issuer's relative strength and position within the industry
and (iv) the reliability and quality of management.
ADDITIONAL INFORMATION
================================================================================
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the Fund's outstanding voting securities as defined in the
1940 Act" currently means the vote of (i) 67% or more of the Fund's shares
present at a meeting, if the holders of more than 50% of the outstanding voting
securities
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<PAGE>
of the Fund are present in person or represented by proxy; or (ii) more than 50%
of the Fund's outstanding voting securities, whichever is less.
Fund shareholders receive semi-annual reports containing unaudited
financial statements and annual reports containing financial statements audited
by independent auditors.
A shareholder's right to receive payment with respect to any redemption
may be suspended or the payment of the redemption proceeds postponed: (i) during
periods when the New York Stock Exchange is closed for other than weekends and
holidays or when regular trading on such Exchange is restricted as determined by
the Securities and Exchange Commission by rule or regulation, (ii) during
periods in which an emergency exists which causes disposal of, or evaluation of
the net asset value of, the Fund's portfolio securities to be unreasonable or
impracticable, or (iii) for such other periods as the Securities and Exchange
Commission may permit.
With respect to the securities offered by the Prospectus, this Statement
of Additional Information and the Prospectus do not contain all the information
included in the Registration Statement filed with the Securities and Exchange
Commission under the Securities Act of 1933. Pursuant to the rules and
regulations of the Securities and Exchange Commission, certain portions have
been omitted. The Registration Statement including the exhibits filed therewith
may be examined at the office of the Securities and Exchange Commission in
Washington, D.C.
Statements contained in this Statement of Additional Information and the
Prospectus concerning the contents of any contract or other document 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 is qualified in all respects by such reference.
A copy of the Declaration of Trust establishing the Trust is on file in
the office of the Secretary of the Commonwealth of Massachusetts.
FINANCIAL STATEMENTS
=============================================================================
The Fund's current annual report to shareholders as filed with the
Securities and Exchange Commission pursuant to Section 30(b) of the 1940 Act and
Rule 30b2-1 thereunder is hereby incorporated herein by reference. A copy of
such report will be provided without charge to each person receiving this
Statement of Additional Information.
WS5089G
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