Municipal Money Market Fund
Tax-Free Money Market Fund
Investment Portfolios Offered By
Lehman Brothers Institutional Funds Group Trust
Statement of Additional Information
May 31, 1994
This Statement of Additional Information is meant to be read in
conjunction with the Prospectuses for the Municipal Money Market Fund
and Tax-Free Money Market Fund portfolios, each dated May 31, 1994 as
amended or supplemented from time to time, and is incorporated by
reference in its entirety into each Prospectus. Because this
Statement of Additional Information is not itself a prospectus, no
investment in shares of the Municipal Money Market Fund or Tax-Free
Money Market Fund portfolios should be made solely upon the
information contained herein. Copies of the Prospectuses for
Municipal Money Market Fund and Tax-Free Money Market Fund may be
obtained by calling Lehman Brothers Inc. ("Lehman Brothers") at 1-
800-368-5556. Capitalized terms used but not defined herein have the
same meanings as in the Prospectuses.
TABLE OF CONTENTS
Page
The Trust
2
Investment Objective and Policies
2
Municipal Obligations
8
Additional Purchase and Redemption
Information
10
Management of the Funds
12
Additional Information Concerning Taxes
18
Dividends
19
Additional Yield Information
20
Additional Description Concerning Shares
21
Counsel
22
Auditors
22
Financial Statements
22
Miscellaneous
22
Appendix
A-
1
THE TRUST
Lehman Brothers Institutional Funds Group Trust (the "Trust") is
a no-load, open-end management investment company. The Trust
currently includes a family of portfolios, two of which are Municipal
Money Market Fund and Tax-Free Money Market Fund (individually, a
"Fund", collectively, the "Funds").
Although the Funds have the same Investment Adviser and have
comparable investment objectives, their yields will normally vary due
to their differing cash flows and their differing types of portfolio
securities (for example, _____).
THIS STATEMENT OF ADDITIONAL INFORMATION AND FUNDS' PROSPECTUSES
RELATE PRIMARILY TO THE FUNDS AND DESCRIBE ONLY THE INVESTMENT
OBJECTIVES AND POLICIES, OPERATIONS, CONTRACTS AND OTHER MATTERS
RELATING TO THE FUNDS. INVESTORS WISHING TO OBTAIN SIMILAR
INFORMATION REGARDING THE TRUST'S OTHER PORTFOLIOS MAY OBTAIN
SEPARATE PROSPECTUSES DESCRIBING THEM BY CONTACTING LEHMAN BROTHERS
AT 1-800-368-5556.
INVESTMENT OBJECTIVE AND POLICIES
As stated in the Funds' Prospectuses, the investment objective
of each Fund is to provide as high a level of current income exempt
from federal income tax as is consistent with relative stability of
principal. The following policies supplement the description of each
Fund's investment objective and policies as contained in the
applicable Prospectus.
The Funds are managed to provide stability of capital while
achieving competitive yields. The Investment Adviser intends to
follow a value-oriented, research-driven and risk-averse investment
strategy, engaging in a full range of economic, strategic, credit and
market-specific analyses in researching potential investment
opportunities.
Portfolio Transactions
Subject to the general control of the Trust's Board of Trustees,
Lehman Brothers Global Asset Management Inc. ("LBGAM"), the Funds'
Investment Adviser, is responsible for, makes decisions with respect
to, and places orders for all purchases and sales of portfolio
securities for the Funds. Purchases of portfolio securities are
usually principal transactions without brokerage commissions. In
making portfolio investments, LBGAM seeks to obtain the best net
price and the most favorable execution of orders. To the extent that
the execution and price offered by more than one dealer are
comparable, LBGAM may, in its discretion, effect transactions in
portfolio securities with dealers who provide the Trust with research
advice or other services.
Transactions in the over-the-counter market are generally
principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage
commissions. With respect to over-the-counter transactions, the
Funds, where possible, will deal directly with the dealers who make a
market in the securities involved except in those circumstances where
better prices and execution are available elsewhere.
Investment decisions for each Fund are made independently from
those for the Trust's other portfolios or other investment company
portfolios or accounts managed by LBGAM. Such other portfolios may
invest in the same securities as the Funds. When purchases or sales
of the same security are made at substantially the same time on
behalf of such other portfolios, transactions are averaged as to
price, and available investments allocated as to amount, in a manner
which LBGAM believes to be equitable to each portfolio, including the
Funds. In some instances, this investment procedure may adversely
affect the price paid or received by the Funds or the size of the
position obtained for the Funds. To the extent permitted by law,
LBGAM may aggregate the securities to be sold or purchased for the
Funds with those to be sold or purchased for such other portfolios in
order to obtain best execution.
The Funds will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase agreements with Lehman Brothers or LBGAM or any
affiliated person (as such term is defined in the Investment Company
Act of 1940, as amended (the "1940 Act")) of any of them, except to
the extent permitted by the Securities and Exchange Commission (the
"SEC"). In addition, the Funds will not purchase "Municipal
Obligations" during the existence of any underwriting or selling
group relating thereto of which Lehman Brothers or any affiliate
thereof is a member, except to the extent permitted by the SEC.
"Municipal Obligations" consist of municipal obligations (as defined
in each Fund's Prospectus) and tax-exempt derivatives such as tender
option bonds, participations, beneficial interests in trusts and
partnership interests. Under certain circumstances, the Funds may be
at a disadvantage because of these limitations in comparison with
other investment company portfolios which have a similar investment
objective but are not subject to such limitations. Furthermore, with
respect to such transactions, securities, deposits and agreements a
Fund will not give preference to Service Organizations with which a
Fund enters into agreements. (See the applicable Prospectus,
"Management of the Fund-Service Organizations").
The Funds may participate, if and when practicable, in bidding
for the purchase of Municipal Obligations directly from an issuer in
order to take advantage of the lower purchase price available to
members of a bidding group. A Fund will engage in this practice,
however, only when LBGAM, in its sole discretion, believes such
practice to be in a Fund's interest.
The Funds may to seek profits through short-term trading. Each
Fund's annual portfolio turnover will be relatively high, but a
Fund's portfolio turnover is not expected to have a material effect
on its net income. Each Fund's portfolio turnover rate is expected to
be zero for regulatory reporting purposes.
Additional Information on Investment Practices
Variable and Floating Rate Instruments. Municipal Obligations
purchased by the Funds may include variable and floating rate
instruments, which provide for adjustments in the interest rate on
certain reset dates or whenever a specified interest rate index
changes, respectively. Variable and floating rate instruments are
subject to the credit quality standards described in the
Prospectuses. In some cases the Funds may require that the
obligation to pay the principal of the instrument be backed by a
letter or line of credit or guarantee. Such instruments may carry
stated maturities in excess of 397 days provided that the
maturity-shortening provisions stated in Rule 2a-7 under the 1940 Act
are satisfied. Although a particular variable or floating rate demand
instrument may not be actively traded in a secondary market, in some
cases, the Funds may be entitled to principal on demand and may be
able to resell such notes in the dealer market.
Variable and floating rate demand instruments held by a Fund may
have maturities of more than thirteen months provided: (i) the Fund
is entitled to the payment of principal at any time, or during
specified intervals not exceeding 13 months, upon giving the
prescribed notice (which may not exceed 30 days), and (ii) the rate
of interest on such instruments is adjusted at periodic intervals
which may extend up to 13 months (397 days). Variable and floating
rate notes that do not provide for payment within seven days may be
deemed illiquid and subject to the 10% limitation on such
investments.
In determining a Fund's average weighted portfolio maturity and
whether a variable or floating rate demand instrument has a remaining
maturity of thirteen months or less, each instrument will be deemed
by a Fund to have a maturity equal to the longer of the period
remaining until its next interest rate adjustment or the period
remaining until the principal amount can be recovered through demand.
In determining whether an unrated variable or floating rate demand
instrument is of comparable quality at the time of purchase to
securities in which a Fund may invest, LBGAM will follow guidelines
adopted by the Trust's Board of Trustees.
Tender Option Bonds. Each Fund may invest up to 10% of the
value of its assets in tender option bonds. A Fund will not purchase
tender option bonds unless (a) the demand feature applicable thereto
is exercisable by the Fund within 13 months of the date of such
purchase upon no more than 30 days' notice and thereafter is
exercisable by the Fund no less frequently than annually upon no more
than 30 days' notice and, (b) at the time of such purchase, LBGAM
reasonably expects that, (i) based upon its assessment of current and
historical interest rate trends, prevailing short-term tax-exempt
rates will not exceed the stated interest rate on the underlying
Municipal Obligations at the time of the next tender fee adjustment,
and (ii) the circumstances which might entitle the grantor of a
tender option to terminate the tender option would not occur prior to
the time of the next tender opportunity. At the time of each tender
opportunity, a Fund will exercise the tender option with respect to
any tender option bonds unless LBGAM reasonably expects that,
(a) based upon its assessment of current and historical interest rate
trends, prevailing short-term tax-exempt rates will not exceed the
stated interest rate on the underlying Municipal Obligations at the
time of the next tender fee adjustment, and (b) the circumstances
which might entitle the grantor of a tender option to terminate the
tender option would not occur prior to the time of the next tender
opportunity. The Funds will exercise the tender feature with respect
to tender option bonds, or otherwise dispose of their tender option
bonds, prior to the time the tender option is scheduled to expire
pursuant to the terms of the agreement under which the tender option
is granted. The Funds otherwise will comply with the provisions of
Rule 2a-7 under the 1940 Act in connnection with the purchase of
tender option bonds, including, without limitation, the requisite
determination by the Board of Trustees that the tender option bonds
in question meet the quality standards described in Rule 2a-7. In the
event of a default of the Municipal Obligation underlying a tender
option bond, or the termination of the tender option agreement, a
Fund would look to the maturity date of the underlying security for
purposes of compliance with Rule 2a-7 and, if its remaining maturity
was greater than 13 months, the Fund would sell the security as soon
as would be practicable. Each Fund will purchase tender option bonds
only when it is satisfied that (a) the custodial and tender option
arrangements, including the fee payment arrangements, will not
adversely affect the tax-exempt status of the underlying Municipal
Obligations and (b) payment of any tender fees will not have the
effect of creating taxable income for the Fund. Based on the tender
option bond arrangement, each Fund expects to value the tender option
bond at par; however, the value of the instrument will be monitored
to assure that it is valued at fair value.
When-Issued Securities. As stated in the Funds' Prospectuses,
the Funds may purchase Municipal Obligations on a "when-issued" basis
(i.e., for delivery beyond the normal settlement date at a stated
price and yield). When a Fund agrees to purchase when-issued
securities, the Custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate
account. Normally, the Custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case that Fund may be
required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains
equal to the amount of such Fund's commitment. It may be expected
that a Fund's net assets will fluctuate to a greater degree when it
sets aside portfolio securities to cover such purchase commitments
than when it sets aside cash. Because that Fund will set aside cash
or liquid assets to satisfy its purchase commitments in the manner
described, such Fund's liquidity and ability to manage its portfolio
might be affected in the event its commitments to purchase
when-issued securities ever exceeded 25% of the value of its assets.
When a Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may
result in such Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous. The Funds do not intend
to purchase when-issued securities for speculative purposes but only
in furtherance of their investment objective. Each Fund reserves the
right to sell the securities before the settlement date if it is
deemed advisable.
Stand-By Commitments. Each Fund may acquire "stand-by
commitments" with respect to Municipal Obligations held in its
portfolio. Under a stand-by commitment, a dealer would agree to
purchase at a Fund's option specified Municipal Obligations at their
amortized cost value to the Fund plus accrued interest, if any.
(Stand-by commitments acquired by a Fund may also be referred to as
"put" options.) Stand-by commitments may be exercisable by a Fund at
any time before the maturity of the underlying Municipal Obligations
and may be sold, transferred or assigned only with the instruments
involved. A Fund's right to exercise stand-by commitments will be
unconditional and unqualified.
The amount payable to a Fund upon its exercise of a stand-by
commitment will normally be (i) the Fund's acquisition cost of the
Municipal Obligations (excluding any accrued interest which the Fund
paid on their acquisition), less any amortized market premium or plus
any amortized market or original issue discount during the period the
Fund owned the securities, plus (ii) all interest accrued on the
securities since the last interest payment date during that period.
Each Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect
consideration. However, if necessary or advisable, a Fund may pay for
a stand-by commitment either separately in cash or by paying a higher
price for portfolio securities which are acquired subject to the
commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for
outstanding stand-by commitments held by a Fund will not exceed 1/2
of 1% of the value of that Fund's total assets calculated immediately
after each stand-by commitment is acquired.
Each Fund intends to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the opinion of the Fund's
Investment Adviser, present minimal credit risks. A Fund's reliance
upon the credit of these dealers, banks and broker-dealers will be
secured by the value of the underlying Municipal Obligations that are
subject to the commitment.
Each Fund would acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes. The acquisition of a stand-by
commitment would not affect the valuation or assumed maturity of the
underlying Municipal Obligations, which would continue to be valued
in accordance with the amortized cost method. Stand-by commitments
acquired by a Fund would be valued at zero in determining net asset
value. Where a Fund paid any consideration directly or indirectly for
a stand-by commitment, its cost would be reflected as unrealized
depreciation for the period during which the commitment was held by
that Fund.
Participations. Each Fund may purchase from financial
institutions tax-exempt participation interests in Municipal
Obligations. A participation interest gives a Fund an undivided
interest in the Municipal Obligation in the proportion that the
Fund's participation interest bears to the total amount of the
Municipal Obligation. These instruments may have floating or variable
rates of interest. If the participation interest is unrated, it will
be backed by an irrevocable letter of credit or guarantee of a bank
that the Trust's Board of Trustees has determined meets certain
quality standards or the payment obligation otherwise will be
collateralized by obligations of the U.S. government and its agencies
and instrumentalities ("U.S. government securities") Each Fund will
have the right, with respect to certain participation interests, to
demand payment, on a specified number of days' notice, for all or any
part of the Fund's interest in the Municipal Obligations, plus
accrued interest. Each Fund will invest no more than 5% of its total
assets in participation interests.
Illiquid Securities. A Fund may not invest more than 10% of its
total net assets in illiquid securities, including securities that
are illiquid by virtue of the absence of a readily available market
or legal or contractual restrictions on resale. Securities that have
legal or contractual restrictions on resale but have a readily
available market are not considered illiquid for purposes of this
limitation. Each Fund's Investment Adviser will monitor on an ongoing
basis the liquidity of such restricted securities under the
supervision of the Board of Trustees.
The SEC has adopted Rule 144A under the Securities Act of 1933,
as amended (the "1933 Act") which allows for a broader institutional
trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor"
from the registration requirements of the 1933 Act for resales of
certain securities to qualified institutional buyers. The Fund's
Investment Adviser anticipates that the market for certain restricted
securities such as institutional municipal securities will expand
further as a result of this regulation and the development of
automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the
PORTAL system sponsored by the National Association of Securities
Dealers.
Each Fund's Investment Adviser will monitor the liquidity of
restricted securities under the supervision of the Board of Trustees.
In reaching liquidity decisions with respect to Rule 144A securities,
the Fund's Investment Adviser will consider, inter alia, the
following factors: (1) the unregistered nature of a Rule 144A
security; (2) the frequency of trades and quotes for a Rule 144A
security; (3) the number of dealers willing to purchase or sell the
Rule 144A security and the number of other potential purchasers;
(4) dealer undertakings to make a market in the Rule 144A security;
(5) the trading markets for the Rule 144A security; and (6) the
nature of the Rule 144A security and the nature of marketplace trades
(including the time needed to dispose of the Rule 144A security,
methods of soliciting offers and mechanics of transfer).
The Appendix to this Statement of Additional Information
contains a description of the relevant rating symbols used by
nationally recognized statistical rating organizations ("NRSROs") for
Municipal Obligations that may be purchased by the Funds.
Investment Limitations
The Funds' Prospectuses summarize certain investment limitations
that may not be changed without the affirmative vote of the holders
of a majority of a Fund's outstanding shares (as defined below under
"Miscellaneous"). Investment limitations numbered 1 through 7 may not
be changed without such a vote of shareholders; investment
limitations 8 through 13 may be changed by a vote of the Trust's
Board of Trustees at any time.
A Fund may not:
1. Purchase the securities of any issuer if as a result more
than 5% of the value of the Fund's assets would be invested in the
securities of such issuer except that up to 25% of the value of the
Fund's assets may be invested without regard to this 5% limitation
and provided that there is no limitation with respect to investments
in U.S. government securities.
2. Borrow money, except from banks for temporary purposes and
then in amounts not exceeding 10% of the value of the Fund's total
assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the Fund's total assets at the time
of such borrowing. Additional investments will not be made when
borrowings exceed 5% of the Fund's assets.
3. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objective and policies.
4. Act as an underwriter of securities, except insofar as the
Fund may be deemed an underwriter under applicable securities laws in
selling portfolio securities.
5. Purchase or sell real estate or real estate limited
partnerships, provided that the Fund may purchase securities of
issuers which invest in real estate or interests therein.
6. Purchase or sell commodities or commodity contracts, or
invest in oil, gas or mineral exploration or development programs or
in mineral leases.
7. Purchase any securities which would cause 25% or more of
the value of its total assets at the time of purchase to be invested
in the securities of issuers conducting their principal business
activities in the same industry, provided that there is no limitation
with respect to investments in U.S. government securities.
8. Knowingly invest more than 10% of the value of the Fund's
assets in securities that may be illiquid because of legal or
contractual restrictions on resale or securities for which there are
no readily available market quotations.
9. Purchase securities on margin, make short sales of
securities or maintain a short position.
10. Write or sell puts, calls, straddles, spreads or
combinations thereof.
11. Invest in securities if as a result the Fund would then
have more than 5% of its total assets in securities of companies
(including predecessors) with less than three years of continuous
operation.
12. Purchase securities of other investment companies except
as permitted under the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization.
13. Invest in warrants.
In addition, without the affirmative vote of the holders of a
majority of a Fund's outstanding shares, such Fund may not change its
policy of investing at least 80% of its total assets (except during
temporary defensive periods) in Municipal Obligations in the case of
Municipal Money Market Fund, and in obligations the interest on which
is exempt from federal income tax in the case of the Tax-Free Money
Market Fund.
In order to permit the sale of Fund shares in certain states,
the Funds may make commitments more restrictive than the investment
policies and limitations above. Should a Fund determine that any such
commitments are no longer in its best interests, it will revoke the
commitment by terminating sales of its shares in the state involved.
MUNICIPAL OBLIGATIONS
In General
Municipal Obligations include debt obligations issued by
governmental entities to obtain funds for various public purposes,
including the construction of a wide range of public facilities, the
refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions
and facilities. Private activity bonds that are or were issued by or
on behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Obligations if the
interest paid thereon is exempt from federal income tax. Opinions
relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income taxes are rendered
by counsel to the issuers or bond counsel to the respective issuing
authorities at the time of issuance. Neither the Funds nor the Funds'
Investment Adviser will review independently the underlying
proceedings relating to the issuance of Municipal Obligations or the
bases for such opinions.
The Funds may hold tax-exempt derivatives which may be in the
form of tender option bonds, participations, beneficial interests in
a trust, partnership interests or other forms. A number of different
structures have been used. For example, interests in long-term fixed
rate Municipal Obligations held by a bank as trustee or custodian are
coupled with tender option, demand and other features when tax-exempt
derivatives are created. Together, these features entitle the holder
of the interest to tender (or put) the underlying Municipal
Obligation to a third party at periodic intervals and to receive the
principal amount thereof. In some cases, Municipal Obligations are
represented by custodial receipts evidencing rights to receive
specific future interest payments, principal payments or both, on the
underlying municipal securities held by the custodian. Under such
arrangements, the holder of the custodial receipt has the option to
tender the underlying municipal securities at its face value to the
sponsor (usually a bank or broker-dealer or other financial
institution), which is paid periodic fees equal to the difference
between the bond's fixed coupon rate and the rate that would cause
the bond, coupled with the tender option, to trade at par on the date
of a rate adjustment. The Funds may hold tax-exempt derivatives, such
as participation interests and custodial receipts, for Municipal
Obligations which give the holder the right to receive payment of
principal subject to the conditions described above. The Internal
Revenue Service has not ruled on whether the interest received on
tax-exempt derivatives in the form of participation interests or
custodial receipts is tax-exempt, and accordingly, purchases of any
such interests or receipts are based on the opinion of counsel to the
sponsors of such derivative securities. Neither the Funds nor the
Funds' Investment Adviser will review independently the underlying
proceedings related to the creation of any tax-exempt derivatives or
the bases for such opinions.
As described in the Funds' Prospectuses, the two principal
classifications of Municipal Obligations consist of "general
obligation" and "revenue" issues, and each Fund's portfolio may
include "moral obligation" issues, which are normally issued by
special purpose authorities. There are, of course, variations in the
quality of Municipal Obligations both within a particular
classification and between classifications, and the yields on
Municipal Obligations depend upon a variety of factors, including
general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of
a particular offering, the maturity of the obligation and the rating
of the issue. The ratings of NRSROs represent their opinions as to
the quality of Municipal Obligations. It should be recognized,
however, that ratings are general and are not absolute standards of
quality, and Municipal Obligations with the same maturity, interest
rate and rating may have different yields while Municipal Obligations
of the same maturity and interest rate with different ratings may
have the same yield. Subsequent to its purchase by a Fund, an issue
of Municipal Obligations may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Fund.
The Fund's Investment Adviser will consider such an event in
determining whether a Fund should continue to hold the obligation.
An issuer's obligations under its Municipal Obligations are
subject to the provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of creditors, such as the federal
Bankruptcy Code, and laws, if any, which may be enacted by federal or
state legislatures extending the time for payment of principal or
interest or both, or imposing other constraints upon enforcement of
such obligations or upon the ability of municipalities to levy taxes.
The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may
be materially adversely affected by litigation or other conditions.
Among other instruments, each Fund may purchase short-term
General Obligation Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper,
Construction Loan Notes and other forms of short-term loans. Such
notes are issued with a short-term maturity in anticipation of the
receipt of tax funds, the proceeds of bond placements or other
revenues. In addition, each Fund may invest in other types of
tax-exempt instruments such as municipal bonds, private activity
bonds and pollution control bonds, provided they have remaining
maturities of 13 months or less at the time of purchase.
The payment of principal and interest on most securities
purchased by a Fund will depend upon the ability of the issuers to
meet their obligations. The District of Columbia, each state, each of
their political subdivisions, agencies, instrumentalities, and
authorities and each multi-state agency of which a state is a member
is a separate "issuer" as that term is used in this Statement of
Additional Information and the Funds' Prospectuses. The
non-governmental user of facilities financed by private activity
bonds is also considered to be an "issuer."
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
In General
Information on how to purchase and redeem each Fund's shares is
included in the applicable Prospectus. The issuance of a Fund's
shares is recorded on a Fund's books, and share certificates are not
issued.
The regulations of the Comptroller of the Currency (the
"Comptroller") provide that funds held in a fiduciary capacity by a
national bank approved by the Comptroller to exercise fiduciary
powers must be invested in accordance with the instrument
establishing the fiduciary relationship and local law. The Trust
believes that the purchase of Municipal Money Market Fund or Tax-Free
Money Market Fund shares by such national banks acting on behalf of
their fiduciary accounts is not contrary to applicable regulations if
consistent with the particular account and proper under the law
governing the administration of the account.
Conflict of interest restrictions may apply to an institution's
receipt of compensation paid by a Fund on fiduciary funds that are
invested in a Fund's Class B or Class C shares. Institutions,
including banks regulated by the Comptroller and investment advisers
and other money managers subject to the jurisdiction of the SEC, the
Department of Labor or state securities commissions, are urged to
consult their legal advisers before investing fiduciary funds in a
Fund's Class B or Class C shares.
Under the 1940 Act, a Fund may suspend the right of redemption
or postpone the date of payment upon redemption for any period during
which the New York Stock Exchange ("Exchange") is closed, other than
customary weekend and holiday closings, or during which trading on
said Exchange is restricted, or during which (as determined by the
SEC by rule or regulation) an emergency exists as a result of which
disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (A Fund
may also suspend or postpone the recordation of the transfer of its
shares upon the occurrence of any of the foregoing conditions.) In
addition, a Fund may redeem shares involuntarily in certain other
instances if the Board of Trustees determines that failure to redeem
may have material adverse consequences to that Fund's investors in
general. Each Fund is obligated to redeem shares solely in cash up to
$250,000 or 1% of such Fund's net asset value, whichever is less, for
any one investor within a 90-day period. Any redemption beyond this
amount will also be in cash unless the Board of Trustees determines
that conditions exist which make payment of redemption proceeds
wholly in cash unwise or undesirable. In such a case, a Fund may make
payment wholly or partly in readily marketable securities or other
property, valued in the same way as that Fund determines net asset
value. See "Net Asset Value" below for an example of when such
redemption or form of payment might be appropriate. Redemption in
kind is not as liquid as a cash redemption. Shareholders who receive
a redemption in kind may incur transaction costs, if they sell such
securities or property, and may receive less than the redemption
value of such securities or property upon sale, particularly where
such securities are sold prior to maturity.
Any institution purchasing shares on behalf of separate accounts
will be required to hold the shares in a single nominee name (a
"Master Account"). Institutions investing in more than one of the
Trust's portfolios or classes of shares must maintain a separate
Master Account for each portfolio or class of shares. Sub-accounts
may be established by name or number either when the Master Account
is opened or later.
Net Asset Value
Each Fund's net asset value per share is calculated by dividing
the total value of the assets belonging to such Fund, less the value
of any liabilities charged to such Fund, by the total number of that
Fund's shares outstanding (irrespective of class or series). "Assets
belonging to" a Fund consist of the consideration received upon the
issuance of Fund shares together with all income, earnings, profits
and proceeds derived from the investment thereof, including any
proceeds from the sale, exchange or liquidation of such investments,
any funds or payments derived from any reinvestment of such proceeds
and a portion of any general assets of the Trust not belonging to a
particular portfolio. Assets belonging to a Fund are charged with the
direct liabilities of that Fund and with a share of the general
liabilities of the Trust allocated on a daily basis in proportion to
the relative net assets of that Fund and the Trust's other
portfolios. Determinations made in good faith and in accordance with
generally accepted accounting principles by the Trust's Board of
Trustees as to the allocation of any assets or liabilities with
respect to a Fund are conclusive.
As stated in the applicable Prospectus, in computing the net
asset value of its shares for purposes of sales and redemptions, each
Fund uses the amortized cost method of valuation. Under this method,
a Fund values each of its portfolio securities at cost on the date of
purchase and thereafter assumes a constant proportionate amortization
of any discount or premium until maturity of the security. As a
result, the value of a portfolio security for purposes of determining
net asset value normally does not change in response to fluctuating
interest rates. While the amortized cost method provides certainty in
portfolio valuation, it may result in valuations of a Fund's
securities which are higher or lower than the market value of such
securities.
In connection with its use of amortized cost valuation, each
Fund limits the dollar-weighted average maturity of its portfolio to
not more than 90 days and does not purchase any instrument with a
remaining maturity of more than 13 months (397 days) (with certain
exceptions). The Trust's Board of Trustees has also established,
pursuant to rules promulgated by the SEC, procedures that are
intended to stabilize each Fund's net asset value per share for
purposes of sales and redemptions at $1.00. Such procedures include
the determination at such intervals as the Board deems appropriate,
of the extent, if any, to which a Fund's net asset value per share
calculated by using available market quotations deviates from $1.00
per share. In the event such deviation exceeds 1/2 of 1%, the Board
will promptly consider what action, if any, should be initiated. If
the Board believes that the amount of any deviation from a Fund's
$1.00 amortized cost price per share may result in material dilution
or other unfair results to investors or existing shareholders, it
will take such steps as its considers appropriate to eliminate or
reduce to the extent reasonably practicable any such dilution or
unfair results. These steps may include selling portfolio instruments
prior to maturity to realize capital gains or losses or to shorten a
Fund's average portfolio maturity, redeeming shares in kind, reducing
or withholding dividends, or utilizing a net asset value per share
determined by using available market quotations.
MANAGEMENT OF THE FUNDS
Trustees and Officers
The Trust's Trustees and Executive Officers, their addresses,
principal occupations during the past five years and other
affiliations are as follows:
Name and Address
Postion with the
Trust
Principal Occupations During
Past 5
Years and Other Affiliations
STEVEN SPIEGEL (1)(2)
3 World Financial
Center
New York, NY 10285
Chairman of the
Board
and Trustee
Managing Director, Lehman
Brothers; President, Lehman
Brothers Global Asset
Management Inc.; formerly
Chairman, Lehman Brothers
International (Europe)
CHARLES F.
BARBER (2)(3)
66 Glenwood Drive
Greenwich, CT 06830
Trustee
Consultant; formerly
Chairman of the Board,
ASARCO Incorporated
BURT N.
DORSETT (2)(3)
201 East 62nd Street
New York, NY 10022
Trustee
Managing Partner, Dorsett
McCabe Capital Management,
Inc., an investment
counselling firm; Director,
Research Corporation
Technologies, a non-profit
patent-clearing and
licensing operation;
formerly President,
Westinghouse Pension
Investments Corporation;
formerly Executive Vice
President and Trustee,
College Retirement Equities
Fund, Inc., a variable
annuity fund; and formerly
Investment Officer,
University of Rochester
EDWARD J.
KAIER (2)(3)
1100 One Penn Center
Philadelphia, PA
19103
Trustee
Partner with the law firm of
Hepburn Willcox Hamilton &
Putnam
S. DONALD
WILEY (2)(3)
USX Tower
Pittsburgh, PA 15219
Trustee
Vice Chairman and Trustee,
H.J. Heinz Company
Foundation; prior to October
1990, Senior Vice President,
General Counsel and
Secretary, H.J. Heinz
Company
PETER MEENAN
260 Franklin Street
Boston, MA 02110
President
Managing Director of Lehman
Brothers; President of
Lehman Brothers
Institutional Funds Group
Trust; formerly, Director,
Senior Vice President and
Director of Institutional
Fund Services, The Boston
Company Advisors, Inc. from
February 1984 to May 1993;
Director, Funds Distributor,
Inc. (1992-1993); Senior
Vice President, The Boston
Company Advisors, Inc. from
August 1984 to May 1993
JOHN M. WINTERS
3 World Financial
Center
New York, NY 10285
Vice President and
Investment Officer
Senior Vice President and
Senior Money Market
Portfolio Manager, Lehman
Brothers Global Asset
Management Inc.; formerly
Product Manager with Lehman
Brothers Capital Markets
Group.
MICHAEL C. KARDOK
One Exchange Place
Boston, MA 02109
Treasurer
Vice President, The
Shareholder Services Group,
Inc.; prior to May 1994,
Vice President, The Boston
Company Advisors, Inc
PATRICIA L. BICKIMER
One Exchange Place
Boston, MA 02109
Secretary
Vice President and Associate
General Counsel, The
Shareholder Services Group,
Inc.; prior to May 1994,
Vice President and Associate
General Counsel, The Boston
Company Advisors, Inc.
________________
1. Considered by the Trust to be "interested persons" of the Trust as defined
in the 1940 Act.
2. Audit Committee Member.
3. Nominating Committee Member.
Mr. Dorsett serves as Trustee or Director of other investment
companies for which Lehman Brothers and LBGAM serve as Distributor
and Investment Adviser.
No employee of Lehman Brothers, LBGAM or TSSG receives any
compensation from the Trust for acting as an Officer or Trustee of
the Trust. The Trust pays each Trustee who is not a director, officer
or employee of Lehman Brothers, LBGAM or TSSG or any of their
affiliates, a fee of $20,000 per annum plus $1,250 per meeting
attended and reimburses them for travel and out-of-pocket expenses.
For the fiscal period February 8, 1993 (commencment of
operations) to January 31, 1994, such fees and expenses totalled
$9,589 for the Municipal Money Market Fund and $8,453 for the Tax-
Free Money Market Fund and $94,754 for the Trust in the aggregate.
As of May 13, 1994, Trustees and Officers of the Trust as a group
beneficially owned less than 1% of the outstanding shares of each
Fund.
By virtue of the responsibilities assumed by Lehman Brothers,
LBGAM, TSSG and their affiliates under their respective agreements
with the Trust, the Trust itself requires no employees in addition to
its Officers.
Distributor
Lehman Brothers acts as the Distributor of each Fund's shares.
Lehman Brothers, located at 3 World Financial Center, New York, New
York 10285, is a wholly-owned subsidiary of Lehman Brothers Holdings
Inc. ("Holdings"). Prior to May 31, 1994, all of the issued and
outstanding common stock (representing 92% of the voting stock) of
Holdings was held by American Express Company. On May 31, 1994,
American Express distributed to holders of common stock of American
Express all outstanding shares of common stock of Holdings. Each
Fund's shares are sold on a continuous basis by Lehman Brothers. The
Distributor pays the cost of printing and distributing prospectuses
to persons who are not investors of a Fund (excluding preparation and
printing expenses necessary for the continued registration of a
Fund's shares) and of preparing, printing and distributing all sales
literature. No compensation is payable by a Fund to Lehman Brothers
or for its distribution services.
Lehman Brothers is comprised of several major operating business
units. Lehman Brothers Institutional Funds Group is the business
group within Lehman Brothers that is primarily responsible for the
distribution and client service requirements of the Trust and its
investors. Lehman Brothers Institutional Funds Group has been serving
institutional clients' investment needs exclusively for more than 20
years, emphasizing high quality individualized service to clients.
Investment Adviser
LBGAM serves as the Investment Adviser to each of the Funds.
LBGAM, located at 3 World Financial Center, New York, New York 10285,
is a wholly-owned subsidiary of Holdings. The investment advisory
agreements provide that LBGAM is responsible for all investment
activities of the Fund, including executing portfolio strategy,
effecting Fund purchase and sale transactions and employing
professional portfolio managers and security analysts who provide
research for the Funds.
The Investment Advisory Agreements with respect to each of the
Funds will continue in effect for a period of two years from February
5, 1993 and thereafter from year to year provided the continuance is
approved annually (i) by the Trust's Board of Trustees or (ii) by a
vote of a "majority" (as defined in the 1940 Act) of a Fund's
outstanding voting securities, except that in either event the
continuance is also approved by a majority of the Trustees of the
Trust who are not "interested persons" (as defined in the 1940 Act).
Each Investment Advisory Agreement may be terminated (i) on 60 days'
written notice by the Trustees of the Trust, (ii) by vote of holders
of a majority of a Fund's outstanding voting securities, or upon 90
days' written notice by Lehman Brothers, or (iii) automatically in
the event of its assignment (as defined in the 1940 Act).
As compensation for LBGAM's services rendered to the Fund, the
Investment Adviser is entitled to a fee, computed daily and paid
monthly, at the annual rate of .10% of the average daily net assets
of the Fund. For the period February 8, 1993 (commencement of
operations) to January 31, 1994, LBGAM was entitled to receive
advisory fees in the following amounts: the Municipal Money Market
Fund, $103,318 and the Tax-Free Money Market Fund, $15,640. Waivers
by LBGAM of advisory fees and reimbursement of expenses to maintain
the Funds' operating expense ratios at certain levels amounted to:
the Municipal Money Market Fund, $103,318 and $133,212, respectively,
and the Tax-Free Money Market Fund $15,640 and $139,234,
respectively. In order to maintain competitive expense ratios during
1994 and thereafter, the Investment Adviser and Administrator have
agreed to voluntary fee waivers and expense reimbursements for each
of the Funds if total operating expenses exceed certain levels. See
"Background and Expense Information" in each Fund's Prospectus.
Principal Holders
At May 13, 1994, the principal holders of Class A Shares of
Municipal Money Market Fund were as follows: Nordstrom, Inc., P.O.
Box 1170, Seattle, WA 98111, 14.23% shares held of record; Hanover
Insurance Company, 440 Financial Group of Worcester, 440 Lincoln
Street, Worcester, MA 01653, 12.91% shares held of record; Employers
Reinsurance Corp., P.O. Box 2991, Overland Park, KS 66201, 8.85%
shares held of record; and National Data Corp., One National Data
Plaza, Atlanta, GA 30329, 7.27% shares held of record. Principal
holders of Class A Shares of Tax-Free Money Market Fund as of May 13,
1994, were as follows: Lehman Brothers Inc., 3 World Financial
Center, New York, NY 10286, 41.67% shares held of record; American
Security Insurance Co., Marshall & Isley Trust Co., 1000 No. Water
Street, Milwaukee, WI 53202, 14.82% shares held of record; Troy
Savings Bank, P.O. Box 58, Troy, NY 12181, 9.88% shares of record
held; Troy Savings Bank, P.O. Box 58, Troy, NY 12181, 9.83% shares
held of record; Exar Corporation, P.O. Box 49007, 2222 Qume Drive,
San Jose, CA 95161, 6.06% shares held of record; and Oster & Co.,
P.O. Box 1338, Victoria, TX 77902, 5.85% shares held of record.
As of May 13, 1994, there were no investors in the Class B and
Class C shares of the Funds and all outstanding shares were held by
Lehman Brothers.
The investors described above have indicated that they each hold
their shares on behalf of various accounts and not as beneficial
owners. To the extent that any investor is the beneficial owner of
more than 25% of the outstanding shares of a Fund, such investor may
be deemed to be a "control person" of that Fund for purposes of the
1940 Act.
Administrator and Transfer Agent
TSSG, a subsidiary of First Data Corporation, is located at One
Exchange Place, Boston, Massachusetts 02109, and serves as the
Trust's Administrator and Transfer Agent. As the Trust's
Administrator, TSSG has agreed to provide the following services:
(i) assist generally in supervising a Fund's operations, providing
and supervising the operation of an automated data processing system
to process purchase and redemption orders, providing information
concerning a Fund to its investors of record, handling investor
problems, supervising the services of employees and monitoring the
arrangements pertaining to a Fund's agreements with Service
Organizations; (ii) prepare reports to the Funds' investors and
prepare tax returns and reports to and filings with the SEC;
(iii) compute the respective net asset value per share of each Fund;
(iv) provide the services of certain persons who may be elected as
trustees or appointed as officers of the Trust by the Board of
Trustees; and (v) maintain the registration or qualification of a
Fund's shares for sale under state securities laws. TSSG is entitled
to receive, as compensation for its services rendered under an
administration agreement, an administrative fee, computed daily and
paid monthly, at the annual rate of .10% of the average daily net
assets of each Fund. TSSG pays Boston Safe, the Fund's Custodian, a
portion of its monthly administration fee for custody services
rendered to the Funds.
Prior to May 6, 1994, The Boston Company Advisors, Inc.
("TBCA"), a wholly-owned subsidiary of Mellon Bank Corporation
("Mellon"), served as Administrator of the Funds. On May 6, 1994,
TSSG acquired TBCA's third party mutual fund administation business
from Mellon, and each Fund's administration agreement with TBCA was
assigned to TSSG. For the period February 8, 1993 (commencement of
operations) to January 31, 1994, TBCA was entitled to receive
administration fees in the following amounts: the Municipal Money
Market Fund, $103,318 and the Tax-Free Money Market Fund, $15,640.
Waivers by the Administrator of administration fees and reimbursement
of expenses to maintain the Funds' operating expense ratios at
certain levels amounted to: the Municipal Money Market Fund,
$103,318 and $28,669, respectively, and the Tax-Free Money Market
Fund, $15,640 and $10,485, respectively. In order to maintain
competitive expense ratios during 1994 and thereafter, the Investment
Adviser and Administrator have agreed to reimburse the Funds if total
operating expenses exceed certain levels. See "Background and
Expense Information" in each Fund's Prospectus.
Under the transfer agency agreement, TSSG maintains the investor
account records for the Trust, handles certain communications between
investors and the Trust and distributes dividends and distributions
payable by the Trust and produces statements with respect to account
activity for the Trust and its investors. For these services, TSSG
receives a monthly fee based on average net assets and is reimbursed
for out-of-pocket expenses.
Custodian
Boston Safe Deposit and Trust Company ("Boston Safe"), a wholly
owned subsidiary of TBCA, which is a wholly-owned subsidiary of
Mellon, is located at One Boston Place, Boston, Massachusetts 02108,
and serves as the Custodian of the Trust pursuant to a custody
agreement. Under the custody agreement, Boston Safe holds each Fund's
portfolio securities and keeps all necessary accounts and records.
For its services, Boston Safe receives a monthly fee from TSSG based
upon the month-end market value of securities held in custody and
also receives securities transaction charges, including out-of-pocket
expenses. The assets of the Trust are held under bank custodianship
in compliance with the 1940 Act.
Service Organizations
As stated in the Funds' Prospectuses, a Fund will enter into an
agreement with each financial institution which may purchase Class B
or Class C shares. The Funds will enter into an agreement with each
Service Organization whose customers ("Customers") are the beneficial
owners of Class B or Class C shares and that requires the Service
Organization to provide certain services to Customers in
consideration of such Fund's payment of .25% or .35%, respectively,
of the average daily net asset value of the respective class held by
the Service Organization for the benefit of Customers. Such services
with respect to the Class C shares include: (i) aggregating and
processing purchase and redemption requests from Customers and
placing net purchase and redemption orders with a Fund's Distributor;
(ii) processing dividend payments from a Fund on behalf of Customers;
(iii) providing information periodically to Customers showing their
positions in a Fund's shares; (iv) arranging for bank wires;
(v) responding to Customer inquiries relating to the services
performed by the Service Organization and handling correspondence;
(vi) forwarding investor communications from a Fund (such as proxies,
investor reports, annual and semi-annual financial statements, and
dividend, distribution and tax notices) to Customers; (vii) acting as
shareholder of record or nominee; and (viii) other similar account
administrative services. In addition, a Service Organization at its
option, may also provide to its Customers of Class C shares (a) a
service that invests the assets of their accounts in shares pursuant
to specific or pre-authorized instructions; (b) provide sub-
accounting with respect to shares beneficially owned by Customers or
the information necessary for sub-accounting; and (c) provide
checkwriting services. Service Organizations that purchase Class C
shares will also provide assistance in connection with the support of
the distribution of Class C shares to its Customers, including
marketing assistance and the forwarding to Customers of sales
literature and advertising provided by the Distributor of the shares.
Holders of Class B shares of a Fund will receive the services set
forth in (i) and (v) and may receive one or more of the services set
forth in (ii), (iii), (iv), (vi), (vii) and (viii) above. A Service
Organization, at its option, may also provide to its Customers of
Class B shares services including: (a) providing Customers with a
service that invests the assets of their accounts in shares pursuant
to specific or pre-authorized instruction; (b) providing sub-
accounting with respect to shares beneficially owned by Customers or
the information necessary for sub-accounting; (c) providing
reasonable assistance in connection with the distribution of shares
to Customers; and (d) providing such other similar services as the
Fund may reasonably request to the extent the Service Organization is
permitted to do so under applicable statutes, rules, or regulations.
Each Fund's agreements with Service Organizations are governed
by a Shareholder Services Plan (the "Plan") that has been adopted by
the Trust's Board of Trustees pursuant to an exemptive order granted
by the SEC. Under this Plan, the Board of Trustees reviews, at least
quarterly, a written report of the amounts expended under each Fund's
agreements with Service Organizations and the purposes for which the
expenditures were made. In addition, a Fund's arrangements with
Service Organizations must be approved annually by a majority of the
Trust's Trustees, including a majority of the Trustees who are not
"interested persons" of the Trust as defined in the 1940 Act and have
no direct or indirect financial interest in such arrangements (the
"Disinterested Trustees").
The Board of Trustees has approved each Fund's arrangements with
Service Organizations based on information provided by the Trust's
service contractors that there is a reasonable likelihood that the
arrangements will benefit such Fund and its investors by affording
the Fund greater flexibility in connection with the servicing of the
accounts of the beneficial owners of its shares in an efficient
manner. Any material amendment to a Fund's arrangements with Service
Organizations must be approved by a majority of the Trust's Board of
Trustees (including a majority of the Disinterested Trustees). So
long as a Fund's arrangements with Service Organizations are in
effect, the selection and nomination of the members of the Trust's
Board of Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust will be committed to the discretion of such
non-interested trustees.
For the period February 8, 1993 (commencement of operations) to
January 31, 1994, neither Fund paid any service fees.
Expenses
The Funds' expenses include taxes, interest, fees and salaries
of the Trust's Trustees and Officers who are not directors, officers
or employees of the Trust's service contractors, SEC fees, state
securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to
investors, advisory, sub-advisory and administration fees, charges of
the Custodian and of the transfer and dividend disbursing agent,
Service Organization fees, certain insurance premiums, outside
auditing and legal expenses, costs of investor reports and
shareholder meetings and any extraordinary expenses. The Funds also
pay for brokerage fees and commissions (if any) in connection with
the purchase and sale of portfolio securities. LBGAM, and TSSG have
agreed that if, in any fiscal year, the expenses borne by a Fund
exceed the applicable expense limitations imposed by the securities
regulations of any state in which shares of that Fund are registered
or qualified for sale to the public, they will reimburse the Fund for
any excess to the extent required by such regulations. Unless
otherwise required by law, such reimbursement would be accrued and
paid on the same basis that the advisory and administration fees are
accrued and paid by that Fund. To each Fund's knowledge, of the
expense limitations in effect on the date of this Statement of
Additional Information, none is more restrictive than two and
one-half percent (2 1/2%) of the first $30 million of a Fund's
average annual net assets, two percent (2%) of the next $70 million
of the average annual net assets and one and one-half percent (1
1/2%) of the remaining average annual net assets.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting a Fund and its investors that are not described
in the Funds' Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of a Fund or its investors or
possible legislative changes, and the discussion here and in the
applicable Prospectus is not intended as a substitute for careful tax
planning. Investors should consult their tax advisers with specific
reference to their own tax situation.
As stated in each Prospectus, each Fund is treated as a separate
corporate entity under the Code and qualified as a regulated
investment company under the Code and intends to so qualify in future
years. In order to so qualify for a taxable year, a Fund must satisfy
the distribution requirement described in the Prospectuses, derive at
least 90% of its gross income for the year from certain qualifying
sources, comply with certain diversification requirements and derive
less than 30% of its gross income for the year from the sale or other
disposition of securities and certain other investments held for less
than three months. Interest (including original issue discount and,
with respect to taxable debt securities, accrued market discount)
received by a Fund at maturity or disposition of a security held for
less than three months will not be treated as gross income derived
from the sale or other disposition of such security within the
meaning of the 30% requirement. However, any other income which is
attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this
purpose.
As described above and in each Fund's Prospectus, each Fund is
designed to provide institutions with current tax-exempt interest
income. A Fund is not intended to constitute a balanced investment
program and is not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of
fluctuations in principal. Shares of a Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans
qualified under Section 401 of the Code, H.R. 10 plans and individual
retirement accounts since such plans and accounts are generally
tax-exempt and, therefore, not only would not gain any additional
benefit from such Fund's dividends being tax-exempt but also such
dividends would be taxable when distributed to the beneficiary. In
addition, a Fund may not be an appropriate investment for entities
which are "substantial users" of facilities financed by private
activity bonds or "related persons" thereof. "Substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt
person who regularly uses a part of such facilities in his or her
trade or business and whose gross revenues derived with respect to
the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, or who
occupies more than 5% of the usable area of such facilities or for
whom such facilities or a part thereof were specifically constructed,
reconstructed or acquired. "Related persons" include certain related
natural persons, affiliated corporations, a partnership and its
partners and an S Corporation and its shareholders.
In order for a Fund to pay exempt-interest dividends for any
taxable year, at the close of each quarter of its taxable year at
least 50% of the aggregate value of such Fund's assets must consist
of exempt-interest obligations. After the close of its taxable year,
a Fund will notify its investors of the portion of the dividends paid
by such Fund which constitutes an exempt-interest dividend with
respect to such taxable year. However, the aggregate amount of
dividends so designated by a Fund cannot exceed the excess of the
amount of interest exempt from tax under Section 103 of the Code
received by that Fund for the taxable year over any amounts
disallowed as deductions under Sections 265 and 171(a)(2) of the
Code. The percentage of total dividends paid by a Fund with respect
to any taxable year which qualifies as federal exempt-interest
dividends will be the same for all investors of that Fund receiving
dividends for such year.
Interest on indebtedness incurred by an investor to purchase or
carry a Fund's shares is not deductible for federal income tax
purposes if that Fund distributes exempt-interest dividends during
the investor's taxable year.
While the Funds do not expect to realize long-term capital
gains, any net realized long-term capital gains will be distributed
at least annually. Each Fund will generally have no tax liability
with respect to such gains, and the distributions will be taxable to
each Fund's investors as long-term capital gains, regardless of how
long a investor has held such Fund's shares. Such distributions will
be designated as a capital gain dividend in a written notice mailed
by the Fund to its investors not later than 60 days after the close
of a Fund's taxable year.
Similarly, while the Funds do not expect to earn any investment
company taxable income, taxable income earned by each Fund will be
distributed to its investors. In general, a Fund's investment company
taxable income will be its taxable income (for example, any
short-term capital gains) subject to certain adjustments and
excluding the excess of any net long-term capital gain for the
taxable year over the net short-term capital loss, if any, for such
year. A Fund will be taxed on any undistributed investment company
taxable income of such Fund. To the extent such income is distributed
by a Fund (whether in cash or additional shares), it will be taxable
to that Fund's investors as ordinary income.
A 4% nondeductible excise tax is imposed on regulated investment
companies that fail currently to distribute an amount equal to
specified percentages of their ordinary taxable income and capital
gain net income (excess of capital gains over capital losses). Each
Fund intends to make sufficient distributions or deemed distributions
of any ordinary taxable income and any capital gain net income prior
to the end of each calendar year to avoid liability for this excise
tax.
If for any taxable year a Fund does not qualify for tax
treatment as a regulated investment company, all of that Fund's
taxable income will be subject to tax at regular corporate rates
without any deduction for distributions to Fund investors. In such
event, dividend distributions to investors would be taxable to
investors to the extent of that Fund's earnings and profits, and
would be eligible for the dividends received deduction for
corporations.
Each Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or 31% of gross
proceeds realized upon sale paid to its investors who have failed to
provide a correct tax identification number in the manner required,
or who are subject to withholding by the Internal Revenue Service for
failure properly to include on their return payments of taxable
interest or dividends, or who have failed to certify to a Fund that
they are not subject to backup withholding when required to do so or
that they are "exempt recipients."
Although each Fund expects to qualify each year as a "regulated
investment company" and to be relieved of all or substantially all
federal income taxes, depending upon the extent of its activities in
states and localities in which its offices are maintained, in which
its agents or independent contractors are located or in which they
are otherwise deemed to be conducting business, a Fund may be subject
to the tax laws of such states or localities.
DIVIDENDS
Each Fund's net investment income for dividend purposes consists
of (i) interest accrued and discount earned on that Fund's assets,
(ii) less amortization of market premium on such assets, accrued
expenses directly attributable to that Fund, and the general expenses
(e.g., legal, accounting and trustees' fees) of the Trust prorated to
such Fund on the basis of its relative net assets. The amortization
of market discount on a Fund's assets is not included in the
calculation of net income.
Realized and unrealized gains and losses on portfolio securities
are reflected in net asset value. In addition, the Fund's Class B and
Class C shares bear exclusively the expense of fees paid to Service
Organizations with respect to the relevant Class of shares. See
"Management of the Funds-Service Organizations."
As stated, the Trust uses its best efforts to maintain the net
asset value per share of each Fund at $1.00. As a result of a
significant expense or realized or unrealized loss incurred by a
Fund, it is possible that a Fund's net asset value per share may fall
below $1.00.
ADDITIONAL YIELD INFORMATION
The "yields," "effective yields" and "tax-equivalent yields"
are calculated separately for each class of shares of each Fund. The
seven-day yield for each series of shares in a Fund is calculated by
determining the net change in the value of a hypothetical preexisting
account in such Fund which has a balance of one share of the class
involved at the beginning of the period, dividing the net change by
the value of the account at the beginning of the period to obtain the
base period return, and multiplying the base period return by 365/7.
The net change in the value of an account in a Fund includes the
value of additional shares purchased with dividends from the original
share and dividends declared on the original share and any such
additional shares, net of all fees charged to all investor accounts
in proportion to the length of the base period and the Fund's average
account size, but does not include gains and losses or unrealized
appreciation and depreciation. In addition, the effective yield
quotations may be computed on a compounded basis (calculated as
described above) by adding 1 to the base period return for the class
involved, raising that sum to a power equal to 365/7, and subtracting
1 from the result. A tax-equivalent yield for each class of a Fund's
shares is computed by dividing the portion of the yield (calculated
as above) that is exempt from federal income tax by one minus a
stated federal income tax rate and adding that figure to that
portion, if any, of the yield that is not exempt from federal income
tax. Similarly, based on the calculations described above, 30-day (or
one-month) yields, effective yields and tax-equivalent yields may
also be calculated.
Based on the period ended January 31, 1994, the yields, effective yields
and tax-equivalent yields
for each of the Funds were as follows:
7-day
Yield
7-day
Effective
Yield
7-day Tax-
Equivalent
Yield
30-day
Yield
30-day
Effective
Yield
30-day Tax-
Equivalent
Yield
Municipal Money Market
Fund
Class A Shares
2.40%
2.43%
3.52%
2.32%
2.34%
3.36%
Class A Shares**
2.27%
2.29%
3.32%
2.19%
2.21%
3.17%
Tax-Free Money Market Fund
Class A Shares
2.27%
2.29%
3.32%
2.24%
2.26%
3.25%
Class A Shares**
2.14%
2.16%
3.13%
2.11%
2.13%
3.06%
**without fee waivers and/or expense reimbursements
Note:Tax-equivalent yields assume a maximum Federal Tax Rate of 31%.
Class B and Class C Shares bear the expenses of fees paid to
Service Organizations. As a result, at any given time, the net yield
of Class B and Class C Shares could be up to .25% and .35% lower than
the net yield of Class A Shares, respectively. The Class B and Class
C shares of the Funds did not have any activity as of January 31,
1994 and, accordingly, yield information is not available with
respect to such classes of shares.
From time to time, in advertisements or in reports to investors, a Fund's
yield may be quoted and
compared to that of other money market funds or
accounts with similar investment objectives and to stock
or other relevant indices. For example,
the yield of the Fund may be compared to the IBC/Donoghue's
Money Fund Average, which is an average
compiled by IBC/Donoghue's MONEY FUND REPORT of
Holliston, MA 01746, a widely recognized
independent publication that monitors the performance of
money market funds, or to the average
yields reported by the Bank Rate Monitor from money market
deposit accounts offered by the 50 leading
banks and thrift institutions in the top five standard metropolitan
statistical areas.
Yields will fluctuate, and any quotation of yield should not be
considered as representative of the future performance of a Fund.
Since yields fluctuate, yield data for a Fund cannot necessarily be
used to compare an investment in that Fund's shares with bank
deposits, savings accounts and similar investment alternatives which
often provide an agreed or guaranteed fixed yield for a stated period
of time. Shareholders should remember that performance and yield are
generally functions of the kind and quality of the investments held
in a portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by banks with respect to customer
accounts investing in shares of a Fund will not be included in yield
calculations; such fees, if charged, would reduce the actual yield
from that quoted.
ADDITIONAL DESCRIPTION CONCERNING SHARES
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable
law. The law under certain circumstances provides shareholders with
the right to call for a meeting of shareholders to consider the
removal of one or more Trustees. To the extent required by law, the
Trust will assist in shareholder communication in such matters.
As stated in the Funds' Prospectuses, holders of shares in a
Fund will vote in the aggregate and not by class or series on all
matters, except where otherwise required by law and except that only
a Fund's Class B and Class C shares, as the case may be, will be
entitled to vote on matters submitted to a vote of shareholders
pertaining to that Fund's arrangements with Service Organizations
with respect to the relevant Class of shares. (See "Management of the
Funds-Service Organizations.") Further, shareholders of all of the
Trust's portfolios will vote in the aggregate and not by portfolio
except as otherwise required by law or when the Board of Trustees
determines that the matter to be voted upon affects only the
interests of the shareholders of a particular portfolio. Rule 18f-2
under the 1940 Act provides that any matter required to be submitted
by the provisions of such Act or applicable state law, or otherwise,
to the holders of the outstanding securities of an investment company
such as the Trust shall 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 the 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 the
portfolio. Under the Rule the approval of an investment advisory
agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved
by the holders of a majority of the outstanding voting securities of
such portfolio. However, the Rule also provides that the ratification
of the selection of independent certified public accountants, the
approval of principal underwriting contracts and the election of
trustees are not subject to the separate voting requirements and may
be effectively acted upon by shareholders of the investment company
voting without regard to portfolio.
COUNSEL
Willkie Farr & Gallagher, One Citicorp Center, New York, New
York 10022, serves as counsel of the Trust and will pass upon the
legality of the shares offered hereby. Willkie Farr & Gallagher also
serves as counsel to Lehman Brothers.
AUDITORS
Ernst & Young, independent auditors, serve as auditors to the
Fund and render an opinion on the Fund's financial statements. Ernst
& Young has offices at 200 Clarendon Street, Boston, Massachusetts
02116-5072.
FINANCIAL STATEMENTS
The Trust's Annual Report for the fiscal period ended January
31, 1994 is incorporated into this Statement of Additional
Information by reference in its entirety.
MISCELLANEOUS
Shareholder Vote
As used in this Statement of Additional Information and the
Funds' Prospectuses, a "majority of the outstanding shares" of a Fund
or of any other portfolio means the lesser of (1) 67% of that Fund's
shares (irrespective of class) or of the portfolio represented at a
meeting at which the holders of more than 50% of the outstanding
shares of that Fund or such portfolio are present in person or by
proxy, or (2) more than 50% of the outstanding shares of a Fund
(irrespective of class) or of the portfolio.
Shareholder and Trustee Liability
The Trust is organized as a "business trust" under the laws of
the Commonwealth of Massachusetts. Shareholders of such a trust may,
under certain circumstances, be held personally liable (as if they
were partners) for the obligations of the Trust. The Declaration of
Trust of the Trust provides that shareholders shall not be subject to
any personal liability for the acts or obligations of the Trust and
that every note, bond, contract, order or other undertaking made by
the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of
Trust provides for indemnification out of the trust property a Fund
of any shareholder of the Fund held personally liable solely by
reason of being or having been a shareholder and not because of any
acts or omissions or some other reason. The Declaration of Trust also
provides that the Trust shall, upon request, assume the defense of
any claim made against any shareholder for any act or obligation of
the Trust and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss beyond the amount invested in a
Fund on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations.
The Trust's Declaration of Trust provides further that no
Trustee of the Trust shall be personally liable for or on account of
any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the
trust estate or the conduct of any business of the Trust, nor shall
any Trustee be personally liable to any person for any action or
failure to act except by reason of bad faith, willful misfeasance,
gross negligence in performing duties, or by reason of reckless
disregard for the obligations and duties as Trustee. It also provides
that all persons having any claim against the Trustees or the Trust
shall look solely to the trust property for payment. With the
exceptions stated, the Declaration of Trust provides that a Trustee
is entitled to be indemnified against all liabilities and expenses
reasonably incurred in connection with the defense or disposition of
any proceeding in which the Trustee may be involved or may be
threatened with by reason of being or having been a Trustee, and that
the Trustees have the power, but not the duty, to indemnify officers
and employees of the Trust unless such persons would not be entitled
to indemnification if they were in the position of Trustee.
APPENDIX
DESCRIPTION OF MUNICIPAL OBLIGATION RATINGS
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes
the two highest rating categories used by Standard & Poor's for
commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues
designated "A-1."
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an
original maturity in excess of 9 months. The following summarizes the
two highest rating categories used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term
promissory obligations. Principal repayment capacity will normally be
evidenced by the following characteristics: leading market positions
in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate
reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial
markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative
liquidity is maintained.
The two highest rating categories of Duff & Phelps for
investment grade commercial paper are "Duff 1" and "Duff 2." Duff &
Phelps employs three designations, "Duff 1+," "Duff 1" and "Duff 1+,"
within the highest rating category. The following summarizes the two
highest rating categories used by Duff & Phelps for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing requirements,
access to capital markets is good. Risk factors are small.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years.
The two highest rating categories of Fitch for short-term obligations
are "F-1" and "F-2." Fitch employs two designations, "F-1+" and
"F-1," within the highest rating category. The following summarizes
the two highest rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues carrying
this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and
"F-1" categories.
Fitch may also use the symbol "LOC" with its short-term ratings
to indicate that the rating is based upon a letter of credit issued
by a commercial bank.
Thomson BankWatch commercial paper ratings assess the likelihood
of an untimely payment of principal or interest of debt having a
maturity of one year or less which is issued by a bank holding
company or an entity within the holding company structure. The
following summarizes the two highest ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of
likelihood that principal and interest will be paid on a timely
basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong,
the relative degree of safety is not as high as for issues rated
"TBW-1."
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank
holding companies and their principal bank subsidiaries. The highest
rating category of IBCA for short-term debt is "A." IBCA employs two
designations, "A1+" and "A1," within the highest rating category. The
following summarizes the two highest rating categories used by IBCA
for short-term debt ratings:
"A1+" - Obligations are supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by a strong capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to
adverse changes in business, economic, or financial conditions.
Municipal Long-Term Debt Ratings
The following summarizes the two highest ratings used by
Standard & Poor's for municipal long-term debt:
"AAA" - This designation represents the highest rating assigned
by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in
small degree.
PLUS (+) or MINUS (-) - The rating of "AA" may be modified by
the addition of a plus or minus sign to show relative standing within
this rating category.
The following summarizes the two highest ratings used by Moody's
for municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in "Aaa" securities.
Moody's applies numerical modifiers 1, 2 and 3 in generic
classification of "Aa" in its bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks at the lower end of its
generic rating category.
The following summarizes the two highest ratings used by Duff &
Phelps for municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to
time because of economic conditions.
To provide more detailed indications of credit quality, the
"AA" rating may be modified by the addition of a plus (+) or minus (-
) sign to show relative standing within this rating category.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
The following summarizes the two highest ratings used by Fitch
for municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated
"AAA." Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+."
To provide more detailed indications of credit quality, the
Fitch rating of "AA" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within this rating category.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of
long-term debt and preferred stock which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States
banks; and broker-dealers. The following summarizes the two highest
rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that
the ability to repay principal and interest on a timely basis is very
high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental
risk versus issues rated in the highest category.
PLUS (+) or MINUS (-) - The ratings may include a plus or minus
sign designation which indicates where within the respective category
the issue is placed.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank
holding companies and their principal bank subsidiaries. The
following summarizes the two highest rating categories used by IBCA
for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial such that adverse changes in business,
economic or financial conditions are unlikely to increase investment
risk significantly.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions may increase investment risk albeit not very
significantly.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within these rating categories.
Municipal Note Ratings
A Standard & Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The
following summarizes the two highest rating categories used by
Standard & Poor's Corporation for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a
plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and
variable rate demand obligations are designated Variable Moody's
Investment Grade ("VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. The following
summarizes the two highest ratings used by Moody's Investors Service,
Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows,
superior liquidity support or demonstrated broad-based access to the
market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in
the preceding group.
Duff & Phelps and Fitch use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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